ORDER
B.C. Mitra, Accountant Member
1. These appeals by the department raising common contentions are disposed of by this consolidated order for the sake of convenience.
2. The point for consideration which is common for all the years under appeal, is whether in computing the capital employed in the assessee’s newly established undertakings, the amount due to the head office as reflected in the balance sheets of the undertakings as on the first day of the computation periods, representing the borrowed monies and debts owed by the head office to third parties, is to be deducted from the aggregate amounts representing the values of the assets of the respective undertakings for the purpose of determining the qualifying amount deductible under Section 80J (1) of the Income-tax Act, 1961 (‘the Act’).
3. In the assessment year 1978-79 the assessee set up an industrial explosive plant at Korba (Korba Unit No. 1) which went into commercial production on 1-3-1978. The balance sheet was drawn up in respect of the said undertaking (Kobra Unit No. 1) as on 1-3-1978. In its profit and loss account drawn for the period ending 31-3-1978, a loss of Rs. 7,71,593 was disclosed. The assessee claimed deduction of Rs. 11,13,875 under Section 80J(1) being 7.5 per cent of the capital employed in the said industrial undertaking of Rs. 1,48,51,466 on the basis of the following computation that was submitted before the ITO :
Rs.
Fixed assets (building, plant and machinery, furniture
and fixtures and motor vehicles) at cost 1,30,08,467
Capital goods in stock 1,48,489
Stores and spare parts 16,94,710
Capital employed Total 1,48,51,666
From the aggregate value of the assets so determined as on the first day of the computation period, the assessee did not deduct the liabilities as shown in the balance sheet of the following two amounts :
Rs.
Current liabilities and provision 16,72,903
Head office/division current account 1,31,78,763
Total 1,48,51,666
In regard to both the sums shown as liabilities of the undertaking as on 1-3-1978, the ITO held that the same were to be deducted from the aggregate value of the asset of the undertaking as on 1-3-1978 in view of the provision contained in Section 80J(1A)(III) as introduced by the Finance (No. 2) Act, 1980 with retrospective effect from 1-4-1972. The ITO by analysing the head office balance sheet as on 1-3-1978 found that ‘investment in the plant was not made out of capital and accumulated reserves of the company but the investment came out of borrowed fund’. He further observed that ‘since the deduction under Section 80J is to be calculated on the capital employed in the industrial undertaking computed in the manner specified in Sub-section (1A) of that section in respect of the previous year and since there is no capital (representing share capital and reserve) employed by the assessee in the industrial explosive plant at Korba during the relevant previous year the assessee’s case does not come within the purview of Section 80J of the Act’. The ITO in the circumstances, rejected the assessee’s claim.
4. In the assessment year 1979-80 the assessee claimed a sum of Rs. 9,97,306 being the deficiency which was to be carried forward under Section 80J(3) on account of the loss suffered in the assessee’s industrial undertaking in Korba (Korba Unit No. 1). The ITO rejected the claim on the grounds mentioned in his order for the assessment year 1978-79, namely, that the amount invested in the industrial undertaking did not flow from the assessee’s capital representing share capital and reserves.
5. In the assessment year 1980-81 the assessee set up another industrial unit at Korba (Korba Unit No. 2). It claimed deduction under Section 80J of Rs. 16,33,790 [wrongly mentioned at Rs. 30,10,464 in the Commissioner (Appeals) order], in respect of Korba Unit No. 1, and further claimed deduction of Rs. 7,42,583 under Section 80J in respect of Korba Unit No. 2. The assessee claim d before the ITO that in view of loss suffered in Korba Unit No. 2, the deficiency as worked out by the assessee at Rs. 7,42,583 should be carried forward under Section 80J(3). Both the claims have been negatived by the ITO, as in respect of Korba Unit No. 1, the ITO found that the position remained the same as found by him for the assessment years 1978-79 and 1979-80, namely, that the assessee’s entire investment in Korba Unit No. 1, came out of its borrowed funds. In respect of Korba Unit No. 2, also the ITO on scrutiny of both the head office and newly established undertakings balance sheets found that ‘the fund invested in the said plant did not come out of the capital of the company but out of the borrowed loan funds’.
6. For the assessment year 1981-82 the assessee set up two more industrial units at Kudra Mukh and Nasik. It claimed deduction under Section 80J in respect of Korba Unit Nos. 1 and 2, aggregating to Rs. 12,89,426 and in respect of the newly established industrial undertakings at Kudra Mukh and Nasik it claimed Rs. 11,93,921 being the deficiency worked out by the assessee in the said units which was to be carried forward in terms of Section 80J(3). The ITO for the reasons mentioned in the earlier years in respect of the assessee’s claim pertaining to Korba Unit Nos. 1 and 2, rejected both the claims of the assessee.
7. The Commissioner (Appeals) by his consolidated order dated 31-5-1985 directed the ITO to allow deduction under Section 80J as claimed by the assessee for each of the assessment years under appeal. The Commissioner (Appeals)’s observations in this regard are as follows :
The Income-tax Officer disallowed claim under Section 80J on the ground that company’s own funds had already been locked up elsewhere and new projects were taken up with borrowed money. But the fact remained that the company had very little borrowing on interest although the amount payable to the sundry creditors (current liabilities) have gone up. The borrowings as appear in the books of account are peculiar to the appellant because of the fact that the appellant purchases petroleum products from Indian Oil Corpn. on credit and sells these products on cash. Therefore, there is always a large amount outstanding on account of credit extended by the Indian Oil Corpn. Since current liabilities in actuality are incidental to the appellant’s business and are not moneys borrowed they do not come under the mischief of Rule 19A or amended Section 80J(1A) and as such, their claim under Section 80J should be allowed. This point is covered by the case of Indian Oil Corpn. Ltd. v. S. Rajagopalan, ITO [1973] 92 ITR 241 (Bom.). The aforesaid disallowances are, therefore, allowed.
8. The departmental representative stated that in terms of Section 80J(1A)(III) the debts owed by the assessee are to be deducted from the aggregate value of the assets of each of the industrial undertakings of the assessee for the purpose of computing the relief admissible to the assessee under Section 80J(1) or for working out the deficiency in terms of Section 80J(3). It has been argued that the ratio of the Bombay High Court decision in the case of Indian Oil Corpn. Ltd. v. S. Rajagopalan, ITO [1973] 92 ITR 241 could not be applied to the facts of the present case inasmuch as, the issue before the High Court was whether the total liability of all the four industrial undertakings of the assessee in that case was to be deducted form the assets of each undertakings for the purpose of determining the qualifying amount to be deducted under Section 80J in respect of each of the undertakings of the assessee. The High Court on a true construction of Rule 19A of the Income-tax Rules, 1962, and Section 80J(1) held that in respect of each undertaking the liabilities of the assessee in respect of that industrial undertaking only are to be deducted from the aggregate value of the assets of the same industrial undertakings. It has been pointed out that the ITO by analysing the balance sheet figures of the assessee’s undertakings and its head office found that the entire finances of the assessee in its industrial undertakings as reflected in the balance sheets drawn up for each undertaking have been made out of borrowed fund and/or debts owed by the assessee. Our attention was also drawn to the Supreme Court decision in the case of Lohia Machines Ltd. v. Union of India [1985] 152 ITR 308 wherein it has been held that for computing the fair return on the ‘capital employed’ which is to be excluded from tax under Section 80J(1), the owner’s capital alone should be taken into account and borrowed monies should be excluded. In reply, the assessee’s learned Counsel stated that in terms of Section 80J(1A), capital employed in an industrial undertaking is to be computed in accordance with Clauses (II) to (IV) of the said section. Therefore, computation of capital is not of the assessee but of the industrial undertakings set up by the assessee. The assessee’s learned Counsel did not dispute the fact found by the ITO that the head office had no surplus funds and it financed the industrial undertakings out of borrowed funds and debts owed to third parties. In fairness he conceded that the current liabilities and provision shown of Rs. 16,72,903 in the assessee’s computation of relief claimed under Section 80J pertaining to the assessment year 1978-79 was to be deducted from the aggregate assets of Korba unit No. 1 as the same represented the liabilities of the said undertaking. According to the assessee’s learned Counsel the debts and borrowings are of the head office and not of the undertakings and, therefore, the amount due to the head office as on the date of the computation periods for which balance sheets have been drawn up for each undertaking cannot be deducted from the aggregate value of the assets of the undertakings for the purpose of computing the capital employed in each of the assessee’s undertakings. In this context, he referred to the observations made in the case of Indian Oil Corpn. Ltd. (supra) at page 259, namely, that the words ‘in respect of the industrial undertaking in which the capital employed is to be computed’ are to be added after the words ‘borrowed moneys and debts due by the assessee’, as appearing in Rule 19A(3) which is in pan materia with the provision contained in Section 80J(1A)(III). It has been pointed out that the interpretation given by the Hon’ble High Court in that case of Rule 19A(3) read with Section 80J(1) has been accepted by the Board vide their Circular No. 380, dated 10-4-1984 [see Taxmann’s Direct Taxes Circulars, Vol. 1, 1985 edn., p. 535]. Our attention was also drawn to a Tribunal decision in the case of Alfred Herbert (India) Ltd. [IT Appeal No. 996 (Cal.) of 1983] wherein the aforesaid decision of the Bombay High Court has been followed and it has been pointed out that the Tribunal refused to draw up a statement of the case against the Tribunal’s order in IT Appeal No. 996 (Cal.) of 1983 vide their order in Reference Application No. 534 (Cal.) of 1984. Reference was also made to the Madras High Court decision in the case of CIT v. South India Viscose Ltd. [1983] 140 ITR 58 wherein it has been observed that :
… In accountancy, when a branch balance sheet is prepared, the amount owed to the head office would be displayed as a liability, as there is no other way of accounting for it. Merely because it is thus shown as a liability in the said balance sheet of the new undertaking which is required to be prepared under the law for working out its profits separately, for granting the relief, it cannot be taken as borrowed monies or a debts owed by the assessee . . . .
9. According to the assessee’s learned Counsel, the expression ‘borrowed monies’ and ‘debts owed by the assessee’ in Section 80J(1A)(III) postulate the existence of third parties from whom monies are borrowed and debts are incurred. In the absence of any such third party, there is no scope for deduction of the said amount for arriving at the capital computation for the purpose of Section 80J. The main plank of the learned Counsel’s submission is that in the balance sheet of the undertaking, the amount owing to the head office as shown, cannot fall within the expression ‘debts owed by the assessee’. In other words, according to the learned Counsel even though the head office financed the undertakings out of borrowed funds and/or debts owed by it to third parties, the same need not be taken into consideration in computing the capital of the assessee’s undertakings under Section 80J. We are not impressed with the learned Counsel’s submissions made in this regard as the undertakings admittedly are owned by the assessee and for accounting purpose only, separate balance sheets of the undertakings of the assessee had to be drawn up. It is the substance of a matter which is to be looked into and not its form. The amount shown as a liability in the branch balance sheet representing the money owing to the head office, in substance, are the monies borrowed by the assessee in respect of the industrial undertakings and, therefore, need be taken into account for purposes of computing the capital employed by the assessee in those undertakings. In this context, it would be relevant to quote the following observations of the Bombay High Court in the case of Indian Oil Corpn. Ltd. (supra) :
. . . If you want to arrive at the capital employed by an assessee in a particular industrial undertaking, you cannot arrive at it by deducting from the assets of that particular undertaking the liabilities not only of that industrial undertaking, but also of three other industrial undertakings. This is mathematically absurd. What you want to find is the capital employed in an industrial undertaking. This cannot be mathematically done by deducting from its assets the liabilities of other undertakings. One will, therefore, have to give a reasonable interpretation to Sub-rule (3) by adding after the words ‘borrowed moneys and debts due by the assessee’, the words ‘in respect of the industrial undertaking in which the capital employed is to be computed’. We accordingly hold that, on a true interpretation of Rule 19A, in respect of each undertaking, the liabilities of the assessee in respect of that industrial undertaking only are to be deducted from the aggregate value of the assets of the same industrial undertaking. . . .
It has not been disputed that the head office had no surplus funds of its own and, therefore, investment made by it in the industrial undertakings were out of borrowed funds. The funds advanced by the head office to its undertakings are reflected in the balance sheets of each of the undertakings in an account styled ‘head office current account’. That being so, the amount shown as monies owed to the head office would in substance, be the amount borrowed by the head office and consequently, would come within the ambit of Section 80J(1A)(III). It is also pertinent to note that in the case of South India Viscose Ltd. (supra) there is a clear finding of the Tribunal that in the branch balance sheet the amount shown as a liability to the head office did not represent borrowed money nor a debt owed to a third party but represented the surplus funds of the assessee. The said decision, therefore, is not applicable to the facts of the assessee’s case. The Tribunal’s order in the case of Alfred Herbert (India) Ltd. (supra) relied on by the assessee’s learned Counsel is also distinguishable on facts, as there was a clear finding that the money invested in the new unit came from its head office funds. We would, accordingly, by reversing the Commissioner (Appeals)’s order restore the ITO’s order rejecting the assessee’s claim under Section 80J for each of the assessment years under appeal.
10. The only other ground raised for the assessment year 1979-80 pertains to the disallowance of Rs. 1,29,471 as capital expenditure, since deleted by the Commissioner (Appeals).
11. The ITO on scrutiny of the miscellaneous expenses account, came across with an expenditure debited of Rs. 1,27,471 being the office renovation expenses incurred by the assessee. The ITO found that beside the aforesaid expenditure, the assessee further incurred expenditure towards architect’s fees paid of Rs. 2,000. On scrutiny, the ITO found that the expenditure was mainly on account of addition and alteration in the office premises by fixing false ceilings for air-conditioning purposes, panelling and partitioning of the office premises. In the ITO’s opinion, the expenditure was in the nature of capital expenditure as the assessee derived benefit of an enduring nature and, thereby, added back the entire amount of Rs. 1,29,471. The Commissioner (Appeals) deleted the ITO’s addition by placing reliance on the Delhi High Court decision in the case of Instalment Supply (P.) Ltd. v. CIT [1984] 149 ITR 52.
12. The assessee’s learned counsel stated that the office premise was a tenanted one. The assessee obtained an advantage in a commercial sense by redesigning the premises and by fixing false ceiling for the purpose of air-conditioning the office. The advantage obtained by the assessee was for the purpose of the business of the assessee and not for requisition of any capital asset. It has been pointed out that the assessee did not make structural changes to the building as such, as it was not the assessee’s property. He, accordingly, supported the Commissioner (Appeals)’s order.
13. After hearing the departmental representative, we are of the opinion that the expenditure incurred by the assessee was primarily motivated for achieving better efficiency and in that sense the advantage derived was in a commercial sense. We are, therefore, satisfied that the assessee by incurring the expenditure for the purposes of renovating the office, did not derive benefit of an enduring nature. We do not find any ground to interfere with the Commissioner (Appeals)’s order in this regard.
14. In the result, the appeals for the assessment years 1978-79, 1980-81 and 1981-82 are allowed and the appeal for the assessment year 1979-80 is allowed in part.