TMI Blog1979 (9) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... r, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the loan of Rs. 23,74,000 taken by the assessee from the Industrial Finance Corporation of India was not liable to be deducted while computing its capital for working out the relief due to it under section 80J of the Income-tax Act ? At the instance of the assessee for A.Y. 1968-69. " 4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the computation of capital employed in the business of the hotel in the accounting year ended on September 30, 1966, should be done under rule 19 of the Income-tax Rules and not under rule 19A, section 80J(3) of the I.T. Act? 5. Whether the Tribunal was correct in holding that loans taken by the assessee had to be deducted for computing its capital as per the provisions of rule 19 and rule 19A for the assessment years 1967-68 and 1968-69, respectively ? 6. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that under rule 19 of the Income-tax Rules, 1962 the amount of depreciation was not liable, to be added to the profits for computing the capital of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to a deduction from the profits and gains of the business of the hotel of 6% of the relevant capital employed during the previous year. The method of computation of the capital employed was laid down in r. 19A. Earlier, similar deductions were dealt with by s. 84 and the capital employed had to be computed in accordance with r. 19. Section 80J, however, made a departure from s. 84 by providing under sub-s. (3) the right to carry for ward the unabsorbed amount of capital employed for a period of seven years which could not be fully allowed in years of loss or when the profit was less. The assessee-company had not made any profit from the hotel business during the assessment year 1967-68 and, therefore, no relief under s. 84 was granted to it in that year. In the assessment year 1968-69, the assessee had made profits and claimed that the unabsorbed relevant amount of capital employed be set off against the profits of the assessment year 1968-69. In this respect, the assessee's contention, further, was that the relevant amount of capital employed for the assessment year 1967-68 should be calculated in accordance with r. 19A and not by reference to r. 19. This contention was, however ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the view that the amount paid was by way of penalty for contravention of law. The Tribunal, however, took the view that the composition fee could be included in the cost of the asset as in its view the words " cost of the asset " were of wide amplitude. In this year, a claim was also made for Rs. 50,635 as representing the cost of construction. This amount included the amount of Rs. 24,000 as composition fee and the balance cost of painting and water proofing, etc., of the roof of the conference hall. The claim regarding the painting and water proofing costs, etc., has been disallowed by all the three authorities on the ground that this expenditure was incurred after the conference hall had been created and did not relate to the costs of creation of the conference hall. We will begin by addressing ourselves to the first question for the assessment year 1968-69. As has been noticed, the conference hall was built while the hotel business was already running. The Tribunal has found that the hall was built after the 31st of March, 1967. The assessee has claimed depreciation under s. 32(1)(v) of the Act which runs as under : " 32. (1) In respect of depreciation of buildings, machin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es (as hair-dressing, shoe-shining), and with telephone booths, writing tables, and washrooms. (See Webster's Third New International Dictionary, Vol. II, p. 1084). Dealing with modern hotels in Encyclopaedia Britannica, 1968 Edn., Vol. II, on page 748, we find the following description. " All first class new hotels that were built in the late 1960s and early 1970s made provision for private bathrooms, and the larger London ones, such as the Churchill, Britannia, Portman, London International, and Skyline, mostly had accommodation for dealing with conferences, exhibitions, and banqueting, which provide the backbone of their off-season business. Similarly, in some of the chief provincial centres and at the more important holiday resorts, establishments were specially geared to catering to conference trade. One new luxury establishment, the 60 bed-room Capital Hotel in Knightsbride, London, took the novel step of providing disposable razors and toothbrushes in all bathrooms as well as individual take operas in all rooms. Also in use in the United Kingdom were service credit cards valid at certain establishments for the payment of accommodation and meals." These reference books ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the department urged that as we are deciding this matter on a reference, it would not be proper for us to proceed to answer the question on the basis that r. 19A(3) is ultra vires the rule-making power. It is settled that in a reference one cannot declare any provisions of the Act or the Rules ultra vires. But we are doing nothing of the sort here. All that we propose to do is to take notice of the decision of this court in Kota Box which declares r. 19A(3) to be ultra vires. The effect of the decision is that r. 19A(3) is wiped out of the statute book, with the result that we have to decide the question as if r. 19A(3) is non-existent. We may also refer to the decision of the Andhra Pradesh High Court in the case of CIT v. Warner Hindustan Ltd. [1979] 117 ITR 68. In that case, one of the questions that arose for decision was as to whether r. 19A(3) can take away the benefit conferred by s. 80J. On an interpretation of s. 19A(3) it was held that the rule did not come in conflict with s. 80J inasmuch as s. 80J did not provide for the method by which the capital employed had to be computed. This, according to the Andhra Pradesh High Court, was left solely to the rule-making power. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e words used in one part of a sub-section, unless there is a contextual intention to the contrary, have to be given the same meaning in the other parts of the section. We have, thus, to ascribe the same meaning to the words " relevant amount of capital employed " occurring in s. 80J(3) as that given to those words in s. 80J(1). Under s. 80J(1) the relevant amount of the capital employed has to be worked out in accordance with r. 19A.This impels us to hold that for purposes of s. 80J(3) the relevant amount of the capital employed has to be calculated in accordance with r. 19A. It is pertinent to point out that the words " relevant amount of capital employed " occurring in s. 80J(1) did not find mention in s. 84 of the Act on which the department places reliance. There is another consideration which weighs with us in adopting this interpretation. The assessee became entitled to the deduction under s. 80J(3) only as from the 1st April, 1968. Section 84 stood repealed then. The result of the repeal of s. 84 was that r. 19 fell with it. Rule 19 was a subordinate piece of legislation whose existence and efficiency depended on the longevity of s. 84, and once that provision flickered out, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld also to have been repealed. " We are fortified in the view that we take by the decision of the Karnataka High Court, Kirloskar Asea Ltd. v. CIT [1979] 118 ITR 703. The answer to the other inter-related question is consequential. So far as question No. 2 is concerned, the Tribunal added half of the profits of the current year while making the relevant capital computation by recourse to r. 19(5). As it has been held that the computation has to be made by r. 19A and not under r. 19 the Tribunal could not do so. So far as question No. 5 is concerned, the computation of the relevant amount of capital employed has to be made in accordance with r. 19A both for the assessment years 1967-68 and 1968-69. As r. 19A(3) is out of the way, borrowed capital had to be added to the capital employed. So far as the sixth question is concerned, inasmuch as we have held that the computation of the relevant amount of capital employed has to be done in accordance with r. 19A and not r. 19, it is not necessary to answer it. We are now left with two questions, viz., question No. 7 and question No. 8, both of which are inter-connected. The amount of Rs. 50,635 forming the subject-matter of question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to do so on the view that these expenses were incurred after the building had already been created. The approach of the Tribunal does not appeal to us. A building is not complete till such time that finishing touches have been given to it so as to make it presentable and useful for the purpose for which it was constructed. In the case of a construction of the type with which we are concerned, unless the painting job is completed and water proofing has been carried out, its utility and attraction as a conference hall would be diminished. Shri Ashok Gupta appearing for the department has urged that the assessee had already started using the conference hall when the expenditure was incurred and as such this amount could not be added to the cost of construction for purposes of s. 32(1)(v). We are unable to agree with this contention. For purposes of calculating the depreciation under s. 32(1)(v) the total cost of the new building has to be taken into account. It can hardly be disputed that a newly erected building has to be painted and made water proof in order that it may become useful for the purpose for which it was constructed. The mere fact that the assessee had started using the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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