M.Katju, J. - (1.) THIS is a reference under s. 256(1) of the IT Act, 1961. In the instant reference the following questions of law have been referred to us for our opinion : "1. Whether, on the facts and in the circumstances of the case, and on proper interpretation of R. 19A(3) of the IT Rules, 1962 the Tribunal was legally correct in holding that for purposes of deduction under s. 80J the amount of borrowed moneys and debts owed by the assessee should be included in the capital employed ? 2.Whether, on the facts and in the circumstances of the case and in view of the provisions of R. 19A of the IT Rules, 1962, the Tribunal was legally correct in holding that while computing the capital employed, half of the profits earned by the unit should be added ?"
(2.) SRI Bharatji Agarwal has put in appearance for the Department but none has appeared for the assessee although an affidavit of service has been filed. The relevant assessment years are 1975-76 and 1976-77. During these years the assessee claimed deduction under S. 80C of the IT Act, 1961, and the question is whether borrowed capital is to be included in the capital for the purposes of S. 80J. In Lohia Machines Ltd. and Anr. vs. Union of India and Ors. (1985) 44 CTR (SC) 328 : (1985) 152 ITR 308 (SC) it has been held by the Supreme Court that borrowed capital cannot be included. Following the said decision, the question No. 1 referred is answered in the negative, i.e., in favour of the Department and against the assessee. Now coming to question No. 2, it appears that there is a typing mistake in the referring order as it mentions R. 19A of the IT Rules while it should be read as r. 19(5) of the said Rules. The Tribunal in its order has made reference to R. 19(5). It is relevant to state here that the Tribunal has placed reliance upon a judgment in CIT vs. Modi Spg. and Mfg. Mills 1981 UPTC 325 and has held that while computing the capital employed, half of the profits earned by the unit should be added in view of R. 19 of the IT Rules. The aforesaid judgment has no relevance to the present case. The said judgment was delivered with respect to the asst. yr. 1965-66 when s. 84 of the IT Act, was operative. Sec. 84 of the IT Act, was operative up to the asst. yr. 1967-68. Sec. 80J was inserted thereafter and R. 19A was framed. Rule 19 of the IT Rules prescribed the mode of I computation of capital employed in an industrial undertaking of a ship or the business of hotel for the purposes of the then S. 84, which was operative up to asst. yr. 1967-68. Sec. 84 of the Act was not operative for the relevant assessment years in question hence E. 19 of the IT Rules will have no application. In view of the fact that s. 84 of the IT Act was no longer on the statute book in the relevant asst. yrs. 1975-76 and 1976-77, reference to r. 19(5) is wholly misplaced and the aforesaid ruling has no application to the fact of the present case. In view of the above, the question No. 2 is answered in the negative, i.e., in favour of the Department and against the assessee.
(3.) THE reference is decided accordingly.;