P. Govindan Nair, C.J. -
(1.) THE question raised by the assessee in this writ petition relates to the validity of Rule 19A(3) of the Income-tax Rules, 1962. THE assessment of the petitioner for the year 1972-73 was made by applying Rule 19A(3) of the Rules.
(2.) SHORTLY stated the point raised is that Rule 19A(3) has taken away the benefit conferred by Section 80J of the Act. We shall extract Section 80J as well as Rule 19A(2) and (3):
" 80J. Deduction in respect of profits and gains from newly established industrial undertakings or ships or hotel business in certain cases.--(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains (reduced by the deduction, if any, admissible to the assessee under Section 80HH) of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent. per annum on the capital employed in the industrial undertaking or ship or business of the hotel, as the case may be, computed in the prescribed manner in respect of the previous year relevant to the assessment year (the amount calculated as aforesaid being hereafter, in this section, referred to as the relevant amount of capital employed during the previous year)......"
Rule 19A(2).--" The aggregate of the amounts representing the values of the assets as on. the first day of the computation period, of the undertaking or of the business of the hotel to which the said Section 80J applies Shall first be ascertained in the following manner :--
(i) in the case of assets entitled to depreciation, their written down value;
(ii) in the case of assets acquired by purchase and not entitled to depreciation, their actual cost to the assessee ;
(iii) in the case of assets acquired otherwise than by purchase and not entitled to depreciation, the value of the assets when they became assets of the business;
(iv) in the case of assets being debts due to the person carrying on the business, the nominal amount of those debts;
(v) in the case of assets being cash in hand or bank, the amount thereof......
(3) From the aggregate of the amounts as ascertained under sub- rule (2) shall be deducted the aggregate of the amounts, as on the first day of the computation period, of borrowed moneys and debts owed by the assessee (including amounts due towards any liability in respect of tax)." From a reading of Section 80J it is clear that the words to be construed for resolving the controversy raised in this case are the words " capital employed ". It is also necessary to refer to the words " computed in the prescribed manner " occurring later in the section. " Prescribed " means, as defined in Section 2(33) of the Act, prescribed by rules. The section enabling the Board to make rules is Section 295. The general provision in Sub-section (1) of Section 295 speaks of the power to make rules to carry out the purpose of the Act. Sub-section (2), without prejudice to the gener ality of the powers conferred by Sub-section (1), prescribes the specific matters regarding which rules could be made. No reference was made to any of the clauses in Sub-section (2) of Section 295 as the provision under which Rule 19A was made. Not that it matters for even when rules are made under any of the clauses of Sub-section (2), rules can be made only for the purpose of carrying out the purposes of the Act.
On behalf of the assessee it was contended that the section clearly has allowed deduction of 6 per cent. on the capital employed and that no rule can provide for any reduction from that 6 per cent. This submission of course supposes that the entire capital employed would have to be taken into account for the purpose of Section 80J. This submission is not accepted by the counsel for the revenue. His contentions were two-fold. It was submitted that the capital employed itself must be understood not as the entire amount invested in capital assets but only the difference' between the value of the assets acquired for the purpose of business and the value of the borrowed capital which was employed for the purpose of acquiring the assets. Reference was made to certain passages from the book on Accounting and the Law by J.L. Dohr, E. L. Phillips, G. C. Thomson and W. C. Warren, page 30. The passages referred to were under the headings " Classification of proprietary capital "--page 30 and "working capital" at page 48. We do not consider that any explanation or definition of the term " proprietary capital " or " working capital " would help us in solving the meaning of the words " capital employed " occurring in Section 80J of the Act. It would be dangerous to apply the meanings attributable to other expressions, especially when those expressions relate to technical matters in interpreting the words of the section. "Capital employed" is not defined for the purpose of Section 80J or generally in the Act. Our attention was drawn to Explanation (b) and (c) to Section 35D of the Act. There is specific reference to " capital employed " in those Sections and an explanation is given as to the meaning to be attributed to those words in that section. It was not urged before us either on. behalf of the revenue or on behalf of the assessee, and we think rightly, that the said explanation would be helpful in interpreting the words " capital employed " occurring in Section 80J of the Act. That explanation will only be for the purpose of Section 35D. We have, therefore, to understand the words " capital employed " in its natural, legal and common sense. We have not been referred to any authority by which capital employed would mean in the legal sense something different from what, it would mean in ordinary parlance or according to the natural grammatical meaning to be attached to these words; nor have we been referred to any decision or authority for the proposition that the words should be understood in common parlance in a manner different from the way in which it should be understood in a technical sense for the purpose of understanding the words " capital employed " in the matter of the business of a company. So, we have to attribute to these words the ordinary meaning. . We think this expression means, in that sense, the amounts that have been employed as capital in the business. There is no indication that the tapital employed must have come from any particular source or sources. There is no reference at all to the nature of the capital that is employed. The capital can be that which a company possessed, namely, share capital or other moneys belonging to the company. It may also be moneys that have become moneys of the company because the company had borrowed. It was not of course contended that money borrowed by a company does not belong to the company. It must necessarily belong to the company, though for certain purposes, the amount borrowed will be shown as representing a liability of the company. But we are not concerned with this aspect of the matter. The borrowed money is the money of the company and if that money had been employed by the company as capital, that amount will become capital employed for the purpose of the section. That is the plain meaning of the section. We see no reason whatever to distort this plain meaning of the section because of any indication whatever in the section or for any other compelling reason discernible from the scheme of the Act. We are unable to hold that an indigent company which has to borrow, particularly on a long-term basis and from well-known and well-established financing concerns established by the State and the Centre, must stand on a footing less advantageous than the more affluent companies which have no need to borrow. If we look at the purpose which we must attribute to the legislature which prompted the enactment of Section 36A(?) which originally came in the Finance Act of 1965, on April 1, 1965, and try to discuss the intention in enacting the Chapter in which Section 80J occurs, it is clear that the legislation is meant for the purpose of helping newly started concerns to establish themselves. This is the main object behind the section. We cannot give an interpretation to any of the expressions occurring in any of the Sections without bearing in mind this primary and essential purpose and intention of the legislature. So understood, we have certainly to give the same benefit to those concerns that have to borrow, which is available to concerns that have no need to borrow., We see no justification whatever in giving to the words " capital employed " occurring in Section 80J a meaning which would take out of the ambit of the provisions companies which are indigent and not able to finance their needs by their own resources.
Now, turning to the argument advanced on behalf of counsel for the revenue that the words " capital employed " must be understood along with the words " computed in the manner prescribed ", the suggestion was that even if " capital employed " can be given the meaning indicated by us that meaning must be turned down or whittled down, by qualifying the effect of the words that followed, namely, " computed in the manner prescribed ". It was urged that those words give the rule-making authority full power to prescribe the manner in which capital employed should be computed and so it would be possible by rules to reduce the quantum of capital employed. If this, argument is accepted then it must be possible for the Board to say in making rules that if the capital employed is a lakh of rupees only 25 per cent. will be taken into account in computing " capital employed ". We do not think that the words in the" section can be interpreted in that manner. If we interpret the section in that manner it would certainly mean that uncanalized power would be available with the rule-making authority. This means that there will be a delegation to an extent which cannot be tolerated and which would amount to excessive delegation. Naturally we have to give a meaning to the section which will not make the section otiose. The reasonable meaning that has, therefore, to be attributed to the words " computed in the manner prescribed " occurring in the section would be that the computation must be in such manner as provided in the rules, the manner being one of the well-known and accepted methods of computing capital employed. This is more or less clearly indicated in Rule 19A(2) which we have already read. But, if we turn to Rule 19A(3) we find a provision therein, which is as follows :
"19A. (3) From the aggregate of the amounts as ascertained under sub-rule (2) shall be deducted the aggregate of the amounts, as on the first day of the computation period, of borrowed moneys and debts owed by the assessee (including amounts due towards any liability in respect of tax)."
This is not prescribing a manner of computation of the capital employed. This is a provision which enables deduction being made from the capital employed of certain amounts, which is specified in Rule 19A(3). The section does not warrant any such rule being made nor has it conferred any power on the rule-making authority to make such provision. The framing of such a rule [19A(3)] would not be for carrying out the purposes of the Act. What is given by the Act has been taken away by the Rules. No rule-making authority can by Rules alter the provisions of the Act. This principle is too well-established to be supported by quoting of any authority.
We are, therefore, of the view that Rule 19A(3) as it is now framed and which has come into force after the third amendment of the Rules on April 1, 1972, is in excess of the rule-making power of the Board conferred by Section 295 of the Act. This sub-rule cannot be relied on for the purpose of computing the words "capital employed" for the purpose of Section 80J.
(3.) AT page 4 of the affidavit filed by the petitioner in support of the petition is extracted a part of the assessment order from which it is seen that a sum of Rs. 35,02,795 had been deducted from the sum of Rs. 61,17,104. The sum of Rs. 61,17,104 represents " capital employed " by the assessee. The amount of Rs. 35,02,795 had been deducted because that amount represented the borrowed capital.
Reference had been made by counsel for the assessee to certain books on accountancy for illustrating the words " capital employed ". The view that we are taking is supported by the decision of the Calcutta High 'Court in Century Enka Ltd. v. Income-tax Officer . The decision is rendered by a single judge of the Calcutta High Court and we are informed that the matter is pending before the same High Court in appeal. But the reasoning of the judgment appeals to us. We have been referred to a number of other decisions but we do not think that these decisions are helpful in answering the question that has arisen before us. But we may, in passing, refer to the decision of this court in Jayaram Mills Lid. v. Commissioner of Excess Profits Tax  35 ITR 651 (Mad). The question that arose in that case turns on the interpretation of a different rule and related to the further question that " capital employed " meant assets employed. In discussing that question there is a reference to a decision of the House of Lords and the trend of the reasoning at page 660 lends support to the reasoning we have adopted in this judgment.
The Supreme Court in India Cements Ltd. v. Commissioner of Income-tax , relied on by counsel on behalf of the revenue, held that:
" A loan is a liability and has to be repaid and, in our opinion, it is erroneous to consider a liability as an asset or an advantage within the test laid down by Viscount Cave and approved and applied by this court in many cases."