Commissioner of Income Tax vs Baroax Morarji Ltd.

Mrs. Sujata Manohar, J.—This reference pertains to the assessment year 1967-68.

The dispute is in relation to the computation of capital for relief allowed in respect of a new industrial undertaking u/s 84 of the Income Tax Act, 1961, which was then in force, read with rule 19 of the Income Tax Rules, 1962, as in force at the relevant time. Under rule 19(3), as then in force, "any borrowed monies and debts due" by the assessee shall be deducted while computing the capital employed in an undertaking. The Department contended before the Tribunal that the computation of money borrowed and debts due should not have been done as at the end of the relevant accounting period, but the value of the liability in this regard should have been taken on an average basis. This contention has been negatived by the Tribunal.

The assessee had also contended that only the debts due and payable by the assessee at the end of the relevant accounting period should be deducted under rule 19(3) while computing the capital of the company and not debts which may be owing by the assessee but which had not become due and payable as at the end of the accounting period. The Tribunal has upheld the contention of the assessee that, for the purposes of rule 19(3), a distinction has to be made between "debts owed" and "debts due". It has, therefore, directed the Income Tax Officer to verify what part of the liability includes monies borrowed and debts due as at the end of the relevant accounting period. It has further directed that only these items shall be excluded under rule 19(3). In respect of the findings given by the Tribunal, the following questions have been referred to us u/s 256(1) of the Income Tax Act, 1961 :

"1. Whether, for the purpose of computing relief u/s 84 in accordance with rule 19, the figure of capital employed is to be worked out by considering the debts due as at the close of the relevant accounting period and not by taking the average of the liabilities as at the beginning and as at the close of the relevant accounting period ?

Whether, for the purpose of computing relief u/s 84 in accordance with rule 19, deduction was to be made only in respect of debts which were due for payment as at the end of the accounting period or deduction was to be made for all the liabilities irrespective of whether or not they were due for payment as at the end of the accounting period ?"

Regarding question No. 1, the Department relies upon the provisions of rule 19(1) as in force at the relevant time. Rule 19(1) deals with those assets which constitute the capital employed in a new industrial undertaking. Under rule 19(1)(a), there is an express provision to the effect that, in the case of assets acquired by purchase, if such assets were acquired on or after the commencing date of the computation period, their average cost during the said period should be taken into account. This sub-rule deals with assets which are entitled to depreciation. Similarly, under sub-rule (b) which deals with assets acquired by purchase but which are not entitled to depreciation, there is a similar provision that, if such assets are acquired on or after the commencing date of the computation period, their average cost during the said period should be taken into account. Under rule 19(1)(d) also, in the case of other assets, there is an express provision for taking the average value as set out in that clause. There is no such provision for averaging under rule 19(1)(c) which deals with assets in the form of debts due to the assessee.

In this connection, our attention was drawn to a decision of this court in the case of Commissioner of Income Tax Vs. Simmonds Marshall Ltd., . The Division Bench in this case considered rule 19(1)(c) and rule 19(1)(d) and held that the concept of averaging cannot be applied to debts which are due to the assessee.

As far as rule 19(3) is concerned, which deals with deductions to be made from the capital for the purpose of section 84, there is no provision for averaging of debts due by the assessee. In fact, it is difficult to see how the concept of averaging can be applied to debts due by the assessee because these debts become due and payable at a specific point of time and, as far as the computation of capital u/s 84 is concerned, the same has to be computed as at the end of the relevant accounting period. Therefore, debts which are due as at the end of the relevant accounting period will have to be deducted from the capital for the purposes of section 84. The ratio of the decision of this court in Commissioner of Income Tax Vs. Simmonds Marshall Ltd., , would also apply to the deductions to be made under rule 19(3) which includes debts due by the assessee. Therefore, the contention of the Revenue that, for the purpose of deduction, the average should be taken of the debts due by the assessee cannot be accepted. There is no such provision for averaging under rule 19(3).

Question No. 1, therefore, is answered in the affirmative and in favour of the assessee.

As far as the second question is concerned, in the case of Commissioner of Income Tax Vs. Boots Pure Drug Co. (I.) Ltd., , being Income Tax Reference No. 184 of 1977 decided by us on October 21, 1992, we have held for reasons set out therein that, u/s 84 read with rule 19, deduction is required to be made in respect of all borrowed monies irrespective of whether the amount is owing or due as well as in respect of all other debts which are due for payment as at the end of the accounting period, and not in respect of other debts which are only owing at the end of the accounting period, but not due. The Tribunal was, therefore, right in directing the Income Tax Officer to verify which part of the liability includes "monies borrowed" as also which part of the liability includes other "debts due" as at the end of the relevant accounting period. It is only these items that are required to be deducted under rule 19(3). Question No. 2 is, therefore, answered as follows :

For the purpose of computing relief u/s 84 in accordance with rule 19, deduction has to be made of borrowed monies and only those other debts which were due for payment as at the end of the accounting period, that is to say, deduction shall not be made of all the liabilities irrespective of whether or not they were due for payment as at the end of the accounting period, save and except in the case of borrowed monies.

In the circumstances, there will be no order as to costs.