The Commissioner Of Income-Tax,Patiala v. M/S Vardhman Spinning And General Mills Ltd., Ludhiana

I.T.R. No. 18 of 1991 [ 1] IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Income-tax Reference No. 18 of 1991Date of decision: August 25 , 2008 The Commissioner of Income-tax,Patiala. ...Applicant v. M/s Vardhman Spinning and General Mills Ltd., Ludhiana.... Respondent CORAM: HON'BLE MR. JUSTICE HEMANT GUPTA HON'BLE MR. JUSTICE RAJESH BINDAL Present: Mr. Rajesh Sethi, Advocate for the Revenue. Mr. Akshay Bhan, Advocate for the assessee. .. Rajesh Bindal J. The following questions of law have been referred for opinionof this Court arising out of order dated 31.8.1994, passed by the IncomeTax Appellate Tribunal, Chandigarh Bench, Chandigarh (for short, `theTribunal') in I.T.A. No. 135/Chandi/80 for the assessment year 1970-71: “1.Whether, on the facts and in the circumstances of thecase, the Appellate Tribunal was right in law in holdingthat borrowed capital shall not be deducted, from theaggregate value of assets ascertained under sub-rule 2 ofRule 19-A in accordance with sub-rule 3 of rule 19-A ? 2.Whether, on the facts and in the circumstances of thecase, the Appellate Tribunal was right in law in holdingrule 19-A(3) is ultra vires of provisions of Section 80-J?” Briefly, the facts are that the assessee filed its return of incomedeclaring a loss of Rs. 4,65,920/- on 5.9.1970, which was subsequentlyrevised on 8.2.1971 declaring a loss of Rs. 3,17,566/-. Again a revisedreturn was filed on 24.6.1971 declaring a loss of Rs. 6,29,310/-. Still notsatisfied with the return filed, the assessee again revised the same on20.9.1972 declaring a loss of Rs. 8,17,048/-. Initially, the assessment of theassessee was framed under Section 143(3) of the Income-tax Act, 1961 (forshort, `the Act') on 30.3.1973 which was set aside in appeal and the case I.T.R. No. 18 of 1991 [ 2] was remitted back for denovo assessment. The dispute in the present case is regarding claim of deductionunder Section 80-J of the Act. Initially, the deduction was claimed for a sumof Rs. 3,82,492/-. In the revised return filed on 20.9.1972, the deductionwas claimed at Rs. 4,10,698/-. However, later on, after the initial assessmentwas set aside and the case was remitted back for denovo assessment, videletter dated 3.12.1977, the deduction was claimed at Rs. 9,58,469/-. Theclaim was not accepted by the Assessing Officer finding that the assesseehad not worked out the same in accordance with the provisions as theamount reflecting the loans, current liability and value of building andmachinery in progress had not been deducted. Referring to Rule 19A(3) ofthe Income-tax Rules, 1962 (for short, `the Rules'), the claim of the assesseefor deduction under Section 80J of the Act was not found to be admissibleto the extent of borrowed capital. The assessee had not been able to supporthis claim in terms of the requirement of Rule 19A(3) of the Rules whichrequired that the borrowing had to be from specified source and repaymentthereof should not be within a period of less than 7 years. In appeal, the Commissioner of Income-tax (Appeals) set asidethe order passed by the Assessing Officer on the issue relying upon aSpecial Bench order of the Tribunal in the case of M/s Amar Bye Chm. Ltd.Bombay v. ITO Company Circle II (3) Bombay, ITA No. 3643 (Bom.) of1974-75 for the assessment year 1970-71 relying upon the judgment ofCalcutta High Court in Century Enka Limitedv. Income-Tax Officer andothers, (1977) 107 ITR 123 and Madras High Court in Madras IndustrialLinings Ltd.v. Income-Tax Officer, Companies Circle (6), Madras andothers, (1977) 110 ITR 256, where Rule 19A(3) of the Rules had beenstruck down being violative of Section 80J of the Act. In appeal by the Revenue before the Tribunal, the order was upheld. In appeal, the Commissioner of Income-tax (Appeals) set asidethe order passed by the Assessing Officer on the issue relying upon aSpecial Bench order of the Tribunal in the case of M/s Amar Bye Chm. Ltd.Bombay v. ITO Company Circle II (3) Bombay, ITA No. 3643 (Bom.) of1974-75 for the assessment year 1970-71 relying upon the judgment ofCalcutta High Court in Century Enka Limitedv. Income-Tax Officer andothers, (1977) 107 ITR 123 and Madras High Court in Madras IndustrialLinings Ltd.v. Income-Tax Officer, Companies Circle (6), Madras andothers, (1977) 110 ITR 256, where Rule 19A(3) of the Rules had beenstruck down being violative of Section 80J of the Act. In appeal by the Revenue before the Tribunal, the order was upheld. Before we proceed to deal with the issue on merits, it would beappropriate to notice at the out-set that judgments of Calcutta High Court inCentury Enka Limited'scase (supra) and of Madras High Court in MadrasIndustrial Linings Ltd.'scase (supra) were over-ruled by Hon'ble theSupreme Court in Lohia Machines Ltd., and anotherv. Union of India andothers, (1985) 152 ITR 308 upholding the vires of Rule 19A of the Rules. If I.T.R. No. 18 of 1991 [ 3] that is so primarily the ground on which the claim of the assessee wasaccepted itself looses its base. Still we proceed to consider the issue onmerits in view of position of law as existing after the judgment of Hon'blethe Supreme Court in Lohia Machines Ltd.'scase (supra). A Bench of Bombay High Court in Commissioner of Income-Taxv. Boots Pure Drug Co. (I.) Ltd., (1993) 203 ITR 979, whileconsidering the judgment of Hon'ble the Supreme Court in Lohia MachinesLtd.'scase (supra) and also referring to Rule 19(3) of the Rules, as was inforce at the relevant time and also referring to Rule 19A of the Rules, whichwas introduced w.e.f. 1.4.1972, opined that during the interregnum periodfrom 1.4.1968 to 1.4.1972, the borrowed moneys of the kind specified insub-rules (a) and (b) of Rule 19A(3) of the Rules were to be included in thecomputation of the capital employed for the purpose of deduction underSection 80J of the Act. Relevant paras thereof are extracted below: “ The relevant provisions of rule 19 were as follows: “19.(1) For the purpose of section 84, the capitalemployed..... shall be taken to be -........ (3) Any borrowed money and debt due by the personcarrying on the business shall be deducted.....” For the assessment years 1968-69 to 1970-71, section 84was replaced by section 80J of the Income-tax Act, 1961, andrule 19(3) was replaced by rule 19A(3). The relevant provisions of rule 19A as in force duringthese assessment years were as follows: “19A. Computation of capital employed in an industrialundertaking or a ship or the business of a hotel for thepurposes of section 80J.- (1) For the purposes of section 80J,the capital employed in an industrial undertaking ..... shall becomputed in accordance with sub-rules (2) to (4)..... (3) From the aggregate of the amounts as ascertainedunder sub-rule (2) shall be deducted the aggregate of theamounts, as on the first day of the computation period, ofborrowed moneys and debts due by the assessee (includingamounts due towards any liability in respect of tax, notbeing- .... I.T.R. No. 18 of 1991 [ 4] (b) in the case of any assessee (including a company) anymoneys borrowed from an approved source for the creation of acapital asset in India, if the agreement under which suchmoneys are borrowed provides for the repayment thereofduring a period of not less than seven years. Explanation.- ...... (i) `approved source' means the Government or theIndustrial Finance Corporation of India or the Industrial Creditand Investment Corporation of India Ltd. or any bankinginstitution.....” I.T.R. No. 18 of 1991 [ 4] (b) in the case of any assessee (including a company) anymoneys borrowed from an approved source for the creation of acapital asset in India, if the agreement under which suchmoneys are borrowed provides for the repayment thereofduring a period of not less than seven years. Explanation.- ...... (i) `approved source' means the Government or theIndustrial Finance Corporation of India or the Industrial Creditand Investment Corporation of India Ltd. or any bankinginstitution.....” The scheme of Section 84 and Section 80J as well as therelevant rules framed thereunder have been considered atlength by the Supreme Court in the case of Lohia MachinesLtd. v. Union of India [1985] 152 ITR 308. While analysingthese sections and the Rules framed thereunder, in order todetermine the constitutional validity of these Rules, theSupreme Court has said, inter alia, that, prior to April 1, 1968,as well as after April 1, 1972, the prevailing position was thatborrowed moneys were required to be deducted whilecomputing capital for the purposes of these sections. Only for ashort period from April 1, 1968, to April 1, 1972, when rule19A(3) was in operation as set out earlier, borrowed moneys ofthe kind specified in sub-rules (a) and (b) of that rule wereincluded in the computation of capital employed. The SupremeCourt has analysed these sections on the basis that, whilecomputing the capital employed for the purposes of section 84and 80J,all borrowed moneys have to be deducted irrespectiveof when they fall due for repayment-save and except for thelimited period from April 1, 1968, to April 1, 1972, when rule19A(3) was in force where certain kinds of borrowed moneyswhich would fall under rule 19A(3)(a) and (b) would beincluded in the computation of capital. ..... ..... ..... .......In respect of “borrowed money”, the Supreme Court, in thecase of Lohia Machines Ltd. [1985] 152 ITR 308, has clearly I.T.R. No. 18 of 1991 [ 5] held that all borrowings- whether long-term or short-term, willhave to be deducted from the capital of a company for thepurposes of section 84 and section 80J, with certain exceptionsfor the period April 1, 1968, to April 1, 1972. Therefore, thecontention of the assessee that only such borrowed moneys asare due and payable on the first day of the computation periodshould be deducted cannot be accepted. All borrowed moneys,irrespective of whether they have become due and payable onthe first day of the computation period, are required to bededucted under rule 19(3) as well as rule 19A(3). In the case ofrule 19A(3), however, there is a specific provision made inrespect of any moneys borrowed from approved sources- whichwould include a banking institution, for the creation of a capitalasset in India, if the agreement under which the moneys are soborrowed provides for repayment during a period of not lessthan seven years. Any borrowing from a banking institutionwhich falls in this category can be included in the computationof capital for the purposes of Section 80J because of theexpress inclusion of such borrowing under rule 19A(3) at therelevant time. This exception would apply in the case of theassessee for the assessment years 1968-69, 1969-70 and 1970-71.” The assessment year involved in the present case is 1970-71. Interms of the exception carved out by interpretation given in Lohia MachinesLtd.'s case (supra), as considered by Bombay High Court in Boots PureDrug Co. (I.) Ltd.'scase (supra), the same falls within the exception whereon satisfaction of certain specified conditions, the borrowed money is alsoincluded in the capital employed for the purpose of calculation of deductionunder Section 80J of the Act, as has been provided in Rule 19A(3) of theRules. The assessment year involved in the present case is 1970-71. Interms of the exception carved out by interpretation given in Lohia MachinesLtd.'s case (supra), as considered by Bombay High Court in Boots PureDrug Co. (I.) Ltd.'scase (supra), the same falls within the exception whereon satisfaction of certain specified conditions, the borrowed money is alsoincluded in the capital employed for the purpose of calculation of deductionunder Section 80J of the Act, as has been provided in Rule 19A(3) of theRules. In view of our above discussion, question No.1, as referred toabove, is answered by holding that for the assessment year in question, theassessee would be entitled to add the borrowed money in the capitalemployed for the purpose of calculation of deduction under Section 80J ofthe Act in case the conditions as laid down in Rule 19A(3)(a) and (b) are I.T.R. No. 18 of 1991 [ 6] complied with. As far as question No.2 is concerned, the same does not requireto be dealt with for the simple reason that it was not the Tribunal which haddeclared the provisions of Rule 19A of the Rules to be ultra vires to theprovisions of Section 80J of the Act, rather it had relied upon the judgmentsof Calcutta High Court in Century Enka Limited's case (supra) and MadrasHigh Court in Madras Industrial Linings Ltd.'scase (supra). In any case, theissue is not required to be dealt with as the issue involved in the present casehas been dealt with on merits in first question of law. The reference is disposed of accordingly. (Rajesh Bindal) Judge August 25, 2008mk (Hemant Gupta) Judge