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High Court Of Delhi
ADDITIONAL COMMISSIONER OF INCOME TAX - Appellant
Versus
GEDORE TOOLS (INDIA) PRIVATE LIMITED - Respondent
I.T.R. 108 of 1974
Decided On : 08/26/1981
INCOME TAX - Computation of capital employed in an industrial undertaking - Rule 19 of the Income-tax Rules, 1962 - Interpretation - Whether the proviso to Rule 19 (1) applies to Rules 19 (1) (d) and not to Rules 19 (1) (a) to 19 (1) (c) of the said Rules.
Fact of the Case:
The assessee, M/s. Gedore Tools (India) Pvt. Ltd., claimed relief under Section 84 of the Income-tax Act, 1961, for the assessment year 1966-67. The Income-tax Officer initially allowed the relief, but later revised the assessment by reducing the relief on the ground that the average value of debts due to the assessee should be taken into account instead of the value as on the last day of the accounting year. The Appellate Assistant Commissioner held that the nominal value of the debts should be taken as at the end of the computation period. The department appealed to the Tribunal, which upheld the order of the Appellate Assistant Commissioner.
Finding of the Court:
The Tribunal held that the proviso to Rule 19 (1) of the Income-tax Rules, 1962, applies only to Rule 19 (1) (d) and not to Rules 19 (1) (a) to 19 (1) (c). It also held that the Income-tax Officer was not justified in taking the average value of the debts as at the beginning and as at the end of the computation period.
Issues: 1. Whether the Tribunal was correct in its interpretation of Rule 19 (1) of the Income-tax Rules in holding that the proviso to Rule 19 (1) applied to Rules 19 (1) (d) and not to Rules 19 (1) (a) to 19 (1) (c) of the said Rules. 2. Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the Income-tax Officer was not justified in taking the average value of the debts as at the beginning and as at the end of the computation period.
Ratio Decidendi: The court held that the proviso to Rule 19 (1) of the Income-tax Rules, 1962, applies only to Rule 19 (1) (d) and not to Rules 19 (1) (a) to 19 (1) (c). The court reasoned that the purpose of the proviso is to state that if an asset the value of which has to be taken into account in the capital computation had been acquired during the computation period its value should be taken not at its value when it became an asset of the business but at an average value to be arrived at in the same manner as the average cost was arrived at under sub-rule (6) for assets covered by clauses (a) and (b). The court also held that the Income-tax Officer was not justified in taking the average value of the debts as at the beginning and as at the end of the computation period, as clause (c) of Rule 19 (1) does not provide for averaging.
Final Decision: The court answered the questions referred to it in the affirmative and in favor of the assessee.
( 1 ) THE Income-tax Appellate Tribunal, Delhi has referred two questions for our decision in this matter which arise out of the assessment to income tax of M/s. Gedore Tools (India) Pvt. Ltd. for the assessment year 1966-67, the corresponding previous year for which was the year ended on 30-6-1965.
( 2 ) THE contnoversy in the reference raises a question of the interpretation of Rule 19 of the Income-tax Rules, 1962. It may be convenient befare setting out the facts to refer to the statutory provisions. Section 84 of the Income-tax Act, 1961 as it stood at the relevant time and in so far as it is relevant for our present purposes provided that income tax was not payable by an assessee on so much of the profits and gains derived from any industrial undertaking to which the section applied as did not exceed 6 per cent per annum on the capital employed in such undertaking computed in the prescribed manner. The computation of the capital for the purposes of this section was provided for by Rule 19 of the Income-tax Rules. 1962. This rule has. six sub-clauses but for our purposes it is sufficient if the first subclause is set out. Rule 19 (1) at the relevant time read as follows:
"19. Computation of capital employed in an industrial undertaking or a hotel (1) For the purposes of section 84, the capital employed in an undertaking 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 said period; (b) in the case of assets acquired by purchase and not entitled to depreciation (i) if they have been acquired before the computation period, their actual cost to the assessee; (ii) if they have been acquired on or after the commencing date of the computation period, their average cost during the said period; (c) in the case of assets being debts due to the person carrying on the business, the nominal amounts of those debts; (d) in the case of any other assets, the value of the assets when they became assets of the business; Provided that if any such asset has been acquired within the computation period, only the average of such value shall be taken in the same manner as average cost is to be computed. Explanation For the purposes of clauses (a) and (b) of this sub-rule, the value of any building, machinery or plant or any part thereof which. having been previously used for any purpose is transferred to the undertaking or hotel at the time of its formation, shall not be taken into account for computing the capital employed in cases to which the Explanation to section 84 applies. "the questions in this reference are regarding the method of evaluation of the debts due to the assessee for the purposes of above capital computation.
( 3 ) FOR the assessment year 1966-67 the Income-tax Officer originally computed the assessee s total income at a figure of about Rs. 36,20,196 and also noted in the order that the assessee was entitled to relief under Section 84 in respect of a sum of Rs. 5,71,318. From annexure II to the order of Income tax Officer which contains the capital computation it is seen that the Income-tax Officer took the figure of debts due to the company as Rs. 18,25,606. This was the value of sundry debtors and other loans and advances due to the assessee as on the last day of the accounting year i. e. as on 30th June, 1965.
( 4 ) SUBSEQUENTLY, the assessment was re-opened under Section 147 (b) as a result of an audit note by the internal auditors of the department. In the re-assessment the Income-tax Officer restricted the amount of relief under Section 84 to the sum of Rs. 4,37,740. This was due to two reasons with one of which we are not concerned here. So far as we are concerned it is mate
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