Desai, J.:— This is a reference at the instance of the assessee under s. 256(1) of the I.T Act, 1961. The question referred to us reads as follows:

“Whether, on the facts and in the circumstances of the case, the moiety of the book profits were includible in the capital employed in the industrial undertaking having regard to rule 19(5) of the Income-tax Rules, 1962?”

2. The assessee is a private limited company carrying on the business of manufacturing radiators, fuel engines, etc., for automobiles. We are concerned in this reference with the assessment year 1964-65. In the assessment the assessee claimed relief under s. 84 of the I.T Act, 1961. The ITO computed the capital employed at Rs. 27,25,755 and 6% of the said amount worked out to Rs. 1,63,545; this was the eligible relief as determined by the ITO. The assessee carried the matter to the AAC and in this appeal there were other points in dispute. Before the AAC an additional ground was raised and it was urged that the ITO had erred in computing the capital employed in the new industrial undertaking by not giving effect to increased capital in terms of the legal fiction or presumption contained in sub-r. (5) of r. 19 of the I.T Rules. It was contended on behalf of the assessee that by reason of this rule the moiety of book profits were required to be added to the capital computed by the ITO for the purpose of ascertainment of profits qualified for relief under s. 84 of the I.T Act, 1961. The AAC rejected the submission holding that there had been no mistake in the computation of capital employed by the ITO. He was of the opinion that the value of the assets and liabilities in question had been taken as available on the first day of the accounting year and additions to such assets or liabilities were also considered on the actual or average basis. In his view, therefore, the contention that under sub-r. (5) half the profits should be added for the purpose of the ascertainment of capital employed could not be accepted because the value of the assets and liabilities held by the assessee throughout the year had been reflected in the computation of the capital.

3. The matter was thereafter carried to the Income-tax Appellate Tribunal. In its judgment, the Tribunal extracted sub-r. (5) of r. 19 and confirmed the decision taken by the AAC in the following words I

“The Income-tax Officer by taking the average value of the assets and liabilities has, no doubt, properly considered the working in terms of the rules provided for this purpose and, therefore, we do not see how the assessee could say that the average profits of the year contemplated under rule 19(5) should be added back so long as the said average profits are already covered by the assets and liabilities taken at the end of the year. Apart from this, we find that sub-rule (5) of rule 19 relates to the average amount of capital employed in a business during any computation period and not with regard to the amount of capital employed in business. In the instant case, we are concerned with computation of capital employed and it has been rightly computed under rule 19(1), (2), (3) and (4). Further, sub-rule (5) of rule 19 only gives the manner of taking the profits in the case of computation of average capital employed but it does not suggest that it should be taken into account when computation is worked out under rule 19(1), (2), (3) and (4) which provide the method of computation of capital. In that view of the matter, in our opinion, sub-rule (5) of rule 19 cannot be held to come into play in the assessee's case. Therefore, we reject this contention of the assessee.”

4. In other words, the view of the Tribunal was that since the capital employed had been rightly computed by application of sub-rr. (1), (2) and (4) of r. 19, sub-r. (5) would not and cannot come into play. It is this decision that the assessee has called into question in this reference.

5. Before dealing with the respective arguments, reference may be made to the provisions under consideration. Under s. 84 prior to its amendment by the Finance (No. 2) Act, 1967, it was provided that income-tax shall be payable by an assessee on so much of profits and gains derived from any industrial undertaking or hotel to which this section applied as do not exceed six per cent, per annum on the capital employed in the undertaking or hotel computed in the prescribed manner. Thus, by the section relief at six per cent, was to be allowed on the capital of the new undertaking computed in the prescribed manner. For this we have to go to the I.T Rules, 1962. Sub-rule (1) of r. 19 provides that for the purposes of s. 84 the capital employed in an undertaking or hotel to which the said section applies shall be taken to be items (a), (b), (c) and (d), and these have to be considered along with the Explanation provided in the sub-rule. These items provide for assets subject to depreciation, assets not entitled to depreciation, assets acquired before the computation period and assets acquired during the computation period.

6. sub-rule (5) of rule 19 reads as follows:

“(5) For the purpose of ascertaining the average amount of capital employed in a business during any computation period, the profits or losses made in that period shall, except so far as the contrary is shown, be deemed—

(a) to have accrued, at an even rate throughout the said period and

(b) to have resulted, as they accrued, in a corresponding increase or decrease, as the case may be, in the capital employed in the business.”

7. On behalf of the assessee, Mr. Dastur drew our attention to the answer given to a question similar to the one referred to us in the present reference. This was in Income-tax Reference No. 4 of 1968—Modella Modella Woollens Ltd. v. Commissioner Of Income-Tax, Bombay City-I. decided on 2nd August, 1977, by this court (since reported in [1979] 120 ITR 726 (Bom)). It is found in the said decision that the answer had been given in favour of the assessee relying upon the decision of the Gujarat High Court in CIT v. Elecon Engineering Co. Ltd., [1976] 104 ITR 510 and of the Allahabad High Court in Addl. CIT v. Hind Lamps (P.) Ltd., [1977] 106 ITR 360. Mr. Joshi on behalf of the revenue submitted that the matter was required to be fully considered and he very strenuously urged that the Tribunal's view that sub-r. (5) of r. 19 could not be called into play by the assessee was correct. The arguments advanced at the bar, we found, were similar to certain observations to be found in the commentary on this sub-rule in Chopra's Income-tax Law and Practice, which observations have been extracted by the Gujarat High Court in Elecon Engineering Co.'s case, [1976] 104 ITR 510 at pages 518, 519. These observations from Chopra's Commentary read as follows;

“Sub-r. (5) of rule 19 lays down the principles on which the average amount of profit or loss should be computed. According to this rule, the profit or loss shall be taken to have accrued at an even rate throughout the computation period and to have resulted, as it accrued, in a corresponding increase or decrease, as the case may be, in the capital employed in the business. The rule does not contemplate a separate addition or deduction, and where the capital employed is computed as above with reference to all the assets and liabilities of the business and the profit or loss remain invested or debited in the business, they would be automatically reflected in the assets of the business. The sub-rule seems to have scope only in cases where the capital employed is worked out by first ascertaining the amount of capital employed at the commencement of the computation period and adding thereto or subtracting therefrom the capital introduced or moneys taken out of the business including profit or loss of the computation period. Since the latter method has not the sanction of law the rule seems otiose and its existence, without expressly authorising the adoption of the latter method, is only confounding. Legislative intervention seems called for in this matter.”

8. The Gujarat High Court, after quoting the above observations which were cited by counsel for the revenue appearing before it, went on to observe that the observation of the learned author was not correct and more so when he observes that sub-r. (5)(a) is otiose. From the decision of the Gujarat High Court it is found that the ITO had originally worked out the capital employed in the undertaking at a particular figure by applying all the relevant applicable provisions to be found in r. 19(1). To the figure thus arrived at he added half the profit for the year from the new industrial project. Six per cent, of this figure was exempted. Thereafter, reassessment proceedings under s. 147(b) were adopted and the addition of half the profits was excluded and the capital computation figure was reduced by the said amount. Being aggrieved by the order of reassessment the assessee went in appeal before the AAC, who confirmed the reassessment order. The assessee carried the matter to the Tribunal, where it was urged on behalf of the revenue that in working out the capital the average profit of the year had already been taken into) account inasmuch as in the working out of the figure the assets were taken as at the beginning of the year, to which was added the average value of additions made in respect of the assets during the previous year. The Tripunal accepted that the average profit of the year was reflected in the assists of the year. It was, however, of opinion that despite this the assessee was entitled under sub-r. (5) of the aforesaid r. 19 to the benefit of further addition of half the amount of the profit in view of the fiction incorporated in the said sub-rule. This view of the Tribunal was upheld by the Gujarat High Court. The observations of the Gujarat High Court are aptly) summarised in the headnote (p. 511) of the decision which reads as follows:

“The legislative intent as expressed in rule 19, having regard to the scheme of the entire rule, is that to effectively extend the concession of the tax holiday, the average capital employed throughout the year in an industrial undertaking or a hotel should form the basis for such concession. The basis appears to emerge from the comparison of the phraseology employed in sub-rules (1) and (5) of rule 19. The legislature has adopted two different concepts in sub-rules (1) and (5), namely, the valuation or the cost of the assets and the average amount of capital employed. It may be that, in a given case, profit or loss might be invested in, or debited to, the financial statement of the assessee from time to time, but it cannot be always so, as the assets of the assessee may not at all times reflect the fluctuations of the profits at different rates as and when they accrue at the different stages of the computation period. The legislature has, therefore, provided that for ascertaining the average amount of capital employed in a business during any computation period, the profit or loss made in that period shall, except so far as the contrary is shown, be deemed to have accrued at an even rate and to have resulted, as they accrued, in a corresponding increase or decrease, as the case may be, in the capital employed in the business. It may be that in ascertaining the average amount of capital, as provided in the fiction, numerous factors have to be considered. But it appears that the income-tax authorities have, by way of rough and ready method, adopted the addition of half amount of the profit on the basis of this fiction that the profits have accrued at a uniform rate throughout the computation period and correspondingly resulted in increase or decrease as and when the profits or losses accrued. The Tribunal was, therefore, right in holding that the figure arrived at by computation under rule 19(5) was to be added to the figure arrived at by computation under rule 19(1) for determining the average capital employed in the assessee's undertaking.”

9. In Modella Woollens Ltd.'s case, [1979] 120 ITR 726 (Bom), the Division Bench has also referred to Hind Lamps (P.) Ltd.'s case, [1977] 106 ITR 360 (All). It is found, however, on going through the decision that the. Allahabad High Court took the view that the entire profit earned by the assessee during the relevant previous year would have to be taken into account in the computation of capital employed. The judgment is somewhat sketchy and apart from setting out sub-r. (5) of r. 19, full discussion and detailed arguments are not to be found in the report of the decision. It would appear to us that bearing in mind the language of sub-r. (5), if the two fictions in cls. (a) and (b) of the said sub-rule were to be applied without there being any material on record to show to the contrary as is provided, the correct addition as contemplated by the sub-rule would be a moiety of the profits earned throughout the year and not the total amount of profits.

10. Mr. Joshi referred us to a decision of a Division Bench of the Bombay High Court dealing with an identical sub-rule to be found in Sch. II to the Excess Profits Tax Act, 1940. Schedules I and II to the said Act contain rules for the computation of profits for the purposes of the E.P.T (Sch. I) and rules for computing the average amount of capital (Sch. II). Schedule II will be found at page 505 of Kanga & Palkhivala's Commentary on Income-tax, 4th edn., Vol. II. The phraseology employed in the first five rules of Sch. II is very similar to the phraseology employed in the five sub-rules of r. 19 of the I.T Rules and r. 5 of Sch. II contains both the fictions or presumptions as are provided for in sub-r. (5) of r. 19 of the I.T Rules, 1962. A Division Bench of the Bombay High Court came to consider r. 5 of Sch. II to the E.P.T Act, 1940, in Devkaran Nanjee Banking Co. Ltd. v. CEPT, [1950] 18 ITR 47 (Bom). Two submissions were made by counsel for the assessee in connection with the provisions contained in r. 5 of Sch. II. Both were accepted by the court in the following words (at pp. 53, 54)

“Sir Jamshedji is right in the two contentions that he has put forward. His first contention is that the expression ‘profits or losses’ used in this rule must be construed to mean ‘statutory profits’ as defined in the Act itself, and the definition of ‘profits’ in the Act is: ‘“Profits” means profits as determined in accordance with the First Schedule’. Profits in this rule cannot mean book profits or actual profits. Sir Jamshedji is also right in his contention that the legislature has laid down an artificial method of determining the profits or losses and also determining the increase or decrease in the capital employed in the business. But the legislature has provided one safeguard and that is that it leaves it open to the income-tax department to prove the contrary which would demolish the presumption raised by rule 5. I do not accept Sir Jamshedji's contention that the expression ‘be deemed’ applies only to sub-clause (a) of rule 5 and not to sub-clause (b). The presumption raised by the rule is (1) that there is an accrual of profits or losses at an even rate throughout the period, and (2) that, these profits or losses as they accrued have increased or decreased the capital employed in the business. Either of these two presumptions can be rebutted by the contrary being shown. It may be shown that in fact the profits or losses did not accrue at an even rate throughout the period, or it may be shown that although the profits or losses accrued evenly throughout the period, in fact they did not result in an increase or decrease in the capital employed in the business.”

11. The court went on to observe further:

“In this case it is not disputed that the profits have accrued at an even rate throughout the accounting period. The only question is whether, having so accrued, they have resulted in a corresponding increase in the capital employed in the business. Unless the contrary is shown, there is a presumption in favour of the assessee that the capital was increased by the accrual of profits, but it would be open to the department to rebut the presumption by showing that there have been actual disbursements by the assessee out of the profits which accrued to the assessee, and in fact although the profits accrued the capital has not been increased as a result of actual disbursements.”

12. Mr. Joshi has urged that what was contained in sub-r. (5) of r. 19 was mere presumption and did not give any right to the assessee to claim inclusion of moiety of the profits in the capital computation for the purposes of relief under s. 84. The submission, in our view, is contrary to the plain words of sub-rule (5). In the case before us neither the assessee nor the revenue has brought any material on record or contended that there was anything contrary to the deeming provisions contained in sub-r. (5). If there is no such material which is required to be considered, then the fictions come into play, and as a result of the fictions it is our opinion that half the profits would have to be added to the capital employed and this would be so as a result of the combined operation of the two fictions contained in sub-r. (5). We are, therefore, in full agreement with the view expressed by the Gujarat High Court in the Elecon Engineering Co.'s case, [1976] 104 ITR 510, and we are also in agreement with its rejection of the passage from Chopra's Commentary on the I.T Act, where the author has come to the conclusion that the said sub-rule is otiose. In our opinion, the sub-rule has to be given effect to; and if the rule is given effect to in the present case, the assessee's contention must be upheld and the assessee must succeed in the reference. In the result, the question referred to us is answered in the affirmative and in favour of the assessee.

13. The Commissioner will pay to the assessee the costs of the reference.