Rule 19A(3) of the Income Tax Rules, which excludes borrowed capital from the computation of capital employed for the purpose of Section 80J tax holiday, is ultra vires and void.

Rajendra Nath Mittal, J.

1. This order will dispose of Civil Writ Petition Nos. 4488 and 4489 of 1978 which contain same questions of law. The facts in the judgment are being given from Civil Writ Petition No. 4488 of 1978.

2. Briefly, the facts are that the petitioner is a partnership firm and is carrying on the business of manufacture of Saria Patti at Gobindgarh. It was established in the year 1972. It is registered under the I.T. Act, 1961 (hereinafter referred to as " the Act "). Its accounting year starts from April 1 to March 31 of the subsequent year. The assessment year in the present case is 1975-76 for which the relevant previous year is 1974-75.

3. The petitioner filed a return for the above-said assessment year on July 30, 1975, declaring an income of Rs. 1,00,740 but did not take into account the provisions of Section 80J of the Act. Consequently, a revised return was filed by it on October 25, 1975, declaring an income of Rs. 84,900 by taking into consideration Rule 19A(3) of the I.T. Rules (hereinafter referred to as " the Rules "), according to which from the aggregate of the amounts as ascertained under Sub-rule (2) could be deducted the aggregate of the amounts, as on the first day of the computation period, of borrowed money and debts owed by an assessee. The ITO, in pursuance of the revised return, allowed deduction of Rs. 15,840 as claimed by it under Section 80J of the Act.

4. It is alleged that later the petitioner was advised that Rule 19A(3) was ultra vires Section 80J of the Act, as the rule-making authority under Section 295 of the Act could not frame the rule. Consequently, a revision petition was filed by it before the Commissioner, respondent No. 2. He, however, after hearing the petitioner, dismissed the revision petition, vide order dated August 28, 1978 (copy annex. " P-3 "). The petitioner has challenged the aforesaid order, inter alia, on the ground that Rule 19A(3) of the rules is ultra vires under Section 80J of the Act.

5. The only question that arises for determination in the present case is whether Rule 19A(3) is ultra vires under Section 80J of the Act. In order to determine the question, it will be necessary to read Section 80J of the Act and Rule 19A of the Rules which are as follows:

"80J. (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 deduction, if any, admissible to the assessee under 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):......"

"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 value 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