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Andhra Pradesh High Court
Judges : K.A.SWAMI, K.MADHAVA REDDY
Warner Hindustan Ltd - Appellant
Versus
Income-tax Officer - Respondent
Decided On : 04-25-80
The court held that Rule 19a(3) of the Income Tax Rules, 1962, which directs the deduction of "borrowed monies and debts due by the assessee" is ultra vires of Section 80j of the Income Tax Act, 1961. The court also held that Rule 19a(2), which directs the aggregation of the amounts representing the values of the assets as on the first day of the computation period of the undertaking, is ultra vires of Section 80j. However, the court held that Rule 19a(2)(i), which directs that in the case of assets entitled to depreciation their written down value should be computed for arriving at the capital employed in the industrial undertaking, is not ultra vires of Section 80j.
Fact of the Case:
The petitioners, various companies engaged in the manufacture of various products, filed writ petitions challenging the validity of Rule 19a of the Income Tax Rules, 1962, as it stood applicable to the assessment years 1969-70 and 1974-75. The petitioners contended that Rule 19a(3) was ultra vires of Section 80j of the Income Tax Act, 1961, as it directed the deduction of borrowed monies and debts due by the assessee in computing the capital employed in an industrial undertaking. The petitioners also contended that Rule 19a(2) was ultra vires of Section 80j as it directed the computation of the capital employed as on the first day of the previous year and not the capital employed during the previous year.
Finding of the Court:
The court held that Rule 19a(3) was ultra vires of Section 80j as it directed the deduction of borrowed monies and debts due by the assessee in computing the capital employed in an industrial undertaking. The court held that the expression "capital employed" in Section 80j meant all amounts from whatever source they were raised and ploughed for working that undertaking. The court also held that Rule 19a(2) was ultra vires of Section 80j as it directed the computation of the capital employed as on the first day of the previous year and not the capital employed during the previous year. The court held that Section 80j directed the computation of the capital employed in the industrial undertaking "in respect of the previous year" and not as on the first day of the previous year.
Issues: 1. Whether Rule 19a(3) of the Income Tax Rules, 1962, which directs the deduction of "borrowed monies and debts due by the assessee" is ultra vires of Section 80j of the Income Tax Act, 1961? 2. Whether Rule 19a(2) of the Income Tax Rules, 1962, which directs the aggregation of the amounts representing the values of the assets as on the first day of the computation period of the undertaking, is ultra vires of Section 80j of the Income Tax Act, 1961? 3. Whether Rule 19a(2)(i) of the Income Tax Rules, 1962, which directs that in the case of assets entitled to depreciation their written down value should be computed for arriving at the capital employed in the industrial undertaking, is ultra vires of Section 80j of the Income Tax Act, 1961?
Ratio Decidendi: 1. The court held that Rule 19a(3) was ultra vires of Section 80j as it directed the deduction of borrowed monies and debts due by the assessee in computing the capital employed in an industrial undertaking. The court held that the expression "capital employed" in Section 80j meant all amounts from whatever source they were raised and ploughed for working that undertaking. 2. The court held that Rule 19a(2) was ultra vires of Section 80j as it directed the computation of the capital employed as on the first day of the previous year and not the capital employed during the previous year. The court held that Section 80j directed the computation of the capital employed in the industrial undertaking "in respect of the previous year" and not as on the first day of the previous year.
Final Decision: The court allowed the writ petitions to the extent indicated, but without costs.
MADHAVA REDDY, J.
( 1 ) IN these writ petitions the validity of r. 19a of the I. T. Rules, 1962, as it stood applicable to the assessment years 1969-70 and 1974-75, is challenged as ultra vires of s. 80j of the I. T. Act, 1961, in so far as it prescribes that in computing the capital employed in an industrial undertaking, (1) the borrowed money and debts due by the assessee should be deducted, (2) that it should be computed as on the 1st day of the previous year, and (3) that it should be assessed at the written down value of the asset after allowing depreciation. These writ petitions can be conveniently disposed of by a common judgment.
( 2 ) SECTION 80j of the I. T. Act, in so far as it is relevant for our present purpose, reads as follows:"80j. Deduction in respect of profits and gains from newly established industrial undertakings or ships or hotel business in certain cases.- (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains (reduced by the aggregate of the deductions, if any, admissible to the assessee under section 80h and section 80hh) of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent. per annum on the capital employed in the industrial undertaking or ship or business of the hotel, as the case may be, computed in the prescribed manner in respect of the previous year relevant to the assessment year (the amount calculated as aforesaid being hereafter, in this section, referred to as the relevant amount of capital employed during the previous year):. . . . . . (2) The deduction specified in sub-section (1) shall be allowed in computing the total income in respect of the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or to operate its cold storage plant or plants or the ship is first brought into use or the business of the hotel starts functioning (such assessment year being hereafter, in this section, referred to as the initial assessment year) and each of the four assessment years immediately succeeding the initial assessment year:. . . . . . "
( 3 ) IN exercise of the rule-making power vested under s. 296 of the Act, the Central Board of Revenue has framed r. 19a, which reads as follows:"19a. (1) For the purposes of section 80j the capital employed in an industrial undertaking or the business of a hotel shall be computed in accordance with sub-rules (2) to (4), and the capital employed in a ship shall be computed in accordance with sub-rule (5 ). (2) 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 following manner:- (i) in the case of assets entitled to depreciation, their written down value; (ii) in the case of assets acquired by purchase and not entitled to depreciation, their actual cost to the assessee; (iii) in the case of assets acquired otherwise than by purchase and not entitled to depreciation, the value of the assets when they became assets of the business; (iv) in the case of assets being debts due to the person carrying on the business, the nominal amount of those debts; (v) in the case of assets being cash in hand or bank, the amount thereof. Explanation 1.- In this rule 1 computation period means the period for which profits and gains of the industrial undertaking or business of the hotel are computed under sections 28 to 43a. Explanation 2.- The value of any building, machinery or plant or any part thereof as is referred to in clause (a) or clause (b) of the Explanation at the end of s
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