Case: Commissioner of Income Tax Gujarat Vs. Elecon Engineering Company Limited

Assessee is a Public Limited Company and the relevant assessment year is 1964-65. This was the second year of the assessees new project at Vidyanagar 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 10 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 tois considerable force in the arguments urged by Sri Talati. In view of the phraseology used in the rules we ar e inclined to accept Sri Talatis 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 assessees contention must, therefore, bethe instance of the Revenue, the Tribunal referred the following question for the opinion of the Highon 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 assesseesHigh Court noticed the feature that there was dearth of judicial decisions on the point at issue, dealt with the relevant provisions at length and came to agree with the conclusion reached by the Appellate Tribunal.Admissibility of exemption under section 84 of the Act whic h has been repealed with effect from 1.4.1968, has never been in dispute.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 re levant provisions of this Rule would depend the ultimate conclusion to be reached. Sub-rule (1), (3) and (5) are relevant.

Court's reasoning:
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 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. 1963 as also on account of the average value of additions. The other assets were valued under Rule 19(1)(b) at Rs.44, 38, 126 as on 1.1.1963. All put together, the aggregate valuation came to Rs.85.88, 837. From this aggregate, deduction of a sum of Rs.44, 01, 803 representing loans, other liabilities including provision 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 representing 6% of the capital employed in the new industrialassessment 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 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 as sets but in its view the deeming provision in Rule 19(5) was the special procedure laid down for computation for the purpose of calculation and could not be overlooked for the reasons advanced by the Revenue. We find sufficient force in the reasoning of the High Court and accept the conclusion reached by it.