- (1.) These Writ Petition raise an interesting question of law relating to the interpretation of S. 80-J of the Income Tax Act, 1961, and on the basis of certain interpretation, they challenge the validity of Rule 19-A of the Income Tax Rules, 1962 and also call in question the constitutionality of the retrospective amendment made in S. 80-J by Finance (No. 2) Act, 1980. The questions arising in these Writ Petition are of considerable importance since they involve revenue aggregating to crores of rupees and they have been argued at great length on both sides.
(2.) The principal controversy between the parties turns on the true interpretation of S. 80-J of the Income Tax Act, 1961 and hence we may begin our discussion of the issues arising in the writ petitions by examining the language of that section. But before we do so, we may usefully refer to the genesis of the provision enacted in S. 80-J and the transformation it has undergone from time to time over the years. It is in fact necessary to trace the historical evolution of this provision in order to arrive at its true interpretation, for, as observed by Cardozo, J. in Duparquet Huat v. Evans, in questions relating to construction, "history is a teacher that is not to be ignored". The first time that a provision of this kind was introduced in the Indian Income Tax Act, 1922 was by the Taxation Laws (Amendment) Ordinance, 1949 when S. 51-C was added in that Act with effect from 31/03/1949. Ss. (1) of S. 15-C exempted a part of the profits and gains of a new industrial undertaking from tax and this provision as originally enacted was in the following terms : 15-C (1) Save as otherwise hereinafter provided, the tax shall not be payable by an assessee on so much of the profits or gains 207 derived from any industrial undertaking to which this S. applies as do not exceed six per cent per annum on the capital employed in the undertaking, computed in accordance with such rules as may be made in this behalf by the central Board of Revenue. The central Board of Revenue in exercise of the powers conferred under Ss. (1) of S. 59 of the Indian Income Tax Act, 1922 issued a Notification dated 15/10/1949 making the Indian Income Tax (Computation of Capital Industrial Undertakings) Rules, 1949 for computation of capital employed in the industrial undertaking as envisaged in Ss. (1) of S. 15-C. Rule 3 of these Rules insofar as material provided inter alia as follows: Rule 3 (1) : For the purpose of S. 15-C of the Act, the capital employed in an undertaking to which the said S. applies shall be taken to be- (A) in the case of assets acquired by purchase and entitled to depreciation- (I) if they have been acquired before the computation period, the written down value on the commencing date of the said period; (Ii) if they have been acquired on or after the commencing date of the computation period, their average cost during the said period ; (B) In the case of assets acquired by purchase and not entitled to depreciation- (I) if they Have been acquired before the computation period, their actual cost to the assessee; (Ii) if they have been acquired on or after the commencing date of the computation period, their average cost during the said period ; (C) in the case of assets being debts due to the person carrying on the business, the nominal amounts of those debts ; (D) in the case of any other assets the value of the assets when they became assets of the business provided that if any such asset has been acquired within the computation period, only the average of such value shall be taken in the same manner as average cost is to be computed. (2) Where the price of any assets has been satisfied otherwise than in cash, the then value of the consideration actually given for the asset shall be treated as the price at which the asset was acquired. (3) Any borrowed money and debt due by the person carrying on the business shall be deducted and in particular there shall be deducted any debts incurred in respect of the business for income-tax and super-tax or business profits tax or for advance payments due under any provision of the Indian Income Tax Act, 1922, or for any sum payable in relation to business profits tax under S. 13 of the Business Profits Tax Act, 1947 (XXI of 1947) :the process of computation of "capital employed in the undertaking" according to this Rule consisted of two steps; one of addition of the value of assets of the industrial undertaking arrived at on the basis of different formulae according to the nature and the date of purchase of the assets and the other, of deduction of "any borrowed money and debt due by the person carrying on the business". The significant point is that borrowed moneys and debts due from the assessee were excluded in computation of "capital employed in the undertaking" by reason of sub-rule (3) of this Rule.
(3.) The Taxation Laws (Amendment) Ordinance, 1949 was replaced by the Taxation Laws (Extension to Merged States and Amendment) Act, 1949 which came into force on 31/12/1949 and by S. 13 of this Act, S. 15-C was continued and though some minor modifications were made, Ss. (1) which granted the exemption remained unchanged. Ss. (2) , (4) and (6) suffered some minor changes and, as re-enacted, these Ss. read as follows: (2) This S. applies to any industrial undertaking which (I) is not formed by the splitting up, or the reconstruction of, business already in existence or by the transfer to a new business of building, machinery or plant used in a business which was being carried on before the 1st day of April, 1948 ; (Ii) has begun or begins to manufacture or produce articles in any Province in India at any time within a period of three years from the 1st day of April, 1948. or such further period as the central government may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking; (Iii) employs more than fifty persons; and (Iv) involves the use of electrical energy or any other form of energy which is mechanically transmitted. and is not directly generated by human agency: (4) The tax shall not be payable by a shareholder in respect of so much of any dividend paid or deemed to be paid to him by an industrial undertaking as is attributable to that part of the profits or gains on which the tax is not payable under this section. (6) The provisions of this S. shall apply to the assessments for the years commencing on the 1st day of April, 1949, and ending on the 31st day of March, 1954. It is significant to note that though the Indian Income Tax (Computation of Capital of Industrial Undertakings) Rules, 1949 provided for exclusion of borrowed moneys and debts due from the assessee in computing the capital employed in the undertaking, the Legislature, when it re-enacted S. 15-C by S. 13 of the Taxation Laws (Extension to Merged States and Amendment) Act, 1949 did not choose to make any change in this position but continued the same Rules under Ss. (2) of S. 34 of the Taxation Laws (Extension to Merged States and Amendment) Act, 1949. The Legislature thus gave its approval to exclusion of borrowed moneys and debts in computation of capital employed in the undertaking and also made it clear that the word 'computed' has been used by it in this context in the sense of involving inclusion as well as exclusion of items which might be regarded as part of the capital employed in the undertaking.;