Citation Codes

Equivalent Citations

citation codes

Case Number

Case Referred No. 33 of 1953

Advocates

For the Appellant: S. Swaminathan, Advocate.
For the Respondent: C.S. Rama Rao Sahib, Advocate.

Judges

Rajagopalan
Balakrishna Ayyar, JJ.

Acts

Section 62(1) of the War Damages Act, 1941,
Section 6 of the Excess Profits Tax Act

See more information ...

Smart Summary

Structured Summary of the Opinion — Balakrishna Ayyar, J.

Factual and Procedural Background

The assessee is a limited liability company that commenced business as a spinning mill on 29-4-1943. It decided to expand and, in 1944, purchased eighty-one looms and other machinery from the Coimbatore Spinning and Weaving Mills. Construction of buildings for a weaving department began on 28-7-1945, was completed by June 1946 and machinery was installed, but the weaving section began actual operation only in July 1947.

The company was liable to excess profits tax. For the chargeable accounting period from 1-7-1945 to 31-3-1946 the Excess Profits Tax Officer excluded from the average capital the value of buildings, plant and machinery relating to the weaving department. On appeal the Appellate Assistant Commissioner held that those amounts were capital employed in the business and should be included. The department appealed, and the Appellate Tribunal reversed the Assistant Commissioner, holding that because the weaving department did not go into production during the chargeable accounting period, the assets had not become business assets and therefore were not capital employed for the purposes of computing average capital.

Pursuant to this Court's orders, the Appellate Tribunal referred the question whether the exclusion of the weaving department's building, plant, machinery and fittings was in accordance with Sch. II, R. 1. The Tribunal was also asked to make a specific finding whether the spinning and weaving departments constituted one business or two; it found they formed part of a single manufacturing business during the relevant period.

Legal Issues Presented

Whether, for the chargeable accounting period ending 31-3-1946, the exclusion of the value of the building, plant, machinery and electric fittings of the weaving department from the computation of the average amount of capital employed in the assessee's business was in accordance with Schedule II, Rule 1 (Sch. II, R.1) to the Excess Profits Tax provisions.
Whether the spinning and weaving departments constituted one business or two distinct businesses during the relevant period (the Tribunal answered this in favour of a single business).

Arguments of the Parties

Department's Arguments (Appellant)

The Appellate Tribunal's position (adopted by the department on appeal) was that because the weaving department did not go into production during the chargeable accounting period, the assets of that department had not become business assets and therefore did not constitute capital employed for computing average capital.
Learned counsel for the department, Mr. Rama Rao Sahib, relied on Birmingham Small Arms Co. v. I.R.C. (1951-2 All ER 296) and passages from Lord Simonds' speech to support the contention that the word "employed" in "capital employed" should not be read so as to include assets that were not actually used during the accounting period.

Assessee's Arguments (Respondent)

The assessee (through its counsel) relied on Inland Revenue Commissioners v. Byron Ltd. ((1946) 14 ITR (Sup) 1), arguing that assets acquired and retained as capital for the business should be treated as capital employed even if they were not actively or productively used in the accounting period. The assessee contended the money expended to acquire the weaving assets should be included in average capital.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Inland Revenue Commissioners v. Byron Ltd. ((1946) 14 ITR (Sup) 1)	Holds that where an asset remains part of the capital of the business, valuation for excess profits tax is the original price paid; assets do not cease to be capital employed merely because they are temporarily inactive or damaged. Actual productive use during the period is not necessary to treat the asset as capital employed.	The Court relied on this authority to support the proposition that actual employment or productive use of an asset during the chargeable accounting period is not necessary for it to be treated as capital employed. Byron supports the assessee's claim that assets bought for business use and retained as capital should be included in average capital.
Birmingham Small Arms Co. v. I.R.C. (1951–2 All ER 296)	In that case the claim to compensation for wartime destruction was held not to be an asset forming part of capital employed in the business for the relevant accounting period; some speeches (notably Lord Simonds) suggested reading "employed" as implying actual employment, though other Law Lords disagreed.	The Court distinguished this case: it observed that in BSA the company had only a claim to compensation (a contingent right) and not an actual asset bought and held for the business. Accordingly, BSA did not support the department's contention that assets must have been put into actual use; the Court concluded BSA was not authority for requiring actual use.

Court's Reasoning and Analysis

The Court began by quoting the relevant statutory provisions: Section 6 of the Excess Profits Tax Act (and its proviso) and sub-rule (1) of Rule 1 of Schedule II. Rule 1(1) specifies that, for average capital (so far as it does not consist of money), assets acquired by purchase shall be taken at the price paid; debts at nominal amount; other assets at their value when they become assets of the business, each subject to specified deductions.

The Court analysed the language of the rule and observed that:

The rule prescribes the measure (price, nominal amount or value) by which capital is to be taken; it does not, by its wording, require that the assets be actually employed in the business during the accounting period.
Grammatically, the term "employed" in the phrase "average amount of capital employed" relates to capital and not directly to the assets; the statutory scheme contemplates capital being represented by assets even where those assets are not actively used in the period.

The Court gave practical examples to illustrate the point: spare parts bought and kept unused, or a replacement engine acquired but not actually installed or used, would nonetheless constitute capital employed because money of the business had been spent to acquire assets for business purposes.

The Court considered authorities. It accepted Inland Revenue Commissioners v. Byron Ltd. as supporting the proposition that an asset may remain capital employed even if not actively or productively used in the accounting period and that valuation for excess profits tax is by reference to original price rather than current realisable value. The Court then examined Birmingham Small Arms Co. v. I.R.C., noting that the English decision concerned only a claim to compensation (a contingent right) and thus differed materially from the instant facts where the company had actually expended capital to acquire assets. The Court further reviewed Lord Simonds' and other Law Lords' speeches from that case, noting that the majority view in that case (as expressed by Lord Radcliffe and Lord Tucker) did not require active use in the accounting period: once capital is introduced into the business and represented by assets that still belong to the business, they may be treated as capital employed.

On this basis, the Court concluded that the assets acquired and present for the weaving department—though not used in the relevant accounting period—were nevertheless capital employed in the business within the meaning of Sch. II, R.1. The Court therefore held that excluding their value from the average capital was not in accordance with the Schedule.

Holding and Implications

Holding: The question referred was answered in the negative. The Court held in favour of the assessee: the exclusion of the weaving department's buildings, plant, machinery and fittings from the computation of average capital for the chargeable accounting period was not in accordance with Sch. II, R.1.

Direct implications for the parties:

The assessee's expenditure on the weaving department is to be treated as part of the average amount of capital employed for the chargeable accounting period ending 31-3-1946.
The Tribunal's decision to exclude those assets was reversed as not being in accordance with the Schedule; the Court answered the referred question in favour of the assessee and awarded costs to the assessee.

Broader implications: The Court's reasoning reaffirms the interpretation that, for the purposes of computing average capital under the cited Schedule and Rule, assets acquired and retained for the business—though not actually used in the accounting period—may be treated as capital employed. The opinion does not state that it sets a new precedent beyond applying and distinguishing existing authorities.

Show full summary ...

Jayaram Mills Ltd. v. Commissioner Of Excess Profits Tax

The Judgment of the Court was delivered by

Balakrishna Ayyar, J.:— The assessee is a limited liability company which commenced business on 29-4-1943 as a spinning mill. Some time later the assessee decided to expand its activities and open a weaving department, and, for this purpose purchased in 1944 eighty-one looms and various items of machinery from the Coimbatore Spinning and Weaving Mills. On 28-7-1945 the assessee commenced the construction of buildings to house its weaving department, and, by June 1946, the work was completed and the machinery installed. But, the weaving section actually commenced to operate only in July 1947.

2. The assessee company was subject to excess profits tax. In computing the average capital of the assessee for the chargeable accounting period bet ween 1-7-1945 and 31-3-1946, the Excess Profits Tax Officer excluded the value of the buildings, plant and machinery which related to the weaving department. On an appeal by the assessee the Appellate Assistant Commissioner held that the amount expended on the buildings, plant and machinery connected with the weaving department was capital employed in the business of the assessee and should therefore be taken into account in computing the average capital.

3. The department appealed against this decision. The Appellate Tribunal held that since,

“the weaving department of the assessee did not go into production during the chargeable accounting period the assets of the aforesaid department did not yet become business assets and hence did not become capital employed for the purpose of earning profits during the chargeable accounting period and the value of such assets cannot therefore be taken in the computation of average capital.”

4. In other words, it reversed the decision of the Assistant Commissioner.

5. In pursuance of the orders made by this Court in C.M.P No. 10254 of 1951, the Appellate Tribunal referred the following question for the decision of this Court:

“Whether on the facts and the circumstances of the case in computing the average amount of capital employed in the assessee's business in the chargeable accounting period ending 31-3-1946 the exclusion of the value of the building, plant, machinery and electric fittings of the weaving department was in accordance with Sch. II, R. 1.”

6. On 20-8-1956 an order was made directing the Tribunal to

“submit a specific finding on the question, whether the spinning and weaving departments constituted one business of the assessee or whether they constituted two separate and distinct businesses of the assessee during the relevant period.”

7. That finding has now been received and it is to the effect that

“both the spinning and weaving sections of the assessee can only form part and parcel of a single manufacturing business carried on by the assessee during the chargeable accounting period in question.”

8. The question, therefore, is whether the capital laid out by the assessee on its weaving department can be taken into account for ascertaining the average amount of capital employed in the business of the assessee within the chargeable accounting period.

9. We shall first quote the relevant statutory provision. We begin with Section 6 of the Excess Profits Tax Act and the first proviso thereto, which run as follows:

“Section 6. Standard profits: (1) For the purpose of this Act, the standard profits of a business in relation to any chargeable accounting period shall, subject to the provisions of sub-ss. (3) and (4), be an amount bearing to the profits of the business during the standard period, if in respect of the business a standard period is available, the same proportion as the chargeable accounting period bears to the standard period:

Provided that if the average amount of capital employed in the business during such chargeable accounting period is greater or less than the average amount of capital employed during the standard period, such amount shall be increased or decreased, as the case may be, by an amount calculated by applying the statutory percentage to the amount of such increase or decrease.”

10. Then we have sub-r. (1). of R. 1 of Sch. II which is as under:

“1. (1) Subject to the provisions of this Schedule, the average amount of the capita employed in a business (so far as it does not consist of money) shall be taken to be—

(a) so far as it consists of assets acquired by purchase on or after the commencement of the business, the price at which those assets were acquired, subject to the deductions hereafter specified;

(b) so far as it consists of assets being debts due to the person carrying on the business, the nominal amount of those debts, subject to the said deductions;

(c) so far as it consists of any other assets which, have been acquired otherwise than by purchase as-aforesaid, the value of the assets when they become assets of the business, subject to the said deductions.”

11. It will be noticed that the rule states that the average amount of capital employed in the business shall be the price paid for assets where such assets have been purchased, the nominal amount of debts where the assets consist of debts, and, the value of the assets where they have been acquired otherwise than by purchase. It will be also noticed that the word “employer” used in the sub-rule relates to capital and not to assets. Purely as a matter of grammatical construction it is not necessary to satisfy the requirements of this sub-rule that the assets should be employed in the business.

12. What the rule says is that the capital employed; in the business shall be taken to be the price or value of the assets or the amount of the debts. It does not say that the assets should be employed in the business. Apart from authority, therefore, on the mere language of the rule, one would be justified in saying that if the funds of the assessee have been used to acquire assets for being used in the business' of the assessee, that would be capital employed in the business within the meaning of the rule. Actual employment of the assets acquired is not necessary. The assessee may lay by a large stock of spare parts. It may happen that no occasion arises to utilise such-spare parts. Still the money spent in acquiring the-spare parts would be capital employed in the business of the assessee.

13. Similarly the assessee may acquire an engine to replace another which it is feared may break down. The new engine may not be used at all. Nevertheless it would be an asset of the assessee and the money used to purchase that piece of machinery would be capital of the assessee employed in its business. The circumstance, therefore, that in the present case the weaving department did not go into actual production will not disentitle the assessee from claiming that the money spent on it should be considered to be capital employed in its business.

14. Learned counsel for the assessee referred to Inland Revenue Commissioners v. Byron Ltd., (1946) 14 ITR (Sup) 1. The relevant facts and the contentions of the Crown are correctly summarised in the first part of the headnote:

“The respondent company carried on business as theatre proprietors, and in April 1937, bought the A. Theatre at Hull for £ 12,280. On 7-5-1941, the theatre was destroyed by enemy action. The freehold, site continued to belong to the company. The Crown contended that there had been a decrease in the average amount of the capital employed in the respondents' business in the accounting period ending 28-5-1941, and that the standard profits should therefore-be decreased in relation to that accounting period by the statutory percentage of 6 per cent on the decrease of capital, and that the company was left with a new and different asset from the asset it acquired for £ 12,280 in April 1937.”

15. The Court held that,

“So long as the asset remains part of the capital employed in the trade or business, it would appear, therefore, that the value to be put upon it for the purposes of calculating excess profits tax is not to be increased with the increase of its real value, and, equally, that changes of circumstances which in fact render the asset no longer worth its original value do not affect the value to be put on the asset for excess profits tax purposes. In these respects, as well, as in others, the valuation of capital under the Schedule for the purpose of calculating the tax is manifestly different from the valuation which would be proper in a balance-sheet or in the application of company law.”

16. Again,

“All that has happened is that, while the original asset continues to be owned by the company, its value has been greatly reduced by the damage which has occurred. On this view of the facts the value that must be attributed to the asset for the purposes of the tax is the price originally paid for it, and there is no decrease in the capital when the capital is computed in accordance with the Seventh Schedule. The Crown put forward, as an alternative contention, the view that the damage which has occurred produced the result that whatever capital the company previously had at Hull was no longer “employed in its trade or business.” In my opinion, this contention is not sound. The fact that the Hull building has been so much damaged that it cannot at present be used as a threatre does not mean to me in itself to establish that the freehold site and what is upon it isl not still ‘employed in the trade or business.’

If the company decided to abandon the use of the site for the purpose of its business, different considerations might arise. If, however, the theatre was for other reasons, temporarily closed, or if it was in course of reconstruction and improvement, this would not justify the contention that it formed no part of the capital referred to in Part II of the Seventh Schedule. Even if it be the case that, for the purposes of excess profits tax, the capital employed in a trade or business of a company does not necessarily include all the capital of the company and it certainly expressly excludes investments held by a company, the income from which is not to be taken into account in computing the profits of the trade or business (Seventh Schedule, Part II, para 3), the asset at Hull must be regarded as still employed in the trade or business, even though it is not actively or productively employed in the accounting period.”

17. This decision is certainly authority for the view that the contention that the assets must have been actually employed or put in use before the value of such assets can be said to be capital employed in the business of the assessee, is not sound.

18. Mr. Rama Rao Sahib, the learned advocate for the department, however, referred to Birmingham Small Arms Co. v. I.R.C, 1951-2 All ER 296. The material facts are summarised in the first paragraph of the head note:

“On several occasions the factory of a company was severely damaged by enemy action, and it was agreed with the Board of Trade for the purpose of the Section 62(1) of the War Damages Act, 1941, that 22-11-1940 should be taken as the date from which interest should accrue in respect of any claim under the Act for compensation for the destruction of machine tools and plant. On 12-11-1945, the amount of the claim was finally agreed by the Board of Trade at £ 6,47,012. Payment was made in one sum in March 1947. In the assessment of the company to excess profits tax for the chargeable accounting period beginning 1-8-1940, and ending 31-7-1941, in computing the amount of capital employed in their trade or business, no account was taken of the right of claim to compensation.”

19. The Court ruled that the claim to compensation was not an asset, the value of which, during the chargeable accounting period in question, formed part of the capital employed in the business of the assessee.

20. It will be at once perceived that there is one important difference between that case and the instant case. In the English case all that the company had was a claim to compensation which might or might not materialise. In the case before us that is not so. The capital of the company had actually been expended in the acquisition of an asset in order that it might be put in use. All that happened is that the assessee was not actually able to do so.

21. Mr. Rama Rao Sahib referred to certain passages from the speech of Lord Simonds at page 299:

“My Lords, it is plain on the face of this sub-para (1) that ‘capital employed” means assets employed. For the capital is something which ‘consists’ of money or ‘consists’ of assets of various kinds. Then by a slight twist the “value” of the assets becomes the “amount” of the capital.” Again,

“My Lords, I see no valid reason for disregarding and giving no meaning to the word ‘employed’.” When, however, we read the speeches of the other learned Lords we find that this view that the assets should have been employed expressed by Lord Simonds was not accepted by them. Lord Radcliffe said:

“The test in computing capital is not whether an asset belonging to the proprietor of a business is employed in his business or not, but whether there is capital employed in his business consisting of this or that asset. In many cases, there is no difference at all between the two questions: in a few cases the difference may be important. But to treat them as the same question does tend to lead to a confusion that has not been absent from the arguments-in this case, for, whereas once capital has been introduced into a business it may naturally be regarded as still employed in it until such capital is lost or withdrawn. I have not been able to bring to my mind any clear conception of what is meant by an asset being employed in a business if it means something different from merely belonging to it. Your Lordships have been, in effect, invited to say that there is some pregnant meaning that should be attached to the word “employed” in this connection.

I do not think that I am being unfair to the argument of the respondents if I say that we were not presented with any set of words which were capable of defining what that pregnant meaning might be, apart from the suggested interpretation of the word “employed” as meaning “actively or productively employed during the accounting period” which has already been rejected by this House in the Terence Byron case, 1945-1 All ER 636………. My Lords, I do not think, that the words “capital employed in a trade or business” bear any significant difference of meaning from the words ‘capital of a trade or business.’ .. .. .. Throughout this section the word “employed” is used in reference to capital, but I take; it to be clear that it is not introduced with the purpose of drawing any distinction between the various kinds or measures of use to which assets may be put once capital of the business has come to consist of them.

They themselves may be money, or debts, or real or personal property, but if they represent a form in which capital of the business has clothed itself for the time being, no further question needs to be asked as to the nature of their contribution at any particular period to the conduct of the business …. …. …. But I think that it would take a good deal of argument to demonstrate that “capital employed in a trade or business” in Sch. VII to this Act has some meaning ascertainably distinct from ‘capital of a trade or business’, if the two phrases were, as I think, interchargeable under the former Act…….. Secondly, capital employed may consist of assets that are inherently unproductive’…………… I should have concluded from these indications and the legislative history of the words ‘capital employed’ that they were used in the present Act without any reference to the actual use made of particular assets during a particular period, once it could be said of them that they were a form of capital which had been put into the business.”

22. Lord Tucker was of the same view:

“My Lords, I agree with those of your Lordships who consider that authority, as well as the legislative history of the words ‘capital employed’, point to the conclusion that in their present context they do not refer to the actual use made of a particular asset in the relevant accounting period once it is shown to have been a form of capital put into the business and still there.”

23. To us it does not appear that the decision relied on by Mr. Rama Rao Sahib is authority for the position that the assets must have been put into use. It seems to us to be sufficient if the assets have been acquired for the purpose of the business, and, whether used or not, are still there and available for the use of the business. In the result, we answer the question referred to us in the negative and in favour of the assessee. The assessee will get its costs.

K.S.B

24. Answered in the negative.

Jayaram Mills Ltd. v. Commissioner Of Excess Profits Tax

Structured Summary of the Opinion — Balakrishna Ayyar, J.

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Department's Arguments (Appellant)

Assessee's Arguments (Respondent)

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Jayaram Mills Ltd. v. Commissioner Of Excess Profits Tax

Comments