S. RATNAVEL PANDIAN


The assessee, viz., M/s. Southern Agrifurane Industries Limited, Madras, in its computation of income for the assessment year 1976-77, claimed relief under section 80J of the Income-tax Act, 1961 (hereinafter referred to as "the Act"). The Incometax Officer, however, while accepting the claim of the assessee, did not accept the quantum of relief claimed by the assessee. The Income-tax Officer, while computing the capital on which relief will have to be worked out, excluded (i) the borrowed capital (about which we are not concerned in this tax case) ; (ii) the value of the capital work-in-progress ; (iii) the value of the stores in transit ; and (iv) the value of the raw materials in transit. On the assessee's appeal, the Commissioner of Income-tax (Appeals) held that borrowed capital also should be included in the capital computation, following the decision of this court in Madras Industrial Linings Ltd. v. ITO 1977 (110) ITR 256, 1978 CTR(Mad) 45 Regarding the remaining three items also, the Commissioner of Income-tax (Appeals) held that they should also be included in the capital for the purpose of grant of relief under section 80J of the Act, following the decision of the Calcutta High Court in CIT v. Indian Oxygen Ltd. 1988 (113) ITR 109, 1978 (113) ITR 109, 1951 (2) All(ER) 296 and the decision of the Gujarat High Court in CIT v. Cibatul Ltd. 1988 (115) ITR 879, 1978 (115) ITR 879, 1979 (8) CTR 145, 1978 CTR(Guj) 145. Accordingly, the Commissioner directed the Income-tax Officer to include the three items in the computation of capital for relief under section 80J The Revenue preferred an appeal to the Tribunal against the order of the Commissioner of Income-tax (Appeals) and the Tribunal noticed that similar issue had been decided by this court in CIT v. Madras Wire Products 1980 (123) ITR 722, 1980 (18) CTR 11, 1981 (5) TAXMAN 70, 1979 (13) CTR(Mad) 279, wherein it was held that the value of machinery in transit should also be included in the capital. The Tribunal further noticed that the computation of capital which was originally provided under rule 19A came to be made part of section 80J itself by introducing sub-section (lA) with retrospective effect from April 1, 1972. The Tribunal, however, held that the retrospective effect of the amendment of the provisions did not affect the principle enunciated by this court in CIT v. Madras Wire Products 1980 (123) ITR 722, 1980 (18) CTR 11, 1981 (5) TAXMAN 70, 1979 (13) CTR(Mad) 279. According to the Tribunal, the language of sub-section (1A) of section 80J being the same as that of rule 19A or rule 19, the ratio of the decision in CIT v. Madras Wire Products 1980 (123) ITR 722, 1980 (18) CTR 11, 1981 (5) TAXMAN 70, 1979 (13) CTR(Mad) 279 (Mad), would clearly apply and hence even after the introduction of section 80J(1A), the value of the work-in-progress would qualify for inclusion in the computation of capital for relief. Regarding borrowed capital, the Tribunal held that the matter should go back to the Income-tax Officer for fresh consideration in view of the amendment of section 80J with retrospective effect from April 1, 1972, by the Finance (No. 2) Act; 1980. Accordingly, the Tribunal directed the Income-tax Officer to recompute the relief under section 80J, according to the amended law, subject to the direction that regarding the above three items, they should be included in the capital base. It is as against the order of the Tribunal, at the instance of the Revenue, that this court directed the Tribunal to state a case and refer the following question of law for the opinion of this court

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the value of work-in-progress, stores and raw materials in transit should be taken as capital for the grant of relief under section 80J of the Income-tax Act, 1961 ?" *


In CIT v. Indian Oxygen Ltd. 1988 (113) ITR 109, 1978 (113) ITR 109, 1951 (2) All(ER) 296 , the Calcutta High Court has observed as follows (p. 119)


"Only in the computation of the value of the assets, acquired at or after the commencing date of the computation period, it is necessary to determine their average cost during the entire accounting period and for that purpose only the actual user of the assets in the business becomes relevant. It is quite clear from the rule that if an asset is acquired prior to the commencement of the accounting period, the question of its user or non-user is entirely immaterial. Whether such an asset is used or not, it will still be included in the capital employed in the business.


Looking at the position from another point of view, it appears to us that the moment capital is utilised for the purpose of acquiring any asset for a business, such capital becomes employed in the business. Whether the asset itself is actually used in the business or not, so far as the capital is concerned, it continues to be employed in the business." *


The above said principle has been followed by the Karnataka High Court in Ravi Machine Tools (P.) Ltd. v. CIT 1988 (114) ITR 459, 1978 (7) CTR 280, 1978 (114) ITR 459, 1978 CTR(Kar) 280, wherein the learned judges have observed as follows (p. 462).


"Section 80J refers to capital employed in an industrial undertaking and not the user of any asset as such. The company acquires an asset for its undertaking and the capital employed in the undertaking is the amount paid to acquire that asset. The user or non-user of the assets so acquired is immaterial for the computation of the benefit under section 80J." *


In CIT v. Cibatul Ltd. 1988 (115) ITR 879, 1978 (115) ITR 879, 1979 (8) CTR 145, 1978 CTR(Guj) 145 (Guj), the assessee purchased machinery in the previous year relevant to the assessment year 1969-70, which was not installed. The Income-tax Officer disallowed the claim for relief under section. 80J of the Income-tax Act, 1961, on the ground that the machinery was not yet installed and, therefore, was not in use and the amount of capital was not employed in the business. On appeal, the Appellate Assistant Commissioner affirmed the decision of the Income-tax Officer. On further appeal, the Tribunal held that "capital employed" cannot have the same meaning as "capital used" as regards the amount spent for the purchase of machinery and it could not be excluded from the capital computation for the purpose of relief under section 80J(3) of the Act. On a reference, the Gujarat High Court observed as follows (p. 881)


"Under sub-rule (2) of rule 19A, the aggregate of the amounts representing the values of the assets as on the first day of the computation period, of the undertaking or of the business of the hotel to which the said section 80J applies shall first be ascertained in the manner set out in the sub-rule and in sub-clause (ii), in the case of assets acquired by purchase not entitled to depreciation, their actual cost to the assessee is to be taken. Under section 32 of the Income-tax Act, before an assessee can become entitled to claim depreciation, it must be shown that the building, machinery, plant or furniture owned by the assessee has been used for the purpose of business or profession, and the reason behind this is sound because, to the extent to which the building, plant, machinery, etc., gets depreciated in the course of use or production, that much part of the value of the building, plant, machinery, etc., is embedded in the profits and for the purpose of depreciation the same Is considered to be income of the plant in the year under consideration. Therefore, so long as the plant or machinery, though purchased, has not been installed, it would not be entitled to depreciation because it is not used and, therefore, under rule 19A(2)(ii), though money has been invested by the assessee in the plant in question, since the plant was not installed, the plant would not be entitled to depreciation, but, for the purpose of considering the aggregate of the amounts representing values of the assets as on the first day of the computation period, this plant would have to be included. The concept of use of the plant does not arise under rule 19A(2)(ii). It is only the question of assets acquired by purchase by the assessee and not entitled to depreciation. Both the requirements of clause (11) of rule 19A(2) are satisfied in the instant case and on that ground alone, the Tribunal was right in coming to the conclusion that the amount of Rs. 8, 33, 032 should be taken into consideration for the purpose of computation of capital employed for the purpose of granting relief under section 80J. It may be pointed out that under rule 19A(2)(v), cash in hand or at bank is to be included in the assets and, therefore, when that cash is converted into assets, though in the shape of machinery which has not been installed, that should be included on the assets side in computing the capital employed for the purpose of relief under section 80J." *


The only question that arises for consideration in this tax case is whether the introduction of section 80J(1A) has changed the legal position enunciated by this court in CIT v. Madras Wire products 1980 (123) ITR 722, 1980 (18) CTR 11, 1981 (5) TAXMAN 70, 1979 (13) CTR(Mad) 279. For this purpose, it is necessary to consider the question as to whether there is any change effected by the amendments made subsequently. The provisions of law as they stood earlier and the subsequent changes are tabulated below.


Rule 19 Rule 19A Section 80J


(1)(a): (2): (1A)(II)


In the case of assets The aggregate of the The aggregate of the amounts acquired by purchase amounts representing the representing the values of and entitled to values of the assets as on the assets as on the first depreciation:- the first day of the computation day of the computation period, of the undertaking period of the undertaking or or of the business of the of the business of the hotel hotel to which the said section to which this section applies 80J applies shall first be shall first be ascertained in ascertained in the following the following manner :-


(i) if they have been (i) in the case of assets (i) in the case of assets acquired before the entitled to depreciation, their entitled to depreciation their computation period, written down value. written down value their written down value on the commencing date of the said period.


A comparison of clause (i) of rule 19(1)(a) and clause (i) of rule 19A(2) with clause (i) of sub-section (1A)(11) of section 80J of the Act would show that Parliament never intended any change in the mode of computation of capital for grant of relief under section 80J, and the latest amendment is only to bring the computation as part of the section instead of providing for it in the rule. No doubt, by Explanation I to sub-section (lA), the phrase "actual cost" has been defined as that found in clause (1) of section 43. But the introduction of the definition clause in this section did not change the legal position. This court in CIT v. Madras Wire Products 1980 (123) ITR 722, 1980 (18) CTR 11, 1981 (5) TAXMAN 70, 1979 (13) CTR(Mad) 279 has observed as follows (p. 726)


"Though normally, a written down value would imply that the asset has been used in the previous years and in respect of the same some depreciation allowance had been, in fact, given so that it is not the actual cost of the assets itself, we are unable to agree that, necessarily and in all circumstances, written down value would only mean something less than the actual cost. We may

refer to section 43(6) itself where, in respect of an asset acquired in the computation period, the written down value is defined to be the actual cost to the assessee. Thus, the Act itself contemplates the actual cost being considered as the written down value for the purpose of computation of capital employed." * The position stated above by this court has not been changed by the introduction of sub-section (1A) to section 80J. It may be noted that the decision of this court in CIT v. Madras Wire Products 1980 (123) ITR 722, 1980 (18) CTR 11, 1981 (5) TAXMAN 70, 1979 (13) CTR(Mad) 279 has been followed by this court in CIT v. Sundaram Industries Ltd. 1987 (166) ITR 35, 1986 (55) CTR 172See also CIT v. Alcock Ashdown & Co. Ltd. 1979 (119) ITR 164, 1979 (8) CTR 223 (Bom) and CIT v. Mohan Meakin Breweries Ltd. 1980 (122) ITR 203, 1979 (11) CTR 52, 1979 (2) TAXMAN 103, 1979 (11) CTR(HP) 52 (HP). We, accordingly, hold that the decision of this court in CIT v. Madras Wire Products 1980 (123) ITR 722, 1980 (18) CTR 11, 1981 (5) TAXMAN 70, 1979 (13) CTR(Mad) 279 would govern this case as well. We answer the question of law referred to this court in the affirmative and against the Revenue. There will be no order as to costs in this case.