The expression "capital employed" in Section 84 of the Income-tax Act, 1961, refers to the capital invested in the business, not just the assets used in the business.

( 1 ) THIS consolidated reference under Section 256 (1) of the Income-tax Act, 1961, is at the instance of both the revenue as also the assessee. The facts found and/or admitted may be shortly noted as' follows :

( 2 ) MESSRS. Indian Oxygen Ltd. , the assessee, is a public limited company manufacturing and selling gases. It also manufactures electrodes. For the assessment year 1965-66, the assessee claimed deduction on account of expenses aggregating to Rs. 3,40,053 incurred for research. This was disallowed by the Income-tax Officer on the grounds that as such expenses constituted capital expenditure and the research was not conducted by the assessee itself, the provisions of Section 35 (1) of the Income-tax Act, 1961, were not applicable. The Appellate Assistant Commissioner, however, allowed such expenses and set aside the order of the Income-tax Officer. The decision of the Appellate Assistant Commissioner was affirmed by the Tribunal.

( 3 ) FOR the same assessment year the assessee had also claimed the relief under Section 84 of the Income-tax Act, 1961, in respect of its wire mill factory on the ground it was a new industrial unit, the products whereof were being used by the assessee in its electrode factory. The Income-tax Officer held that the assessee was not entitled to the relief claimed inasmuch as the products of this mill had not been sold in the market. On appeal, the Appellate Assistant Commissioner, following the decision in the case of Anil Starch Products Ltd. [1966] 59 ITR 514 (Guj), allowed the appeal and held that for the purpose of allowing relief under Section 84 of the Income-tax Act, 1961, the profits of the new industrial undertaking would have to be computed on ordinary commercial principles. The Tribunal, on further appeal, however, reversed the finding of the Appellate Assistant Commissioner following its earlier decision based on a judgment of this court in the case of Textile Machinery Corporation Ltd.

( 4 ) A further controversy arose in respect of computation of the capital of the said wire mill unit as also the gas plant belonging to the assessee at Bombay. In respect of the gas plant at Bombay the assessee claimed that for computation of the capital in this unit, under Section 84 of the Act, capital under the item " work-in-progress" should be included. The Income-tax Officer disallowed the claim of the assessee and excluded the amount of such capital from the computation on the ground that the assets representing the; said capital had not been brought into use during the computation period. In the appeal, the Appellate Assistant Commissioner rejected the contentions of the assessee and held that in the case of assets not acquired or purchased during the relevant accounting period their value should be included as and when they became assets of the business and used therein. The Appellate Assistant Commissioner construed the proviso to Rule 19 (1) of the Income-tax Rules, 1962, and held that the capital included in the item " work-in-progress " represented assets which were not brought into use and could not be considered for the purpose of computation of capital. On further appeal the Tribunal accepted the contentions of the assessee and held that the proviso to Rule 19 (1) applied only to an asset which was acquired within the computation period. Only in respect of such an asset average cost had to be computed and in the computation of such average cost the actual user of the asset became relevant. If any asset was in existence throughout the computation period, it formed part of the capital within the meaning of the said Rule and the said section and should be included in the computation.

( 5 ) THE following questions have been referred for determination by this court :" 1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the sum of Rs. 3,40,053 paid by the asscssee to M/s. British Oxygen Ltd. was a permissible deduc