ORDER
UDAY SINHA, J. :
This is a reference under s. 256(1) of the Income-tax Act, 1961. The following questions have been referred to us for our opinion :
1. Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that even the development rebate reserve fund has to be treated as capital employed in the undertaking ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the money borrowed should be treated as capital for the purpose of granting relief under section 80J of the Income-tax Act, 1961 ?
2. This assessment is in relation to assessment year 1975-76. The assessee is a registered partnership Firm. The accounting year is Diwali to Diwali.
3. In regard to the first question, the short question is whether the sum set apart as development rebate is available to the Firm during the eight years or not. The answer must be in the affirmative. It is true that the assessee may treat it as blocked amount for eight years in order to claim the rebate but there is no bar upon the assessee to utilise the sums set apart for business purposes. That sum, therefore, cannot be treated as part of the capital. The Tribunal relied upon the case of CED vs. Smt. Nirmala Chandulal (1977) 106 ITR 630 (Guj) holding that the development rebate reserve fund has to be treated as capital employed in the undertaking. In my view, the decision is not germane to the question at issue. The decision of the Gujarat High Court so far it goes is unexceptionable but it does not lay down that where the profits have been kept as reserve, it would be treated as capital of the assessee. In the instant case, we are concerned with the nature of the development rebate reserve fund. The rebate reserve funds is the liability of the assessee. In my view, the Tribunal was not right in holding that development rebate reserve fund had to be treated as capital employed in the undertaking. The first question, therefore, referred to this Court must be answered in the negative.
4. The next question is, how is the borrowed capital to be treated. Is it to be treated as capital for the purpose of granting relief under s. 80J of the IT Act ? This question was concluded by our decision in CIT vs. M/s. Patwari Udyog (T.C. 315 of 1980) disposed of on 14th September, 1989. The question whether borrowed capital has to be deducted from capital or not has to be answered in the light of rule r. 19A of the IT Rules. Sub-r. (2) lays down how the capital employed in an industrial undertaking has to be computed. Sub-r. (2) shall be deducted from the aggregate of the amounts as on the first date of the computation period of borrowed money deducted from the computation for ascertaining the capital employer in an industrial undertaking. The validity of r. 19A was assailed before the Supreme Court in Lohia machines Ltd. vs. Union of India (1985) 152 ITR 308 (SC). The Supreme Court upheld the vires of that rule. After the pronouncement of the Supreme Court decision and of this Court, There is not much left to be stated in regard to the treatment of borrowed capital in the assessment. I an, therefore, of the view that the Tribunal was not right in holding that the money borrowed should be treated as capital for the purpose of granting relief under s. 80J.
5. In my view, therefore, both the questions must be answered in the negative in favour of the Revenue and against the assessee.
6. Let a copy of this order be transmitted to the Assistant Registrar, Income Tax Appellate Tribunal, Patna in terms of section 260 of the Act.
S. C. MOOKHERJI, J.
I agree.