CALCUTTA B BENCH INCOME TAX OFFICER v. I.B.P. CO. LTD. November 28, 1986 JUDGMENT 20 ITD 470 Income-Tax Officer. vs I. B. P. Company Limited. Bench: ITAT CALCUTTA ORDER Per Shri B.C. Mitra, Accountant Member--These appeals by department raising common contentions are disposed of by this consolidated order for sake of convenience. 2. point for consideration which is common for all years under appeal. is whether in computing capital employed in assessee's newly established undertakings, amount due to head office as reflected in balance sheets of undertakings as on first day of computation periods, representing borrowed monies and debts owed by head office to third parties, is to be deducted from aggregate amounts representing values of assets of respective undertakings for purpose of determining qualifying amount deductible under section 80J(1) of Income-tax Act, 1961 ('the Act'). 3. In assessment year 1978-79 assessee set up industrial explosive plant at Korba (Korba Unit No. 1) which went into commercial production on 1-3-1978. balance sheet was drawn up in respect of said undertaking (Korba Unit No. 1) as on 1-3-1978. In its profit and loss account drawn for period ending 31-3-1978, loss of Rs. 7,71,593 was disclosed. assessee claimed deduction of Rs. 11,13,875 under section 80J(1) being 7.5 per cent of capital employed in said industrial undertaking of Rs. 1,48,51,466 on basis of following computation that was submitted before 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 aggregate value of assets so determined as on first day of computation period, assessee did not deduct liabilities as shown in balance sheet of 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 sums shown as liabilities of undertaking as on 1- 3-1978, ITO held that same were to be deducted from aggregate value of asset of undertaking as on 1-3-1978 in view of provision contained in section 80J(1A)(III) as introduced by Finance (No. 2) Act, 1980 with retrospective effect from 1-4-1972. ITO by analysing head office balance sheet as on 1-3-1978 found that 'investment in plant was not made out of capital and accumulated reserves of company but investment came out of borrowed fund'. He further observed that 'since deduction under section 80J is to be calculated on capital employed in industrial undertaking computed in manner specified in sub-section (1A) of that section in respect of previous year and since there is no capital (representing share capital and reserve) employed by assessee in industrial explosive plant at Korba during relevant previous year assessee's case does not come within purview of section 80J of Act'. ITO in circumstances, rejected assessee's claim. 4. In assessment year 1979-80 assessee claimed sum of Rs. 9,97,306 being deficiency which was to be carried forward under section 80J(3) on account of loss suffered in assessee's industrial undertaking in Korba (Korba Unit No. 1). ITO rejected claim on grounds mentioned in his order for assessment year 1978-79, namely, that amount invested in industrial undertaking did not flow from assessee's capital representing share capital and reserves. 5. In assessment year 1980-81 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 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. assessee claimed before ITO that in view of loss suffered in Korba Unit No. 2, deficiency as worked out by assessee at Rs. 7,42,583 should be carried forward under section 80J(3). Both claims have been negatived by ITO, as in respect of Korba Unit No. 1, ITO found that position remained same as found by him for assessment years 1978-79 and 1979-80, namely, that assessee's entire investment in Korba Unit No. 1, came out of its borrowed funds. In respect of Korba Unit No. 2, also ITO on scrutiny of both head office and newly established undertakings balance sheets found that 'the fund invested in said plant did not come out of capital of company but out of borrowed loan funds'. 6. For assessment year 1981-82 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 newly established industrial undertakings at Kudra Mukh and Nasik it claimed Rs. 11,93,921 being deficiency worked out by assessee in said units which was to be carried forward in terms of section 80J(3). ITO for reasons mentioned in earlier years in respect of assessee's claim pertaining to Korba Unit Nos. 1 and 2, rejected both claims of assessee. 7. Commissioner (Appeals) by his consolidated order dated 31-5- 1985 directed ITO to allow deduction under section 80J as claimed by assessee for each of assessment years under appeal. Commissioner (Appeals)'s observations in this regard are as follows: "The Income-tax Officer disallowed claim under section 80J on ground that company's own funds had already been locked up elsewhere and new projects were taken up with borrowed money. But fact remained that company had very little borrowing on interest although amount payable to sundry creditors (current liabilities) have gone up. borrowings as appear in books of account are peculiar to appellant because of fact that appellant purchases petroleum products from Indian Oil Corpn. on credit and sells these products on cash. Therefore, there is always large amount outstanding on account of credit extended by Indian Oil Corpn. Since current liabilities in actuality are incidental to appellant's business and are not moneys borrowed they do not come under 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 case of Indian Oil Corpn. Ltd. v. S. Rajagopalan, ITO  92 ITR 241 (Bom.). aforesaid disallowances are, therefore, allowed." 8. departmental representative stated that in terms of section 80J(1A)(III) debts owed by assessee are to be deducted from aggregate value of assets of each of industrial undertakings of assessee for purpose of computing relief admissible to assessee under section 80J(1) or for working out deficiency in terms of section 80J(3). It has been argued that ratio of Bombay High Court decision in case of Indian Oil Corpn. Ltd. v. S. Rajagopalan, ITO  92 ITR 241 could not be applied to facts of present case inasmuch as, issue before High Court was whether total liability of all four industrial undertakings of assessee in that case was to be deducted form assets of each undertakings for purpose of determining qualifying amount to be deducted under section 80J in respect of each of undertakings of assessee. High Court on true construction of rule 19A of Income-tax Rules, 1962, and section 80J(1) held that in respect of each undertaking liabilities of assessee in respect of that industrial undertaking only are to be deducted from aggregate value of assets of same industrial undertakings. It has been pointed out that ITO by analysing balance sheet figures of assessee's undertakings and its head office found that entire finances of assessee in its industrial undertakings as reflected in balance sheets drawn up for each undertaking have been made out of borrowed fund and/or debts owed by assessee. Our attention was also drawn to Supreme Court decision in case of Lohia Machines Ltd. v. Union of India  152 ITR 308 wherein it has been held that for computing fair return on 'capital employed' which is to be excluded from tax under section 80J(1), owner's capital alone should be taken into account and borrowed monies should be excluded. In reply, assessee's learned counsel stated that in terms of section 80J(1A), capital employed in industrial undertaking is to be computed in accordance with clauses (II) to (IV) of said section. Therefore, computation of capital is not of assessee but of industrial undertakings set up by assessee. assessee's learned counsel did not dispute fact found by ITO that head office had no surplus funds and it financed industrial undertakings out of borrowed funds and debts owed to third parties. In fairness he conceded that current liabilities and provision shown of Rs. 16,72,903 in assessee's computation of relief claimed under section 80J pertaining to assessment year 1978-79 was to be deducted from aggregate assets of Korba unit No. 1 as same represented liabilities of said undertaking. According to assessee's learned counsel debts and borrowings are of head office and not of undertakings and, therefore, amount due to head office as on date of computation periods for which balance sheets have been drawn up for each undertaking cannot be deducted from aggregate value of assets of undertakings for purpose of computing capital employed in each of assessee's undertakings. In this context, he referred to observations made in case of Indian Oil Corpn. Ltd. at page 259, namely, that words 'in respect of industrial undertaking in which capital employed is to be computed' are to be added after words 'borrowed moneys and debts due by assessee', as appearing in rule 19A(3) which is in pari materia with provision contained in section 80J(1A)(III). It has been pointed out that interpretation given by Hon'ble High Court in that case of rule 19A(3) read with section 80J(1) has been accepted by 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 Tribunal decision in case of Alfred Herbert (India) Ltd. [IT Appeal No. 996 (Cal.) of 1983] wherein aforesaid decision of Bombay High Court has been followed and it has been pointed out that Tribunal refused to draw up statement of case against 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 Madras High Court decision in case of CIT v. South India Viscose Ltd.  140 ITR 58 wherein it has been observed that: " ...In accountancy, when branch balance sheet is prepared, amount owed to head office would be displayed as liability, as there is no other way of accounting for it. Merely because it is thus shown as liability in said balance sheet of new undertaking which is required to be prepared under law for working out its profits separately, for granting relief, it cannot be taken as borrowed monies or debts owed by assessee ....." 9. According to assessee's learned counsel, expression 'borrowed monies' and 'debts owed by assessee' in section 80J(1A)(III) postulate existence of third parties from whom monies are borrowed and debts are incurred. In absence of any such third party, there is no scope for deduction of said amount for arriving at capital computation for purpose of section 80J. main plank of learned counsel's submission is that in balance sheet of undertaking, amount owing to head office as shown, cannot fall within expression 'debts owed by assessee'. In other words, according to learned counsel even though head office financed undertakings out of borrowed funds and/or debts owed by it to third parties, same need not be taken into consideration in computing capital of assessee's undertakings under section 80J. We are not impressed with learned counsel's submissions made in this regard as undertakings admittedly are owned by assessee and for accounting purpose only, separate balance sheets of undertakings of assessee had to be drawn up. It is substance of matter which is to be looked into and not its form. amount shown as liability in branch balance sheet representing money owing to head office, in substance, are monies borrowed by assessee in respect of industrial undertakings and, therefore, need be taken into account for purposes of computing capital employed by assessee in those undertakings. In this context, it would be relevant to quote following observations of Bombay High Court in case of Indian Oil Corpn. Ltd. "... If you want to arrive at capital employed by assessee in particular industrial undertaking, you cannot arrive at it by deducting from assets of that particular undertaking liabilities not only of that industrial undertaking, but also of three other industrial undertakings. This is mathematically absurd. What you want to find is capital employed in industrial undertaking. This cannot be mathematically done by deducting from its assets liabilities of other undertakings. One will, therefore, have to give reasonable interpretation to sub-rule (3) by adding after words 'borrowed moneys and debts due by assessee', words 'in respect of industrial undertaking in which capital employed is to be computed'. We accordingly hold that, on true interpretation of rule 19A, in respect of each undertaking, liabilities of assessee in respect of that industrial undertaking only are to be deducted from aggregate value of assets of same industrial undertaking. . . . ". . It has not been disputed that head office had no surplus funds of its own and, therefore, investment made by it in industrial undertakings were out of borrowed funds. funds advanced by head office to its undertakings are reflected in balance sheets of each of undertakings in account styled 'head office current account'. That being so, amount shown as monies owed to head office would in substance, be amount borrowed by head office and consequently, would come within ambit of section 80J(1A)(III). It is also pertinent to note that in case of South India Viscose Ltd. there is clear finding of Tribunal that in branch balance sheet amount shown as liability to head office did not represent borrowed money nor debt owed to third party but represented surplus funds of assessee. said decision, therefore, is not applicable to facts of assessee's case. Tribunal's order in case of Alfred Herbert (India) Ltd. relied on by assessee's learned counsel is also distinguishable on facts, as there was clear finding that money invested in new unit came from its head office funds. We would, accordingly, by reversing Commissioner (Appeals)'s order restore ITO's order rejecting assessee's claim under section 80J for each of assessment years under appeal. 10. only other ground raised for assessment year 1979-80 pertains to disallowance of Rs. 1,29,471 as capital expenditure, since deleted by Commissioner (Appeals). 11. ITO on scrutiny of miscellaneous expenses account, came across with expenditure debited of Rs. 1,27,471 being office renovation expenses incurred by assessee. ITO found that beside aforesaid expenditure, assessee further incurred expenditure towards architect's fees paid of Rs. 2,000. On scrutiny, ITO found that expenditure was mainly on account of addition and alteration in office premises by fixing false ceilings for air-conditioning purposes, panelling and partitioning of office premises. In ITO's opinion, expenditure was in nature of capital expenditure as assessee derived benefit of enduring nature and, thereby, added back entire amount of Rs. 1,29,471. Commissioner (Appeals) deleted ITO's addition by placing reliance on Delhi High Court decision in case of Instalment Supply (P.) Ltd. v. CIT [ 1984] 149 ITR 52. 12. assessee's learned counsel stated that office premise was tenanted one. assessee obtained advantage in commercial sense by redesigning premises and by fixing false ceiling for purpose of air- conditioning office. advantage obtained by assessee was for purpose of business of assessee and not for requisition of any capital asset. It has been pointed out that assessee did not make structural changes to building as such, as it was not assessee's property. He, accordingly, supported Commissioner (Appeals)'s order. 13. After hearing departmental representative, we are of opinion that expenditure incurred by assessee was primarily motivated for achieving better efficiency and in that sense advantage derived was in commercial sense. We are, therefore, satisfied that assessee by incurring expenditure for purposes of renovating office, did not derive benefit of enduring nature. We do not find any ground to interfere with Commissioner (Appeals)'s order in this regard. 14. In result, appeals for assessment years 1978-79, 1980-81 and 1981-82 are allowed and appeal for assessment year 1979-80 is allowed in part. *** INCOME TAX OFFICER v. I.B.P. CO. LTD.