Back
High Court Of Calcutta
Ajit Kumar Sengupta, Bhagabati Prasad Banerjee
COMMISSIONER OF INCOME-TAX - Appellant
Versus
INDIAN EXPLOSIVES LTD. - Respondent
Income-Tax Reference 82 Of 1978
Decided On : 12/14/1990
INCOME TAX ACT, 1961 - SECTION 80J, RULE 19A, SECTION 40(A)(V)/40(C), SECTION 35(1)(IV), SECTION 35(2)(IV) - DEPRECIATION - CAPITAL EMPLOYED - MEDICAL EXPENSES - DEVELOPMENT REBATE - FACTORY BUILDING: 1. Borrowed capital is excluded from the computation of capital employed in new industrial undertakings for the purpose of Section 80J. 2. Current liabilities are to be excluded in computing the capital employed in new industrial undertakings for the purpose of Section 80J. 3. Deduction under Section 80J should be allowed at the full rate of 6% of the capital employed in the fertilizer project. 4. Medical expenses reimbursed to employees are excluded from the computation of disallowance under Section 40(a)(v)/40(c). 5. Disallowance of interest paid to the bank is upheld. 6. No depreciation is admissible on assets used for scientific research. 7. Process warehouses, inter-plant connecting roads, and roads leading from the main road to the factory are part of the factory building and not plant and machinery.
Fact of the Case:
The assessee claimed various deductions and allowances under different provisions of the Income-tax Act, 1961. The issues related to the computation of capital employed for Section 80J, exclusion of borrowed capital and current liabilities, deduction under Section 80J, exclusion of medical expenses from disallowance, disallowance of interest paid to the bank, depreciation on scientific research assets, and the characterization of certain assets as plant and machinery for the purpose of development rebate and depreciation.
Finding of the Court:
The court answered the questions referred to it by following the precedents set by the Supreme Court and the Calcutta High Court in similar cases. It held that borrowed capital and current liabilities should be excluded in computing the capital employed for Section 80J, and that the full rate of 6% deduction should be allowed under Section 80J. Medical expenses reimbursed to employees were excluded from the computation of disallowance, and the disallowance of interest paid to the bank was upheld. No depreciation was allowed on assets used for scientific research, and certain assets were held to be part of the factory building rather than plant and machinery.
Issues: 1. Whether borrowed capital and current liabilities should be excluded in computing the capital employed for Section 80J? 2. Whether the full rate of 6% deduction should be allowed under Section 80J? 3. Whether medical expenses reimbursed to employees should be excluded from the computation of disallowance under Section 40(a)(v)/40(c)? 4. Whether the disallowance of interest paid to the bank should be upheld? 5. Whether depreciation should be allowed on assets used for scientific research? 6. Whether certain assets should be characterized as plant and machinery for the purpose of development rebate and depreciation?
Ratio Decidendi: The court relied on the following principles in reaching its decision: 1. The provisions of Section 80J and Rule 19A of the Income-tax Rules, 1962, require the exclusion of borrowed capital and current liabilities in computing the capital employed for the purpose of Section 80J. 2. The decision in CIT v. Oyster Packagers (P.) Ltd. [1985] 152 ITR 471 supports the allowance of the full rate of 6% deduction under Section 80J. 3. The decision in Indian Leaf Tobacco Development Co. Ltd. v. CIT [1982] 137 ITR 827 supports the exclusion of medical expenses reimbursed to employees from the computation of disallowance under Section 40(a)(v)/40(c). 4. The decision in Woolcombers of India Ltd. v. CIT supports the upholding of the disallowance of interest paid to the bank. 5. Section 35(2)(iv) of the Income-tax Act, 1961, as amended by the Finance (No. 2) Act, 1980, clarifies that no depreciation is admissible on assets used for scientific research. 6. The decision in Oil India Ltd. v. CIT [1986] 159 ITR 151 supports the characterization of certain assets as part of the factory building rather than plant and machinery.
Final Decision: The court answered the questions referred to it in the following manner: 1. Borrowed capital and current liabilities should be excluded in computing the capital employed for Section 80J. 2. The full rate of 6% deduction should be allowed under Section 80J. 3. Medical expenses reimbursed to employees should be excluded from the computation of disallowance under Section 40(a)(v)/40(c). 4. The disallowance of interest paid to the bank should be upheld. 5. No depreciation should be allowed on assets used for scientific research. 6. Certain assets should be characterized as part of the factory building rather than plant and machinery.
( 1 ) IN this reference at the instance of both the assessee and the Commissioner, as many as seven questions have been referred to this court under Section 256 (1) of the Income-tax Act, 1961, for the assessment years 1971-72 and 1972-73 :" 1. Whether, on the facts and in the circumstances of the case and on a correct interpretation of Section 80j of the Income-tax Act, 1961, and Rule 19a of the Income-tax Rules, 1962, the Tribunal was right in holding that the exclusion of borrowed capital from the computation of capital employed in two new industrial undertakings for the purpose of Section 80j was not at all justified ?
( 2 ) WHETHER, on the facts and in the circumstances of the case and on a correct interpretation of Section 80j of the Income-tax Act, 1961, and Rule 19a of the Income-tax Rules, 1962, the Tribunal was correct in holding that, in computing the capital employed in the two new industrial undertakings for the purpose of Section 80j, current liabilities were to be excluded ?
( 3 ) WHETHER, on the facts and in the circumstances of the case and on a correct interpretation of Section 80j of the Income-tax Act, 1961, the Tribunal was correct in holding that the deduction under the said section should be allowed at the full rate of 6 per cent, of the capital employed in the fertiliser project ?
( 4 ) WHETHER, on the facts and in the circumstances of the case, the Tribunal was correct in holding that medical expenses reimbursed to the employees fell to be excluded from the computation of disallowance under Section 40 (a) (v)/40 (c) of the Income-tax Act, 1961 ?
( 5 ) WHETHER, on the facts and in the circumstances of the case, the Tribunal was right in restoring the disallowance of Rs. 1,63,514 out of interest paid to the bank in the assessment ?"2. The first two questions are concluded by the decision of the Supreme Court in the case of Lohia Machines Ltd. v. Union of India. Following the said decision, we answer the first question in the negative and the second question in the affirmative. 3. The third question is concluded by the decision of this court in the case of CIT v. Oyster Packagers (P.) Ltd. [1985] 152 ITR 471. Following the said decision, we answer the third question in the affirmative and in favour of the assessee. 4. The fourth question is concluded by the decision of this court in the case of Indian Leaf Tobacco Development Co. Ltd. v. CIT [1982] 137 ITR 827. Following the said decision, we answer the fourth question in this reference in the affirmative and in favour of the assessee. 5. So far as the fifth question is concerned, it is concluded by the decision in the case of Woolcombers of India Ltd. v. CIT. Following the said decision, we answer the fifth question in this reference in the negative and in favour of the assessee.
( 6 ) THE sixth question in this reference is as follows :"6. Whether, on the facts and in the circumstances of this case, the Tribunal was right in upholding the disallowance of the assessee's claim of Rs. 43,990 for depreciation in the assessment for the assessment year 1971-72 ?"
( 7 ) THE facts relating to this controversy are as follows : The assessee claimed depreciation allowance of Rs. 43,990 relating to scientific research assets purchased in earlier years. The Income-tax Officer disallowed the claim on the ground that the whole of the capital expenditure on the assets was already allowed under Section 35 of the Act in the respective years of acquisition and, therefore, as provided in that section, no further depreciation was, according to him, admissible on such assets.
( 8 ) THE matter was taken in appeal before the Appellate Assistant Commissioner. He found that the assessee incurred Rs. 47,511, Rs. 25,445 and Rs. 84,373 during the accounting years ending September 30, 1967, September 30, 1968 and September 30, 1969, respectively, as capital expenditure on scientific research related to its business. These expenses were admittedly allowed in f
AI
An indispensable Tool for Legal Professionals, Endorsed by Various High Court and Judicial Officers
Please visit our Training & Support
Center or Contact Us for assistance
Scan Me!
India’s Legal research and Law Firm App, Download now!
For Daily Legal Updates, Join us on :
Back to top
