# M/S LOHIA MACHINES LIMITED AND ANR v. UNION OF INDIA AND ORS

- **Citation:** [1985] 2 S.C.R. 686
- **Court:** Supreme Court of India
- **Decided:** 1985-01-25
- **Bench:** Y.V. Chandrachud, P.N. Bhagwati, Amarendra Nath Sen, D.P. Madon, M.P. Thakkar
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/m-s-lohia-machines-limited-and-anr-v-union-of-india-and-ors-8971
- **Pages:** 98

## Headnote

Constitution of India, Articles 14 and 19 (1) (g).
Income Tax Act, 1968, ss.80J(l) and(lAl, s. 296-lncome Tax Rules,
1962-Rule 19A-Validity of.
"Capital employed" in industrial undertaking-Meaning of-Whether
includes long term borroWiflgs-Computed in the prescribed manner-Central
Board of Reyenue-fflhether competent to prescribe the manner of computation
by Rules-Providing for computation of "capital employed" as on "the first day
of the computation period"-Whether ultra vfres s. 801 (1)-Whether suffers
from excessive delegation of legislative power-Whether violative of Art. 14.
''Capital employed'' in industrial undertaking-Profits and gains derived
from-Tax relief to new industries-s.801-retrospective amendment of b1
Fi,,ance (No. 2) Act, 1980-lncorporalion of Rule 19A-Validity of-Whether
violative of Articles 14 and 19 (1) (g) of the Constitution.
Interpretation of statute-Interpretation of a provision-Historical
Evolution-Whether could be ignornd.
Words used-Plain an unambiguous-Reasonably susceptible to one
meaning only-Whether could be given effect to by the Court-Whether Court
concerned with the policy invlvoed or with the result which may follow.
Legislative intent-Whether to be gathered from consistent practice
followed- Whether cognate statutes to be lookd into.
Validating Act-Re~rospective Operation of-When becomes arbitrary
and unreasonable.
LOHIA MACHINHS V. UNION
687
Administrait~e Law- Legislative power in a taxing statute-Delegation
of- Rule-making Authority-Scope nf- Where relief of exemptiQn is granted by
the st:Jtute- Whether Rule-111aking Authority competent to work out derails of
relief and exemption a its discretion- Legislature's srict vigilance and control
over the Rule-making Authority-Whether excessive delegation of legislative
power fiJ the Executive.
Acquiescence in an earlier exercise of ultra vires rule-making powerA
Wheiher such exercise of rule-making power valid at a subsequent date.
B
Words and Phrases-Meaning of "Capital en1ployed" - 'Computed in
the prescribed manner'-'Computed'-Meaning of-''Capital employed during
the prei'iiJllS year" and ''Capital en1p!oyed in respect of the previous year"-
Distinction betwt•en.
The Taxation Laws (Amendment) Ordinance 1949 introduced s.t5C in
the Indian Income Tax Act 1922 with effect from 31st March 1949. This provision
was similar to s. 80J of the Income Tax Act 1961. Sub-s. (!)of s.15C exempted
a part of the profits and gains of a new industrial undertaking from tax. The
Central Board of Revenue made the Indian Income Tax (Computation of Capital
of Industrial Undertakings) Rules, 1949 for computation of capital employed in
the industrial undertaking as envisaged in s.15C(l). According to Rule 3 of
these .Rules the process of computation of "capital employed in the undertaking"
consisted of two steps : one of addition of the value of assets of the industrial
undertak;ng arrived at on the basis of differnt formulae according to the nature
and the date of the purchase of the assets and the other, of deduction of "any
borrowed money and debt due by thf' person carrying on the business". Borrowed
monies and debts due from the assessee were excluded in co1nputation of "capital
employed in the undertaking" by sub-rule (3) of this Rule.
The Taxation Laws :(Amendment) Ordinance 1949 was replaced by the
Taxation Laws (Extension to Merged States and Amendment) Act 1949 on 31st
c
D
E
December 1949 and s.13 thereof retained s.15C with some minor modifications.
F
Sub-s.(I) which granted the exemption remained unchanged. While reenacting
s.15C, the Legislature did not change this position but continued the same Rules
and thus approved the exclusio.1 of borrowed 1nonies 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.
Thereafter f

## Text

_Characters 0–39,897 of 266,078. This is a partial read: ask again with offset=39897 for what follows._

A
B
c
D
E
F
G
H
686
M/S LOHIA MACHINES LIMITED AND ANR.
v.
UNION OF INDIA AND ORS.
January 25, 1985
(Y.V. CHANDRACHUD, C.J., P.N. BHAGWATI, AMARENDRA NATH
SEN, D.P. MADON AND M.P. THAKKAR, JJ.]
Constitution of India, Articles 14 and 19 (1) (g).
Income Tax Act, 1968, ss.80J(l) and(lAl, s. 296-lncome Tax Rules,
1962-Rule 19A-Validity of.
"Capital employed" in industrial undertaking-Meaning of-Whether
includes long term borroWiflgs-Computed in the prescribed manner-Central
Board of Reyenue-fflhether competent to prescribe the manner of computation
by Rules-Providing for computation of "capital employed" as on "the first day
of the computation period"-Whether ultra vfres s. 801 (1)-Whether suffers
from excessive delegation of legislative power-Whether violative of Art. 14.
''Capital employed'' in industrial undertaking-Profits and gains derived
from-Tax relief to new industries-s.801-retrospective amendment of b1
Fi,,ance (No. 2) Act, 1980-lncorporalion of Rule 19A-Validity of-Whether
violative of Articles 14 and 19 (1) (g) of the Constitution.
Interpretation of statute-Interpretation of a provision-Historical
Evolution-Whether could be ignornd.
Words used-Plain an unambiguous-Reasonably susceptible to one
meaning only-Whether could be given effect to by the Court-Whether Court
concerned with the policy invlvoed or with the result which may follow.
Legislative intent-Whether to be gathered from consistent practice
followed- Whether cognate statutes to be lookd into.
Validating Act-Re~rospective Operation of-When becomes arbitrary
and unreasonable.
LOHIA MACHINHS V. UNION
687
Administrait~e Law- Legislative power in a taxing statute-Delegation
of- Rule-making Authority-Scope nf- Where relief of exemptiQn is granted by
the st:Jtute- Whether Rule-111aking Authority competent to work out derails of
relief and exemption a its discretion- Legislature's srict vigilance and control
over the Rule-making Authority-Whether excessive delegation of legislative
power fiJ the Executive.
Acquiescence in an earlier exercise of ultra vires rule-making powerA
Wheiher such exercise of rule-making power valid at a subsequent date.
B
Words and Phrases-Meaning of "Capital en1ployed" - 'Computed in
the prescribed manner'-'Computed'-Meaning of-''Capital employed during
the prei'iiJllS year" and ''Capital en1p!oyed in respect of the previous year"-
Distinction betwt•en.
The Taxation Laws (Amendment) Ordinance 1949 introduced s.t5C in
the Indian Income Tax Act 1922 with effect from 31st March 1949. This provision
was similar to s. 80J of the Income Tax Act 1961. Sub-s. (!)of s.15C exempted
a part of the profits and gains of a new industrial undertaking from tax. The
Central Board of Revenue made the Indian Income Tax (Computation of Capital
of Industrial Undertakings) Rules, 1949 for computation of capital employed in
the industrial undertaking as envisaged in s.15C(l). According to Rule 3 of
these .Rules the process of computation of "capital employed in the undertaking"
consisted of two steps : one of addition of the value of assets of the industrial
undertak;ng arrived at on the basis of differnt formulae according to the nature
and the date of the purchase of the assets and the other, of deduction of "any
borrowed money and debt due by thf' person carrying on the business". Borrowed
monies and debts due from the assessee were excluded in co1nputation of "capital
employed in the undertaking" by sub-rule (3) of this Rule.
The Taxation Laws :(Amendment) Ordinance 1949 was replaced by the
Taxation Laws (Extension to Merged States and Amendment) Act 1949 on 31st
c
D
E
December 1949 and s.13 thereof retained s.15C with some minor modifications.
F
Sub-s.(I) which granted the exemption remained unchanged. While reenacting
s.15C, the Legislature did not change this position but continued the same Rules
and thus approved the exclusio.1 of borrowed 1nonies 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.
Thereafter from time to time changes were made in s.t SC by verious
Finance Acts but these changes were not substantial and they merely extended the
period of production for eligibility from the initial 3 years to 18 years. Business
of hotel was also brought within the purview of the exemption and conditions for
grant of such exemption were laid down. Thus, the basic structure of s. 15C as
well as the Indian Income Tax (Computation of Capital oflndustrial Undertakings)
G
Rules 1949 remained unchanged. 'Jhe result was that throughout the period from
H
A
B
c
D
E
F
G
688
UPREME COURT REPORTS
[1985] 2 s.c.R.
31st March, 1949, whens. !SC was introduced in the Indian Income Tax Act 1922
upto the period it remained in force, borrowed monies and debts due from the
assessee were excluded in computing the capital employed in the undertaking for
the purpose of determining the quantum of the exemption eligible under s. 15C.
The Income Tax Act, 1961 repealed the Indian Income~Tax Act 1922.
Section 15C of the Indian Income Tax Act 1922 was recast as s.84 in the Income
Tax Act 1961. Sub-s.(1) of s.84 granted the same exemption as was granted by
sub-s.(l) of s.JSC and the only change made was that the profits or gains eligible
for exemption were now to be calculated at "six per cent per annum on the capi.
tat employed in the undertaking or hotel computed in the prescribed manner".
The word 'prescribed' according to definition in sub-s.(33) of s. 2 meant prescribed
by Rules made by the Central Board of Revenue under the Act i.e. Income Tax
Rules 1962. Rule 19 prescribes as to how the capital employed in an undertaking
or a hotel shall be computed for the purpose of s.84. Even under s.84 of the
Income Tax Act 1961 the same position prevailed as before. This position continued un-interrupted until s.84 was replaced by s.80J with effect from 1st April
1968 by Finance (No. 2) Act 1967. Sub-s.(I) of s.80J brought about a material
change in the provision as it stood in sub-s.{1) of s.84.
Under sub-S.(1) of s.80J the benefit of the exemption was extended additionally to profits derived from a ship and so far as the quantum of exemption
was concerned, the formula adoPted for calculating it was "six per cent per annum
on the capital employed in lhe indurstrial undertaking or ship or business of the
hotel, computed in the prescribed manner in respect of the previous year relevant
to the assessment year". The new words introduced were "in respect of the previous year relevant tn the assessment year". Sub-s.(2) of s.80J laid down the period
for which the exemption shall be .allowable and sub-s.(3) provided that any deficiency in the benefit of the exemption arising on account of the profits and gains
being less than the relevant amount of capital employed during the previous year
shall be carried forward and allowed as a straight deductioa in computing , the
total income of the assessee for the subsequent years subject to the proviso that
in no case shall the deficiency or any part thereof be carried forward beyond the
seventh assessn-,ent year as reckoned from the end of the initial assessment year.
Sub-s.(4} enacted certain conditions to be fulfilled before an industrial undertaking could quti'lify for the benefit of the exemption and one of the conditions was
that the industrial undertaking should not have been formed "by the transfer to
a new business of a building machinery or plant previously used for any purpose.•
Sub-s.(5) laid down several conitions to be fulfilled before the benefit of the
exemption could be made available in case of profits derived fiom a ship. Sub-s.
(6) provided certain exceptions to the provisions contained in sub-s.(4).
Since the profits derived from an industrial undertaking or a ship or the
business of a hotel were eligible for exemption only to the extent of per
annum of the capital employed in the industrial undertaking or ship or business
of a hotel computed in the prescribed manner in respect of the previous year
relevant 10 the assessment year, the Central Board of Revenue made Rule 19A
prescribing the manner in which the capital employed in the industrial undertaking, ship or business of the hotel should be computed for the purpose of Section
80J. :Jtule J9A made material alteraticins in the taxture of Rule I'.
'
•
'
LOlliA MACHINES V. UNION
689
Rule 19A brought about two noticeable changes, namely, {1) that where
as under the Indian Income Tax (Computation of Capital of Inc'ustrial
Undertakings) Rules 1949 and Rule 19, the average cost of assets acquired by
purchase on or after the commencing date of the compu!ation period was required to be taken into account in computing the capital employed in the industrial
undertaking or hotel,. a deliberate departure was n ade f1om this formula and
under Rule 19A, assets acquired on or after the cornrnenccment oftl:e ccrrputation period were to be left out of account and only the arr.aunts rei:-resenting the value of the assets as on the first day of tl'e ccrnputaticn prricd
were to enter into the computation of the capital err1ployed in the ir.dusl rial
undertaking or the businesc of a hotel, and (2) that though under the
Indian Income Tax (Computation of Capital of Industrial Undertakings) Rules
1949 and Rule 19, all borrowed monies and debts due from the assessee were
required to be deducted in computing the 'capital employed' in the industrial
undertaking or a hotel, a certain amount of liberalisation was introduced under
Rule 19A providing that "monies borrowed from an approved source for the
creatain of a capital asset in India, if the agreement under which such monies are
borrowed provides for the repayment thereof during a period of not less than
seven years" shall not be liable to be deducted but shall be taken into account in
computing the capital employed in the industrial undertaking or the business of
a hotel for the purpose of Section 801. The result was that from and after 1st
April 1968, when Rule 19A came into force, borrowings from an approved
source repayable in not less than seven years started for the first time to be taken
into account in computation of the capital employed in the industrial undertaking
or the business of a hotel, though other categories of borrowed monies and debts
due from the assessee continued to remain excluded from such compatation.
This state of affairs continued until 1st April 1971 when the Finance (No.
2) Act 1971 came into force. While introducing the Bill, the Finance Minister
made a policy statement on the floor of the House, that in calculating the limit
of 6 p~r cent of the capital for purposes of tax-exemption, debentures and long·
term. borrowings will be exeluded, This policy statement was implemented by the
Central Board of Revenue by amending Sub-Rule(3) of Rule 19A. The consequeni:e of this amendment was that the position as it provailed prior to the
enactment of Rule 19A wai;; again r..::stored with effect from 1st April, 1972.
Under Rule 19 of the Indian Income-Tax (Computation of Capital of
Industrial Undertakings) Rules 1949 from Ist April 19-1-9 upto 31st M.irch 1968
all borrowe,I monies and debts owed by the assessee were excluded in computing
the capital employed in all industrial undertaking or the business of a hotel. 1'1-J
challenge was ever preferred against these Rules.
From 1st April 1968 under rule 19A a liberalisation was introduced by
inclusion of long term borrowings (repayable in not less than seven ye1lSJ in
computation of the 'capital employed'. Tliis liberalisation was wi1;idrawn with
effect from Ist April 1972 and only then for the first time some asscssees raised a
c9ntention before the Bombay Bench of the Income Tax Appellate Tribunal in
A
B
D
E
F
G
ff
A
B
c
D
E
F
G
690
SUPRBM E COURT REPORTS
[1985] 2 S.C R·
Mis. Alim Chal'ld T pan Dass v. J.T.0. that on true construction of sub-s. (1) of
s.801 th! capital emp oyed in thel ndustrial undertaking or the business of a hotel
would include long tenu borrowing 1 since according to fair natural construction
of the words used, they were part ·)f the 'capital employed' and Rule 19A subrule (3) in so f<ir as it excluded long term borrowings from the computation of the
'capital employed was ultra vires sub-s. (1) of s. 80J and despite sub-rule (3) of
Rule t9A, long term borrowings were liable to be taken into account in computing the 'capital employed' in the industrial undertaking or the business of a
hotel.
The Bombay Bench of the Tribunal accepted this contention and held
that sub-rule (3) of Rule 19A was in conflict with sub-s. (1) of s. 801 and hence
it was liab'e to be ignored in computing the capital employed in the industrial
undertaking or the business of a hotel. This decision was, however, reconsidered
by a Special Bench of the Tribunal in M/s. Enico Transforn1e1's Ltd. v. ITO and
the Special Bench overruled this decision and held that there was no conflict at
all between sub-rule (3) of Rule 19 and sub-s. (I) of s. 80J and all borrowings
including Jong term borrowings owing from the assessee were liable to be excluded in computing the capital employe1 in the industrial undertaking or the business of a hotel.
Later differi:Jlt High Courts had held conflicting op1n1ons as regards the
exclusion of long lerm borrowings Some of the High Courts also found fault
with another provision in Rule 19A which 1equired that the 'capital employed'
should be computed as on the first day of the computation period. The Calcutta
High Court in Century Enca Ltd. v. ITO ITR 909 took the view that what
sub-s. (1) of s. 801 required was computation of capital in respect of the
previous year and not as in the first day of the previous year and therefore
Rule 19A, in so far as it provided that the computation of capital should
be made as en the first day of the computation period, was ultra vires sub-s.
(1) of s. 80J. One or two other High Courts also adopted this v:ew.
The Government felt that this view was erroneous and did not correctly
reflect the intention of Parliament as is evident clearly by the legislative history
of this provision. Parliament in order to avoid confusion and uncertainty which
would prevail in the state of law until a finsl pronouncement was made on these
two issue by the Supreme Court, amended s.80J in 1980 by introducing sub-s
(lA) with retrospective effect fron1 lst April 1972.
The newly introdu~ed sub-~.(1A) was in the same terms at Rul~ 19A. The
manner of computation of the 'capital employed' in an indu<itrial undertaking or
the business of a hotel or a shi,, remained the same but it was now set out in sub.
s.(tA) instead of Rule 19A. The words "compukd in the prescribed manner"
occurring in sub-s.(1) of s. 80J were also substituted by the words ''computed in
the manner specified in sub-s. (IA)" \vith retrospective effect fron1 1st Ayri1,
1972.
In the writ petitions to this Court it was contended on behalf of the pe
1
•
. .J
-'
•
LOHIA MACHINES V. UNIOr.l
691
tioners : The expression "capital employed in re~pect of the previous year"
has two dimensions, namely, dimension of quantum and dimension of time. As
regards the dimension of quantum, the expression "capital employed" in its legal
as well as in its popular or commerial sense must, include long tern1 borrowings
and working capital and on a fair and liberal view, it would also include short
term borrowings. In any event, long term borrowings must be held to be included
in the ''capital employed". Under the Companies Act 1956 a Joan repayable after
one year or more from the date of the balance sheet would be a long term loan
and it must be held to be part of the 'capital employed'. Even assumin there was
any ambiguity in tbe expression 'capital employed' it must necessarily include
long term borrowings in the context of s.80J because Parliar.1ent could not have
possibly intended to favour affiuent assessees who are able to employ their
own capital and to discriminate against indigent assessees who have to borrow
funds tu finance their undertakings.
As regards the dimension of tiine it was urged that the concept of 'capital
employed' durin& or in respect of the previous year is a concept which must
compel attention to the reality of the funds used durig the whole year and not
merely on any one single day such as the first day of the computation period.
Cdn<;equently, Rule 19A was ultra vires s.(1) of s.80J to the extent that it prescribed a mode of computation of the 'capital employed' in terms that excluded
all borrowed capital and also provided for computation of th.: 'capital employed'
only on the first day of computation period and ignored all additional capital
employed during the rest of the computation period. Rule 19A was invalid since
it derogated frOm the full operative effect of the provisions of Section SOJ and ar ..
bitrarily abridged the scope of the exen1ption under that section byexcludin& what
was clearly part of the 'capital employed' and ignoring the ccapital employed'
throughout the cornputation period except on the first day. Therefore, the amended sub-s.(lA) introduced in s.80J with retrospective effect from 1st April 1972
was unconstitutional as being violative of Articles 14 and 19(1)(g) of the Consti ..
tutioaal.
On behalf of the respondents-Union of India. it was contended :
(1) tilat the expression 'capital employed' was neither a term of art nor an
cxpres~ion with a definite fixed connotatian and it meant different things in
different contexts. It did not necessarily include longterm borrowings and
sub-rule (3) of Rule 19A excluding long term borrowings from the compu ..
tation of the 'capital employed' could not, therefore, be said
to be in
conflict with sub-s.'l) of s.80J Alternatively, in any event, for calculating the
relief under sub-s.(1) of s.80J, the stipulated rate of percentage was to be
applied not just to the 'capital employed' without any further qualification but
to the ·capital employed ... computed in the prescribed manner'. The manner of
computation was to be prescribed by Rules made by the Central Board of Revenue. Computation involved exclusion as inclusion of items which might be regarded as forming part of the 'capital employed' and sub-rule (3) which was an
integral part of the process of computation laid down in Rule 19A did not, there·
fore, derogate from the provisions of sub-s.(l) of s-80J and was within the mandate of that section; (2) that sub-s.(l) of s.801 being a provision in a taxing statute,
A
B
c
D
E
11
G
A
B
c
D
•
692
SUPREME COURT RBPORfS
it had necessarily to be left to the Central Board of Revenue to decide, ha"ing
regard to the changing economic circumstances \vhat should from time to time
be taken to be 'capital employed' for the purpose of calculating the relief a1lowable under sub s.(1) of s.801 and moreover the Rules made by the Central Board
or' Revenue in that behalf were required to be placed before each House of Parliament for its approval and there was, therefore, no excessive delegation involved
in sub·s.(1) of s.80J leaving it to the Central Board of Revenue to prescribe how
the capital employed' should be computed and what items shculd be included
and what items excluded;(3) that the words used in sub·s.(1) of s 80J in regard
to the computation of the 'capital employed' were not 'capital employed during
the previous year' but 'capita] employed ... in respect of the previous year. The
words 'in respect of the previous years' were deliberately introduced in sub·s.(1)
ofs.80J when that section came to be enacted with the result that the 'capital
employed' that was required to be computed for the purpose of s.80J was the
'capital employed in respect of previous year'. Rule 19A was, therefore, not in
conflict with sub-s.(1) of s.80J when it provided that the 'capital employed'
in respect of the previous year shall be computed as on the first day of the previ.
ous year. If Rule 19A was valid in its entirely no equestion of constitutional
validity of the newly introduced sub·s.(1 A) could possiblly arise because what
sub~s.(lA) did was merely to reproduce Rule 19A ipsissin1a verba with effect
from 1st April, 1972 and it was clarificatory in nature. Alternatively, if Rule 19A
was invalid in both respects, the new sub s.(lA) introduced in s.80J with retrospective effect from 1st April, 1972 did not violate any of the fundamental rights
under Article 14 and 19(!)(g) and was not unconstitutional or void.
Olsrolssing the Writ petitions,
HELO : [C,J., Hhagwali, Madon and Thakkar, JJ. Per majority.]
[A.N. Sen, J. dissenting.]
I (I) Rule 19 A in so fat as it excluded borrowed monies and debts in
t'Omputation of the 'capital employed' and provided for computation of the
'taPital employed' as on the first day of the computation period was not ultra
vires s.80J and was a perfectly valid rule within the rule-making authority
conferred upon the Central Board of Revenue. [749C]
1 (ii). So also, or the same reasons, Rule 19A in so far as it'provided
that the 'capital employed' in a ship sha11 be taken to be the written·down value
:_,":"
of the ship as reduced by the aggregate of the amounts owed by the assessee as
on the computation date on account of monies borrowed or debts incurred in
G
acquiring that ship must be held to be valid as being within the rule making
authority of the Central Board of Revenue. [749D]
I (iii). Sirtce, Rule 19A did not suffer from any infirmity and was valid in
its entirety, Finance Act (No. 2) of 1980 in so far as it amended s.80J by incor·
porating Rule 19A in the section with retrospective effec,. from 1st April, 1972
was marely clarificatory in nature and must accordingly be held to be valid. [749E]
.;
r
toHlA MACHINES v UNION
"'/
2. The exclusion of all borrowed monies including long term borrowings
from computation of the 'capital employed' as being in conflict with either s.15C
or .i .84 remained unchallenged for a period of 19 years i e. fron1 Ist April, 1949
to 31st March, 1968, but that cannot be a ground for negativing such challeni;:e.
Acquiescence in an earlier exercise of rul~-makinf) power which was beyond the
jurisdiction of the rule-making authority cannot make such exercise of rule·
making power or a similar exercise of rule-making power at a subsequent date
\.-
valid. If a rule made by a rule-making authority is outside the scope of its power,
.,. -;_
it is void and it is not at all relevant that its validity has not been questioned for
a Ion,::: period of time : if a rule is void, it ren1ains void whether it has been
acquiesced in or not. [722C-E]
Proprietar.v Articles Trade Associations v. A.G. of Canada, [1931] AC.
310 and A.G. for Australia v. Queen, 95 C.L.R. 529, referred to.
\.
3. Non-challenge of exclusion of borrowed monies from computation of
"' ..l.
capital employed' and the validity of Indian Income Tax (Computation of
Capital of Industrial Undertakings) Rules 1949 and Rule 19 for 19 years shows
that both the assessees as well as the Revenue proceeded on the basis that on a
true construction of the language of ss. 15C and 84, it was within the competence
of the Central Board of Revenue to exclude borrowed monies in computing the
'capital employed'. Parliament also approved of this interpretation of ss. 15C
and 84 and posited the validity of the Indian Income Tax (Computation of
Industrial Undertakings) Rules 1949 and Rule 19. While re-enacting s 15C,
•
Parliament continued the same rules and thereby placed its further seal of
approval on such exclusion of borrowed monies in computing the 'capital
""'
employed' for the purpose of s 15 C. If Parliament thought that the Indian Income Tax (Computation of Capital of Industrial Undertakings) Rules 1949 in so
far as they provided for exclusion of borrowed monies were not in conformity
with its intention, it could have easily made specific provisions indicating its
intention in the clearest terms when it enacted s.84 in the Income Tax Act, 1961.
Rule 19 made to give effect to s.84 again excluded borrowed monies from computation of the 'capital employed', Income Tax Rules 1962, which included Rule
19, after having laid before each House of Parliament, got the approval of the
,,J... Parliament. It is 11ot that even if a Rule purporting to be made under a statute is
outside the authority conferred by the statute, it would still be valid and have the
force of F.iw if it is placed before each House of Parliament and is not disappro·
ved by either House. By not disapproving of Rule 19, Parliament accepted the
validity of the assun1ption that exclusion of borrowed monies in computation of
'capital employed' was permissible under the terms of s.84 and clearly indicated
that such exclusion of borrowed monies had its approval. Thus, Parliament
throughout, save in respect of the period from Ist April, 1968 to 31st March,
1972, approved of exclusion of borrowed monies in con1puting the 'capital emplo~
yed' as being in conformity with its intention and regarded such exclusion as
""¥ being within the terms of s.15C or s.84 or s.80). [722E-H to 725A-Dj
4. Even during the period from !st April 1968 to 31st March 1972 when
Rule 19A sub-rule (3J stood unamended, it is only borrowings from an approved
A
B
c
D
E
F
G
H
B
c
0
F
G
694
SUPREME COURT REPORTS
[1985) 2 s.c.R.
source repayable within not less th1n 7 ye1rs which were includible in computation of the 'capital employed' and not all long term borrowings. If all long term
borrowings invariably and in all cases formed part of the 'capital employed' and
were liable to be included in the computation, the unamended sub-rule (3) of Rule
19 A in so far as it excluded long term borrowings, other than those from an
approved source repayable within not less than 7 years, would be invalid as being
in derogation of the provisions of s.80J, Sub-s. (1). The validity of the unamended
sub-rule (3) of Rule 19A was never challenged by the assessees.
l731F; 713H ; 7l!G-H]
5. There is no unanimity amongst accountants and lawyers in regerd to
the question whether 'capital employed', either in its legal sense or in commercial
parlance or accountancy practice, necessarily or always includes long term borrowings. Even the High Courts have differed in regard to the true meaning and
content of the expression 'capital employed', The expression 'capital employed'
is not a term of art not is it an expression having a fixed connotation or meaning
but it is susceptible of varied meanings, including or excluding short term
borrowings or long tenn borrowings, whether of all categories or of any particular category or categories depending on its environmental context.
A
[730G-H!; 731A-C]
The Internal finance of Industrial Undertakings by T.G. Rose; Tern1inology of Cost Accountancy published by The Institute of Cusi and Works Accountants, U.K. (October~ 1967) The Director's Guide to Accounting and Finance by
M.G. Wright: Modern Published Accounts by RS. Waldron and E.H.D. San1·
bridge ; Jnter-Ffrm Co111parison of Financial Performance by the Bon1bay Tex ..
)
tile Re.search Association; Dictionary of Business and Management by K.C.
~
Parekh ; Principles
and Practice
of Managen1ent
Accountancy
by J.L.
Brown; Financial Manager's Job by Elizabeth Marting and Robert E. Finley; r
Glossary of Manage1nent Accounting Terms by the institute) of Cost and Works
Accounting of India; F~n1nce For the .Non-Accountant by L.B. Rock/ey;
Principles and Practice oj Ma11agement by E.F.L. Brech ;
Information Note
No. 10 on Return on Capital E1np/oyed prepared by All India
Management
Association,· Advanced Accounts by Carter (5th Ed11. by Douglas Garbutt); Book
Keeping and Accounts by Spicer and Pegler and Management Accountancy by
Even J. Batty ; Members Handbook of the Institute of Chartered Accountant in
England and Wales; Framework of Accountancy by C.C. Magee; Business ~
Accouutlng I by B./:,""'. TJlliott; Company Law by
Palmer; and Principles of
Modern Company Law by Gower ; referred to.
SA. There is no material difference between the language of sub-s.(1) of
of s.SOJ and the language of its predeceessor sections, namely, s.15C sub-s.(1) and
s.84 sub·s.(l). The words used in sub·s.(l) of s.SOJ are "capital employed ....
computed in the prescribed manner". The statutory rate of percentage for the
purpose of calculating the relief allowable under sub-s(l) of s.SOJ is to be applied
not just to the ·capital employed' but to the "capital employed ... computed in
the prescribed manner". [725E-F]
6. The expression 'capital employed' has a variable meaning and that
is why Legislature has enacted that for the purpose of calculating the relief allowable under s.SOJ sub-s.(l), the statutory percentage must .be applied to the
'capital employedT as computed in the prescribed n1anner, which was to be pres-
l
y
'
...
LO HI A MACHINES V. UNION
695
cribed by the Central Board of Revenue by making Rule or Rules under s.295 of
the Income Tax Act, 1961. The process of computation would involve both inclu
sion and exclusk n of it( ms which may possibly be regarded as falling within the
expression 'capital employed'. The Central Board of Revenue may include some
items and exclude some others while prescribing the manner cf computation of
the 'capital employed'. This is the sense in wh:ch the word 'computed' has been
consistently used by the Legislature while enecting legislation of this kind, namely, Excess Profits Tax Act, 1940, Business Profits Act, 1941. Super Profits Tax
Act 1953 and Companies (Profits) Sur Tax Act 1964. The legislative history
behind the use of the word 'computed' in relation to the 'ccpital employed' and
the legislative recognition it has got indicate that it involves, as part of the pro. ess
of computation, both inclus.ion as well as exclusion of items which may otherwise be regarded as forming part of the 'capital employed'. In the definition of
"total income in" s2. cl.(45> of the Income Tax Act, 1961 itself the word 'comuted' has been used by the Legislature as comprehending within its scope not only
inclusion but also exclusion of certain items of income which are part of the income of the assessee. In ss.10, II, 30 to 43A, 80A to 80VV, 80HH 80JJ and 80-0
of the Income Tax Act, 1961, the word 'computed' in relation to the 'capital employed' has been ass:gr.ed the same rreaning. Even in scme of sub-sections of s.
80J the word 'cornpUted' has been used in the same sense as involving both inclusion and exclusion. The point is not whether an exclusion is made by the Legislature or by the rule- making authority but whether such exclusion is implicit in the
pr<'cess of computation so as to be comprised in it. It is left by the legislature
to the Central Board of Revenue to prescribe the manner in which the 'capital
employed' shall be computed and in so prescribing, the Central Board of Revenue
may include or exclude items which may be regarded as forming part of the
'capital employed.' [732B-H; 733 A-CJ
7. When the Central Board of Revenue prescribes by making rule or rules
what items shall be included and what items excluded in computation of the
'capital employed', what the Central Board of Revenue does is to prescribe the
manner or mo<'e of computation of the 'capital employed' by hying down as to
how the 'capital employed shall be computed . and that would be clearly within
the rule-making authority conferred upon the Central Boarl-i of Revenue. Therefore, if the Central Board of Revenue makes rule or rules providing for exclusion
of long term borrowings in computation of the 'capital employeJ', there can be
no question of encroaching upon or remoulding the substance of the 'capital employed'. The conclusion must, therefore, inevitably foilow that even if long term
borrowings could be said to form part of 'capital employed'-and indeed they
can in a given context form part of the 'capital employed'·it was competent to the
Central Board of Revenue in exercise of its rule-making power to prescribe that in
computing the 'capital employed', borrowed inonies and debts shall be excluded.
[736A·E]
8. The Central Board of Revenue in making sub-rule (3) of Rule 19.1\. was
guided by earlier precedents in Excess Profits Taxr Act 1940, Business Profits Tax
Act 1947, and Super Profits Tax Act, 1963 and made a
~imilar provision excluding borrowed 1nonies and debts in computation of the 'capital employed'_ Jn the
circumstances, it could not be said to have acted arbitrarily or whimsically or in
an irrational or unusual manner in enacting sub-·ule(3) of Rule 19A. (737C-D]
Utah Construction v. Pataky, (1965]3 All England Reports 650 and Sales
fax officer v. K.1. Abraham, [1967] 3 SCR 518, relied upon.
A
B
c
D
E
F
G
A
8
c
D
E
F
G
!I
696
SUPR!lMB COURT REPORTS
(1985] 2 S.C.R,
9. Once it is conceded that the Central Board of Revenue was within
its authority in including certain categories of long term borrowings and
excluding certain other ca 1egorieo in computation of the 'capital employed"
it must follow as a necessary corollary that the Central Board of Revenue
equally without e:itceediog the authority conferred upon it, exclude all long
term borrowings to whichever category they mi~ht belong. [73 JH; 732A)
JO. In the instant case,
so
far as sub-s.
(1)
of s. 80J is
concerned, interest payable on borrowed monies in deductible in computing
the total income of the assessee and is not required to be added back and
hence it is quite consistent with the pr<tctice adopted and recognised by the
Legislature in these various statutes, to exclude long term borrowings in
computation of the 'capital employed', for the purpose of allowing relief
under sub-s. (1) of s. 80J. [739E-F]
11. Although the object of the E<cess Profits Tax Act 1940, Business
Profits Tax Act 1947, Super Profits Tax Act 1963 and the Companies
(Profits) Sur Tax Act 1964 is different from sub·s. (1) of s. 80J in that the
four statutes belonging to the former group seek to tax excess profits or
iuper profits while the statutory provisirins in the latter group seek to offer
tax incentive by exempting a certain portion of profits, but so far as the
question of computation of the 'capital employed' is concerned there is no
distinction between the above.mentioned four statutes on the one hand and
sub-s. (I) of s. 801 on the other. [740E-F)
12. Though the object of the two sets of provisions is different, the
concept of fair return on 'capital employed' lies at the base of both sets of
provisions. If for the purpose of determining the excess profits liable t<
the
charge of additional tax under ony of the afore·mentioned four statates,
rair return is calculated on the owner's capital employed in the undertaking
excluding the borrowed monies, there is nothing irrational or unusual in the
Central Board of Revenue providing that for computing the fair return on
the 'capital employed' which is to be exempted from from tax uhder sub.s.
(1) of s. 80J, the owner's capital alone should be taken into account and
borrowed monies should be excluded. [740G-H; 741A]
13. It is obvious that the Central Board of Revenue intended-and
having regard to the retrospective amendment of s. 80J by Finance Act
(No. 2) of 1980, that mu'it also be taken to be the intention of the
Legislature-that the assessces should be given relief only with reference to
their own capital and not with reference to any borrowed monies, presumably because the object of giving relief was to encourage assessees to bring
out their own monies for starting new industrial undertakings and the
intention was not that the assessces should be given relief with reference to
monies which did not belong t0 them but which were borrowed from
financial institutions and other parties which would have to be repaid.
[7420-E]
14. In the instant case, there is no question of excessive delegation
of legislative power. The efSCntial legislative policy of allowing relief of
an assessee who starts a new industrial undertaking or business of a hotel and
~cclarin~ the period for wltich such relief shall be ~ranted, is laid down. by
.. ,.
'
LOHiA MACHINES v, UNION
697'
the Legislature itfelf in the various sub-sections of s. 80J and all that is
left to the Central Board of Revenue to prescdbe is the manner of computtit icin
of 'capi1al
employed' with reference to which the quantum of
relief, which would depend on diverse factors, is to be calcula~ed. This
is clearIY permissible wi1hout offending the inhibition against excessive
delegation of legislative power. Section 80J enacts an exemption in a
taxing statute and a certain margin of latitude is always allowed to the
executive in working out the details of exemption in such a taxing statute.
[742F-H; 743A]
Pt. Banarsi Dass Bhanot v. State of Madhya Prade>h, [1959] SCR 427;
Sitaram Bls~ambardas and Ors. v. State of U.P. and Ors. [1972] 2 SCR 141
and Hlralal Rata11 Lal v. State of U.l'. and Anr., [1973] 2 SCR 502, followed.
n
IS. Under s. 296 of the Income Tax Act, 1961 every rule made
C
under the Act is required to be laid before each House of Parliament.
Parliament has thus not parted with its control over the rule-making
authority and it exercises strict vigilance and control over the rule-making
power exercised by the Central Board of Revenue. [74SG]
Powell v. Appollo Candle Company Limited, [1885] 10 AC 282, & G.S.
Grewal v. State of Punjab [1959] Suppl. I S.C.R. 792, relied upon.
16. When sub-s. (ll of s. 80J speaks of 'capital employed' in an
industrial undertaking or business of a hotel, it does not refer to 'capital
employed' during the ·previous year but it uses the expression 'capital
employed' in respect of the previous year. There is a vital difference between
·tho expression Hduring the previous year" and the expression "in connection with the previous year". The expression used in sub-s. (1) of s. 80J
being ''capital employed ..•... computed in the prescribed manner in respect
of the previous year,,, the computation bas to be in respect of the previous
year and it need not take into account the averge amount of 'capital
employed' during the previous year but it can legitimately take the first
day of the previous year as the point of time at which the 'capital employed'
must be computed. The 'capital employed go computed would clearly fall
within the expression ''capital cmployed ...... computed in the prescribed
manner in respect of the previous year". The description given in the
parenthetical portion at the
end of
sul>-s. (I) of s. SOJ b merely a
description given to the amount calculated as provided in the main part of
sub-s. 801 and in the m'lin part the words are "in rcspe.;t of the previous
year" and not "during the previous year''. It
wa~ following upon the
introduction of the words "in respeet of the previons year" in sub-s. (I}
of s. 801 that Rule l 9A was made providing for computation of the 'capital
employed' as on the first day o: the computation period. Even if the words
"in respect of the previous year" were absent, it would have been competent
to the Central Board of Revenue as the rule making authority to provide
for the computation of the 'capital employed' as on the first day of computa·
tion period, as was dono by the Legislature in the case of the Companies
(Profits) Sur Tax ActJ 1964. The words "in respect of the previous year"
are facilitative of the computation of the 'capital employed' being prescribed
~·on t~e first day of the computation period. Sub-rQlc (3) of Rμle l9A
J)
G
"
A
B
c
D
E
F
698
SUPRllMB COURT REPORTS
(1985) 2 S.C.R•
is, therefore, a perfectly valid piece of subordinate legislation.
[747G-H; 748A-H; 749A]
P~r .4..N. Sen, J, (Dissenting).
Rule 19A in so far as it seeks to exclude the borrowed capital and
fixes the first day of the year for the computation of relief under s.