I.T.R. No. 18 of 1991 [ 1] IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Income-tax Reference No. 18 of 1991 Date of decision: August 25 , 2008 The Commissioner of Income-tax, Patiala. ...Applicant v. M/s Vardhman Spinning and General Mills Ltd., Ludhiana. ... Respondent CORAM: HON'BLE MR. JUSTICE HEMANT GUPTA HON'BLE MR. JUSTICE RAJESH BINDAL Present: Mr. Rajesh Sethi, Advocate for the Revenue. Mr. Akshay Bhan, Advocate for the assessee. .. Rajesh Bindal J. The following questions of law have been referred for opinion of this Court arising out of order dated 31.8.1994, passed by the Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh (for short, `the Tribunal') in I.T.A. No. 135/Chandi/80 for the assessment year 1970-71: “1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that borrowed capital shall not be deducted, from the aggregate value of assets ascertained under sub-rule 2 of Rule 19-A in accordance with sub-rule 3 of rule 19-A ? 2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding rule 19-A(3) is ultra vires of provisions of Section 80-J?” Briefly, the facts are that the assessee filed its return of income declaring a loss of Rs. 4,65,920/- on 5.9.1970, which was subsequently revised on 8.2.1971 declaring a loss of Rs. 3,17,566/-. Again a revised return was filed on 24.6.1971 declaring a loss of Rs. 6,29,310/-. Still not satisfied with the return filed, the assessee again revised the same on 20.9.1972 declaring a loss of Rs. 8,17,048/-. Initially, the assessment of the assessee was framed under Section 143(3) of the Income-tax Act, 1961 (for short, `the Act') on 30.3.1973 which was set aside in appeal and the case I.T.R. No. 18 of 1991 [ 2] was remitted back for denovo assessment. The dispute in the present case is regarding claim of deduction under Section 80-J of the Act. Initially, the deduction was claimed for a sum of Rs. 3,82,492/-. In the revised return filed on 20.9.1972, the deduction was claimed at Rs. 4,10,698/-. However, later on, after the initial assessment was set aside and the case was remitted back for denovo assessment, vide letter dated 3.12.1977, the deduction was claimed at Rs. 9,58,469/-. The claim was not accepted by the Assessing Officer finding that the assessee had not worked out the same in accordance with the provisions as the amount reflecting the loans, current liability and value of building and machinery in progress had not been deducted. Referring to Rule 19A(3) of the Income-tax Rules, 1962 (for short, `the Rules'), the claim of the assessee for deduction under Section 80J of the Act was not found to be admissible to the extent of borrowed capital. The assessee had not been able to support his claim in terms of the requirement of Rule 19A(3) of the Rules which required that the borrowing had to be from specified source and repayment thereof should not be within a period of less than 7 years. In appeal, the Commissioner of Income-tax (Appeals) set aside the order passed by the Assessing Officer on the issue relying upon a Special Bench order of the Tribunal in the case of M/s Amar Bye Chm. Ltd. Bombay v. ITO Company Circle II (3) Bombay, ITA No. 3643 (Bom.) of 1974-75 for the assessment year 1970-71 relying upon the judgment of Calcutta High Court in Century Enka Limited v. Income-Tax Officer and others, (1977) 107 ITR 123 and Madras High Court in Madras Industrial Linings Ltd. v. Income-Tax Officer, Companies Circle (6), Madras and others, (1977) 110 ITR 256, where Rule 19A(3) of the Rules had been struck down being violative of Section 80J of the Act. In appeal by the Revenue before the Tribunal, the order was upheld. Before we proceed to deal with the issue on merits, it would be appropriate to notice at the out-set that judgments of Calcutta High Court in Century Enka Limited's case (supra) and of Madras High Court in Madras Industrial Linings Ltd.'s case (supra) were over-ruled by Hon'ble the Supreme Court in Lohia Machines Ltd., and another v. Union of India and others, (1985) 152 ITR 308 upholding the vires of Rule 19A of the Rules. If I.T.R. No. 18 of 1991 [ 3] that is so primarily the ground on which the claim of the assessee was accepted itself looses its base. Still we proceed to consider the issue on merits in view of position of law as existing after the judgment of Hon'ble the Supreme Court in Lohia Machines Ltd.'s case (supra). A Bench of Bombay High Court in Commissioner of Income- Tax v. Boots Pure Drug Co. (I.) Ltd., (1993) 203 ITR 979, while considering the judgment of Hon'ble the Supreme Court in Lohia Machines Ltd.'s case (supra) and also referring to Rule 19(3) of the Rules, as was in force at the relevant time and also referring to Rule 19A of the Rules, which was introduced w.e.f. 1.4.1972, opined that during the interregnum period from 1.4.1968 to 1.4.1972, the borrowed moneys of the kind specified in sub-rules (a) and (b) of Rule 19A(3) of the Rules were to be included in the computation of the capital employed for the purpose of deduction under Section 80J of the Act. Relevant paras thereof are extracted below: “ The relevant provisions of rule 19 were as follows: “19.(1) For the purpose of section 84, the capital employed..... shall be taken to be -........ (3) Any borrowed money and debt due by the person carrying on the business shall be deducted.....” For the assessment years 1968-69 to 1970-71, section 84 was replaced by section 80J of the Income-tax Act, 1961, and rule 19(3) was replaced by rule 19A(3). The relevant provisions of rule 19A as in force during these assessment years were as follows: “19A. Computation of capital employed in an industrial undertaking or a ship or the business of a hotel for the purposes of section 80J.- (1) For the purposes of section 80J, the capital employed in an industrial undertaking ..... shall be computed in accordance with sub-rules (2) to (4)..... (3) From the aggregate of the amounts as ascertained under sub-rule (2) shall be deducted the aggregate of the amounts, as on the first day of the computation period, of borrowed moneys and debts due by the assessee (including amounts due towards any liability in respect of tax, not being- .... I.T.R. No. 18 of 1991 [ 4] (b) in the case of any assessee (including a company) any moneys borrowed from an approved source for the creation of a capital asset in India, if the agreement under which such moneys are borrowed provides for the repayment thereof during a period of not less than seven years. Explanation.- ...... (i) `approved source' means the Government or the Industrial Finance Corporation of India or the Industrial Credit and Investment Corporation of India Ltd. or any banking institution.....” The scheme of Section 84 and Section 80J as well as the relevant rules framed thereunder have been considered at length by the Supreme Court in the case of Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308. While analysing these sections and the Rules framed thereunder, in order to determine the constitutional validity of these Rules, the Supreme Court has said, inter alia, that, prior to April 1, 1968, as well as after April 1, 1972, the prevailing position was that borrowed moneys were required to be deducted while computing capital for the purposes of these sections. Only for a short period from April 1, 1968, to April 1, 1972, when rule 19A(3) was in operation as set out earlier, borrowed moneys of the kind specified in sub-rules (a) and (b) of that rule were included in the computation of capital employed. The Supreme Court has analysed these sections on the basis that, while computing the capital employed for the purposes of section 84 and 80J,all borrowed moneys have to be deducted irrespective of when they fall due for repayment-save and except for the limited period from April 1, 1968, to April 1, 1972, when rule 19A(3) was in force where certain kinds of borrowed moneys which would fall under rule 19A(3)(a) and (b) would be included in the computation of capital. ..... ..... ..... .......In respect of “borrowed money”, the Supreme Court, in the case of Lohia Machines Ltd. [1985] 152 ITR 308, has clearly I.T.R. No. 18 of 1991 [ 5] held that all borrowings- whether long-term or short-term, will have to be deducted from the capital of a company for the purposes of section 84 and section 80J, with certain exceptions for the period April 1, 1968, to April 1, 1972. Therefore, the contention of the assessee that only such borrowed moneys as are due and payable on the first day of the computation period should be deducted cannot be accepted. All borrowed moneys, irrespective of whether they have become due and payable on the first day of the computation period, are required to be deducted under rule 19(3) as well as rule 19A(3). In the case of rule 19A(3), however, there is a specific provision made in respect of any moneys borrowed from approved sources- which would include a banking institution, for the creation of a capital asset in India, if the agreement under which the moneys are so borrowed provides for repayment during a period of not less than seven years. Any borrowing from a banking institution which falls in this category can be included in the computation of capital for the purposes of Section 80J because of the express inclusion of such borrowing under rule 19A(3) at the relevant time. This exception would apply in the case of the assessee for the assessment years 1968-69, 1969-70 and 1970- 71.” The assessment year involved in the present case is 1970-71. In terms of the exception carved out by interpretation given in Lohia Machines Ltd.'s case (supra), as considered by Bombay High Court in Boots Pure Drug Co. (I.) Ltd.'s case (supra), the same falls within the exception where on satisfaction of certain specified conditions, the borrowed money is also included in the capital employed for the purpose of calculation of deduction under Section 80J of the Act, as has been provided in Rule 19A(3) of the Rules. In view of our above discussion, question No.1, as referred to above, is answered by holding that for the assessment year in question, the assessee would be entitled to add the borrowed money in the capital employed for the purpose of calculation of deduction under Section 80J of the Act in case the conditions as laid down in Rule 19A(3)(a) and (b) are I.T.R. No. 18 of 1991 [ 6] complied with. As far as question No.2 is concerned, the same does not require to be dealt with for the simple reason that it was not the Tribunal which had declared the provisions of Rule 19A of the Rules to be ultra vires to the provisions of Section 80J of the Act, rather it had relied upon the judgments of Calcutta High Court in Century Enka Limited's case (supra) and Madras High Court in Madras Industrial Linings Ltd.'s case (supra). In any case, the issue is not required to be dealt with as the issue involved in the present case has been dealt with on merits in first question of law. The reference is disposed of accordingly. (Rajesh Bindal) Judge (Hemant Gupta) Judge August 25, 2008 mk