C.I.T. GUJARATversusELECON ENGINEERING CO. LTD.

A                             C.l.T. GUJARAT
                                        v.
                   ELECON ENGINEERING CO. LTD.

                                JULY 21, 1987

B         [R.S. PATHAK, CJ AND RANGANATH MISRA, J.)

          Income Tax Act, l96J/Income Tax Rules, 1962-Section 84
    (Section 801)/Rule 19-New Industrial Undertaking-Admissibility of'
    exemption-Manner of computation.

C         The assessee, a public limited company, in the assessment year
    1964-65 was in the second year of its new project going into production.
    The Income-tax Officer computed the assessment under s. · 143(3) of ,
    the Income-tax Act, 1961 after determining the rebate admissible under
    ss. 84 and 101 at Rs.2, 72,372. He re-opened the assessment under
    s. 147(b) and re-computed the rebate at Rs.2,51,222. The appeal by the
D   assessee to the Appellate Assistant Commissioner was dismissed. The
    Appellate Tribunal accepted the plea of the assessee that to the figure of ~
    capital as worked out under Rule 19(1) is to be added the average profit
    as worked out under sub-rule (5) of Rule 19 and held that the average
    capital has to be taken at Rs.45,39,557 and not at Rs.41,87,034. In the
    Reference, the High Court agreed with the conclusion reached by the
E   Appellate Tribunal.

          Dismissing the Appeal of the Revenue,

          HELD: 1. Admissibility of exemption under s. 84 of the Income-      J
    tax Act, 1961 which has been repealed with effect from 1.4.1968 has      11
F   never been in dispute. What has been deputed is the manner of its " ·
    computation. Rule 19 of the Income-tax Rules, 1962 prescribes the .•
    method of computation and on a proper interpretation of sub-rule (1),
    (3) and (5) of this Rule would depend the ultimate conclusion to be
    reached. [590F-G I

G         2. The High Court is right in saying that the dispute has to b~
    resolved by referring to sub-rules (1), (3), (5) and (6) of Rule 19. The ·
    High Court fonnd that the value of assets entitled to depreciation under
    Rule 19(1)(a) worked out to Rs.40,10,947. To this figure was added a
    sum of Rs.1,39,764 on account of depreciation as on 1.1.63 as also on
    account of the average value of additions. The other assets were valued
H   under Rule 19(1)(b) at Rs.44,38,126 as on 1.1.63. All put together the
                                      588
                         C.l.T. v. El.ECON ENGG. [MISRA, J.]               589

       aggregate valuation came to Rs.85,38,837. From this aggregate, deduc· A
       lion of sum or Rs.44,01,803 representing loans, other liabilities includ·
       Ing provision for tax as authorised by Rule 19 was made leaving the
       valuation of the capital at Rs.41,87,034. To this figure the sum
       of Rs.3,52,503 being half of the profit from the New Project was
       added to compute the value at Rs.45,39,537. Following the provision of
       s. 84, entitlement to exemption was determined at Rs.2, 72,372 B
       representing 6% of the capital employed in the new industrial under-
       taking. [592C-E)



-            3. Re-assessment was made by deleting the addition of
       Rs.3,52,503. which represented half the profit ofthe year. According to
       the Revenue, profits earned during the year bad already been taken C
       into account in the process of computation and there was no warren! for
       its addition over again to the extent of a moiety. In fact, that is the only
       dispute that fell to be resolved. The High Court took note of the fact
       that profits had necessarily been reflected in the average valuation of
       the assets but in its view the deeming provision of Rule 19(5) was the
       special procedure laid down for computation for the purpose of calcula· D
       lion and could not be over-looked for the reasons advanced by the
       Revenue. There is sufficient force in the reasoning of the High Court
       and the conclusion reached by it is accepted. [592E-G]

             CIVIL APPELLATE JURISDICTION: Civil Appeal No. l of
       ~-                                                                        E
            From the Judgment and Order dated 11/12.9.1973 of the Gujarat
       High Court in I. T. Reference No. 19 of 1971.

             K.P. Bhatnagar and Ms. A. Subhashini for the Appellant.
                                                                                 F
             The Judgment of the Court was delivered by

            RANGANATH MISRA, J. This appeal by certificate has been
      carried by the Revenue challenging the decision rendered by the
      Gujarat High Court reported in 104 ITR 510 on a reference under the
    ~ IncomeTaxAct, 1961.                                                 G

            Assessee is a Public Limited Company and the relevant assess-
       ment year is 1964-65. This was the second year of the assessee's new
       project at Vidy;magar going into production. On 19 .3. 1965, the
       Income Tax Officer computed the assessment under section 143{3) of
       the Act after determining the rebate admissible under sections 84 and H
                                /
    590                   SUPREME COURT REPORTS            [ 1987) 3 S.C.R.

A   IO 1 of the Act at Rs.2, 72,372. He reopened the assessment under
    section 147(b) of the Act and by his reassessment order dated
    29.11.1966 recomputed the rebate at Rs.2,51,222. The appeal by the
    assessee to the Appellate Assistant Commissioner was dismissed. The
    Appellate Tribunal on further appeal by the assessee came to hold:-

p              "'There is considerable force in the arguments urged by Sri
               Talati. In view of the phraseology used in the rules we are
               inclined to accept Sri Talati's plea that to the figure of
               capital as worked out under Rule 19( 1) is to be added the
               average profit as worked out under sub-rule (5) of Rule 19.
                                                                               -··
               Accordingly, the average capital has to be taken at                   ._
               Rs.45,39,537 and not at Rs.41.87.034. The assessee's con-
c              tention must, therefore, be upheld."

    At the instance of the Revenue, the Tribunal referred the following
    question for the opinion of the High Court:-

D              "Whether on the facts and in the circumstances of the case,
               the figure arrived at by computation under rule 19(5) was
               to be added to the figure arrived at by computation under
               rule 19(1) for determining the average capital employed in
               the assessee's undertaking?"

E         The High Court noticed the feature that there was dearth of
    judicial decisions on the point at issue, dealt with the relevant provi-
    sions at length and came to agree with the conclusion reached by the
    Appellate Tribunal.

        Admissibility of exemption under section 84 of the Act which has
F been repealed with effect from 1.4.1968, has never been in dispute.
  What has been debated is the manner of its computation. Rule 19 of
  the Income Tax Rules, 1962 prescribes the method of computation and
  on a proper interpretation of the relevant provisions of this Rule
  would depend the ultimate conclusion to be reached. Sub-rule (1), (3)
  and (5) are relevant. They provide:
G
              "19. (!) For the purposes of section 84, the capital emp-
              loyed in an undertaking or a hotel to which the said section
              applies shall be taken to be:-

                    (a) in the case of assets acquired by purchase and en-
H                   titled to depreciation-
             C.l.T. v. ELECON ENGG. [MISRA, J.)                 591

            (i) if they have been acquired before the computation       A
            period, their written down value on the commencing
            date of the said period;

            (ii) if they have been acquired on or after the com-
            mencing date of the computation period, their average
            cost during the said period;                                B

            (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;
                                                                        c
            (ii) if they have been acquired on or after the com-
            mencing date of the computation period, their aver-
            age cost during the said period;

                                                                        D

        (3) Any borrowed money and debt due by the person car-
        rying on the business shall be deducted and in particular
        there shall be deducted any debts incurred in respect of the
        business for tax (including advance tax) due under any pro-
        vision of the Act:                                              E

             Provided that any such debt for tax (including
        advance tax) shall, for the purpose of this sub-rule, be
        deemed to have become due-

             (a) in the case of any advance tax due under any           F
             provision of the Act or of any tax payable under sec-
             tion 140-A or under section 141, on the date on
             which, under the provisions of section 211 or section
             2U or section 213 or section 140-A or section 220, as
             the case may be, the payment first became due;
    '                                                                   G
              (b) in any other case, on the last day of the period of
              time within which the tax is payable under section
              220.

        (5) For the purpose of ascertaining the average amount of
        capital employed in a business during any computation           H
    592                    SUPREME COURT REPORTS            [1987] 3 S.C.R.

A
                period, the profits or losses made in that period shall, ex-      ~"'
                cept so far as the contrary is shown, be deemed- ·
                      (a) to have accrued at an even rates throughout the
                      said period; and
                      (b) to have resulted, as they accrued, in a corres-
B                     ponding increase or decrease, as the case may be, in ~ _
                      the capital employed in the business."
  'Average Cost', 'Computation Period', 'depreciation' and 'Written
  Down Value' have been defined in sub-rule (6). The High Court is
  right in saying that the dispute has to be resolved by referring to
                                                                                  •.
  sub-rules (1), (3), (5) and (6) of Rule 19. The High Court found that
C the valme of assets entitled to depreciation under Rule 19(1)(a) worked
                                                                                    -
  out to Rs.40, 10,947. To this figure was added a sum of Rs.1,39,764 on
  account of depreciation as on 1. 1. 1963 as also on account of the aver-
  age value of additions. The other assets were valued under Rule
  19( l)(b) at Rs.44,38, 126 as on 1.1.1963. All put together, the aggregate
D valuation came to Rs.85.88,837. From this aggregate, deduction of a
  sum of Rs.44,01,803 representing loans, other liabilities including pro-
  vision for tax as authorised by Rule 19 was made leaving the valuation
  of the capital at Rs.41,67,034. To this figure, the sum of Rs.3,52,503
  being half of the profit from the New Project was added to compute
  the value at Rs.45,39,537. Following the provision of Section 84 of the
  Act, entitlement to exemption was determined at Rs.2,72,372 repre-
E senting 6% of the capital employed in the new industrial undertaking.

           The assessment was made by deleting the addition of
    Rs.3,52,503 which represented half the profit of the year. According
    to the Revenue, profits earned during the year had already been taken
    into account in the process of computation and there was no warrant
F   for its addition over again to the extent of a moiety. In fact, that is the
    only dispute that fell to be resolved. The High Court took note of the
    fact that profits had necessarily been reflected in the average valuation
    of the assets but in its view the deeming provision in Rule 19(5) was the
    special procedure laid down for computation for the purpose of calcu-
    lation and could not be overlooked for the reasons advanced by the
G   Revenue. We find sufficient force in the reasoning of the High Courrf.
    and accept the conclusion reached by it.
          The appeal is devoid of merit and is dismissed. Parties shall bear
    their own costs throughout.

H A.P.J.                                                  Appeal dismissed.