M. Katju, J. - (1.) THIS is a reference made by the Income-tax Appellate Tribunal, Allahabad, under Section 256(1) of the Income-tax Act, 1961 ( hereinafter referred to as "the Act").
(2.) THE assessee is a registered firm having its head office at Barhaj. THE assessee also had a branch at Bhilai, where it was running a distillery. THE present dispute relates to the assessee's claim for deduction under Section 80J of the Income-tax Act in respect of the said distillery for the assessment year 1974-75. THE books of the distillery showed a credit balance of Rs. 7,16,672 in the accounts of the head office. THE assessee claimed that this amount should be held to be capital of the distillery for computing relief under Section 80J of the Act. THE Income-tax Officer, however, rejected the claim of the assessee and held that there was no capital whatsoever of the partnership and the entire business was being done with the help of loans and, in view of Rule 19A of the Income-tax Rules, the loans could not be included in the capital for the purpose of deduction under Section 80J of the Act. The assessee appealed to the Appellate Assistant Commissioner who agreed with the contention of the assessee and allowed the appeal holding that the aforesaid amount was capital employed in the distillery. The Department thereupon filed an appeal to the Tribunal which found that the account of the partners taken together showed a negative balance. The Tribunal also found that the entire business was being carried on with the help of loans taken by the assessee. These loans had been taken by the head office and, out of these loans, a sum of Rs. 7,16,672 had been transferred to the distillery. The Tribunal, accordingly, held that this amount could not be held to be capital of the assessee for the purposes of Section 80J of the Act as it was borrowed money. Accordingly, the Tribunal allowed the Department's appeal and set aside the order of the Appellate Assistant Commissioner. On a reference under Section 256(1) of the Act, the following question has been referred to this court : "Whether, on the facts and in the circumstances of the case, the distillery was entitled to relief under Section 80J on a sum of Rs. 7,16,672 transferred from the head office set to the distillery set ?"
(3.) WE have heard Shri Vikram Gulati for the assessee and standing counsel for the Department in great detail. Rule 19A(3) of the Income-tax Rules states that borrowed moneys and debts owed by the assessee shall be deducted from the aggregate of the amounts as ascertained under Sub-rule (2) of Rule 19A. Hence, borrowed moneys and debts cannot be treated to be capital for the purpose of Section 80J. Shri Gulati has contended that the amount of Rs. 7,16,672 should be treated as capital of the distillery as it was not borrowed by the distillery but by the head office. We cannot agree with this contention. The amount transferred by the head office to the distillery was a part of the loan borrowed by the head office. This is a specific finding of the Tribunal in paragraph 6 of its order dated June 18, 1976. It may be mentioned that a branch is not a separate legal entity unlike say a registered subsidiary company. In the present case, the legal entity is the assessee firm and the branch is only a part of it. As held by the Hon'ble Supreme Court in Agenda Commercial International Ltd. v. Custodian of the Branches of Banco Nacional Ultramarino, AIR 1982 SC 1268 (head-note ) ; "It is indisputable as a general proposition that a body corporate and its branches are not distinct and separate entities from each other, that the branches constitute mere components through which the corporate entity expresses itself and that all transactions entered into ostensibly with the branches are, in legal reality, transactions with the corporate body, and it is with the corporate body that a person must deal directly." ;