SKOL BREWERIES LTD Vs. THIRD INCOME TAX OFFICER
LAWS(IT)-1985-5-26
INCOME TAX APPELLATE TRIBUNAL
Decided on May 10,1985

Appellant
VERSUS
Respondents

JUDGEMENT

I.S. Nigam, Accountant Member - (1.)THIS is an appeal filed by the assessee-company against the order of the Commissioner (Appeals) Bombay.
(2.)The assessee is a limited company and the appeal relates to the assessment year 1979-80. Among the claims before the ITO in the course of the assessment proceedings, one was that the preliminary expenses of Rs. 4,95,435 shown on the assets side of the balance sheet should be taken into account in working out the capital employed for the purpose of relief under Section 80J of the Income-tax Act, 1961 ('the Act'). This claim was not accepted by the ITO. It was brought to our notice at the time of the hearing of the appeal that this claim was also made by grounds of appeal before the Commissioner (Appeals) but was, not considered by him. The assessee-company has, therefore, come up in the present appeal before us.
The assessee's learned counsel, Shri Lalkaka, pointed out that the preliminary expenses of Rs. 4,95,435 appearing on the assets side of the balance sheet were for public issue of share capital. Our attention was invited to rule ID of the Wealth-tax Rules, 1957 ('the 1957 Rules'), where Explanation II provided for amounts shown as assets in the balance sheet not being treated as assets and Rule 2D again under the 1957 Rules, where it was provided that the value of some assets, which were disclosed in the balance sheet shall not be taken into account for the purpose of determining the net value of assets of the business as a whole. Shri Lalkaka submitted that in the absence of any such exclusion provided in the case of Section 80J, we must presume that all the amounts shown on the assets side of the balance sheet should be taken into account in the computation of capital employed for the purpose of relief under Section 80J. Reference in this connection was made by him to the observations of the Hon'ble Supreme Court in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52 at p. 60 that as long as the law allows preliminary expenses and goodwill to be treated as assets, although of an intangible nature, the money so spent is in the nature of capital expenditure just as much as money spent in the purchase of land and machinery. He, therefore, submitted that the preliminary expenses was an asset, though of an intangible nature and, therefore, there was no reason why the preliminary expenses of Rs. 4,95,435 should not be taken into account in the computation of capital employed under Section 80J. The alternative argument of Shri Lalkaka was that if the preliminary expenses were not treated as an asset, the corresponding liability for incurring these expenses should also not be considered as a liability. Summing up, Shri Lalkaka vehemently argued before us that on this issue, the orders of the revenue authorities were not correct.

(3.)ON the other hand, the learned departmental representative, Shri Mahadeshwar, pointed out that the preliminary expenses did not represent an asset intangible or otherwise, they were fictitious assets, which had no value whatsoever and they were shown on the assets side of the balance sheet only because they being expenses of a capital nature, could not be debited to the profit and loss account and had, therefore, to be shown on the assets side of the balance sheet to comply with the requirements of Schedule VI of Part I of the Companies Act, 1956. Reference was then made by him to Section 80J, as retrospectively amended by the Finance (No. 2) Act, 1980, with effect from 1-4-1972, and Rule 19A of the Income-tax Rules, 1962 ('the 1962 Rules'), both of which provided that in the computation of capital employed in an industrial undertaking, the assets have to be taken if entitled to depreciation at their written down value, if acquired by purchase and not entitled to depreciation, their actual cost to the assessee, and if acquired otherwise than by purchase and not entitled to depreciation, the value of the assets when they became assets of the business and this clearly showed that unless the assets can come under one of these classifications, they cannot be taken into account in the computation of capital employed. Coming to the alternative argument of Shri Lalkaka, Shri Mahadeshwar again referred to both Rule 19A of the 1962 Rules and the retrospectively amended Section 80J both of which laid down that what is to be deducted from the aggregate of the amounts representing the values of the assets as on the first day of the computation period will be borrowed moneys and debts owed by the assessee. He, therefore, vehemently argued before us that there is no merit in the alternative argument of Shri Lalkaka.


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