U.S. DHUSIA, J.M. B. NATH, A.M. B. NATH, A.M. U.S. DHUSIA, J.M. Y. UPADHYAY, VICE PRESIDENT Editorial Note Third Member agreed with Accountant Member on last two issues. While assessee is in appeal for asst. yrs. 1974-75 to 1979-80, Revenue is in appeal for asst. yrs. 1976-77 to 1978-79. As these appeals involve consideration of common issue, these are combined together and disposed of by this common order. 2. We first take up appeal filed by assessee for asst. yr. 1974- 75. One of issues which is common for all years both in appeals filed by assessee as well as those filed by Revenue is regarding claim of assessee for deduction under s. 80J of IT Act, 1961( Act ). assessee, company, had taken over running business of partnership concern Hindustan Tools & Dies, Laxmi Mansion, Bistupur, Jamshedpur with all its assets and liabilities. Soon after taking over this business from Hindustan Tools & Dace, Laxmi Mansion, assessee launched scheme of expansion n d diversification of manufacturing job which was done by existing business. assessee made purchases of plant and machinery amounting to Rs. 1,96, 20 8 for asst. yr. 1975-76, Rs. 2,10,355 for asst. yr. 1976-77, Rs. 5,03,053 for asst. yr. 1977-78 and Rs. 63,229 for asst. yr. 1978-79. machinery and plant which he had obtained from Hindustan Tools & Dies, Laxmi Mansion was valued at Rs. 5,21,411. According to assessee he had pumped into business quite substantial amount of fund to make these purchases which he installed in shed obtained from Hindustan Tools & Dies, Laxmi Mansion, which was lying vacant and unused. As result of installation of new plants and machineries of such value as given above, he was able to produce several new articles which had not been produced so far. These were high speed steel single point, tools and tool bits, high speed steel milling cutters and high sped steel reamers and tungsten carbide tipped mining tools. It was also submitted that as result of this expansion there was tremendous fillip given to sales. Profit also showed tremendous increase. We reproduce below two tables in this connection : Asst. Gross Sales Rejections Net Sales Old Unit New Unit yr. 1975- 2,32,009.70 1,26,692.54 2,193,407.16 13,58,915.70 8,34,491.46 76 1976- 58,01,610.69 1,87,234.24 56,14,376.45 36,78,915.75 19,35,460.70 77 1977- 57,35,054.99 2,09,873.01 55,25,181.98 34,15,719.11 21,09,562.87 78 1978- 56,40,714.78 2,89,486.01 53,51,228.77 36,31,975.50 17,19,253.27 79 Asst. Total Gross Old Unit New Unit yr. Profit 1975- 2,82,290.60 54,022.45 2,28,268.15 76 1976- 11,60,995.03 8,02,835.73 3,58,159.30 77 1977- 11,66,624.15 7,21,185.79 4,45,438.36 78 1978- 11,89,883.25 8,39,669.07 3,50,214.18 79 assessee further submitted that ours is not continuous process industry and each machine, i.e., milling, grinding, etc., is separate entity by itself. "In conclusion we wish to submit that ours is case of self-contained new industrial undertaking in addition to our existing unit. new unit was set u p with new machinery to make new products and machines have independent physical location. It was explained that old machinery continued to be utilised for manufacture of old range of products and was not utilised for manufacture of new products." It was claimed by assessee that he should be allowed benefit of deduction provided under s. 80J as new industrial unit was independent, distinct unit. Its coming into operation increased sale many-fold as also its profit as given out in table reproduced above. ITO however, was not persuaded and he declined request of assessee to allow benefit of exemption under s. 80J. He rejected claim of assessee for two reasons. One of grounds was that assessee had maintained composite accounts of all trading done. He observed very fact that assessee has not separately maintained accounts in respect of business done by use of new plant and machinery strikes at root of claim. Even it is is assumed that new industrial undertaking came into being, base for deduction under s. 80J, i.e., profit of so-called new unit is not available. Another ground for his rejection was that he refused to accept that assessee had set up separate, independent and distinct, trading and industrial undertaking for diversification of expansion of scheme because according to him business was done by newly added machinery and plant which had merged with business taken over by company. According to him it was old existing business which was reformed which had been responsible for diversification and expansion. It was not new industrial undertaking which was separate from old industrial unit. It was for these reasons, ITO turned down his claim for all years. 3 . assessee having felt aggrieved by refusal of ITO to allow him benefit of deduction provided under s. 80J, appealed to CIT (A). CIT (A) went into facts and made fresh appraisal of facts. According to him, ITO was not justified in refusing claim of assessee on two grounds on which he had relied. He did not agree with ITO that assessee had not set up separate and independent industrial unit. According to him, assessee had set up new industrial unit. He observed obviously appellant satisfies tests laid down in aforesaid case inasmush as new industrial undertaking was producing results. It had minimum number of workers engaged in manufacturing concern, new business was not substantially same as old business and there was also substantial investment of fresh capital in order to earnings attributable to new capital. capital invested in new unit was substantial. new unit was economically viable unit. mere fact that in some way or other it was connected with business which was already carried on by appellant would not deprive it of exemption under s. 80J of Act . Regarding second objection raised by ITO, CIT (A) observed I hold that ITO was not justified in declining to allow deduction under s. 80J on said account on ground of non-maintenance of separate accounts . In reaching this finding he relied on several judicial pronouncements. Therefore, he held that ITO was not justified in disallowing claim of assessee for deduction under s. 80J on two grounds referred to above. He, however, disallowed claim of assessee for asst. yrs. 1974-75 and 1975-76 on account of old shed obtained from Hindustan Tools & Dies, Laxmi Mansion, which was claimed by assessee to be lying vacant and unused by partnership firm. assessee-firm installed its new machinery in this shed which resulted in diversification and expansion of production. According to CIT (A), cl. (ii) of sub-s. (4) of s. 80J forbade transfer to new business of building, machinery or plant previously used for any purpose. This clause underwent amendment by s. 12 of Finance Act, 1975 w.e.f. 1st April, 1976. By amendment words building were deleted. Therefore, CIT (A) held that assessee was not entitled to 80J deduction for asst. yr. 1974-75 because he had used building in two asst. yrs. 1974-75 and 1975-76 for housing its machinery and plants. It was only when word building was omitted claim of assessee could not be made to suffer on account of user of shed for housing new machineries and plants. Therefore, CIT (A) upheld finding of ITO for disallowing benefit under s. 80J for asst. yrs. 1974-75 and 1975-76 but he upheld claim of assessee for asst. yrs. 1976-77 to 1978-79. Therefore, both Revenue and assessee felt aggrieved. assessee for upholding finding of ITO for asst. yrs. 1974-75 and 1975-76 and Revenue for upholding claim of assessee for asst. yrs. 1976-77 to 1978-79. 4. Before us, learned counsel for assessee and Departmental Representative raised same plea and counter plea which were raised before lower authorities. According to Departmental Representative assessee had not been able to establish that he set up independent, distinct industrial unit. new machinery and plant which were installed got merged in existing business and lost their identity. Besides, Departmental Representative stretched down addition of working out deduction in case where composite accounts were maintained. According to him, it was not possible to work out profit derived from newly established unit correctly. further submission was made by Departmental Representative in this connection. According to him, assessee had no capital of his own particularly in asst. yr. 1974-75 when he depended upon borrowings to finance purchase of new machinery and plants. He referred to well-known decision recently delivered by Supreme Court to effect that 80J deduction was allowable only in respect of one s own capital and not on borrowings. On other hand, learned counsel for assessee objected to this plea on ground that it was not one of grounds on which ITO had made out plea to disallow claim of assessee for deduction under s. 80J. As far as other two objections were concerned, he submitted that findings of CIT (A) were based on several judicial pronouncements. There is no possibility of any objection surviving after account is taken of judicial pronouncements relied on by CIT (A). 5. We have considered facts of case and it does not appear that we can find any fault with CIT (A) in respect of his finding for asst. yr. 1974- 75. CIT (A) has upheld refusal of ITO to allow benefit of deduction during this year, on consideration of cl. (ii) of sub-s. (4) of s. 80J. In our view claim of assessee suffers in this year for want of any profit or loss arising from working of new unit. As far as claim of assessee for other years is concerned, we do not find that any of plea on which ITO based his claim can be sustained in law. Regarding point he has made out from composite accounts maintained by assessee for entire business, we reproduce observation of their Lordships of Calcutta High Court in case of CIT vs. Dunlop Rubber Co. (I) Ltd. (1977) 107 ITR 182 (Cal) : "The assessee in instant case had kept composite account and had made apportionment on certain basis on principle of commercial accounting. With regard to method adopted by assessee, Tribunal said that method adopted by assessee could not be said to be wrong, that if ITO found it to be wrong, he could have corrected it and not rejected it wholesale, .... i n circumstances, assessee s statement of profits of new undertaking had to be accepted ..." (p. 183) Similar view was taken by their Lordships in CIT vs. Rohtas Industries Ltd. (1979) 1 20 ITR 110 (Cal) and Karnataka High Court in International Instruments (P) vs. CIT (1979) 9 CTR (Kar) 291 : (1980) 123 ITR 11. Their Lordships of Supreme Court had endorsed same view in Textile Machinery Corpn. Ltd. vs. CIT (1977) 107 ITR 195 (SC). Their Lordships observed : "We may observe that we are not required to consider in these appeals h o w profit will be actually calculated in order to determine quantum of exemption of six per cent of profits on capital employed. If difficulties are insurmountable and, therefore, profit cannot be ascertained, that will be different question in course of practical application of section. That kind of possible difficulty should not weigh in true construction of s. 15C ...." (p. 20 7) In light of aforesaid observations, it cannot be held that true profits earned by new unit cannot be worked out approximately to enable assessee to claim deduction under s. 80J. Revenue should not take approach which insists for mathematical precision in bringing out income earned by new unit form composite accounts. Reality of life and more so of commercial world do not proceed on mathematical realities but on rough and ready and practical realities which may not be altogether identical with mathematical realities. It is found that Tribunal, Madras Bench also in case of ITO vs. Carborundum Universal Ltd. 13 ITJ 370 held that maintenance of final accounts or final determination of profits for entire business as whole for accounting purposes cannot also be disqualification. As far as other ground for which ITO s rejection is concerned, we reproduce below observations made by Hon ble Allahabad High Court in case of CIT vs. Modi Spg. & Mfg. Mills Co. Ltd. (1980) 125 ITR 361 (All) : "Some of factors which go to make undertaking new industrial undertaking within meaning of s. 15C were stated to be that new industrial undertaking must produce result, that it should have certain number of workers engaged in manufacturing process carried on by it, and it must not be substantially same old existing business. There should be substantial investment of fresh capital in order to enable earning of profits attributable to that new capital." (p. 366) In present case, it was found by Tribunal that it was economically viable unit. mere fact that it was in same way or other connected with business which was carried on by assessee would not deprive it of exemption under s. 80J. Calcutta High Court in case of Rohtas Industries Ltd. (supra) observed as under : "... fact that assessee by establishment of new industrial undertaking expands his existing business, which he certainly does, would not, on that score, deprive him of benefit under s. 15C. Every new creation in business is some kind of expansion and advancement. true test is not whether new industrial undertaking connotes expansion of existing business of assessee but whether it is all same new and identifiable undertaking separate and distinct from existing business ... In order that n e w undertaking can be said to be not formed out of already existing business, there must be new emergence of physically separate industrial unit which may exist on its own as viable unit ..." (p. 122) 6. It is apparent that new unit set up by assessee had new team of workers engaged in manufacturing concern. In new business, assessee had poured more capital which was by any test applied substantialy. new unit was economically viable unit. That it was connected with old business in some way would not deprive assessee of benefit of deduction under s. 80J. In this connection, plea was raised by Departmental Representative on basis of Supreme Court decision that t h e assessee was not entitled to claim benefit because he had not contributed his own capita. In this connection we have to hold that plea advanced by Revenue was misconceived. It was not case of ITO when he disallowed claim of assessee for deduction under s. 80J. It was not claim of Revenue when matter was thrashed out by CIT (A). There is no finding recorded by any of two authorities on this aspect. Revenue is not entitled to raise new plea to make out altogether new case at second appellate stage on which neither authority had recorded any finding. revenue has other remedies but it is not by rewriting new order which is not before us and which was not before any of two authorities below that it can seek to raise plea which had not been considered by either of two authorities. We, therefore, reject plea of Revenue in this connection raised at this stage as misconceived. There remains consideration arising from user of shed by assessee for housing its machinery and plant which it had purchased for new unit. According to assessee, shed was lying vacant and was not being used when he started housing new machinery and plant in shed. CIT (A) relying on cl. (ii) of sub-s. (4) of s. 80J held that user must be presumed or implied because predecessor of company had claimed depreciation on shed which was on basis of this view taken by CIT (A) that he held that assessee was not entitled to claim 80J relief. On careful reading of aforesaid cl. (ii) we are not satisfied that CIT (A) has taken correct view in matter. Clause (ii) refers to facts, building, material or plant previously used for any purpose . If Revenue wants to rely on this clause, onus is on Revenue to prove that building was used. If building was not used and was lying vacant assessee cannot be denied benefit of exemption under s. 80J on ground that predecessor firm had claimed depreciation of this shed. In our view, rejection of claim of assessee for asst. yr. 1975-76 on this ground by CIT (A) was misconceived and is, therefore, vacated by us. 7. As far as claim of assessee for asst. yrs. 1976-77 to 1978-79 is concerned, having rejected pleas advanced on behalf of Revenue, we uphold finding of CIT (A) and dismiss appeal of Revenue on this issue. This disposes of one common issue raised in all these five years of appeal by Revenue and assessee. 8. We now take up another issue raised in appeal for asst. yr. 1974- 75 in appeal of assessee. assessee had made provision of Rs. 34,033. ITO disallowed claim of assessee in respect of sum of Rs. 752 and turned down plea of assessee that entire provision was to be allowed. In his view, amount of Rs. 8,752 was not in accordance with provisions of s. 40A (7) of Act. CIT (A) found that on basis of actual payment only sum of Rs. 2,582 was allowable. He has dealt with this issue in para 4 of his order where he held that assessee was not entitled to seek deduction on account of provision made. He had another objection also in this connection. He found that he had made provision for gratuity payable for years prior to asst. yr. 1974-75. Therefore, he caused disallowance of Rs. 6,170 which had been allowed by ITO but which was not paid during assessment year and also related to liability for prior assessment years. Similarly, he disallowed sum of Rs. 25,960 out of Rs. 34,083 provided for gratuity during asst. yr. 1975-76. In this year also, CIT (A) allowed on basis of actual payment of gratuity made during asst. yr. 1975-76. For asst. yr. 1976-77 he disallowed sum of Rs. 22,565 out of total claim of Rs. 34,874 provided in accounts for gratuity. He allowed Rs. 12,309 and disallowed balance, which was not actually paid during year. assessee in this connection has referred to decision passed by Patna High Court. In aforesaid case referred to by CIT (A) in his order, of Heckett Engg. (India Branch) Co. Jamshedpur, their Lordships had similar question in respect of deduction to be made for gratuity. Here also amount was provided in account for liabilities of prior years. company had set apart sum of Rs. 2,01,929 for gratuity including provision of Rs. 81,972. This provision was for accounting year ending 31st Dec., 1972. provision was in accordance with provision of Payment of Gratuity Act, 1972 which came into force during relevant accounting year from 16th Sept., 1972. assessee claimed deduction of this sum but ITO disallowed on ground that it represented mere provision. Their Lordships observed as under : "Now in instant case, s. 4 of Gratuity Act casts legal obligation on employer to pay gratuity to its employees in accordance with terms thereof. It is not disputed that in instant case said sum of Rs. 81,978 had been calculate in accordance with said provisions of Gratuity Act. said amount, therefore, was known liability which assessee has to set apart out of its profit of year, may be that it was additional liability. But all same, amount was not set apart merely as reserve, but had been set apart for known liability. I think, then it has rightly been held to be deductible in assessing assessee s real profits from business." Same view has been taken by Supreme Court in CIT vs. Nickles Engg. Co. (Civil Appeal NO. 3372 (NIT) of 1979, dt. 11th Aug., 1983). Taking this view of matter, we have no doubt left in our mind that assessee is entitled to relief and disallowance made by CIT (A) is due for deletion. Similarly, we dispose of appeal on this issue raised by assessee for asst. yrs. 1975-76 and 1976-77 and vacate and disallowances made by CIT (A). 9 . In asst. yr. 1974-75, assessee had raised further issue regarding disallowance made from expenditure incurred on vehicle upkeep and repair expenses. Similarly, part of depreciation on vehicle has also been disallowed. CIT(A) had dealt with this issue in para 5 of his order. ITO had disallowed one-fourth expenditure and one-fourth depreciation claimed on vehicle on account of personal use of cars by directors. CIT (A) restricted disallowance to one-sixth of expenditure and depreciation allowance claimed. It is represented by learned counsel for assessee that director Shri Amrit Lal Chachra who was looking after business of company was having his own car No. BHT 362. Therefore, there could not arise any question of disallowance on ground of personal user of directors or their families. It was also pointed out that directors are also partners in Amrit Stores/Hindustan Sales Agency in which already ITO had disallowed one- fourth expenditure incurred on maintenance and running of car and depreciation for personal user of directors. It was also pointed out that Tribunal in appeal for asst. yrs. 1969-70 to 1972-73 in case of predecessor firm did not uphold any disallowance under these heads. Taking stock of these facts, we hold that no disallowance was called for and, therefore, disallowances as sustained by CIT (A) for asst. yrs. 1974-75, 1977-78 and 1978-79 under these heads and depreciation are deleted. 10. assessee has also raised another ground No. 5 for asst. yr. 1974-75 which has not been pressed. same is dismissed. Similarly, assessee had raised ground of appeal Nos. 2 to 7 which have not been pressed. These are, therefore, dismissed. For asst. yr. 1978-79, assessee has raised several ground Nos. 2 to 10 which have not been pressed. These are also dismissed. Therefore, appeals of assessee for asst. yrs. 1974-75, 1977-78 and 1978-79 are partly allowed while appeals for asst. yrs. 1975-76 and 1976-77 are allowed in full. 11. We now take up appeals filed by Revenue for asst. yrs. 1976-77, 1977-78 and 1978-79. We have already disposed of ground No. 1 raised in these appeals for three years while disposing of appeals of assessee on this issue. appeals of Revenue on this issue for all three years are rejected and dismissed. 12. For asst. yr. 1977-78, Revenue has raised two further issues- one is in respect of income derived from letting out of property which was assessed by ITO under s. 22 of Act who was assessed by CIT (A) as income from business. CIT (A) has dealt with this issue in para 19 of his order. According to assessee this issue is directly covered by decision in IT Appeal No. 560 (Pat) of 1983, dt. 22nd July, 1985 for asst. yr. 1979-80. Tribunal upheld finding of CIT (A) that rental income of property in question was to be treated as income derived from business. Therefore, following said order, we uphold finding of CIT (A) and dismiss appeal of Revenue. 13. Another issue raised in this appeal is in respect of depreciation allowed by CIT (A) on property which had been let out on rent but rental income in preceding paragraph had been held to be income derived from business. We have scanted order of CIT (A). We have not been able to find finding of CIT (A) on this issue. Therefore, in our view issue does not arise out of finding of CIT (A) and ground of appeal raised by Revenue is incompetent and is liable only be dismissed. We do so. 14. There is another issue raised regarding charging of interest of Rs. 4,7 94 under s. 217 of Act by ITO. CIT (A) has dealt with this issue in para 20 . Reading through his finding, it appears to us that Revenue has been misdirected both on facts and in law in raising issue. Since, estimate has been filed by assessee, there could not be any justification for charging interest under s. 217. Accordingly, appeal of the Revenue on this issue is dismissed. 1 5 . In appeal for asst. yr. 1978-79, Revenue raised only additional issue regarding assessment on rental income as business income. Following our findings for asst. yr. 1977-78, we have no hesitation in upholding finding of CIT (A) and dismissing appeal of Revenue. 16.In result, appeals of Revenue for all three years are dismissed. I do not agree with decision of my learned brother on two issues, namely, on issue of admissibility to assessee of relief under s. 80J in different years as also on relief given by my learned brother under head Gratuity . First of all I would deal with claim of assessee against decision of CIT (A) in various years under head Gratuity expenses . facts in short are that assessee had Claimed certain gratuity expenses for three years under appeal, namely, asst. yrs. 1974-75 to 1976-77 on basis of provision only and not by making cash payments in relevant years. CIT (A) had allowed these expenses in these years to extent payments were made in cash but had disallowed that part of expenses which was in nature of provision only in accordance with provisions of law as mentioned in s. 40A(7). CIT(A) has mentioned that it was admitted before him that conditions laid down under s. 40A (7) were not fulfilled. Thus, CIT (A) allowed expenses to extent of gratuity paid in cash during relevant years and upheld disallowance of amounts which were claimed under this head by making provision only. My learned brother has allowed whole of claim of assessee under this head by resorting to decision of Patna High Court in case of Heckett Engg. (India Branch) Co., Jamshedpur. I find that said decision of their Lordships of Patna High Court has been overruled in same case by decision of Supreme Court in Nickles Engg. Co. s case (supra). facts in this case were that High Court declined to go into and apply provisions of s. 40A (7), as IT authorities had not mentioned and had not taken note of provisions of s. 40A (7). High Court under these circumstances declined to consider applicability of provisions of s. 40A (7). Supreme Court has held reversing decision of High Court in this case as under : "These being facts and circumstances of case, we are clearly of view that High Court was not right in declining to go into this question, whereby it permitted deduction to assessee which was claimed by Department in contravention of newly inserted provision. Unquestionably contention based on new provision required investigation into facts but High Court should have called for supplementary statement of case from Tribunal on basis of investigation into facts which could have been directed to be undertaken by taxing authorities. Since, in our view question raised is important one and impugned judgment of High Court could be regarded as in sense as per curiam, i.e., by completely ignoring relevant PROVISION of law that had come on statute book and were operative with retrospective effect, it is necessary that matter should go back to Tribunal." 2 . As decision of High Court which has been made basis for giving relief by my learned brother has been overruled by Supreme Court n d as according to verdict of Supreme Court, assessee is not entitled to any further relief with regard to expenses claimed as gratuity, I am of opinion that order of CIT (A) on this issue in all these years has to be upheld and grounds of appeal relating thereto in appeals of assessee have to be rejected accordingly. 3. other issue on which I have not been able to agree with my learned brother is on issue of admissibility of relief under s. 80J to assessee. My learned brother has held that assessee s claim has to be allowed on ground that there was viable new manufacturing unit on which capital was invested. He has also held that even if separate accounts of new unit were not maintained assessee is entitled to relief. I agree with my learned brother as far as this part of order is concerned, but I do not agree with my learned brother on two points. Firstly, he has held that old godown in which new industrial unit was installed was not used for any purposes earlier by old unit. It my opinion, this conclusion is not correct as old unit had claimed depreciation on said godown in earlier years which was allowed. Now admittedly assessee cannot turn round and say that old godown was not used earlier. Depreciation was admittedly claimed earlier as old godown was used and Department has also allowed depreciation which has not been withdrawn so far. It has to be held in my opinion that old godown was used earlier. new industrial unit being installed in old godown which was previously used, relief under s. 80J would not be admissible for asst. yrs. 1974-75 and 1975-76. CIT (A) had disallowed claim under s. 80J in asst. yr. 1974-75 and my learned brother has also given to assessee for asst. yr. 1974-75 even on ground that assessee admittedly did not use any capital in new industrial unit on first day of previous year or asst. yr. 1974-75. This conclusion is based on assessee s own written submissions on statement of facts filed before us as under : "The new machines started arriving during first half of year 1972-73 and new items were made during second half of year as such capital employed for purposes of claim under s. 80J as on 1stday of computation period, i.e., 1st Oct., 1972 was nil." 4. For asst. yr. 1975-76, relief under s. 80J is not admissible in my opinion to assessee on ground that new industrial unit was installed in old godown which was used earlier. 5. For rest of years in appeal also in my opinion, relief under s. 80J is not admissible. My learned brother has held that relief under s. 80J is admissible to assessee for asst. yrs. 1975-76 to 1978-79. I do not agree with this conclusion basically as assessee has utilised only borrowed capital in new industrial undertaking. This argument was taken by standing counsel in course of hearing before us but my learned brother has not considered this argument as authorities below have not mentioned about it in their orders. In my opinion, this important aspect of matter which goes at root of matter cannot be ignored merely because authorities below have not mentioned same nor considered it. disallowance of relief under s. 80J as borrowed capital is based on retrospective amendment of r. 19A of IT Rules, 1962 ( Rules ). This amendment has been held to be valid in leading and recent decision of Supreme Court in Lohia machines Ltd. vs. Union of India (1985) 44 CTR (SC) 328 : (1985) 152 ITR 308. Their Lordships of Supreme Court have also held in case of Heckett Engg. Co. (supra) that where newly introducted provision of law prohibits deduction of particular expense and said law is introduced with retrospective effect it cannot be ignored and should be considered even though said issue was not raised by IT authorities. Respectfully, following said two decisions of Supreme Court, I hold that basic fact that assessee s new unit worked with only borrowed capital has to be taken into account and claim for relief under s. 80J has to be considered, taking this important fact also into consideration, I do not agree with my learned brother that this basic fact cannot now be taken into consideration only on ground that it was not considered by ITO and CIT (A). As far as capital of assessee utilised in new units is concerned, capital in different years was as under : "The value of new machines installed were as under as per figures of assessee : Sl. No. Asst. yr. Amount Rs. 1. 1974-75 2,04,809 2. 1975-76 1,96, 20 8 3. 1976-77 2,10,355 4. 1977-78 5,03,953 5. 1978-79 63,229 Total 11,78,554" Further, loan taken by assessee for this purpose amounting to Rs. 5.65 lakhs + 5.75 lakhs = 11.40 lakhs. value of new machines introduced in asst. yr. 1978-79 cannot be taken into consideration as according to said decision of Supreme Court inLohia Machines Ltd. scase (supra), capital has to be taken on first day of previous year. Thus, capital introduced in course of previous has not to be taken into account. assessee, thus, introduced capital of Rs. 11.15 lakhs while he took loans from Bihar State Financial Corpn. of Rs. 11.40 lakhs. assessee took this loan from Bihar State Financial Corpn. is admitted by assessee in statement of facts filed before us as under : "Term loan application was made with Bihar State Financial Corpn., Patna on 19th Jan., 1973 and sanction letter dt. 14th Nov., 1973 for term loan of Rs. 5.65 lakhs were received. loan of Rs. 5.75 lakhs was also sanctioned vide letter dt. 16th Feb., 1972 and disbursed in subsequent years." I, therefore, hold that whole of new unit functioned with borrowed capital and assessee was not entitled to any relief in any one of years under consideration under s. 80J. In fact even in course of hearing, assessee s representative had verbally conceded that new manufacturing unit worked only with borrowed capital. 6 . Except for two issues mentioned above I agree with my learned brother on other issues on which he has given decision in his order. ORDER UNDER SECTION 255(4) OF INCOME-TAX ACT, 1961 We, Members of Patna Bench having differed on following issues, while deciding IT Appeal Nos. 566 to 570 (Pat) of 1983 for asst. yrs. 1974-75 to 1978-79 and IT Appeal Nos. 713, 714 and 715 (Pat) of 1983 for asst. yrs. 1976-77 to 1978-79 in case of Hind Tools & Dies (P) Ltd, refer following questions to President, Tribunal under s. 255(4) of Act : "1. Whether, on facts of case assessee was entitled to benefit under s. 80J for asst. yrs. 1975-76 to 1978-79 and whether plea of Revenue taken before Tribunal that new unit worked with only borrowed capital could not be entertained for consideration in this connection? 2. Whether, on facts of case CIT (A) was correct in disallowing claim of gratuity made by making provisions under s. 40A (7) ?" We, Members of Patna Bench having differed on above issue while deciding case of Hind Tools & Dies (P) Ltd., Jamshedpur in IT Appeal No. 566 to 570 (Pat) of 1983 and IT Appeal Nos. 713, 714 and 715 (Pat) of 1983, refer following questions to President, Tribunal under s. 255(4). Z : "1. Whether, on facts and in circumstances of case, plea of borrowed capital advance by Revenue during years of appeal before Tribunal could be considered for judging eligibility of claim made by assessee under s. 80J ? 2 . Whether Revenue is entitled to weave out new case during hearing of appeal before Tribunal on which neither ITO nor CIT (A) had recorded any finding ? 3. Whether, on facts and in circumstances of case, CIT (A) was correct in law in disallowing part of claim for deduction gratuity made by assessee under s. 40A (7) of IT Act, 1961 ? THIRD MEMBER ORDER question under s. 255 (4) has been assigned to Third Member by t h e Hon ble President as there was disagreement on conclusion by learned Accountant Members, and Judicial Member. It is relevant to mention that members, even, has not agreed on question which they have forwarded to President for reference to Third Member. Hon ble Judicial Member has formulated questions as hereunder : "1. Whether, on facts and in circumstances of case, plea of borrowed capital advanced by Revenue during hearing of appeals for asst. yrs. 1974-75 to 1978-79 before Tribunal could be considered for judging eligibility of claim made by assessee under s. 80J ? 2 . Whether Revenue is entitled to weave out new case during hearing of appeal before Tribunal on which neither ITO nor CIT (A) had recorded any finding ? 3.Whether, on facts and in circumstances of case, CIT (A) was correct in law in disallowing part of claim for deduction on gratuity made by assessee under s. 40A (7) of IT Act, 1961 ? Whereas Accountant Member has formulated questions as given below : "1. Whether, on facts of case assessee was entitled to benefit under s. 80J for asst. yrs. 1975-76 to 1978-79 and whether plea of Revenue taken before Tribunal that new unit worked with only borrowed capital could not be entertained for consideration in this connection ? 2. Whether, on facts of case, CIT (A) was correct in disallowing claim of gratuity made by making provision only, under s. 40A (7) ?" 2. After considering facts and questions of Members, questions for answers formulated as hereunder : "1. Whether, on facts and in circumstances of case assessee was entitled to benefit under s. 80J for asst. yrs. 1975-76 to 1978- 79 ? 2.Whether, on facts and in circumstances of case, assessee s claim could be computed after disallowing borrowed capital ? 3.Whether, on facts and in circumstances of case, ground for disallowance of borrowed capital could be raised for first time before Tribunal by Revenue ? 4.Whether, on facts and in circumstances of case, provision of gratuity could be allowed under s. 40A (7) of IT Act, 1961 ?" 3. assessee was partnership firm named Hind Tools & Dies (P) Ltd., Laxmi Mansion, Bistupur, Jamshedpur. This business was taken over by private limited company and assessee in 1974 took expansion plan. assessee spent on machineries during asst. yrs. 1974-75 to 1978-79 as under : Asst. yr. Amount Rs. 1974-75 2,04,809 1975-76 1,96, 20 8 1976-77 2,10,355 1977-78 5,03,953 1978-79 63,229 Total 11,78,554 assessee indicated that loan of Rs. 5.65 lakhs was taken from Bihar State Financial Corpn. whereas balance amount was spent out of fund of assessee. It also indicated that turnover and profit of assessee were up and assessee fulfilled conditions of s. 80J. ITO did not allow claim of assessee on ground that assessee did not maintain separate accounts for new unit and that assessee did not had separate and independent industrial unit. CIT (A) confirmed order of ITO on this issue. 4. learned Judicial Member was of view that assessee fulfilled conditions of s. 80J and, therefore, assessee was eligible for relief. It was indicated by Judicial Member that assessee has made investment, new machines were purchased, separate unit was established and separate building was constructed. He did not entertain ground of Department that assessee, if, has constructed new unit with borrowed fund, assessee was no eligible for relief in view of Lohia Machines Ltd. s case (supra). Accountant Member, on other hand, was of view that assessee constructed new unit with borrowed capital and, therefore, if computation of relief is made, assessee cannot get relief on borrowed fund in view of Lohia Machines Ltd. s case (supra) and, therefore, assessee was not eligible for relief under s. 80J. learned Accountant Member further indicated that Revenue was right, before Tribunal, in arguing that claim cannot be allowed because unit has been established with borrowed fund. 5. assessee s representative very strongly supported finding of Judicial Member and indicated that assessee took, no doubt, two loans of Rs. 5.65 lakhs and Rs. 5.75 lakhs in 1973 and 1971 but loan of Rs. 5.75 lakhs was spent by firm and not by present assessee which is claiming relief under s. 80. representative urged that assessee also invested money out of capital on which relief could have been allowed. 6 . Departmental Representative, Shri N. P. Singh, very strongly supported order of Hon ble Accountant Member and indicated that assessee took loan of Rs. 11.40 lakhs whereas assessment on new unit t Rs. 11.78 lakhs. Therefore, almost all investment was made out of borrowed fund and, therefore, assessee was not entitled for any relief. 7. first three questions are about allowability of relief under s. 80J. assessee took up expansion programme in 1974. assessee obtained loan from Bihar State Financial Corpn. project was financed partly by loan and partly out of capital of assessee. assessee constructed shed and purchased new machines. necessary labour as required under s. 80J was employed. objection taken by ITO was not correct that relief could not be allowed because assessee did not maintain separate accounts for new unit. profit of new unit could be calculated on commercial basis. second objection taken by ITO was also not justified that assessee did not start new and independent unit. assessee was doing business since it took over assets and liabilities of firm. expansion programme was taken up by present assessee. assessee as stated earlier has started new unit for which new machines were purchased and, therefore, this new unit of assessee was eligible for relief under s. 80J. 8 . assessee financed new project out of its own resources and partly out of loan. Hon ble Accountant Member has indicated in order that assessee took two loans of Rs. 5.65 lakhs and Rs. 5.75 lakhs. loan of Rs. 5.75 lakhs was granted by Bihar State Financial Corpn. vide their letter dt. 16th Feb., 1971. This loan was stated to have been utilised by firm. second loan was granted by said Institution on 19th Jan., 1973 for Rs. 5.65 lakhs. This loan was utilised for expansion programme. assessee has purchased machineries for Rs. 11,78,554. Therefore, it is clear that new project was financed partly by capital of assessee and partly by loan. assessee cannot get relief under s. 80J on borrowed capital Lohia Machines Ltd. s case (supra). Under said circumstances borrowed fund will be deducted and on balance amount assessee is only eligible for relief under s. 80J. 9 . Department took objection that project was financed by assessee out of borrowed fund and, therefore, assessee cannot be allowed any relief. This objection of Department, for first time, was taken before Tribunal. Accountant Member has entertained objection and accordingly has given finding whereas learned Judicial Member was of opinion that Department cannot take this stand for first time before Tribunal. 80J relief is in two stages. first stage is whether unit is eligible for exemption. If answer of above question is in affirmative, computation of relief starts which is second stage. Therefore, relief under s. 80J can be allowed in two stages and if unit is eligible for relief, second stage automatically comes into picture. objection of Revenue is sustainable and can be raised regarding disallowance of borrowed fund if project had been financed by borrowed fund in view of Lohia Machines Ltd. s case (supra). There was nothing wrong in objection of Department and, consequently, three questions are answered in following manner : "1. On facts and in circumstances of case assessee was entitled to benefit under s. 80J for asst. yrs. 1975-76 to 1978-79. 2.On facts and in circumstances of case assessee s claim could be computed after disallowing borrowed capital. 3.On facts and in circumstances of case, ground for disallowance of borrowed capital could be raised for first time before Tribunal by Revenue." 10. order difference of Members is on allowance of provisions of gratuity. assessee made claim in asst. yr. 1974-75 for gratuity of Rs. 34,033. provision made by assessee at Rs. 8,752 was disallowed. It appears that actual payment was allowed. Similar provision was disallowed at Rs. 25,960 and 22,565 for asst. yrs. 1975-76 and 1976-77. disallowance made by ITO has been confirmed by CIT(A). 1 1 . disallowances sustained by CIT (A) were deleted by Hon ble Judicial Member whereas same was confirmed by Hon ble Accountant Member, it appears following decision in Shree Sajjan Mills Ltd. vs. CIT (1985) 49 CTR (SC) 193 : (1985) 156 ITR 585. issue is covered by decision of Supreme Court in Shree Sajjan Mills Ltd. s case (supra). supreme Court has indicated that provision for gratuity after introduction of s. 40(7) cannot be allowed unless conditions of s. 40A (7) are satisfied by assessee. Three conditions are mentioned in Act. Judicial Member and Accountant Member have not discussed whether conditions were satisfied by assessee. They have gone simply on ground that provision can be allowed or cannot be allowed. after considering Supreme Court decision in Shree Sajjan Mills Ltd. s case (supra) question is answered as follows : "The provision for gratuity could be allowed under s. 40A (7) provided conditions of said section had been fulfilled." 12. matter is accordingly referred back to Bench for passing necessary order. *** HIND TOOLS & DIES (P) LTD. v. FOURTH INCOME TAX OFFICER