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TMI Blog1977 (4) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... s affirmed by the Tribunal. For the same assessment year the assessee had also claimed the relief under section 84 of the Income-tax Act, 1961, in respect of its wire mill factory on the ground it was a new industrial unit, the products whereof were being used by the assessee. In its electrode factory. The Income-tax Officer held, that the assessee was not entitled to the relief claimed inasmuch as the products of this mill had not been sold in the market. On appeal, the Appellate Assistant Commissioner, following the decision in the case of Anil Starch Products Ltd. [1966] 59 ITR 514 (Guj), allowed the appeal and held that for the purose of allowing relief under section 84 of the Income-tax Act, 1961 the products of its of the new. industrial undertaking would have to be computed on ordinary commercial principles. The Tribunal, on further appeal, however, reversed the finding of the Appellate Assistant Commissioner following its earlier decision based on a judgment of this court in the case of Textile Machinery Corporation Ltd. [1971] 80 ITR 428 (Cal). A further controversy arose in respect of computation of the capital of the said wire mill unit as also the gas plant belonging ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ducts of the wire mill unit were used as raw material in the manufacture of electrodes at the electrode factory, Khardah, the Tribunal was justified in holding that the assessee was not entitled to relief under section 84 of the Income-tax Act, 1961, in respect of profits from the wire mill unit ? " So far as question No.1 is concerned, the same is now covered by a decision of this court in Income-tax Reference No. 78 of 1970 in the case of the same assessee (Commissioner of Income-tax v. Indian Oxygen Ltd. [1978] 112 ITR 1025 (Cal)). Following that decision we answer the question in the affirmative and in favour of the assessee. Similarly, question No. 3 is now covered by a decision of the Supreme Court in the case of Textile Mchinery Corporation Ltd. v. Commissioner of income-tax [1977] 107 ITR 195. Following the said judgment we answer the question in the negative and also in favour of the assessee. So far as question No. 2 is concerned to appreciate the controversy between the parties it is necessary to consider the section and the rule involved. Section 84 of the Income-tax Act, 1961, inter alia, reads as follows : "84. (1) Save as otherwise hereinafter provided, income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of rule 19. The said rule 19 lays down all categories of capital employed in the business which includes assets of the business. Therefore, in order to compute capital, it is also necessary to compute the value of the assets of the business as laid down by the said rule. Mr. Pal submitted that if the said section and the rule were read together an item could not be an asset of the business under clause (d) of the rule unless it was used and employed in the business during the relevant period and contributed to the earning of the profit. Section 84 contemplated employment of capital in the business and clause (vi) of rule 19 also envisaged that assets should be used in the business. In support of his submissions Mr. Pal cited two decisions. The first was a decision of the House of Lords in the else of Birmingham Small Arms Co. Ltd. v. Inland Revenue Commissioners [1951] 2 All ER 296. Here, the House of Lords considered and construed the expression "capital employed" in relation to the excess profits tax imposed by the Finance Act, 1939. This tax was charged upon the excess of profits and in the computation of excess profit it was necessary to compute the average amount of capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. The case, of the appellants, as I understand it, rests mainly, if not entirely, on the contention that in the case of a company carrying on a business all its assets are 'employed' in that business unless expressly excluded by the Act --a contention succinctly stated by saying that the capital employed in a business is the samething as the assets of a business. It was, I think, essential to the appellants' case to maintain this argument, for the Special Commissioners had found that the right (or 'claim' as they called it) regarded as an asset was not employed in the trade. It had, therefore, to be shown either that they were wrong in law because they had misinterpreted the word 'employed', or that there were no facts to support their finding. Thus, it was that the appellants formulated the second reason in their formal case in these words : 'Because every asset of a trade or business is part of the capital employed in the trade or business unless expressly excepted by statute.' My Lords, I see no valid reason for disregarding and giving no meaning to the word 'employed'. It was suggested that, inasmuch as the section had to cover the case of an individual or firm as well a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat part of the capital of a partner was employed in the partnership business, or what part of the individual's capital was employed in his trade or business. The provisions of the paragraph deal with the assets of which the capital employed in the trade or business consists, and it deals with them exhaustively. Apart from money, these assets are divided into (a) assets acquired by purchase, (b) assets being debts due to the person carrying on the trade or business, and (c) any other assets acquired otherwise than by purchase. The appellants' contention is that 'assets' include every item of property of every kind which may be made available to satisfy the debts of the owner of the assets, and that (apart from money) every item of property, including every chose-in-action belonging to the company, which does not fall under heads (a) or (b) of the sub-paragraph, necessarily falls under head (c). In this case we are asked to treat as capital employed in the trade or business an asset consisting of a claim to money which is not a debt and which, therefore, does not fall within head (b). It is a claim that might and later did ripen into a debt, and it is capable of being valued, though ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... what other distinction remains." Radcliffe concurred with the conclusion and dismissed the appeal with the following observation : But lest I go too far, I will content myself with saying that no part of the capital employed in this business in the accounting period consisted of this claim, which was at that date uncertain as to the amount that it would produce or the year in which it would be paid. A case of this sort is quite exceptional. The asset is, as it were, voted by Parliament, but it remains a vote until the claim is recognised and paid. We treat it as a chose-in-action for the purposes of this case, but I would think it unsafe to suppose that every chose-in-action which belongs to the proprietor of a business in connection with it is a form of capital emploved in his business." Lord Tucker observed as follows : "My Lords, I agree with those of your Lordships who consider that authority as well as the legislative history of the words 'capital employed', point to the conclusion that in their present context they do not refer to the actual use made of a particular asset in the relevant accounting period once it is shown to have been a form of capital put into the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chargeable accounting period, the assets of the said department did not become business assets and, therefore, did not form part of capital employed for the purpose of earning profits during the said period. The value of such assets, therefore, could not be taken into account for computation of average capital. On a reference, the Madras High Court held that once the assets had been acquired for the purpose of business, whether the same were used or not, they would still be assets of the business and available for the use of the business. It held further, that the fact that the weaving department did not go into actual production will not disentitle the assessee from claiming that the money spent on it should be considered as capital employed in the business. The High Court construed the section and observed that the word "employed" in the sub-rule related to the capital and not to the assets. The rule did not lay down that the assets should be employed in the business. The decision of the House of Lords in the case of Birmingham Small Arms Co. Ltd. [1951] 2 All ER 296 was cited and was considered by the Madras High Court which noted that the observation of Lord Simonds had not be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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