B.K.MEHTA, J. - (1.)THIS reference raise a short but an interesting question as to the scope and width of clause (5) of rule 19 of the Income -tax Rules, 1962, regarding computation of capital employed in an industrial undertaking or a hotel for purposes of section 84 of the Income -tax Act, 1961. The question posed by the Tribunal for our opinion in as under :
'Whether, on the facts and the circumstances of the case, the figure arrived at by computation under rule 19(5) was to be added to the figure arrived at by computation under rule 19(1) for determining the average capital employed in the assessee's undertaking ?'

(2.)IN order to appreciate the rival contentions for and against the point involved in this question, a few facts which have led to this reference need be stated.
The relevant assessment year is 1964 -65. Under section 84 of the Income -tax Act, 1961, the respondent -assessee was entiled to exemption in respect of its newly established industrial undertaking. In the course of the original assessment the Income -tax Officer had worked out the capital employed in the undertaking at Rs. 45,39,537. For working out this figure, the Income -tax Officer has, as per rule 19(1)(a), valued the assets entitled to depreciation including the additions made during the year at Rs. 40,10,947. He has a added a sum of Rs. 1,39,764 to the said amount on account of the net depreciable assets as on January 1, 1963, and also on account of the average value of the additions. The Income -tax Officer, thereafter, valued other assets as on January 1, 1963, at Rs. 44,38,126 as per rule 19(1)(b). The aggregate valuation so placed by the Income -tax Officer was Rs. 85,88,837. Out of this aggregate valuation, the Income -tax Officer has deducted an amount of Rs. 44,01,803 on account of loans, other liabilities and tax provisions, etc. The Income -tax Officer after deducting the aforesaid amount of Rs. 44,01,803 found the valuation of capital according to rule 19(1) at Rs 41,87,034 to which he added Rs. 3,52,503 being half of the profit for the year from its new industrial project at Vidyanagar. He thus computed the value of the capital employed at Rs. 45,39,537. Accordingly, under section 84 read with section 101 of the Income -tax Act, 1961, the Income -tax Officer exempted an amount of Rs. 2,72,372 being 6 per cent. of the capital employed in the new industrial undertaking. It appears that the Income -tax Officer thereafter held reassessment proceedings under section 147(b) and computed the capital employed at Rs. 41,87,034 as stated above. However, he refused to add the amount of Rs. 3,53,503 being half of the profit for the year from the new industrial undertaking at Vidyanagar as he was of the opinion that the average profit of the year had already been taken into account, inasmuch as in arrive at the above figure, the assets were taken as at the beginning of the year to which added the average value of additions made in respected of the assets during the previous year and the liabilities were also computed accordingly and, therefore, the profits were already reflected in the assets and it was, therefore, not necessary to give benefit again to the assessee by adding the amount the Vidyanagar project. Accordingly, the Income -tax Officer respondent -assessee was entitled to claim exemption only for the amount of Rs. 2,51,222 being six per cent of Rs. 41,87,034 being the amount of capital employed in the industrial undertaking.

(3.)BEING aggrieved by this order of reassessment, the respondent -assessee went in appeal before the Appellate Assistant Commissioner; he, however, confirmed the reassessment order of the Income -tax Officer. In further appeal to the Appellate Tribunal, it was contended that full effect was not given to clause (5) of the aforesaid rule 19, inasmuch as the Income -tax Officer failed to add the profit which accrued and which also resulted in corresponding increase in the capital. The contention of the revenue was that in working out the capital at Rs. 41,87,034, the average profit of the year had already been taken into account, inasmuch as in working out the said figure the assets were taken as at the beginning of the year to which was added the average value of addition made in respect of the assets during the previous year. It appears that the Tribunal did accept this contention of the revenue that the average profit of the year was reflected in the assets of that year. However, the Tribunal was of the opinion that the respondent -assessee was entitled under clause (5) of the aforesaid rule 19 to have benefit of further addition of half the amount of the profit in view of the fiction incorporated in the said clause (5). The Tribunal, therefore, held that the assessee was entitled to claim a further addition of Rs. 3,52,503 being half the amount of the profit to the valuation of the capital at Rs. 41,87,034 and, therefore, the net valuation should be Rs. 45,39,537. On that basis the assessee was entitled to claim exemption on the amount of Rs. 2,72,372 being 6 per cent. of the value of the capital employed in the industrial undertaking. At the instance of the Commissioner, therefore, the question set out hereinabove has been referred to us for our opinion.
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