Judgement

RANGANATH MISRA , J. :- This appeal by certificate has been carried by the Revenue challenging the decision rendered by the Gujarat High Court reported in 104 ITR 510 on a reference under the Income-tax Act, 1961.

2. Assessee is a Public Limited Company and the relevant assessment year is 1964-65. This was the second year of the assessees new project at Vidyanagar going into production. On 19-3-1965, the Income-tax Officer computed the assessment under S. 143(3) of the Act after determining the rebate admissible under Ss. 84 and 101 of the Act at Rs. 2,72,372/-. He reopened the assessment under S. 147(b) of the Act and by his reassessment order dated 29-11-1966 recomputed the rebate at Rs., 2,51,222/-. The appeal by the assessee to the Appellate Assistant Commissioner was dismissed. The Appellate Tribunal on further appeal by the assessee came to hold : -

"There is considerable force in the arguments urged by Sri Talati. In view of the phraseology used in the rules we are inclined to accept Sri Talatis plea that to the figure of capital as worked out under R. 19(l) is to be added the average profit as worked out under sub-r. (5) of R. 19. Accordingly, the average capital has to be taken at Rs. 45,39,537/- and not at Rs. 41,87,034/-. The assessees contention must, therefore, be upheld." .

At the instance of the Revenue, the Tribunal referred the following question for the opinion of the High Court: -

"Whether on the facts and in the circumstances of the case, the figure arrived at by computation under R. 19(5) was to be added to the figure arrived at by computation under R. 19(l) for determining the average capital employed in the assessees undertaking?"

3. The High Court noticed the feature that there was dearth of judicial decisions on the point at issue dealt with the relevant provisions at length and came to agree with the conclusion reached by the Appellate Tribunal.

4. Admissibility of exemption under S. 84 of the Act which has been repealed with effect from 1-4-1968, has never been in dispute. What has been debated is the manner of its computation. Rule 19, Income-tax Rules, 1962 prescribes the method of computation and on a proper interpretation of the relevant provisions of this Rule would depend the ultimate conclusion to be reached. Sub-rules (1), (3) and (5) are relevant. They provide :

"19.(l) For the purposes of S. 84, the capital employed in an undertaking or a hotel to which the said section applies shall be taken to be :--

(a) in the case of assets acquired by purchase and entitled to depreciation -

(i) if they have been acquired before the computation period, their written down value on the commencing date of the said period;

(ii) if they have been acquired on or after the commencing date of the computation period, their average cost during the saidperiod;

(b) in the case of assets acquired by purchase and not entitled to depreciation

(i) if they have been acquired before the commutation period, their actual cost to theassessee;

(ii) if they have been acquired on or after the commencing date of the computation period, their average cost during the saidperiod;

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(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 tax (including advance tax) due under any provision of the Act :

Provided that any such debt for tax (including advance tax) shall, for the purpose of this sub-rule, be deemed to have becomedue -

(a) in the case of any advance tax due under any provision of the Act or of any tax payable under S. 140-A or under S. 141, on the date on which, under the provisions of S. 211 or S. 212 or S. 213 or S. 140-A or S. 220, as the case maybe, the payment first became due;

(b) in any other case, on the last day of the period of time within which the tax is payable under S. 220.

(5) For the purpose of ascertaining the average amount of capital employed in a busine