COMMISSIONER OF INCOME TAXversusM/S. ALCOCK ASHDOWN AND CO. LTD. ETC

                 COMMISSIONER OF INCOME TAX                                    A
                             v.
           MIS. ALCOCK ASHDOWN AND CO. LTD. ETC ..

                           FEBRUARY 5, 1997

       (B.P. JEEVAN REDDY AND K.S. PARIPOORNAN, JJ.]                           B:.

      Income Tax Act, 1961

      Income Tax--Deductions-Section 84 (since omitted) and Section 80
~rofits and gains of newly established undertakings-Expression 'Capital        C
employed in such unde1taking'-!nterpretation .of-Acquisition or purchase of
an asset, even though the same was not utilised or put to use during the
relevant accounting year, covered-Actual user of the asset i"elevant.

       The Respondent-assessee, a public limited company with a chain of ·
workshops, in the previous year relevant to the assessment year 1962-63, D
started a new industrial undertaking wherein a good portion of plant and
machinery purchased was installed for new business, but some of them
agt.;-egating to Rs. 11,95,167 remained to be installed, though paid for. The
assessees claim for relief under section 84 of the Act for an amount of Rs.
21,17 ,178 (including cost of workshop under construction aggregating to E
Rs. 9,22,011) was rejected by the Income Tax Officer on the ground that
the assets had not been put to use during the accounting year. The findings
of the Income Tax Officer was affirmed by the Appellate Assistant Com-
missioner but set aside by the Income Tax Appellate Tribunal.

      In the appeal filed by the Revenue, it was contended for the appellant   F
that in determining 'the capital employed in the undertaking' cost of only
those assets used in business should be taken into account.

       For the assessee-Respondent it was contended that a proper inter-
pretation of section 84 read with Rule 19(1) only envisaged that a par-
ticular asset should have been a form of capital put into business during      G'
the relevant year and does not refer to actual use made of any particular
asset.

      Dismissing the appeals, this Court

      HELD : 1.1. In view of the provisions of Section 84 of the Income Tax    H
                                    939
     940                   SUPREME COURT REPORTS                     [1997] 1 S.C.R.
A Act, 1961 the·moment an asset is acquired or purchased for the purpose
     of the business, it is capital employed, though the asset as such is not
     actually utilised 01· used during the accounting period. [947-B]

           1.2. In the chain of events, the earliest act or event is the purchase
     or acquisition of the asset. That by itself entitled the assessee to get relief.
B    The employment of the capital is done or over. The subsequent or later
     events - including the actual user· of the asset has nothing to do in the
     matter. [947-C]

           2. Many High Courts also took a consistent view that Section 84(1)
C    envisages relief to the assessee the moment capital is employed in the
     undertaking and. that it does not state or specify that the asset should be
     actually used or utilised. [944-H]

           CIT v. Alcock Ashdow11 & Co. Ltd., 119 lTR 164 (Born), upheld.

D         Jayaram Mills Ltd. v. CEPT 35 ITR 651 (Mad) and Binni11gham Small
     Anns Co. Ltd. v. !RC, (1951) 2 All ER 296 HL, referred to.

           CIT v. I11dian O.\ygcn Ltd., 113 ITR 109 (Cal); Rari-Machi11e Tools
     (P) Ltd. v. CIT, 114 ITR 459 (Kar); CIT v. Boehringer Knoll Ltd., 148 ITR
     70 (Born); CIT v. Hi11dusta11 Polymers Ltd., 156 lTR 860 (Born); CIT v.
E    Advani Oerliko11 Pvt. Ltd., 161 ITR 449 (Born); CIT v. Indian Smelti11g &
     Refining Co. Ltd., 169 ITR 562 (Bom); CIT v. Elpro l11tematio11al Ltd., 177
     !TR 20 (B0111); CIT v. Century Spg. & Manufacturing Co. Ltd., 181 ITR 214
     (Born); CIT v. Mohan Meakin Breweries Ltd., 122 ITR 203 (HP); CIT v.
     Cibatu I Ltd., 115 ITR 879 (Guj); CIT v. Sw1daram Industries Ltd., 166 ITR
p    35 (Mad); Periyar Chemicals Ltd. v. CIT, 162 ITR 163 (Ker); CIT v. South
     Agrifurane Industlies Ltd. 174 ITR697 (Mad) and CITv. Gopi Cha11d Textile
     Mills Ltd., 179 ITR 371 (P & H), approved.

           C!VlL APPELLATE Jl'RISDTCTION : Civil Appeal No. 1274 of
      1980 Etc.
G
            Fro~ the Judgment and Order dated 27.3.87 of the Bombay High
      Court in I.T.R. No. 453 of 1975.

            Dr. R.R. Mishra, S. Rajappa and S.N. Terdol for the Appellant.

 H          S. Ganc:,h, P.D. Tyagi and Ms. AK. Verma for the Respondents.
            C.l.T. v. ALCOCK ASHDOWN AND CO. LTD. [ PARIPOORNAN, J.] 941

              The Judgment of the Court was delivered by                                A
              PARIPOORNAN, J. A common question of law arises for considera-
        tion in both the appeals. The appeals are preferred against the judgments
        of the Bombay High Court in I.T.R. No.40 of 1969 dated 7.7.1978 and
        I.T.R. No. 453 of 1975 dated 27.3.1987. Civil Appeal No. 1274 of 1980
        preferred against the judgment of the Bombay High Court in I.T.R. No. 40        B
        of 1969 is the main appeal. The judgment rendered therein is reported in
        (1979) 119 !TR 164. This judgment was followed in the latter case, I.T.R.
        No. 453 of 1975.

              2. In Civil Appeal No: 1274 of 1980, the question arose \vith reference   C
        to the assessment year 1962-63, wherein the interpretation of Section 84 of
        the Income-true Act, 1961, as it existed then, came up for consideration.
        Civil Appeal No. 9796 of 1995 is concerned with the assessment year
        1969·70, wherein Section 80-J of the Act came up for consideration. It was
        agreed at the Bar and it is also fairly clear that the controversy in these
        cases, is regarding the interpretation of the crucial words viz. 'capital       D
        employed in the undertaking' occurring both in Sec~ions 84(1) and 80-J of
        the Income-true Act (hereinafter referred to as 'the Act').

              3. We heard counsel.

              4. It will be sufficient if we advert to the minimal facts in the main    E
        appeal · Civil Appeal No. 1274 of 1980. The respondent- assessee is a
        public limited company. It has a chain of machine workshops. In the
        previous year (calendar year 1961), relevant for the assessment year 1962-
        63, the assessee started a new industrial undertaking at Bhavnagar. It was
        to consist of several workshops, including one for the manufacture of small     F
        boats. The undertaking at Bhavnagar started business operations in the
        year of account. The profit for this year was Rs. 5,39,791. A good portion
        of the plant and machinery was installed for the new business operations,
        but some of them remained to be installed, though they were paid for.
        Some of the workshops were still under construction. The value of the plant     G
        and machinery not installed came to Rs.11,95,167, while the cost of the
        workshop under construction came to Rs. 9,22,011. The aggregate for the
        above two items came to Rs. 21,17,178. The assessee claimed relief for.this
'-"'"   amount under Section 84 of the Act as "capital employed in the new
        industrial undertaking" at Bhavnagar. The Income-true Officer declined to
        afford the relief claimed on the ground that the assets had not been put to     H
     942                   SUPREME COURT REPORTS                   [1997) 1 S.C.R.
                                    "'
A use during the accounting period;'The appeal filed before the Appellate
     Assistant Commissioner was futile. In second appeal filed by the assessee,
     the Appellate Tribunal held that the industrial undertaking at Bhavnagar
                   •         i(                            -                    •
     formed an integral Whole and the new workshops under construction
     remaining to be installed were part and parcel of that rind.ertaking. The
B    Appellate Tribunal also held that the business of the industrial undertaking
     at Bhavnagar had already commenced and was being carried on during the
     year of account. The Tribunal further held that it was not in dispute that
     the assets in question could not be segregated from the industrial under-
     taking at Bhavnagar. These are the basic findings of the Appellate
     Tribunal. On the basis of the above findings, the Tribunal concluded that
C    "the capital employed in the undertaking" has to be distinguished from
     "assets used in the undertaking" and the relief envisaged by Section 84 of
     the Act is with reference to the capital utilised for the purpose of acquiring
      the asset for the business and the question as to whether it (the asset) was
     actually used in the business or not during the relevant year is of no
D     consequence. The Tribunal decided the question in favour of the assessee
      and held that the aggregate amount of Rs.21,17,178. was includible in the
      computation of capital for the .purpose of granting relief under Section 84
      of the Act to the assessee. On motion by the Revenue, the Appellate
      Tribunal referred the following question of law under Section 256(1) of the
      Act to the High Court of Bombay :
E
              ''Whether, on the facts and in the circumstances of the case, the
              amount of Rs: 21,17,178 representing the cost of Workshop under
              construction, could be taken into account in determining the capi-
              tal employed in the undertaking at Bhavnagar for the purpose of
              granting relief to the' company in terms of Section 84 of the
F
              Income-tax Act, 1961 for the assessment year 1962-63?"

             5. The High Court of Bombay, by its judgment dated 7.7.1978,
      considered the rival pleas of the Revenue and the assessee in detail and
      concurred with the reasoning and conclusions of the Appellate Tribunal
.G    and answered the question in the affirmative and in favour of the assessee.
      Thereafter, this Court granted special leave to the Revenue to appeal to
      this Court against the aforesaid judgment of the Bombay High Court and
      that is how the appeal is before us.

 H          6. Section 84(1) of the Income-tax Act, 1961 at the relevant period
 (
-{

        c.r:T.v.ALCOCKASHDOWNANDCO.LTD.[PARIPOORNAN,J.) 943

     read as follows :                                                              A
             "84(1) Save as otherwise hereinafter provided, income- tax shall
             not be payable by an assessee on so m~cllof the profits or gains
             derived from any industrial undertaking or hotel to which this
             section applies as do not exceed six per cent per annum on the
             capital employed in the undertaking or hotel, computed in the          B
             prescribed manner."

                                                           (Emphasis supplied)

     Rules 19(1) and (6) of the Income-tax Rules, 1962 insofar as they are
     relevant, provide as follows :                                                 C
             "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 or hotel to which the said section applies shall
             be taken to be -
                                                                                    D
                (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 thi; commencing date of the said           E
             period;

                (ii) if-they have been acquired on or after the commencing date
             of the computation period, their average cost during the said
             period;
                                                                                    F
                 (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; ·
                                                                                    G
                (ii) if they have been acquired ·on or after the commencing date
             of the comput~tion ·p~rldd, 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;                  H
     944                   SUPREME COURT REPORTS                  [1997] 1 S.C.R.
A              (d) in the case of any other assets, the value of the assets when
                                                                                     1I
            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
B

             (6) In this rule, -

                 (i) 'average cost' in relation to any asset means such proportion
c            of the actual cost thereof as the number of days of the computation
             period during which such asset is used in the business bears to the
             total number of the days comprised in the said period;

                (ii) 'computation period' means the period for which the profits
             and gains of the undertaking or hotel are computed under sections
D.           28 to 43A....................."

         7. Counsel for the appellant (Revenue), Dr. R.R. Misra, contended
  that the High Court should have read section 84(1) along with Rules 19(1)
  to (6) of the Income-tax Rules and held that the relief under Section 84
E was meant only for assets actually used and if the assets are not actually
  and directly used in the business, the amount representing the cost thereof
  should not be taken into account in determining the capital employed in
  the undertaking. On the other hand, counsel for the assessee, Mr. S.
  Ganesh, submitted that the proper interpretation of Section 84 read with
  Rule 19(1) of the Rules only envisages that the particular asset should have
F been a form of capital put into the business during the relevant accounting
  period and does not refer to the actual use made of any particular asset
  during that period. The emphasis placed by counsel for the Revenue on
  Rule 19(6) of the Rules has no relevance since reference to Rule 19(6) is
  called for only in cases where the average cost in relation to an asset arises
G for consideration.

        8. On examining the rival pleas, we are of the view that the reasoning
  and conclusion of the High Court does not call for any interference.
  Section 84(1) of the Income-tax Act is very clear. It affords relief to an
  assessee as provided therein the moment 'the capital is employed in the
H undertaking'. The Section does not state or specify that the asset should
   C.LT. v. ALCOCK ASHDOWN AND CO. LTD. [ PARIPOORNAN, J.] 945

be acmally used or utilised. After adverting to the interpretation placed by A
the House of Lords on similar or kindred words that occurred in the
Finance Act (England) and also the decision of the Madras High Court in
Jayaram Mills Ltd. v. CEPT 35 ITR 651, wherein similar words were
construed with reference to Excess Profits Tax Act, a Division Bench of
the Calcutta High Court, in CIT v. Indian Oxygen Ltd. 113 ITR 109 at pages
                                                                             B
119 and 120, laid down the law, with reference to Section 84 and Rule 19
of the Income-tax Rules, thus :

        "Only in the computation of the value of the assets, acquired at or
        after the commenCing date of the computation period, it is neces-
        sary to determine their average cost during the entire accounting C
        period and for that purpose only the actual user of the assets in .
        the business becomes relevant. It is quite clearfrom the rnle that
        if an asset is acquired prior to the commencement of the account-
        ing period the question of its user or non-user is entirely im-
        material. Whether such an asset is used or not, it will still be D
        included in the capital employed in the business.

            Looking at the position from another point of view it appears
        to us that the moment capital is utilised for the purposes of acquiring
        a11y asset for a business such capital becomes employed in the
        business. Whether the asset itself is actually used in the business       E
        or not, so far as the capital is concerned, it continues to be
        employed in the business.

            Our view as aforesaid finds support from t11e observations of
        the majority of the Law Lords in the case of Binningham small
        Anns Co. Ltd. (1951) 2 All ER 296 (HL). The Madras High Court             F
        has taken the same view in the case of Jayaram Mills Ltd. (1959)
        35 ITR 651."

                                                        (Emphasis supplied)
                                                                                  G
In the decision under appeal, (Alcock case - 119 lTR 164) the Bombay
High Court has followed the above Calcutta decision.

      9. Construing the words 'capital employed in the undertaking', a
Bench of the Karnataka High Court in Ravi Machine Tools (P) Ltd. v. CIT,
114 ITR 459 at page 462, stated the law thus :                           H
    946                  SUPREME COURT REPORTS                       (1997] 1 S.C.R.

A           "Section 80J refer to capital employed in an industrial undertaking
            and not the user of any asset as such. The company acquires an - ··
            asset for its undertaking and the capital employed in the under-
            taking is the amount paid to acquire that asset. The user or non-user
            of the assets so acquired is immate1ial for the computation of the
            benefit under Sec. 80!. This is the view that was taken by the High
B           Court of Calcutta in CIT v. Indian. Oxygen Ltd., (1978) 113 ITR
            109 and also (1959) 35 ITR 651 of the High Court of Madras
            (Jayaram Mills Ltd. v. Commissioner of Excess Profits Tax). In
            Indian Oxygen's case (1978) 113 ITR 109, after referring to the
            observations of the House of Lords in the case of Binningham
c           Small Amis Co. Ltd. (1951) 2 All ER 296, it was held - See {1978)
            113 ITR 109, 120 {Cal).

                 "............... it appears to us that the moment capital is utilised
                 for the purposes of acquring any asset for a business, such
                 capital becomes employed in the business. Whether the asset
D                itself is actually used in the business or not, so far as the
                 capital is concerned, it continues to be employed in the
                 business."

            We entirely agree with this enunciation........ ".
E                                                                (Emphasis supplied)

         We find that the Bombay High Court has consistently followed the
   decision in CIT v. Alcock Ashdown & Co Ltd., 119 ITR 164, the decision
   under appeal in the subsequent cases. See - CIT v. Boehringer Knoll, 148
F ITR 70; CIT v. Hindustan Polymers Ltd., 156 ITR 860; CIT v. Advani
   Oerlikon Pvt. Ltd., 161 ITR 449; CIT v. Indian Smelting & Refining Co. Ltd.,
   169 ITR 562; CIT v. Elpro International Ltd., 177 ITR 20 and CIT v. Century
   Spinning & Manufacturing Co. Ltd., 181 ITR 214. The other High Courts
   have also followed, either the one or more or all, the decisions reported in
G CIT v. Indian Oxygen Ltd., 113 ITR 109 Calcutta, Ravi Machine Tools Pvt.
   Ltd. v. CIT, 114 ITR 459 (Karnataka) a!Jd the decision under appeal CIT
   v. Alcock Ashdown & Co. Ltd., 119 ITR 164. See - CIT v. Cibatul Ltd., 115
   ITR 879- (Gujarat); CIT v. Mohan Meakin Breweries Ltd., 122 ITR 203 -
   (Himachal Pradesh); Periyar Chemicals Ltd. v. CIT 162 ITR 163 - (Kerala);
   CIT v. Sundaram Industries Ltd., 166 ITR 35 - (Madras); CIT v. Southem
 H Agrifurane Industries Ltd., 174 ITR 697-(Madras) and CIT v. Gopi Chand
         C.I.T. v. ALCOCK ASHDOWN AND CO. LTD. [ PARIPOORNAN, J.) 947

      Textile Mills Ltd., 179 ITR 371 (Punjab & Haryana). Our attention was not        A
      invited to any decision taking a contrary view.

            10. In our opinion, the law laid down in Indimt Oxygen Ltd.'s case
      (113 ITR 109) and followed in the decision under appeal, Alcock Ashdown
      & Co.'s case (119 ITR 164) and other cases referred to above represents
      the correct law on the subject. We are of opinion, that the moment an asset      B
      is acquired or purchased for the purpose of the business, it is capital
.-.   employed, though the asset as such is not actually utilised or used during
      the accounting year. In the chain of events, the earliest act or event, is the
      purchase or acquisition of the asset. That by itself entitles the assessee to
      get the relief. The "employment" of the Capital is done or over. The             C
      subsequent or later events - including the actual "user of the asset has
      nothing to do in the matter. In this view, the judgment under appeal merits
      no interference. The appeal is accordingly dismissed with costs.

            11. In Civil Appeal No. 9796 of 1995, the judgment under appeal has
      only followed the earlier decision in Alcock Ashdown & Co's case 119 ITR         D,
      164. Since we have already dismissed the appeal preferred by the Revenue
      against the decision reported in 119 ITR 164 (Civil Appeal No. 1274 of
      1980), Civil Appeal No. 9796 of 1995 is also dismissed. There shall be no
      order as to costs.

             The appeals are disposed of as above.                                     E
      R.D.                                                    Appeals disposed of.