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

M/S LOHIA MACHINES LIMITED AND ANR. B v.

UNION OF INDIA AND ORS.

January 25, 1985 c

Constitution of India, Articles 14 and 19 (1) (g). D 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 E 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. F 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. G 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. H

LOHIA MACHINHS V. UNION 687 A 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 power- 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. c

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 D 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 E 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 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 inclu- sion as well as exclusion of items which might be regarded as part of the capital employed in the undertaking. G

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) Rules 1949 remained unchanged. 'Jhe result was that throughout the period from H

688 UPREME COURT REPORTS [1985] 2 s.c.R.

A 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 B 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 conti- c nued 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 addi- tionally 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 previ- ous 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 defi- ciency 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 undertak- ing 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).

G 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 undertak- ing, 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 A 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 requir- ed 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 ccrrputa- B tion period were to be left out of account and only the arr.aunts rei:-re- senting 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 D 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. E 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 conse- queni: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. F

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.

' G 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 ff

690 SUPRBM E COURT REPORTS [1985] 2 S.C R· A 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 sub- rule (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 compu- B ting the 'capital employed' in the industrial undertaking or the business of a hotel.

The Bombay Bench of the Tribunal accepted this contention and held c 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 exclu- D ded in computing the capital employe1 in the industrial undertaking or the busi- ness 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 E 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 ..J 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. F 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.

G 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

• LOHIA MACHINES V. UNIOr.l 691 A 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 B 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 c 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. D Cdn<;equently, Rule 19A was ultra vires s.(1) of s.80J to the extent that it pres- cribed 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.. E 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 amend- ed 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. 11 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 G 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 Reve- nue. Computation involved exclusion as inclusion of items which might be regar- ded 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 man- date of that section; (2) that sub-s.(l) ofs.801 being a provision in a taxing statute,

• 692 SUPREME COURT RBPORfS

A 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 a1low- able 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 Parlia- ment 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 B 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 c 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 retros- pective effect from 1st April, 1972 did not violate any of the fundamental rights D 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]

toHlA MACHINES v UNION

"'/ 2. The exclusion of all borrowed monies including long term borrowings A 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 B \.- 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. c 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 D 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 In- E come 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 com- putation 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 F 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, G 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

4Copy pinpoint4. 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 H

p. 694 Copy page pinpoint

source repayable within not less th1n 7 ye1rs which were includible in computa- tion 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 B 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]

5Copy pinpoint5. 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 bor- rowings. Even the High Courts have differed in regard to the true meaning and content of the expression 'capital employed', The expression 'capital employed' c 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 parti- ) cular category or categories depending on its environmental context. A [730G-H!; 731A-C]

The Internal finance of Industrial Undertakings by T.G. Rose; Tern1ino- logy of Cost Accountancy published by The Institute of Cusi and Works Accoun- 0 tants, 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 F 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 .... G 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]

6Copy pinpoint6. The expression 'capital employed' has a variable meaning and that is why Legislature has enacted that for the purpose of calculating the relief allow- able 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-

LOHI 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, name- ly, 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 y of computation, both inclus.ion as well as exclusion of items which may other- wise 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 'comu- ted' 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 in- come 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 em- c ployed' 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 inclu- sion and exclusion. The point is not whether an exclusion is made by the Legisla- l ture 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 D may include or exclude items which may be regarded as forming part of the 'capital employed.' [732B-H; 733 A-CJ

7Copy pinpoint7. 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 E ... 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. There- fore, 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 em- ployed'. 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 F 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]

8Copy pinpoint8. 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 G Act 1947, and Super Profits Tax Act, 1963 and made a ~imilar provision exclud- ing 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.

696 SUPR!lMB COURT REPORTS (1985] 2 S.C.R,

9Copy pinpoint9. 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)

8 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] c

11Copy pinpoint11. 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)

12Copy pinpoint12. 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] F

13Copy pinpoint13. 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, presu- mably because the object of giving relief was to encourage assessees to bring out their own monies for starting new industrial undertakings and the G 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]

14Copy pinpoint14. 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 !I ~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 computti- t 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. n [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.

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. J)

16Copy pinpoint16. 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 connec- tion 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 G "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

698 SUPRllMB COURT REPORTS (1985) 2 S.C.R•

A 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. 80J is B invalid and unconstitutio!lal and the same has to be struck down and bas been struck down rightly by the various High Courts. The impugned amendment of 1980 incorporating the provision of the invalid Rule 19A in the section itself. is valid in its prospective operation from the date of the amendment but is unconstitutional and invalid in so far as the said amend· ment is sought to be brought into operation retrospectively with effect from 1st April, 1972. [782H; 783A-B) c Century Enka Ltd. v. I.T.O., (1977) 107 !TR 123; Madras Industrial Ltd. v. I."f.O., (1977) 110 IfR 256; Kora Box Manufacturing Co. v. l.T.O., (1980) 123 lTR 638; Ganesh Steel Industries v. I.T.O. (1980), 126 !TR 258 and Warner Hindustan Ltd. v. I.T.0, (1982) 134 I.T.R. 158, approved.

Commissioner of Income Tax, M.P. II v. Anand Bahri Steel and Wire ) Products, (1982) 133 I.T.R. 365, over ruled. D

2. (1) In the instant cases; the words 'capital employed' have to be understood and interpreted 10 the contex: the sa-id words have been used in s. 80J. It is quite clear rrom the text of s. 80J that the words 'capital employed' have been used in the context of the capital which hBS been employed in the undertaking for producing profits and gains of the under-· taking in the relevant year. If borrowed capital is also employed in the E undertaking, capital employed necessarily and clearly includes such borrowed capital which has been employed in the undertaking and wh iCh has contributed to the profits and gains of tbe undertaking. Therefore, s. 801 in clear language postulates that capita! employed in the undertak.. ing includes own capital and also borrowed c1pital employed in the undertaking in the relevant year and the section plai11ly and uoequivoca lly makes this ioteotion of tho Parliament manifestly clear. [759A·C) F

2. (ii) This interpretatioa not only makes perfect sense but also clearly promotes the object for which this section was incorporated. The object of s. 801 which indeed replaces the earlier s. 84 which came in place of s. l 5C of the earlier Income-tax ActJ is to give impetus and encourage- _,;......., mcnt to the setting up of new industrial undertakings by offering tux incen- tives or tax relicrs on the capital employed in such undertakings. [7598-F]

G Emperor v. Banwari Lal SarmaJ A.LR. 1945 P.C. 48; Kanti Lal Sur v. Paramnidhi Sadhukhan, A.LR. 1957 S.C. 907; Textile Machinery Corporation v. Commissioner of Income-tax, West Bengal, (1977) 107 I.T.R. l9S and Rajagapalavan Mills Ltd. v. Commissioner oj' Income Tax, Madras, t 1976) 115 ITR 777; relied on.

3. Section SOJ only enjoins that capital employed is to be computed in the manner to be prescribed and the manner of computation of the capital em~lored onlf authorises the rqle-making authority to deal witl\

LOHiA MACHINES v. UNION 699

he details reg:irding cotnputation of capital employed for carrying cut the provisions of the section and the provision regarding the manner of com- putation does n'Jt empower or authorise the rule-making authority to lay- down which part of the capital employed or how much of it will have to A be included or excluded and to what extent, if any. The question whether there should be any such exclusion or inclusion in the matter of considera- tion of the grant of relief, is essentially a m1tter of policy for the Legislature to decide and is not a matter for the ru le-m.1ktng authority to prescribe, The power of the rule-mJking authority in terms of the provisions of s. 295 of the Income Tax Ac·: is limited to the framing of ... the Act. The rule-mlking authJrity doe~ not have any power to encroach B ) upon any substantive provisions in the statute. [760H; 76JA-C]

4. In the section itself or in any other provisions of the Act it does not appear that there is any provision laying down any guideline which may entitle the rule-making authority to exch de any part of the capital employed, whether it is borrowed capital or own capital. There could not poS.iibly be any such provision or guid!ine in the Act, as the section itself c clearly provides that the entire amount _of capital employed for eaniing the profits will qualify for the relief. If it be held that the rule-making autho· rity ·enjoys power of excluding any part of the capital employed in the undertaking, It must necessarily be held that the rule-making authority enjoys the power of framing a rule contrary to the provision of the section. It must further be held that th~ rule-making authority at its discretion enjoys the power to exclude the whole or part of owner's capital and also the D whole or part of the borrowed capitai. This interpretation would mean that uncanalised power will be available with the rule-making authotity which at its discretion and in the absence of any guideiine will be enti tied to exclude anY 9r every part of the capital employed even to an extent of rendering the section itself nugatory. fhis will have the effect of justifying a delegation of power to the rule-mJ.king authority to an extent which cannot be per- E -. mitted. The rule making authoJity docs not enjoy any such power or jur'isdiction. No such power or jurisdiction in the absence of specific provisi in and clc:ar guideline in the Act could b: delegated to the rule- making authority. [761G-H; 762A-D] Sales Tax Officer v. K. S, Abraham [1967] 3 S.C.R. 518 and Utah Cor.struction & Engineering Pv1. and Anr. v. Paraky, [1965] 3 All. E.~ 650 relied on. E

5. Interest paid on borrowed capital by any uudertaking, whether it is an undertaki11g within the m3aning of s. 8'lJ or not, is taken into account as ?usiness. expend1tur~ in calculating the profits and gains of any under- taking. It is the prescribed mode of calculating the profit and gains of eve 1y undertaking and in no special benefit for any undertaking; and undoubltedly it affords no incentive or special relief to a new underlaking which has G nec~~sarily to satisfy the required conditions laid down in s. SOJ for being entitled to the relief int(.'nded to be granted to an undertaking which comes within the purview of s. 80J. [764A-D]

. In the i~st~nt case, the ex~Jusion of borrowed capital by the rule- mak1n~ ~uthor~ty 10 the rules prescribed for computation of the relief under s. 80J •s 1pconmtent with and derogatory to the provioions of the statute,

700 SUPREME COURT REPORTS [1985] 2 s.c.R.

The said rule not only fails to carry out the purpose of the said section but · A in fact tends to defeat the same and the rule runs clear Jy contrary to the provision! of the statute. The rule excluding borrowed capital must, there•, fore, be held to be bad and invalid. [764F-G] Century Enka Ltd. v. f.T.O., (1977) 107 !TR 123; Madras Industrial Linings ltd. v. l.T.O. (1977) 110 !TR 256 : Kata Box Manufacturing .Co. v. l.T.O., (1980) 123 !TR 638 ; Gane.h Steel Industries v. J.T.O. (1980) 126 !TR B 258 anti Warner Hindustan ltd. vs. l.T.O. (1982) 134 !TR 158 approved. Commissioner of Income Tax,. M.P. II v. Anand Bahri Steel and Wjre Products (1982) 1331.T.R. 365; explained and disapproved.

7. It is entirely for the Parliament to decide whether any relief by way of inccntive!should be allowed and if so to what extent and in what manner. There is no obligation on the part of the Parliament to make any prOvision for!granting relief to promote new industries. The LegisJature in its c wisdom may decide to grant relief and may equally decide not to grant any relief. It is essentially for the Legislature to decide as to whether any incen· tive for promoting industrial growth of the country is called for anci if the L_eg_islature feels that in the situation prevailing in the country such incentive should be provided it will be again for the Legislature to decide what kind - of. incentive and .. in what form and to _what extent the same should be Pro~ \ided and to pass appropriate legislation in this regard. The Parliament A A would have been legally competent to withdraw the entire relief under s._-80J D and 'to abrogate the said section in its entir~ly, if the Parliament had considerd such withdrawal to be necessary. The Parliament is equally competent to increase or reduce the qu1ntum of relief intended to be given under thic; section. In providing that relief intended under s. 80J would be allowed only to owner's own capital and to any borrowed capital, there can:,be"·no. infringem.;nt of Art. 14. He enterprenuer or businessman can claim as a matter of right that relief by way of incentive should be provided E to new undertakings to be set up by him. The Parliament provides for such relief in pursuance of a policy and policy may change from time to time in view of :.the situation prevailing from time to time, The Parliament may legitimately. feel that borrowing by bu, inessme'.l may not be sncouraged and persons should be encouraged to bring their own money for setting up new undertakings and Parliament may provide for appropriate relief by way of incentive~~to .. the 1 ownes's capital employed to the exclusion of borrowe,d F capital i~ the~sei'ting up of any new industrial undertaking. It is not for this Court to: sit in judgment over the wisdom of the Parliament in the framing of the its policy. 1he discr mination in the matter of granting relief to own capital to the exclusion·'of borrowed capital in pursuance of a policy cannot be said to ··~ be violative of Art. 14, as the two classes of capita!, though forming a part of the totarcapital of theJundertaking, are distinct and they stand on a different G footi'1g. A classificationlbetween these two classes of capital for encouraging investment of own:capital in setting up new industlial undl!rtaking, cannot be held to be unreasonable and unjustified. [769H; 770A-GJ

8. The mere existence of an invalid rul~ without any challenge for any length of time does not effect the question of validity of c,the rule and cannot render a rule otherwise invalid to be valid only on the ground that the rule had · remaineg in existence without any challen~e for a number Qf years.[76~FJ

LOMA MACffiNES ~. UNiON 701 A Proprietary Articles Trade Associatian v. Attorney General for Canada, [1931] A.C. 310 ; Campbell College Belfast (Governors) v. Commissioner of Valuation for Northern Ireland [1964] I W.L.R. 912; and Kera/a State Electri- city Board v. Indian Aluminium Ltd., [1976] I S.C.R. 552; relied on.

9. The other impugned provision of the rule, presribing that capital employed should be computed on the basis of the capital employed on the fir1t day of the year, must on the proper construction of the section be also JI held to be invalid. The section clearly provides that the deduction to _be allowed is to be computed in the prescribed manner in respect of the pre. vious year relevant to the assessment year, The deduction to be allowed is on the profits and gains of the undertaking earned in the relevant ycbar in respect of the previous )'ear relevant to the assessment year. Profits and gains which are to be taken into account are the profits and gains earned in the relevant year and the year must necersarily mean and include the whole of the year and not some days or months of the year. The capital employed c for earning the profits and gains during the whole year must necessarily be the capital which is entitled to the benefit of the section. Capital employed on the 1st day of the year does not produce the profits of the entlre relevant year, unless the very same amount of capital r-emains employed throughout the year. It does not usually happen and in any event it may not bapp~n. Therefore, by prescribing the 1st day of the year to be date of computation ' of the capital employed, the capital employed during the whole year is D sought to be denied by the rule the benefit to which it is entitled under the section. This provision, therefore, is clearly contrary to and inconsistent with the specific provision of the statute, as by fixing the 1st day of the Year to be the date of computation of the capital employed for the year, the rule- making authority is seeking to deny the benefit conferred by the statute. (7670-G] 10, The power and competence of the Parliament to amend any statutory provision with retrospective effect cannot be doubted, Any retros.. E pective amenriment to be valid n1ust, however, be reasonable and not arbitrary and must not be violative of any of the fundamental rights guaran. teed under the Constitution. The mere fact that any statutory provision has been amended with retrospective effect does not by itself make the <imeD.d- mcnt unreasonable. Unreasonableness or arbitrariness of any such amend- ment with retrospective effect has necessarily to be judged on the merits of the amendment in the light of the facts and circumstances under which such F amendment is made. In considering the question as to whether the legis- lative power to amend a provision with retrospective operation has been reasonably exercised or not, it becomes relevant to enquire as to how the retrospective effect of the amendment operates. [776H; 777A-C]

11. A Valdidating Act validating any fiscal provision with f..!tros- pective operation is usually held not to be unreasonable or arbitrary. In the case of any Validating Act, 1he intention of the Legislature is generally .G made sufficiently clear in the section or in the Act which is declared invalid on account of some flaw or defect which is within the competence of the Parliament to rectify. There is in effect and substance no imposition of any new tax for the earlier years by virtue of retrosoective operation and the retrospective operation merely validates the levy already imposed and possibly collected· This is done in public i11terest for properly regulalin$ H

~02 SUPREMB COUllT REPORTS [1985] 2 s.c.R. the fiscal structure and to relieve the Government of any financial .burden 'A by way of refund or taxes collected for enabling the State to implement its budget. Validating Act' stand on different footing. [778A-C]

12, By the present amendment the Parliament is seeking to validate not any provision of the statute declared invalid because of any flaw or defect, as there was none, but is seeking to validate an invalid rule which had s'ought to deprive the assessee of the benefit which the Parliament had clearly bestowed on the assessee by the section. [781G]

, , 13. The withdrawal with retrospective effect by amendment of any finaD\:l&l benefit or relief granted by a fiscal statute must ordinarily be held to' be unreasonable and arbitrary. Such withdrawal makes a mockery of a ·'beneficial statutory provision and leads to chaos and confusion. Such with- , . dr3.wal in effect results in the imposition of a levy at a future date for past .,iYear:s for which there was no such levy in the relevant years. The imposition - of ~ny fresh. tax with retrospective effect for years for which there was no suCb levy is bound to operate unduly harshly on every assessee who is 'entif.led to arrange and normaliy arranges his financial affairs on the basis of c , the law as it exists. Such retrospective taxation imposes an unjust and un- warranted accumulated burden on the assessee for no fault on his part and the assessee has to face unnecessarily without any just reason very serious '"financial and other problems. lmposition of any tax with retrospective ' effect 'for years for which no such tax was there, cannot also be considered " to be just and reasonable from the point of view of revenue. The years for ~ which levy is sought to be imposed with retrospective effect had already passed. and there cannot be any proper justification for imposition of any -D fr.esh tax for those years. Such retrospective taxation is likely to disturb and unsettle the settled position ; and because of such imposition of retros- pective levy for the years for which there was no such levy, assessments for , those ye_ars which might already have been completed and concluded will get upset. If the State is in need of more funds, the State instead of seeking to levy .any tax with retrospective effect can always take appropriate steps to · ·coUect any larger amount so required by imposition of higher taxes or by · other appropriate methods. [781H; 782A·El Epari Chinna Krishna .r.Joorthy, proprietor Epari Chinna Moorthy and E Sons, Berhampur, Orissa v. State of Orissa, [1964] 7 S.C.R. 185; Rai Ram Krishna & Ors, v. State of Bihar (1964] ! S.C.R, 897; Jawaharlal v. State of Rajasthan & Ors, [1966] 1 S.C.R. 890; Assistant Commissioner of Urban Land Tax. v, The Buckingham & Carnatic Co. Ltd., (1970] 1 S,C.R. 268 ; Ml s Krishnamurthi & Co. Etc. v. State of Madras & Anr .. [1973] 2 S.C.R. 54 and "Hiril Lal Rattan Lal etc. etc. v. State of A.P. & Anr, etc. etc., (1973] 2 S.C.R 502 and State of Gujarat v. Ramanalal Kashake Lal Soni, (1983] 2 S.C.C. 33.

14. To establish arbitraririess or unreasonableness it is not necessary F tO prove that the undertaking of the assessee will be completely crippled and will have to be closed down in consequence of the withdrawal of the relief with retrospective effect. The operation of the retrospective amendment is bound to have reasonable possibility of the business of the assessee being adversely affected and seriously prejudiced. In th:: absence of any justifiable ground and any serious prejudice to the interest of Revenue, retrospective ·ame~dment establishes unreasonableness and arbitrariness. The retros- pective amendment. therefore, is violative of Art. 19(1)(g) of the Constitution. G [781C-DJ : ., 15, There is no reason as to why there should be any'difficu}ty in . coJttputing the relief and in proceeding to con1plete the assessment by grant- . ,jog the _relief legally available to assessee under s. 801 even a ... tcr the invalid part of the rule had been struck down. Parliament had also not considered it _necessary to effect this amendment earlier inspite of the decisions of the High Courts, although the Parli<lment had introduced other amendments i~to this section. (781G·H1 · · JI

LOHIA MACHINES v. UNION (81ugwati, J.) 703

ORIGINAL JURISDICTION : Writ Potition Nol. 4509, 4542-43 etc. A of 1980 (Under Article 32 of the Constitution of India)

N.A. Palkhivala, B.K. Mohanti, Ram Panjwani, T.A. Ramachan- dran, D. Pal, A.K. Sen, M.M. Abdul Khader and G.C. Sharma, Dinesh Vyas. T.M. Munim, S.P. Me1ha, Ramesh Diran, Srinivasmurlhi, B Barish N. Salve, Homi Raina, J.B. Dadachanji, Ravinder Narain, O.C. Mathur, Mrs. A.K. Verma T.M. Ansari, Miss Rainu· rWalia, D.N. Mishra, S. Sukmaran, P.K. Ram, H.M. Dilia, Adiiya Narain, Ashok Sagar, Vijay Panjwani, Raj Panjwani, S.K. Bagga, H.K. Puri, C.S.S. Rao, La/ii Kumar Gupla, Subhash Du/la, Vimal Dave Mrs. Janaki Ramachandran, P.H. Parekh, Ashok K. Gupla A.V. c Rangam M.K. Gark, Dalveer Bhandari, B. Parthasarthi, Praveeen Kumar, Anil Kumar Sharma, As/wk Mathur, R.P. Garg, S.K. Bansal, P.K. Mukherjee, Dr. V. Gouri Shankrr, K.L. Hathi, Mano} Arora, D.K. Chhaya, Mrs. Hemantike Wahi, N. Sudhakaran, KN. Bhatt, V.K. Verma, M. L. Lahoty, Hrishikesh Roy, Nassem Ahmed, S.K. Jain, M.M. Kshatriya, M. Seal. D.N. Gupta, H.P. Ranian, A.B. D Rohtagi: C.S. Aggarwal, B. V. Desai, M.L. Verma, M.R K. Pillai, B.D. Sharma, Kai/ash Vasdev, 0.P. Vaish, Santosh K. Aggarwal, P.K. Bhindria, A,K. Sanghi, Ravinder Bana, Miss Meera Bhatia, S.K. Dholakia, V.H. Garpule, S.K. Gambhir, SC. Patel, Sarwa Mitter, K.H. Kaji, M.N. Shrojj; M.C. Dhingra, T.P. Sundrajan, E B.B. Tawkley, K.K. Jain, S.K. Gupla, P. Dayal, A.D. Sanger: Anoop Sharma, R.S. Sharma, La/it Bhasin, Rankesh Sah"i, Vineet Kumar, Miss Arshi Singh, A. Sub!Ja Rao B.R. Aggarwala, R.C. Pandey, Miss V. Menon, Santosh Chatterjee, Alta/ Ahmad and A.K. Panda, for the appearing Petitioners.

K. Parasaran, Attorney General and Miss A. Subhashin! for F the Respondents.

The following Judgments were delivered

BHAGWATI, J. These Mil petitions raise an interesting question of law relating to the interpretation of Section 80 J of the Income Tax Act, 1961, and on the basis of certain interpretation, they chal- G lenge the validity of Rule 19A of the Income Tax Rules, 1962 and also call in question the constitutionality of the retrospective amend- ment made in Section 80 J. by Finance (No. 2) Act, 1980. The ques- tions arising in these writ petitions are of considerable importance since they involve revenue aggregating to crores of rupees and they have been argued at great length on both sides. H=

704 SUPREME COURt REPORTS 11985) 2 s.c.ll..

A The principal controversy between the parties turns on the true interpretation of Section 80 J, of the Income Tax Act, 1961 and hence we may begin our discussion of the issues arising in the writ petitions hy examining the language of that Section. But before we do so, we may usefully refer to the genesis of the provision enacted in Section 80 J. and the transformation it has undergone from time to B 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 Hua/ v. Evans(') in ques- tions relating to construction, ''history is a teacher that is not to be ignored." The first time that a provision of this kind was introduced c in the Indian Income Tax Act, 1922 was by the Taxation Laws (Amendment) Ordinance 1949 when Section I 5C was added in that Act with effect from 31st March 1949. Sub-section (I) of Section 15C exempted a part of the profits and gains of a new industrial under- taking from tax and this provision as originally enacted was in the following terms ; D "15C (1) Same as otherwise hereinafter provided, the tax shall not be payable by an assessee on so much of the profits or gains derived from any industrial undertaking to which this section applies as do not exceed six per cent. per annum on the capital employed in the undertaking, compu- E ted 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 con- ferred under sub-section ( 1) of Section 59 of the Indian Income Tax Act 1922 issued a Notification dated 15th October 1949 making the F Indian Income Tax (Computation of Capital of Industrial Underta- kings) Rules 1949 for computation of capital employed in the indus- rial undertaking as envisaged in sub-section (I) of Section l 5C. Rule 3 of these Rules in so far as material provided inter alia as follows :

"Rule 3 (I) For the purpose of Section 15C of the Act, the capital employed in an undertaking to which the G said section applies shall be taken to be-

(a) in. the case of assets acquired by purchase and entitled to depreciation-

H (!) 297 us 216

tollIA MACfllNBS v. UNION (Bhagwati, J.) 70) , (i) if they have been acquired before the computation A period, the written-down value on the commencing date of the said period ; (ii) if they have been acquired on or after the commen- B cing date of the computation period, their average cost during the said period ; (b) in the case of assets acquired by purchase and not I~ entitled to depreciation - (i) If they have been acquired before the computation period, their actual cost to the assessee ; c (ii) if they have be\'n acquired on or after the commen- cing 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 D 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 computa- • tion period, only the ·average of such value shall be taken in the same manner as average cost is to be com- puted. -- . E (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 F 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 section 13 of the Busi- ness Profits Tax Act, 1947 (XXI of 1947) :" G The process of computation of "capital emplo}ed in the under- taking" according to this Rule consisted of two steps ; one of addi- tion of the value of assets of the industrial undertaking arrived at on the basis of different formulae according to the nature and !he date of purchase of the assets and the other, of deduction of "any borro- wed money and debt due by the person carrying on the business". H

706 SUPREME COUllT REPOR rs [1985) 2 S.C-R. A The significant point is that borrowed monies and debts due from the assessee were excluded in computation of "capital employed in tbe undertaking" by reason of sub-rule (3) of this Rule.

The Taxation Laws (Amendment) Ordinance 1949 was replaced B by thejTaxation Laws (Extension to Merged States and Amendment) Act 1949 which came into force on 3 Jst December 1949 and by Section 13 of this Act, Section 15 C was continued and though some minor modifications were made, sub-section (I) which granted the exemption remained unchanged. Sub-sections (2), (4) and (6) suffe- red some minor changes and, as reenacted, these sub-sections read as c follows : " (2) This section applies to any industrial undertaking which- (i) is not formed by the splitting up, or the reconstruction A_ of, business already in existence or by the transfer to a 1 A

D new business of building, machinery or plant used in a business which was being carried on before the !st day of April, 1948 ;

(ii) bas begun or begins to manufacture or produce articles • in any Province in India at any time within a period of E three years from the I st 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 G 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 tbis section .

.(5) The provisions of this section shall apply to the assess- ments for the years commencing on the 1st day of April, 1949, and ending on the 31st day of March, H 1954." :'

LOH!A MACHINES v. UNION (Bhagwati, J.) 707 A It is significant to note that though the Indian Income Tax (Computation of Capital of Industrial Undertakings) Rules 1949 pro- vided for exclusion for borrowed monies and debts due from the assessee in computing the capital employed in .the undertaking, the Legislature, when it reenacted Section I 5C by Section 13 of the B Taxation Laws (Extension to Merged States and Amendment) Act 1949 did not choose to make any change in this position but conti- nued the same Rules under sub-section (2) of Section 34 the Taxation Laws (Extension to Merged States and Amendment) Act 1949. The Legislature thus gave its approval to exclusion of borrowed monies and debts in computation of capital employed in the undertakmg and also made it clear that the word 'computed' has been used by it in c 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 Section l 5C by various Finance Acts but these changes were not substantial of and they merely extended from time to time the period of production for eligibility from initial 3 years to 18 years by suitable amendments in clause (ii) of sub-section (2) and brought the business of hotel also within the purview of the exemption and laid down the conditions for grant of such exemption. We are not concerned with these chan- ges so far as the present writ petitions are concerned and hence we need not refer to them in detail. Suffice it to state that the basic structure of Section l 5C remained the same and so did the Indian Income Tax (Computation of Capital of Industrial Undertaking) Rules 1949. The result was that throughout the period from 31st March 1949 when Section 15C was introduced in the Indian Income Tax Act 1922 upto the time that the Indian Income Tax Act 1922 remained in forci~. 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 Section !SC.

Then came the Income Tax Act 1961 which repealed the Indian Income Tax Act 1922. Section 15C of the Indian Income Tax Act G 1922 was recast as Section 84 in the Income Tax Act 196!. Sub- section (I) of Section 84 granted the same exemption in respect of a portion of the profits and gains derived from any industrial under- taking or hotel to which that_ Section applied as did sub-section(!) of Section I SC but a slight change was made namely, that the profits or 41ains elieible for exemption were now to be calcl]lated at "six per H

708 SUPREME COURT AEPORTS [1985] S.C.R.

A cent per annum on the capital employed in the undertaking or hotel computed in the prescribed manner" (underlining is ours). The word 'prescribed' according to the definition in sub-section (33) of Section 2 meant prescribed by Rules made under the Act and in exercise of the powers conferred under Section 29 ', the Central Board of Reve- B nue made the Income Tax Rules 1962 which contained inter a/ia Rule 19 prescribing as to how the capital employed in an undertaking or a hotel shall be computed for the purposes of Section 84. Sub- ; rules ( !l, (3) and (6) of Rule 19 read inter alia as follows : ; "19 (!) For the purpose of section 84, the capital c employed in an undertaking or a hotel to which the said section applies shall be taken to he- (a) in the case of assets acquired by purchase and entitled to depreciation- (i) if they have been acquired before the computation l . ,l. , D period, their written down value on the commencing date of the said period ; (ii) if they have been acquired on or after the commen- cing date of the computation period, their average cost during the said period ;

E (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 commen- F cing date of the computation period, their average cost during the said period ; (cl in the case of assets being debts due to the person car- rying on the business, the nominal amounts of those debts ; G (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. (3) Any borrowed money and debt due by the person car· rying on the bn>iness shall be deducted and in particu- H. lar there shall be deducted any debts incurred in respect

LOHIA MACHINES v. ,UNION (Bhagwati J.) 709 A of the business for tax (including advance tax) due under any provision of Act: (6) In this rule- (il "average cost" in relation to any asset means such proportion of the actual cost thereof ast he number of days of the computation period during which such B asset is used in the business bears to the total num- ber of the days comprised in the said period ; (ii) "computation period" means the period for which the profits and gains of the undertaking or hotal are computed under sections 28 to 43A; c (iii) "depreciation" means the allowance admissible under clause (i) or clause (ii) or clause (iv) of sub- section ( 1) of section 32; (iv) "written-down-value" means the written-down- value computed under sub-section (6) of section 43 D as if for the words "previousy ear" the words "com- putation period" were substituted."

Theere were also several other changes made in Section l 5C of the Indian Income Tax Act 1922 while recasting it as section 84 but thees changes are not material for the purpose of the present E

- writ petitions and they need not therefore detain us.

It will thus be seen that even under Section 84 of the Income Tax Act 1961 the same position prevailed as before in regard to exclusion of borrowed monies and debts in computing regard to exclusion of borrowed monies .and debts in computing the capital employed in an undertaking or a hotel for the purpose of determin- ing the quantum of exempted profits under that Section. This posi- tion continued un-interrupted until Section 84 was replaced by Section 81JJ with effect from !st April 1968 by Finance (No 2) Act 1967. Sub-section (I) of Section 801 brought about a material change in the provision as it stood in sub-section (I) of Section 84. We shall have occasion to examine the implications of this change when we deal with the arguments advanced on behalf of the parties, but for the time being it would be sufficient if we indicate this change by reproducing sub-section '1) of Section 801 as under : "80 (1) (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial \l!ldertakinll or a ship or the business of a hotel, to which

710 SUPREME COURl REPORTS t 1985] 2 S.C,l\, A this section applies. there shall, in accordance with and subject to the provisions of this section, be allowed from in computing the total income of the assessee, a deduction from such profits and gains (reduced by the aggregate of the deductions), if any, admissible to the as5essee under B Section 80H and Section 80-1) of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent, per annum on the capital employed in the ind us trial undertaking or ship or business of the hotel, as the case may be, computed in the prescribed manner in res- pect of the previous year relevant to the assessment year c the amount calculated as aforesaid being hereafter, in this section. referred to as the relevant amount of capital emplo- yed during the previous year.'

It may be noticed that under sub-section (I} of Section 80J the benefit of the exemption was extended additionally to profits derived from a ship and so far as the quantum of exemption wos concerned. the formula adopted for calculating it was "six per cent per.annum on the capital employed in the industrial undertaking or ship or business of the hotal as the case may be. computed in the prescribed manner in respect of the previous year reievant to the assessment year". The new words introduced were "in respect of the previous year relevant to the assessment year" Sub-section (2) of Section 80J said down the period for which the exemption shall be allowRble and sub-section (3) provided that any deficiency in the benefit of the exemption arissing on account of the profits and gains being Jess than the relevant amount of capital employed during the previous year shall be cgrried forward and allowed as a straight deduction in computing the total income of the assessee for the sub- F sequent years subject to the proviso that in no case shall the nefi- ciency or any part thereof be carried forward beyond the seventh assessment year as reckoned from the end of the initial assessment year. Sub-section (4) enacted certain conditions which must be fulfiled before an industrial undertaking could qualify for the benefit of me exemption and once of the benefit the conditions was that the industrial undertaking should not have been formed G "by the transfer to a new business of a building machinery or plant previously used for any purpose." But sub-section (6) provided by way of an exception that where in the case of an industrial undertaking, any building, machinery or platn or any part thereof previously used for any purpose is transferred to l:J a new business and the total value of the building, machinery or plant

LOHlA MACHINES v. UNION ( Bhagwati, J.) 711

or part so transferred does not exceed 20% of the total value of the A building, machinery or plant used in the business, then the condition set out in sub-section (4) shall-be deemed to have been complied with and the total value of the building, machinery or plant or part so transferred shall not be taken into account in computing the capital employed in the industrial uudertaking, So far as the applicability of B Section 80J to profits derived from a ship was concerned, sub-section (5) laid down several conditions which were required to be fulfilled before the benefit of the exemption could be made available in case of profits derived from the ship.

Since the profits de_rived from an industrial undertaking or a c ship or the bnsiness of a hotel were eligible for exemption only to the extent of 6%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 reievant to the assessment year, the Central Board or Revenue made Rule 19A prescribing the manner in which the capital employed in the industrial undertaking, D ship or business of the hotel should be computed for the purpose of Section 80J Rule I9A made material alterations in the texture of Rule 19 and since a considerable part of the controversy between the parties has turned on the validity of this Rule, it would be desirable to set out its releaant portions in extenso : E "19.A. Computation of capital employed in an indus- trial undertaking or a ship or the business of a hotel for the purposes of section 80J- (I) For the purposes of section 80J, the capital employed in an industrial undertaking or the business ot a hotel shall be computed in accordance with sub rules 2) and F (4) and the capital employed in a ship shall be com- puted in accordance with sub-rule (5). ( ) The aggregate of the amounts representing the values of the assets as on the first day of the computation period, of the undertaking or of the business of the hotel to which the said section 80J applies shall first be ascertained in the following manner : (i) in .the case of assets entitled to depreciation, their written down value ; (ii) in the case of assets acquired by purchase and not entitled to depreciation, their acutal cost to the assessee ;

712 SUPREME COURT REPORTS (1985] 2 s.C.It. A (iii) in the case of assets acquired otherwise than by purchase and not entitled to depreciation the value of the assets when they became assets of the busi- ( ' ness; ·' (iv) in the case of assets being debts due to the person B carrying on the business, the nominal amount of those debts, (v) in the case of assets being cash in hand or bank the ; amount thereof. ' (3) From the aggregate of the amounts as ascertained '· c under sub·rule (2) shall be deducted the aggregate of the amounts, as on the first day of the computa- tion period, of borrowed moneys and debts due by the assessee (including amounts due towards any liability in respect of tax), not being-

D (a) in the case of an assessee being a company, the amount of its debentures, if any, and ~ ) . (b) in the case of any assessee (including a company) any moneys borrowed from an approved source for the creation of a capital asset in India, if the agree- ment under which such moneys are borrowed provi- E des for the repayment thereof during a period of not less than seven years. -\

Explanation-For the purpose of this sub-rule,- 1<-"

(i) "approved source" means the Government or the F Industrial Finance Corporation of India or the Industrial Credit and Investment Corporation of India Ltd. or any banking Institution or any person in a country outside India or any of the following financial institutions, namely ; (a) a State Financial Corporation established under G' the State Financial Corporations Act, 195I (LXIII of 1951) ; (b) the Industrial Development Bank of India, establi- shed under the Industrial Development Bank of India Act, 1964 (XIX of 1964); (cl the Madras Industrial and Investment Corporation '-.- of India Limited ; i

H (d) the Re-finance Corporation of Industry Ltd. i

LO!liA MACHINES v. UNION (Biiagwati, J.) ') l J A (e) the Life lrrsurance Corporation of India established under the Life Insurance Corporation Act, (XXXI of 1956);

x x x x B (4) The resultant sum as determined under sub-rule(3) shall be dimini~hed by the value, as ascertained ' under sub-rule (2), of any investments the income from which is not taken into account in computing the profits of the business and any moneys not required for the purpose of the business, in so far as the aggregate c of such investments or moneys exceed the amount of the borrowed moneys which under sub-rule (3) are required to be deducted in computing the capital. (5) The capital employed in a ship shall be taken to be the written down value of the ship." D > ' Two changes immediately become noticeable. One is that where as under the Indian Income Tax (Computation of Capital of Indus- trial Undertakings Rules 1941 and Rule 19, the average costs of assets acquired by purchase on or after the commencing date of the computation period was required to be taken into account in com- putation the capital employed in the industrial undertaking or hotel, a deliberate departure was made from this formula and under Rule 19A, assets acquired on or after the commencement of the computa- tion period were to be left-out of account and only the amounts re- presenting the value of the assets as on the first day of the computation period were to enter into the computation of the capital employed in the industrial undertaking or the business of a hotel. The other change made was 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 requ red 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 creation 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 or the business of a hotel for the purpose of Section 80J. The result was that from and after !st April H

714 SUPREME COURT REPORTS (1985] 2 S.C.R.

A 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, through other categories of borrowed monies and debts due from the assesseee conti- B nued to remain excluded from such computation. These two changes appear to have been made in view of the Interim Re ,>Ort on Rationa- lisation and Simplification of Direct Taxation Laws by Shri S. Bhoo- thalingam, where a recommendation was made that instead of the formula which was being followed upto 31st March, 1968, it would be desirable to simplify the procedure for computation of capital "by c basing it on owned capital and long term borrowings as at the begin- ning of the year, ignoring the fresh introduction of capital in the course of the year."

This state of affairs continued until !st April 1971 when the Finance (No. 2) Act 1971 came into force. While introducing the Bill D which ultimately culminated in the Finance (No. 2) Act 1971, the Finance Minister made a policy statement on the floor of the House in the following terms :

"At present, in the case of new industrial undertakings, ships and approved hotels, profits upto 6 per cent of the capital employed are entitled to tax exemption for a period of five years. Since debentures and long-term borrowings do not in any manner represent risk capital and interest thereon is in any case deducted, it was generosity on the part of the Government to extend the tax holiday provision even to such constituents of capital. I now propose that in calcula- ting the limit of 6 per cent of the capital for purposes of tax-exemption, debentures and long-term borrowings will be excluded.

This single measure will provide the exchequer with Rs. JO crores during the current year ; the yield for a full year will be of the order of Rs. 14 crores."

G This policy statement was implemented by the Central Board of Revenue by amending Sub-Rule (3) of Rule 19A so that after the amendment Sub-Rule (3) read as follows : "(3) From the aggregate of the amounts as ascertained under Sub-Rule (2) shall be deducted the aggregate of the amounts, as on the first day of the computation period, of

toliiA MACHINES v. UNION (Bhagwati, J.)

borrowed moneys and debts owed by the assessee (including amounts, due towards any liability) in respect of tax."

The consequence of this amendment was that the position as it prevailed prior to the enactment of Rule 19A was again restored and all borrowed moneys and debts due by the assessee as on the first day of the computation period became deductible in computing the capi- tal employed in the industrial und~rtaking or the business of a hotel for the purpose of Section 80J. This amendment came into force with effect from 1st April, 1972.

But a serious controversy was sparked off by this amendment c of Rule 19A. Though right from !st April 1949 upto 31st March 1968, for a period of almost 19 years, all borrowed monies and debts owed by the assessee were excluded in computing the capital emplo- yed in the industrial undertaking or the business of a hotel, no chal- lenge was preferred against the validity of the Indian Income Tax (Computation of Capital of Industrial Undertakings) Rules, 1949 and D Rule 19 which provided for such exclusion and no as.essee disputed the computation of the capital employed in the industrial undertaking or the business of a hotel made on the basis of such exclusion. It was only when the liberalisation made under Rule 19A by inclusion of long term borrowings (repayable in not less than seven years) in com- putation of the capital employed which liberalisation was introduced E from 1st April 1968-was withdrawn with effect from !st April 1972 that some assessees raised a contention for the first time that on a true construction of sub-sect10n (I} of Section 80 J, the capital emplo- yed in the industrial undertaking or the business of a hotel would include long term borrowings since according to plain natural cons- truction of the words used, they were part of the 'capital employed' F and Rule 19A sub-rule (3) in so far as it excluded long term borro- wings from the computation of the capita! employed was, therefore ultra vires sub-section (I) of Sec. 80J and despite sub-rule (3) of Rule J9A, long term borrowings were liable to be takeu into account in computing the 'capital employed' iu the industrial undertaking or the business of a hotel. This contention was raised for the first time before the Bombay Bench of the Income Tax Appellate Tribunal in G M/s. Alim Chand Topan Das v. l.T.O. and the Bombay Bench of the Tribunal by an order dated 2Hh July 1973 accepted this contention and held that sub-rule (3) of Rule 19A was in contlict with sub-sec- tion (I) of Section 80J and hence it was liable to be ignored in com- puting the capital employed in the industrial undertaking or the business of a hotel. This decision was however, reconsidered by a H

716 SUPREME COURT REPORTS [ 1985] 2 s.c.R.

A Special Bench of the Tribunal in M/s. Emco Transformers Limiied v. l,T.O and the Special Bench by an order dated 26th September 1974 over-ruled this decision and held that there was no confiict at all between sub-rule (3) of Rule 19A and sub-section (l) of Section 80J and all borrowings including Jong term borrowings owing from the B assessee were liable to be excluded in computing the capital employed in the Industrial undertaking or the business of a hotel. However, soon thereafter, the Calcutta High Court held in Century Enca Limited v. I.TO., 107 ITR 123 that sub-rule (3) of Rule 19A in so far as it directed exclusion of borrowed capital except from an appro- ved source (this was obviously a case governed by the unamended c Rule 19A) was ultra vires sub-section (I) of Section 801 and long term borowings from any source being part of capital employed were liable to be taken into account in computing the capital employed in the industrial undertaking or the business of a hotel. The same view was taken by the Madras High Court in Madras Industrial Linings Limited v. I.T.O. llOITR 256 and the Allahabad High Court also D in three decisions namely CIT v. U.P.Hotel and Restaurant Limited 123 !TR 626, Kota Box Manufacturing Company v. I. T. 0 v. 123 !TR 63c aad Rarnpur Distillery and Chemical Limited v. CIT 140 ITR 725 adopted the same view. The same view also prevailed with the Punjab and Haryana High Court in Ganesh Steel Industries v. I.T.O. 126 !TR 258 and the Andhra Pradesh High Court m Warner Hindustan Limited v. I.T.O. 134 ITR 158. The Madhya Pradesh E High Court however took a different view and held that sub-rule (3) of Rule 19A was not in conflict with sub-section (I I of Section 80J and all borrowings including long term borrowings were liable to be excluded in computing the capital employed in the industrial under- taking or the business of a hotel. Vide els CIT v. Anand Bihari Steel and Wire Products 133 !TR 365 and CIT v. K.N. Oil Industries F 134 !TR 651. The controversy in regard to the exclusion of long term borrowings thus gave rise to a conflict of opinion amongst the diffe- rent High Conrts. There was also another provision in Rule 19A in respect of which fault was found by some of the High Courts and that was the provision which required that the 'capital employed' should be computed as on the first day of the computation period. The Cal- cntta High Court in Century Enca Limited v. l.T.O. ITR 909 took G the view that what Section 80J Sub-section (1) required was compu- tation of capital in respect of the pre~ious year and not as on the first day of the previous year and therefore Rule 19A, in so far as it pro- vided that the computation of capital should be made as on the first I H day of computation period, was ultra vires sub-section (I) of Section

LOHIA MACHINES v. UNION (Bhagwati, j.) 717 A 80J. This view was also adopted by one or two other High Courts. Since some High Courts took the view that Rule l 9A was ultra vires sub-section (l) of Section 80J in so far as it provided for exclusion of long term borrowings and computation of the 'capital employed' to be made as on the first day of the computation period and in the opinion of the Government, this view was erroneous and did not cor · B rectly reflect the intention of Parliament as evinced clearly by the legislative history of this provision, Parliament, with a view to avoi- ding confusion and uncertainty which would prevail in the state of the law until a final pronouncement was made on these two issues by the Supreme Court, introduced an amendment in Section 80J by the Finance (No 2) Act, 1980 While moving the Finance (No. 2) Bill c 1980, the Finance Minister said in the course of his speech in the Rajya Sabha on 24th July, 1980 ;

, "I have received many representations on the amend- • ment proposed to be made in section 80J of the lncome- D tax Act with effect from the !st April, 1972 ..... The capital employed for this purpose is calculated in accordance with the provisions made in the Income-tax Rules and excludes borrowed capital. Some High Courts have taken the view that the provision in the rule is ultra vires the provision in Section 80J and that borrowed capital should also be inclu- E ded in capital base for the purpose of computing the tax holiday profits. The Bill seeks to transfer the provision of the rule to section 80J retrospectively from 1st April, 1972. In several representations, it has been urged that the pro- posed change should not be made retrospectively. In my reply to the General Debate on the Budget, J. had explained that the provision in the Bill seeks merely to give effect to the manifest intention of Parliament. I have again given anxious thought to this question and I am convinced that both on considerations of law and equity there is absolutely no case for modification of the provisions in the Bill. Section 80J specifically provides that the capital employed will be computed for the purpose of determining the tax holiday profits in accordance with the rules and the rules clearly lay down that the borrowed capital will be excluded from the capital base for this purpose. Tax holiday provisions have been on the statute book in one form or the other right from 1949. Up till 1968, the basis for calculating the capital H

SUPREME COURT REPORTS [1985) i S C.R.

A employed in an industrial undertaking was set out in the rules which provided for exclusion of borrowed capital for the purpose and this position was never doubted. Although in 1968, the rules were amended to provide for the inclusion of certain specified long-term borrowings in the capital base, status quo ante was restored with effect from 1-4-1972. As 1 have already stated in the House, the then Finance Minister B Shri Y.B. Chavan, had, in his Bu<.lget speech for the year 1971-7 2, unequivocally stated that he proposed to exclude the borrowed capital from the capital base for the purpose of determining the tax holiday profits. It is thus obvious that the intention has always been that borrowed capital should not form part of the capital emplo.!'ed for the purpose of determining tbe tax holiday profits. I am, therefore satisfied c that no change in this regard is called for."

The Finance Bill (No. 2) of 1980 ultimately culminated in the Finance (No. 2) Act 1980 and by this Act, Section 80J was amended and sub-section (I Al was introduced with retrospective effect from lst April, 1972. The newly introduced sub-section (IA) was in the same terms as Rule l }A, so that the manner of computation of the 'capital employed' in an industrial undertaking or the business of a D hotel or a ship remained the same but it was now set out in sub- section (IA) instead of Rule 19A. The words "computed in the prescribed manner" which occurred in sub-section (1) of Section 80J were also substituted by the words "computed in !the manner • specified in sub-section (I A)" with retrospective effect from the E same date, namely, 1st April 1972.

Mr Palkkiwala, learned advocate appearing on behalf of the petitioners in some of the Writ Petitions pointed out that the expression "capital employed ............ in respect of the previous year" has two dimensions, namely, dimension of quantum and ) F dimension of time. So far as regards the dimension of quantum, Mr. Palkhiwala urged that the expression "capital employed" in its legal as well as in its popular of commercial sense must, in any view of the matter, include long term borrowings and working capital and on a fair and liberal view, it would also include short term borrowings but be was content with submitting that in any event long term borrowings must be held to be included in the "capital employed". He pointed out that under the Companies Act 1956 a loan 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

LOHIA MACHINES v. UNION (Bhagwati, J.) 719 A the 'capital employed'. He also contended that even assuming there was any ambiguity in the expression 'capital employed' it must necessarily include long term borrowings in the context of Section 80J because Parliament could not have possibly intended to favour affluent assessees who are able to employ their own capital and to discriminate against indingent assessees who have to borrow funds to finance their undertakings. It was also urged by Mr. Palkhiwala B in regard to the dimension of time, that the concept of 'capital employed' during or in respect of the previous year is a concept which must compel attention to the reality of the funds used during the whole year and not merely on any one single day such as the first day of the computation period. The argument of Mr. Palkhiwala based on this premise was that Rule I 9A was ultra vires sub-section (I) of Section 80J to the extent that it prescribed a mode of compu- c tation of the 'capital employed' in terms that excluded all borrowed capital and also provided for computation of the 'capital employed' ' only on the first day of computation peiod and ignored all additional capital employed during the rest of the computation period. Rule 19A, contended Mr. Palkhiwala, was invalid in these two respects, since it derogated from the full operative effect of the provisions of D Section 80J and arbitrarily abridged the scope of the exemption under that Section by excluding what was clearly part of the 'capital employed' and ignoring the 'capital employed' throughout the computation period except on the first day. The conclusion pressed by Mr. Palkhiwala on the basis of this argument was that long term borrowings were, in any event, liable to be taken into account in computing the 'capital employed' and such computation could not be made as on the first day of the computation period but was required to take into account additional capital which might be employed during the computation period. So far as the amended sub- section (IA) introduced in Section 80J was concerned, Mr. Palkhi- wala submitted that this amendment made with retrospective effect from !st April 197 l was unconstitutional. as being violative of Articles 14 and !9(1)(g) of (the Constitution. We need not set out here the specific grounds on which the amended sub-section (IA) was assailed by Mr Palkhiwala as offending Articles 14 and 19(1) (g), since on the view we are taking in regard to the validity of Rule !9A, it is not necessary for as to examine these grounds urged by G Mr. Palkhiwala.

\ The learned counsel appearing on behalf of the petitioners in the other Writ Petitions re-iterated the same grounds with only this H

720 SUPREME COURT REPORTS (1988] 2 S.C.R.

A difference that according to Dr. Devi Pal, learned counsel appearing on behalf of the petitioners in one of the Writ petitions, the ·capital employed' would include not only long-term borrowings as submitted by Mr. Palkhiwala but also short term borrowings so that all borrowed monies and not just long term borrowings were liable to be taken B into account in computing the 'capital employed'. Dr. Gauri Shankar appearing on behalf of the petitioners in writ petition No. 6188 of 1980 also submitted a separate set of written arguments on the same lines and supported the main theseis of Mr. Palkhiwala.