The Judgment of the Court was delivered by

Sabyasachi Mukharji, J.:— In this application I am concerned with the assessment made under the Income-tax Act, 1961, for the assessment year 1972-73. The petitioner is a public limited company. For the aforesaid assessment year the petitioner claimed relief under section 80J of the Income-tax Act, 1961, and in view of the contentions urged in this application it is necessary to refer to the relevant portion of the assessment order dealing with this question. The said assessment order stated, inter alia, as follows:

“(vi) Relief u/s. 80J.

The assessee claimed Rs. 49,69,033 under section 80J for the year on the basis of average capital. For reasons discussed in the preceding year, the assessee's claim is disallowed. The claim is confined to Rs. 21,85,515 as under:

Rs. Rs. 21,85,515 1,49,56,675 (a) Assets entitled to depreciation: Written down value of fixed assets as on 30-9-1970 as per last asstt. order 3,73,26,323 (b) Assets not entitled to depreciation: Land as per balance-sheet as on 30-9-1970 8,91,979 (c) Current assets: As per balance-sheet as on 30-9-1970 3,08,08,326 Total assets 6,90,26,628 [as per rule 19A(2) deduct the following as per balance-sheet as on 30-9-1970 (as per rule 19A(3))] (i) Current liabilities and provisions 53,40,400 Less: Provision for excise duty on Polymer Chips on the ground that the same is not ‘due’ within the meaning of cl. (iii) of Expln. at foot of r. 19A(3) 13,96,000 39,44,400 (ii) Loans (secured & unsecured) 2,86,56,984 3,26,01,384 3,64,25,244

2. It appears that in accordance with rule 19A(2) of the Income-tax Rules, 1962, for the purpose of granting relief on the capital employed the aggregate amount of the value of the assets on the first day of the previous year has been taken to be the basis. Rule 19A(2) in so far as it directs/that the capital employed on the first day of the computation period should be taken as the basis has been held by me to be beyond the scope of section 80J of the Act and as such not within the competence of the rule-making authority. I have so held in Civil Rule No. 2887(W) of 1972 [Century Enka Ltd. v. Income-tax Officer [1977] 107 ITR 123 (Cal)]. For the reasons given in the said judgment I must hold in this case also that, so far for the computation of capital employed the aggregate amount of the assets on the first day of the computation period has been taken as the basis, it is invalid and the Income-tax Officer must recompute the same in the light of the observations made in the aforesaid judgment. In this case, however, counsel on behalf of the revenue sought to argue that in view of section 296 of the Act the question whether the rule was beyond the purpose of the Act did not really fall for consideration. It was urged that section 296 of the Act enjoined that the rules framed by the Central Government should be placed before Parliament, and the same might be modified by Parliament. This is one of the methods by which the legislative forum maintains supervision over the subordinate authority in respect of delegated legislation. But by this process the rules framed by the delegates do not become legislation of Parliament. In some statutes where it is intended by the legislature that the rules when framed should have the effect of the statute, the rule-making power in such statutes has specifically provided for such situations; for instance, in the Central Excises and Salt Act, 1944, before its amendment in 1973, section 38 had provided that the rules when framed under the Act would become part of the statute. If such was the position in the instant case different considerations might have arisen and it might have required consideration as to whether such rules which by the provisions of the Act are directed to be part of the statute could be considered to be beyond the jurisdiction of the rule-making authority. Even where an Act provides that the subordinate legislation shall have the effect as if enacted in the Act, in England it has been held it did not prevent the same being questioned in court on the ground of inconsistency with the Act. See the decision in the case of Minister of Health v. The King [1931] AC 494 (HL). Such, however, is not the position in the instant case. Under section 295 of the Income-tax Act, 1961, the Board is only authorised to make rules to carry out the purposes of the Act. As was observed by the Supreme Court in the case of Commissioner of Income-tax v. Taj Mahal Hotel [1971] 82 ITR 44 (SC), the rules framed under an authority could only be for carrying out the provisions of the Act and could not take away what was conferred by the Act or whittle down its effect. Inasmuch as I have held that the purpose of section 80J was being whittled down by rule 19A(2), I have held that such rule was beyond the compentency and jurisdiction of the rulemaking authority. In England in the case of Institute of Patent Agents v. Lockwood [1894] AC 347 (HL) it was held that where statute provided for laying of the rules before Parliament and Parliament had the authority to annul the rules, such a provision would make the rules beyond challenge on the ground of incompetency of the rule-making authority. But in India the position is different. Subordinate legislation cannot be said to be valid unless it is within the scope of the rule-making authority. See the decision of the Supreme Court in Kerala State Electricity Board v. Indian Aluminium Co. Ltd. (1976) 1 SCC 466 : AIR 1976 SC 1031.

3. The second aspect, however, which was urged in this case was regarding the validity of sub-clause (3) of rule 19A, which is 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 borrowed moneys and debts due by the assessee (including amounts due towards any liability in respect of tax) not being,—

(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 agreement under which such moneys are borrowed provides for the repayment thereof during a period of not less than seven years.

Explanation.—For the purpose of this sub-rule,—

(i) ‘approved source’ means the Government or the 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 the State Financial Corporations Act, 1951 (LXIII of 1951);

(b) the Industrial Development Bank of India, established under the Industrial Development Bank of India Act, 1964 (XIX of 1964);

(c) the Madras Industrial and Investment Corporation of India Ltd.;

(d) the Refinance Corporation of Industry Ltd.;

(e) the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (XXXI of 1956);

(ii) “tax” means—

(a) income-tax or super-tax (including advance tax), due under any provision of the Act;

(b) wealth-tax due under any provision of the Wealth-tax Act, 1957 (27 of 1957);

(c) super profits tax due under any provision of the Super Profits Tax Act, 1963 (XIV of 1963);

(d) surtax due under any provision of the Companies (Profits) Surtax Act, 1964 (VII of 1964);

(iii) any liability in respect of tax shall be deemed to have become due—

(a) in the case of advance tax due under any provision of the Act, on the date on which the payment first became due; and

(b) in the case of any other tax, on the first day of the period within which it is required to be paid.”

4. Therefore, from the aggregate of the amounts as on the first day of the computation period, borrowed moneys and debts due by the assessee except certain amounts mentioned in sub-rules (a) and (b), are to be excluded. Therefore, the borrowed capital employed in the new industrial undertaking except to the extent indicated in sub-rule (a) and sub-rule (b) cannot be taken into consideration according to sub-rule (3) of rule 19A in computing capital employed for the purpose of granting relief as contemplated under section 80J. On this basis in the instant case loans secured and unsecured to the extent of Rs. 2,86,56,984 have been deducted. Section 80J provides as follows:

“80J. Deduction in respect of profits and gains from newly established industrial undertakings or ships or hotel business in certain cases.—(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, 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 assessee under section 80H and section 80HH) 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 industrial undertaking or a ship or business of the hotel, as the case may be, computed in the prescribed manner in respect of the previous year relevant to the assessment year, the amount calculated as aforesaid being hereafter, in this section, referred to as the relevant amount of capital employed during the previous year.”

5. Section 80J, in my opinion, allows deduction in respect of the profits and gains from the new industrial undertaking in the contingency mentioned in the section, and the relief is granted on the basis of “capital employed in the industrial undertaking”. Therefore, the relief is on the capital employed in the industrial undertaking. The authority of the rulemaking body is to prescribe rules for computation of that capital. But the relief is not restricted to capital employed in the shape of the assessee's own money. What is necessary for the grant of the relief is employment in the new industrial undertaking and employment in the shape of capital. These are the two ingredients of section 80J in order to be entitled to this benefit. As I have mentioned in the judgment referred to hereinbefore, the purpose of section 80J was to encourage employment of capital in particular industries covered by section 80J. As was observed by the Supreme Court in the case of Indore Malwa United Mills Ltd. v. State of Madhya Pradesh [1965] 55 ITR 736 (SC), at page 740, that after borrowing by a company the money becomes the company's money. It is not really necessary even for the purpose of the benefit under section 80J that the money should become the assessee's money. The section does not provide that the capital employed must be out of the money belonging to the assessee. Therefore, borrowed money if it is employed as capital in a new industrial undertaking, in my opinion, is entitled to computation. In this connection on the expression “capital employed in a trade or business” for the purpose of excess profits tax in England, reference may be made to the observations of the House of Lords in the case of Birmingham Small Arms Co. Ltd. v. Inland Revenue Commissioners [1951] 2 All ER 296 (HL), at pages 303 to 305 of the report. Indeed, the rule itself also provides for the relief in respect of borrowed capital but it restricts relief in such cases only to the extent the borrowings are by way of debentures or moneys from approved sources as defined in the rule. There is, in my opinion, no warrant for restricting the computation of capital in the manner done and in so far as rule 19A(3) does so, in my opinion, it is violative of the authority given under section 80J and is not carrying out “the purposes of the Act”. I, therefore, hold that rule 19A(3) in so far as it directs exclusion of borrowed capital except from the approved sources is ultra vires, being beyond the power of the rule-making authority.

6. The assessment order is, therefore, set aside and the Income-tax Officer is directed to make a fresh assessment making a fresh recomputation on the basis of the observations contained in this judgment as well as in the judgment in Civil Rule No. 2887(W) of 1972 [Century Enka Ltd. v. Income-tax Officer [1977] 107 ITR 123 (Cal)].

7. The rule is made absolute to the extent indicated above.

8. There will be no order as to costs.

9. There will be a stay of operation of this order for six weeks from date.