1974 (7) TMI 32

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....nufactures yarn of different counts. During assessment of the assessee for the assessment year 1962-63, the Income-tax Officer found that the assessee was entitled to the benefit of exemption from income-tax provided under section 84 (since omitted) of the Income-tax Act, 1961, in respect of its newly established industrial undertakings. Section 84(1) confers on an assessee certain benefits of exemption from income-tax in respect of the profits of a newly established industrial undertaking. The said section reads as follows: "Save as otherwise hereinafter provided, income-tax shall not be payable by an assessee on so much of the profits or gains derived from any industrial undertaking or hotel to which this section applies as do not exceed six per cent. per annum on the capital employed in the undertaking or hotel computed in the prescribed manner." According to the assessee the amount of capital employed was Rs. 32,21,400, and on that basis the assessee claimed relief under section 84(1) to the extent of Rs. 1,93,284 calculated at 6% on the said amount of capital employed. The Income-tax Officer, however, computed the amount of capital employed in the business of the assesse....

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....ner in his order dated September 16, 1963, observed that: " The records show that the Income-tax Officer has taken into consideration the entire assets of the appellant-company as at the end of the account year for computing the average capital included in the business. The profits earned by the appellant-company in the account year would necessarily be part and parcel of the assets held by the appellant-company at the end of the account year and as such the appellant's claim for a further adjustment for the profits earned in the account year does not arise." In that view of the matter the Assistant Commissioner dismissed the assessee's appeal. On further appeal before the Tribunal the assessee contended that the sum of Rs, 3,88,720, comprising Rs. 98,500, provision for income-tax and Rs. 2,90,220, the net profit for the year, should be included for the purpose of ascertaining the average amount of capital employed in the business, as laid down in rule 19(5) of the Income-tax Rules, 1962. The Tribunal, however, found that for arriving at the average capital employed during the year 1961, the Income-tax Officer took the written down value of the fixed assets as on January 1....

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.... accrued at an even rate throughout the said period and to have resulted, as they accrued, in a corresponding increase or decrease, as the case may be, in the capital employed in the business. By working out average capital in the manner that he has done, the Income-tax Officer has ensured that the provisions of rule 19(5) have been duly complied with." The Tribunal, accordingly, dismissed the assessee's appeal. At the time of hearing of the reference application under section 256(1) of the Income-tax Act, 1961, the assessee did not press for the inclusion of the provision for taxation in the figure of net profit in so far as it affected the capital computation as according to the assessee the sum of Rs. 98,500 was in the nature of tax liability. According to the assessee the net profit for the year amounted to Rs. 2,90,220, and, therefore, under rule 19(5), Rs. 1,45,110 should be regarded as the average increase in capital attributable to earning of profits during the previous year. It should, however, be noted that it is not disputed by the assessee that the figure of Rs. 21,23,545 is the correct figure of average capital in accordance with the provisions of rule 19(1), (2)....

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....achinery or plant or any part thereof which having been previously used for any purpose is transferred to the undertaking or hotel at the time of its formation, shall not be taken into account for computing the capital employed in cases to which the Explanation to section 84 applies. (2) Where the price of any asset has been satisfied otherwise than in cash, the then value of the consideration actually given for the asset shall be treated as the price at which the asset was acquired. (3) Any borrowed money and debt due by the person carrying on the business shall be deducted and in particular there shall be deducted any debts incurred in respect of the business for income-tax and super-tax or for advance payments due under any provision of the Act: Provided that any such debt for income-tax or super-tax shall, for the purpose of this sub-rule, be deemed to have become due-- (a) in the case of income-tax and super-tax on the last day of the period of time within which the tax is payable under section 220 ; (b) in the case of any advance payment due under any provision of the Act or of any provisional tax paid under section 141 on the date on which, under the provision....

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....he earlier sub-rules, i.e., sub-rules (1) to (4), of the said rule 19, for according to the learned counsel if the benefits given under or the matters provided in sub-rule (5) were also provided in the earlier sub-rules, i.e., (1) to (4), then there was no purpose besides making an independent sub-rule, viz., sub-rule (5). It was the contention of the learned counsel that while computing the amount of capital employed under rule 19 effect will have to be given to sub-rule (5), which according to the learned counsel is an independent sub-rule, and in doing so average profit or average loss made during the computation period should be added to or deducted from the amount of capital employed determined in accordance with sub-rules (1) to (4) notwithstanding the fact that such profit or loss had already entered into the calculation made under sub-rules (1) to (4). The learned counsel further contended that if the court considers that the meaning of sub-rule (5) is not clear and definite then following the well-established canons of construction the court should adopt such construction that would be favourable to the assessee. According to the learned counsel the purpose behind sub-rule....

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....d. It was the contention of the learned counsel for the revenue that inasmuch as in the instant case in computing the amount of capital employed under sub-rules (1) to (4) the benefit conferred by sub-rule (5) had already been taken into account, the assessee was not entitled to have the average profit of the year (i.e., Rs. 1,45,110) again to be added to the amount of the capital employed determined by the Income-tax Officer. Under sub-rule (1) of rule 19 capital employed in an undertaking shall be taken to be : (a) Assets acquired by purchase and entitled to depreciation. (c) Assets being debts due to the assessee. (d) Any other assets. Therefore, the amount of capital employed comprises four kinds of assets as stated above. But under sub-rule (3) certain deductions will have to be made and under sub-rule (4) certain investments and moneys should not be taken into account. Regarding assets mentioned in subrules (1)(a)(ii) and (1)(b)(ii) their average cost will have to be taken and in rule 19(6)(i) it is stated what "average cost" means. According to the proviso to rule 19(6)(d) in the case of other assets average value should be taken into account and the average v....