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

c These arguments advanced on behalf of the petitioners were sought to be refuted by the learned Attorney General appearing on behalf of the respondents. The learned Attorney General contended that the expression 'capital employed' was neither a term of art nor an expression with a definite fixed connotation and it meant different things in different contexts. It did not necessarily include long-term borrowings and sub-rule (3) of Rule l 9A excluding long-term { borrowings from the computation of the, capital employed' could not therefore be said to be in conflict with sub-section (I) of Section 80J. It was also urged by the learned Attorney General in the alternative that, in any event, for calculating the relief under sub-section (I) of Section 80J, the stipulated rate of percentage was to be applied not just to the 'capital employed' without any further qualification but to the 'capital employed ..... computed in the prescribed m1nner". The manner of computation was left to be prescribod by Rules to be made by the Central Board of Revenue and according to the learned Attorney General, computation involved exclusion as well as inclusion of items which might be regarded as forming part of the 'capital employed' and sub-rule (3) which was an integral part of the process of computation laid down in Rnle l 9A did not therefore derogate from the provisions of sub-section (1) of Section 80J and was within the mandate of that section. The learned Attorney General repelled the contention of Mr. Palkhiwala that if sub-section (I) of Section 80J were read as conferring power on the Central Board of Revenue to exclude from the computation of the 'capital employed' G any item or items as it thinks fit without any guidelines being provided by the statute in that behalf, such power would be unfettered and unguided and would suffer from the vice of excessive delegation. The learned Attorney General pointed out that sub-section (I) of Section SOJ being a provision in a taxing statute, it had necessarily I to be left to the Central Board of Revenue to decide, having regard to changin(! economic circµmstances, what should from time to tim~ H

LOHIA MACHINBS v. UNION (Bhagwati, J.) 721 A be taken to be 'capital employed' for the purpose of calculating the relief allowable under sub-section (I) of Section 80J and moreover the Rules made by the Central Board of Revenue in that behalf were required to be placed before each House of Parliament for its approval and there was, therefore no excessive delegation involved in sub-section (1) of Section 80J leaving it to the Central Board of Revenue to prescribe how the 'capital employed' should be computed fl and what items should be included and what items excluded. H was also submitted by the learned Attorney General that the words used • in sub-section ( n of Section 80J in regard to the computation of the 'capital employed' were not 'capital employed during the previous year' but 'capital employed ..... in respect of the previous year." The words 'in respect of the previous year' were deliberately introduced c in sub-section \I) of Section 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 Section 80J was the 'capital employed in respect of the previous year' Rule 19A was therefore, according to the learned Attorney General, not in conflict with D sub-section (I) of Section 80J when it provided that the 'capital employed' in respect of the previous year shall be computed as on the first day of the previous year. The learned Attorney General pointed out that if rule !9A was valid in its entirety as contended for by him, no question of constitutional validity of the newly > introduced sub-section (IA) could possibly arise because what sub- E section (IA) did was merely to reproduce Rule I9A ipsissima verba • with effect from !st April, 1972 and it was clarificatory in nature. The learned Attorney General also contended in the alternative that even if Rule !9A was inva' din both respects as submitted by Mr. Palkhiwala and the other learned counsel appearing on behalf of the petitioners, the new sub-section (IA) introduced in Section 80J with retrospective effect from !st April, 1972 did not violate any of the fundamental rights under Article l 4 and l 9(l)(g) and was not unconstitutional or void.

These rival contentions raise interesting questions of law relating to the interpretation of sub-section (I} of Section 80J and the validity of Rule 19A. Now there can be no doubt that if the attack against the validity of Rule I 9A cannot be sustained and Rule 19A 1s held to be valid in its entirety, it would be unnecessary to examine the grounds of challenge urged on behalf of the petitioners -\ against the constitutional validity of the newly enacted sub-section (IA}, because in that event, sub-section (IA) would be merely enac- ting in statutory form the provisions in regard to computation of ff

722 SUPREME COURT REPORTS (1985) 2 S.C.R.

A the 'capital employed' which were in force until then in the form of rule 19A and the enactment of sub-section (IA) by way of amendment would be simply clarificatory in nature. The principal question which therefore arises for consideration is as to whether Rule 19A could be said to be in conformity with the mandate of sub-section B (I) of Section 80 J in so far as it is provided for exclusion of all borrowed monies including long term borrowings from computation of the 'capital employed' and enacted that computation of the 'capital employed' should be made as on the first day of the compu- tation period. The answer to this question depends on the true ·" I i -

interpretation of the language employed in sub-section (I) of Section 80J. But before we proceed to consider this question of inter- c pretation, it is necessary to point out that at least so far as exclusion of all borrowed monies including long term borrowings from compu- tation of the 'capital employed' is concerned, the position which prevailed right from 1st April 1949 to 31st March 1968 for a period of 19 years was that all borrowed monies due from the assessee were excluded in computing the 'capital employed' and no one challenged such exclusion as being in conflict with either Section I 5C or Section

84. It is undoubtedly true that merely because for a long period of 19 years, the validity of the exclusion of borrowed monies in computing the 'capital employed' was not challenged, that cannot be a ground for negativing such challenge if it is otherwise well founded. It is settled law that acquiescence in an earlier exercise of rule-making 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, 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 long period of time: if a rule is void, it remains void whether it has been acquiesces! in or not. Vide ., Proprietary Articles TraJe Associations v. A.G. of Canada. [1931] A. C. 310: A. G. for Australia v. Quein 95 C.L.R. 529. But when we are pointing out that for a period of 19 years the exclusion of borrowed monies from computation of the 'capital employed' was ilot challenged by any assessee and the validity of the Indian Income Tax (Computation of Capital of Industrial Undertakings) Rules 1949 and Rule 19 was not at any time assailed on the ground that they derogated from the provisions of Section I SC or Section 84, it is not for the purpose of supporting any plea of acquiescence but for the purpose of indicating that both the assessees as well as the Revenue proceeded on the basis that on a true interpretation of the language ff of Sections 15C and 84, it was within the competence of the Central

LOHIA MACHINES v. UNION (Bhagwati, J.) 723 A

Board or Revenue to exclude borrowed monies in computing the ., > r 'capital employed'. Not only the assessees and the Revenue but Parlialll~nt also approved of this interpretation of sections I5C and 84 and posited the validity of the Indian Income Tax (Computation of Capital of Industrial Undertakings) Ru.le 1949 and Rule 19 which provided for exclusion of borrowed monies in computing the 'capital B employed' for the purpose of giving relief under these Sections.

.. • l. Though the Indian Income Tax (Computation of Capital of Indus- trial Undertakings) Rule ! 949 provided in so many terms that bor- rowed monies shall be deducted in computing the 'capital' employed' for the purpose of Section I SC as originally introduced in the Indian Income Tax Act 1922, Parliament when it re-enacted Section !SC by c the Taxation Laws (Extension to Merged States and Amendment) Act 1949, did not seek to make any change in the Indian Income Tax (Computation of Capital of Industrial Undertakings) Rules 19·49 but . continued the same Rules providing for exclusion of borrowed monies. Parliament clearly proceeded on the hypothesis that the Indian •A. Income Tax (Computation of Capital of Industrial Undertakings)· D Rules 1949· in so far as they provided for exclusion of borrowed monies in computation of the 'capital employed' were within the mandate of' Section I SC and placed its seal of approval on such exclusion of borro •ed monies in computing the 'capital employed' for the purpose of Section !SC. The Indian Income Tax (Computa- tion of Capital of Industrial Undertakings) Rules 1949 thereafter E continued in force until 1st April 1962 when the Indian Income Tax Act 1961 came to be enacted and the Income Tax Rules 1962 were made. During this period Section l 5C was amended several times but though Parliament knew full well that the Indian Income Tax (Computation of Capital of Industrial Undertakings) Rules 1949 F provided for exclnsion of borrowed monies in computation of the 'capital employed'. Parliament did not make any change in the statute with a view to clarifying that borrowed monies were not intended to be. excluded. Even when the Income Tax Act 1961 was enacted, Parliament continued to use the same language in Section 84 as it did in Section 15C and did not make any change in the G language with a view to indicating that the Indian Income Tax (Computation· of Capital of Industrial Undertakings) Rules 1949 which had been made under Section 1SC did not correctly reflect the intention of Parliament. If Parliament thought that the Indian Income Tax (Co nputation of Capital of Industrial Undertaking) Rules 1949 in so far as they provided for exclusion of borrowed monies were not in conformity with its intention, Parli~ment could H

724 SUPRllME COUR!I' Rl!!IOIITS [1985] 2 S.C.R. A have easily made specific provision indicating its · intenti<ln In .tire clearest· terms when it enacted Section 84 in the Income TuAct

1961. Even after the enactment of Section 84, when Rule 19 was made with a view to giving effect to Section 81, that Rule again excluded borrowed monies from computation of the 'capital employed'. B It is interesting to note that though the Income Tax Rules 1962 which included Rule l 9 were lai1 before each House of Parliament soon after they were made as required by Section 296 of the Income Tax Act, 1961, neither House of Parliament expressed its disapproval ; ~

of Rvle 19 or made any modification in it and both Houses of Parlia· I ment thus gave their approval to Rule 19 knowing full well-and this c p·resumption niust be made in favour of members of eaeh·House,,.;that that Rule provided for exclusion of borrowed monies in computation of the 'capital employed'. We may make it clear that when we make I this comment. we should not be understood to say that even if.a Rule purporting to be made under a statute is outside the authority confeFred by the statute, It would still be valid and have the force of law if it is placed before each House of Parliament and is not disapproved by · either Hons. But what we wish to point out is that by not disapproving of Rule· 19, Parliament accepted the validity of the assumption that exclusion of borrwed monies in computation of the 'capital employed' was_ permissible under the terms of Section 84 .and cleat'ly indicated that ~uch exclusion of borrowed monies had its approval, Even after Section 84 was enacted and Rule 19 was made, there were several amendments made in Section 84 from time to time but on none of those occasions w.as any opportunity taken by Parlia- ment to set at naught what had been done by Rule 19 by way of exclusion of borrowed monies, assuming that Parliament .did not approve of it The result was thatthe exclusion of borrowed monieSciD complitatlon'of the 'capital employed' continued and that was plainly and indubitably in accord with the intention of Parliament. But wlu:n · Section 80J replaced Section 84 and Rule 19A was made with· a view to giving elfect to Section 80J, a change was deliberately brought about and Jong term borrowings from approved sources were brought into G computation of the 'capital employed'. This change was, however, short lived and vJith effect from !st April, 1972 the original position.was: restated. Tl\e Finance Mini~ter mad it clear by way of a preface in his Budget Speech that he proposed to exclude debentures and long term ,. borrowings in computation the 'capital employed' and in accordance. with this statement Rule l 9A was amended so as to exclude all. borrowed monies. The amending Rule was laid before.each House. of Parliainent and there was no dissent: or disapproval. It is not a. possible to believe that despite the statement of the Finance Minister

' ) . LOH!A MACHINE!I' ••. UNlfJN•(Bhagwati, J) 725 » , on,f.be' lloor of the House.and the 11l<!Gi11310I,the. amen~Jing Rule A ·./ before'. each House, Parliament was not awai-11 'M 1tq what the amended Rule l9A provided. Parliament must be P:fe!!Umed to hav.e known that Rule 19A was amended in accordance with the statement of the Finance. Minister and the amended Rule 19A provided for exclusion of borrowed monies in computing the 'capital employed' and yet B Parliament if it thought that such <litClusion was contrary to its trµe l J' , intent, did not take any. steps to rectify the position, Then again, while moving Finance (No, 2) Bill 1980, the Finance Minis.ter stated on tile floor of the House that the intention of Parliament has.always been to exclude borrowed monies in computing the 'capital employed' and therefore Section SOJ was sought to be amended by incorpo- c rating Rule 19A in Section with retrospective effect This legislative history traced· by us Clearly shows beyond doubt that Pa.rliament tluongoout, save in respect of the period from !st April 1968 to 31st /· March, 1972, approved of exclusion of borrowed monies in compu- ~ ting the 'capital employed.:. :as being in conformity with its intention and regarded such exclusfon as being within the terms qf Section I 5C D or Sectfon 84 or Section 80J as the case may be.

Now we turn to consider the language of sub.section. (IJ of section &OJ and while doing so, we may poii1t out that so, f11r 11~ this question is concerned, there is no material difference. l:>etween the > la11g11age of snb-secfjqn .(l) of Se~tion 801 and the lllnguage .<!fits E ) .. pre<!ecessor Sectiol)l;,namely, Section 15.C sub,sectiqn (l).and Section 84 s11b-section (!).The words use,d in S.ub-section (I) of. ~e~ti,on 80J are:"capital employed .. ., .. comp\lted in the pres9ribed m~imer';. '.J:'he stlltgt!lry rllte of petcenl~ge for, tb.<1< purpose of cajculati,n,g the; relief aJlQ,wfl.bJe 11nder S\l,b·s~qtion m of, S"1tion 80J, is to be .appljed not R jlJ!!t; to: th~.. 'PllPital· ,tlmployec!\ ~yto 1to, .,tbe; ''capital employed.,., .. cO.IIl!lllle\\;jn t\le .!lr~ribell ml!D»~Ji";. We shall Pf@llen1'yco,q.~d.er l,r<; tl)ll Cl(i'ecl., of the qu~Iifying words, "cooiputed in .. the preSJ<rib~d Jll<l!l!ler'', but .before, we. do that, we mµst ~first :exarn)µe,the tru~ ml!aning;rndJoiporl; ~f. the expression 'capital .emplpyep', for it 1s on thm ~'llPrllSSio.n ns~d in the Section· thatthe stroµgest reliance was G plac;~d, by ;)Yir. l'alkb.iwala and the entire argument advanced by him r.e.sted. ,M);. Palkhiw11laand the·other. learned counsel following upon him. · str9ngjy CO!;(tended that the expression 'capital, emp)oye!I' aGcq,i:ding to its commonly accepted meaning as also accori:Iing \o ·'"\the c,ounotation it .has acquir~d i~ commercial usage and accpqn- . tancy practice, w 0 uld necessarily mcludes, at the least, long tqm boqowjngs. and the Central Board of Revenue cannot uqder ·lhe guise of making I\ rule for. computation 9f the '.capital employed', ~llcl\lQC

'726 SUPREME COURT R~RTS [ 1985} 2 S.C.R. A long. term borrowings which constitut~ an essential part of the 'capital , ~ employed'. That would be clearly derogating from the provisions of '>· Sub-section (I) of Section SOJ and would be totally impermissible. . ' Now this contention would have had some force if the premise on which it is based were well-founded. But we are unable to agree with B Mr. Palkhiwala and the other learned counsel supporting him that 'capital employed', either in its legal sense· or in commercial parlance .J of accountancy practice, necessarily and· always includes long term ~ ' borrowings.

c Mr. Palkhiwala relied upon ·.passages from various text books on Business Management and ·Accountancy in support of his_ plea that 'capital employed' must necessarily include long term borrowings. One of the text-books on which reliance was placed by Mr. Palkhi- wala was ''The Internal Finance of Industrial Undertakings" by T.G. >. Rose where it is stated that "the total money in the business at any .L " D moment or the 'total capital employed' is to be found in the figure recorded at the foot of the assets columu in the balance-sheet, less any fictitious assets". This passage equates 'total capital employed' with the total money in the business at any moment. It is significant to note that the reference here is not just to 'capital employed' but to 'total capital employed'. Moreover this expression bas been used. -1( E in the context· of performance evaluation through profit resource •, ratio and this is made amply clear by a passage whil'h occurs .. subsequently in the same text book where it is observed that the "question of whether the T.C. is owned or borrowed is immaterial for this control figure. ·The Company is employing so much capital F in its·trading, and therefore that capital must turn over, through sales, to an extent sufficient to. provide a proper return on that capital" Mr. Palkhiwala also cited an extract from "Terminology of Coirt Accountancy" published by The Institute of Cost and Works r~ Accountants, UK. (October 1967} where the expression 'capital employed' is explained but we fail to see bow this explanation can "" G assist the argument of Mr. Palkhiwala,. because according to this ,, (;,

explanation the expression 'capital employed' can mean any one of the following three things : 'Total Capital Employed' which may include loans or 'Total Shareholders' Capital Employed' or 'Total Equity Capital Employed'. 'Then, reliance was placed on certaion passage from "The Director's Guide to Accounting and Finance" .(."--· by M.G. Wright dealing with the profitability ratio. The author points out in this passage that the "principal ratio that measures B profitability is the return on 'capital employed', This is a ratio which

· i.ollrA !.rA.cil1'NEs v. UNION (hhagwati, 1.) measures output to resource-use-in this case profit earned to the capital required to earn that profit" and then, in this context proceeds to add that 'capital employed' is generally accepted to mean the total of all the long term funds employed, that is, all sharehol· ders' funds plus long term borrowings. The long term borrowings are regarded as forming part of the 'capital employed' .because the object is to measure the profitability with reference to the total funds invested in the undertaking. This passage does not, in our opinion, lay down that the . expression 'capital employed' must necessarily and in all contetxs include long-term borrowings. Mr. Palkhiwala also relied on certain Balance Sheets given in "Modern Published Accounts" by R.S. Waldron and E.H D. Sambridge which undoubtedly treat long-term borrowings as part of 'capital c employed'. But it may be noted that this is done for determining the profitability ratio by measuring profit as a percentage of Operating CaJ?ital Emloyed and interestingly, the expression 'capital employed'. according to these Balance Sheets, also includes short-term borrowings. Mr. Palkbiwala also relied . on "Inter-Firm Comparison D of Financial Performance" by the Bombay Textile Research.Asso- ciation and "Dictionary of Business and Managcmcnt"by K.C. Parekh where 'capital employed' is defined to mean the total of share capital, reserves and long-term borrowings. But again it may be noted that this definition is for the purpose of evaluating financial performance and efficiency of management, the true measure of which can be ascertained by taking the ratio of profit earned to the total funds employed in the business. Then reliance was placed on "Principles ) and Practice of Management Accountancy" by J:L.Brown, "Finan· cial Manager's Job" by Elizabeth Marting and Robert E. Finley and "Glossary of Man~gement Accounting Terms" by the Institute of Cost & Works Accounting of India, where the expression 'capital employed' is understood to mean share capital, retained profits and long-term borrowings. But it may be pointed out that in these text- books also, the expression 'capital employed' has been used in the context of efficiency of business which is naturally measurable by considering what is the profit derived from deployment of the total funds in the business and since long term borrowings are also deployed in the business, the profitability of the undertaking cannot be evaluated without taking into account such long term borrowings which have gone in the earning of the profit. It is significant to note that even in "Principles and Practice of Management Accountancy" by J.L. Brown there is a highly revealing statement that in regard to 'capital employed', "there is a good deal of controversy among accountants over which ite~s should be included''. We .may tben H

l19s5J 2 s.c.tl. A refer to ~riot her· .text:book relied'· ()n by Mr. 'Palkhiwala, naiircly, ''Finance For rhe ·Non-Accountant" by L E. Reckley. The paS!!age from t)lis text' book cited by' Mr. Palkhiwala far from helping his argument, militates against it, for it concedes ih so many terms that "the expression 'capital employed' does have several possible inter· B pretation" and proceeds to add tha.t 'capi ta! employed' is frequently referred to as the total assets possessed by the concern and shown in its balance sheets, no deductions being made for any liabilities but "such is not afl'of the possible combinations leading to an assessment of the capital employed by any Company." It is no doubi true that .there are observations in "Principles and Practice of Managemeni" c by E.F.t. Brech as also irf'Table 2 annexed to Information Note No. HJ on "Return on Capital Employed" prepared by Ail 'll!clfa: Man~gement Association which support the Plea of Mr. Palkhiwala that 'capital employed' includes (unds received from Joan creditors bµt again it must be remembered that this meaning is giveO' to· the expression 'cap.ital employed' in the context of evaluation of pei-for· D mlnce and profitability by determining. whether the concern has , earned a satisfactory annual profit, having regard to the expected r.eturn on .the total funds employed in the business.

E : The balance sheets of some Companies were produced before us by Mr. Palkhiwala with a view•to showing that even according to accountancy practice, long.term borrowlngsare included in 'capital employed' but we do not think that the. se balance sheets assist the argument of Mr. Palkhiwala, for all these balance sheets are for years subsequent to the .arising of the present.. controversy and in most of tllrese balance sheet_s, the w.rds variously .used ;i,r.e "Total Funds Employed", "Source of Funds'', ,'.'Funds Employed" and "Net AliSets_ Employed" and ti1ey do not therefore throw any parti9ular light on the question before us. In fact, in the balance sheet of SOlllll,l!Y Pilkihgtons •Ltd. for the year ending 30th. June 1978 . prod11ced . ,by the learned Attorney General ·orl behalf of th..e Rewnue, .th~ *SF~iP: tion of the ·heading given is ''Capital Efilj)loyed and ,ao,ro}Vi~''., which shows that there is na uriiforin practice. aftreatiQ&~OJlil~rlll. borrowings as part af 'capital employed\ fin ·acco.untanQY.tP~i!;e. Mr. Palkhiwala also relied on certain extracts from C.arter'f f'Ad\'.~n" ced Accountsl·' and Spicer and Pegler's "Book keeping and Aoc_ou.nts" but these extracts dorm! more than· 6bow that in certain .contexts• the expressi6n 'capital efinol'>yed' would include .Jong ·<term borrowings. ·"

toHIA MACHINES v. UN/bN (Bhaglvati, J.) 729 Now' tlie learned tt<lrney General appearing on behalf of the A Revenue did not dispute proposition that in a given colltext the expres· · sion 'capital employed' mhy include long term borrowings. But his contention was that.this expression has no fixed definite connotation which would necessarily include long term borrowings and that in a given situation, it may include long term borrowings or it may not. B The meaning and content of the expression 'capital employed' would, contended the learned Attorney General, depend upon the context and the circumstances in which it is used. The learned Attoflley ' General pointed out, and in our opinion rightly, that the various passages relied on by Mr. Palkhiwala in support of his contention dealt mostly with business management and profitability and in those G passages, the expression. 'capital employed' was used in the context of business ·efficiency and performance evaluation with a view to measuring profitability by determining the capital output ratio and that is the reason why it was said in those passages that 'capital employed' would include long term borrowings. We agree with the Learned Attorney General that the expression capital employed' has D a variable meaning depending on the context in which it occurs and the purpose for which it is used. There are a number of text-book authorities which ·support this view in regard to the scope and ambit of.the expression 'capital employed'. Even J. Batty in his book on "Management Accountancy"-a book strongly relied on by ·lvlr. Pa!,\chiwala·has observed that "there is no generally accepted defini- E tion of the two essential terms (I) Capital Employed and (2) Profit". ) He then proceeds to observe "Capital employed is used to describe the investment made in a business. As noticed earlier, there is no generally 'accepted definition of the term. Somo accountants think of .one thing, whereas others think of another. One delinitiow may F Include certain assets and the other exclude them altogether. Anol>her definition ma)' consider ordinary share capital, thus measu- rinirhow much is actually invested by shareholders." He points out 'thfe!:opossible definitions of 'capital. employed', namely, (I) Gross Capital Employed, (2),Net Capital Employed and (J) Proprietors' Net Capital Employed. Bo also Members' HandbOdk of the Institute of G Chartered :.Aecoontants in 'Englatid and Wales affirms that the . e&pression' 'capitill' employed' means different things according to th& purpote-for which it is used a:nd points out that there are various m~ods· of computing 'capital employed' and classifies. 'capital e111ployed' into , three .:ategories, namely, (I) Share capital and res~rves; (2)Equity capital and 1eserves;and (3) total capital employed which would include debentures and other long term liabilities. To the same effect we find observation in "Framework of Accountancy" u

?:lo sui>REME couitt llEi>okts [\98S] 2 s.c.1t A by C.C. Magee where it is said "There are several possible defini- tions of the term 'capital employed' ...... The new worth of the business, ..... comprises ..... tbe 0,riginal capital contribution together ·with retained profit .. From the view point of ownership the net worth Mpital employed in the business and it is on the basis of this figure that ownership will judge the success or failure of manage- B ment." Of course, while making this statement it is conceded by the author that "a view is taken by some that capital employed should be defined as net worth plus long term loans" but the author maintains that "the effective capital, or capital employed in a business ...... or the net worth ...... is always Rule to the original c capital plus retained profit less any loss that may have been incurred.' So also in Business Accounting I by B. E. Elliott the expression 'capital employed' is used in more senses than one and it is pointed out that the income used to calculate the rate of return must be appropriate to the capital employed to generate that income. Carter in his book on "Advanced Accounts" (5th Edn. by Douglas Garbutt) D utters a warning against describing a borrowing, whether long·term or short, term as capital. He says; "Money borrowed by means of ordinary Joans, mortgages, debentures, bonds etc. is frequently spoken of as Loan Capital. Most accountants, however. consider it loose to describe such a liability as capital." We find that Palmer also in bis 'Company Law' disapproves of the expression Loan E Capital and emphatically state that this phrase, though frequently used in business circles, is in the eyes of a lawyer a contradiction in terms, because it is difficult to see how a debet can ever be regarded as capital. Jn fact, the looseness of the expression 'capital' is emphasise.d also by Gower in his "Principles of Modern Company Law" where he states that "Unhappily capital is a word of many different appli- F cations and even in the legal, economic and accounting senses with which we are concerned, it is used loosely and to describe different concepts at.different times although its users do not always recognise the fact." It will thus be seen that there is no unanimity amongst accountants and lawyers in regard to the question whether 'capital ~I I) G employed' necessarily includes long term borrowings. It is significant \ to note that even the High Courts have differed in regard to the "11 true meaning and content of the expression 'capital employed', the High Court of Madhya Pradesh· taking one view ·and some of the other High Courts taking another view. There can be no doubt that the expression 'capital employed' is susceptible of more than one interpretation and it may include long term borrowings or it may H

LoillA MAi:IiiNES v. UNION (Bhagwati, j,) 131 not, depending on the context and the' circumstances in which it is used. There is even doubt amongst lawyers and accountants whether short term borrowings can be regarded as forming part of the 'capital employed'. So1J1e balance sheets show short term borrowings as forming part of the 'capital employed' while others ilo not and even amongst counsel appearing befor~ us though Mr. B Palkhiwala conc~ded that short term borrowings would not form part of the 'capital empoloyed', Dr. Devi Pal vehemently contended to , the contrary. It is obvious that the expression 'capital employed' is not a term of art nor 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 term borrowings, whether or all categories or of any particular category or cate~ory or cate- c . gories depending on its environmental context. It is therefore not possible to accept the contention of Mr. Palkbivala and .the learned counsel supporting him that tbe expression 'capital employed' has a fixed definite connotation wliich necessarily and in all cases includes long term borrowings and it was therefore not competent to the Central Board of Revenue to truncate the full width and amplitude D of the expression 'capital employed' by making Rule l9A sub-rule (3 J excluding long term borrowings in computation of the 'capital employed'.

It is interesting to note that even during the period from l st E April 1968 to 31st March 1972 when Rule 19A sub-rule (3) stood unamended, it is only borrowings from an approved source repayable within not Jess than 7 years which were includible in computation of the 'capital employed' and not all long term borrowings. If the contention of Mr. Palkhivala were correct that all long term borrow- ings invariably and in all cases formed part of tbe 'capital employed' F and were liable to be included in the ,computation, the unamended sub-rule (3) of Rule 19A in so far as it excluded long term borrow· ings, other than those from an approved source and repayable within not less than 7 years, would be invalid as being in derogation of the provisions of Section 80J sub-sectiou (I). But the validity of the unamended sub-rule (3) of Rule 19A was at no time challenged on G behalf of the assessees and Mr. Palkhivala and the learned counsel • supporting him did not seem to contend that the unall\ended sub-rule (3) of Rule 19A was invalid. 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 categories in computation of the 'capital employed', it must follow H

[1985] 2 s.c.tl.. ¥ ~ 11~ry corollary . t)lat., the Centr,1d Board of Revenue could· c;q~ajly, ~ithout . exceeding the authority conferred upon.it, exclude all long term borrowings to which ever category they might belong. . ·

U is because the expression 'capital employed' has a variable IJ: meaning that •it has ·been ·enacted by the· Legislature that, for the purpose.of calculating. the relief allowable under Section 80J sub- section (I); the statutory pePcmttage'.must be applied to the 'capital employed as computed in the prescribed manner. How the 'capital emplgyed' shall be computed is left to be prescribed by the Central c Board•of Revenue· by making. Rule or Rules under Section 295 of J the Income Tip: Act; 1961. The process •of .computation would involve · both inclusion· and exclusion of-items which may possibly be regardea as.falling within the.expression 'capital employed'. The Central Board of Revenue may include some items and exclude some others while prescribing the manner of computation of the 'capital employed'. D This is the sense in which the word 'computed' has been consistently <I used by the Legislature while enacting legislation of this kind. Turning· to the earliest legislation where the word 'computed' has been used in relation .to the 'capital employed', we·find that in' the Excess Profits Tax Act, 1940 for determining the standard profits, the statutory percentage was required to be applied to the average E amouI\t of .capi\al .employed as computed in accordance with the Sec<md Schedule and the Second Schedule provided for inclusion of "'-·. certainAtel)ls and e11clusion of. certain others including bo.rrowed ' monies IUJ,d qebts. The Legislature clearly, in this statute, regarded exclusion of borrowed monies and ·debts as implicit in the process of computati 0n of the 'capital employed' or to .put it differently, ·~ according to legislative usage, computation of 'capital employed' could legitimately il!volve as .part of the process, exclusion of items such as borrowed monies and debts. So also in the Business Profits• Tax Act J~41. ~pd.the ~uper Tax. P.rofits Tax Act 1953. the word 'coll)puted' w~& used iq !he ~m~.sense ·as involving in the process · G · of computation of t\le. 'capital employed', •exclusion of borrowed • monies. and <j.ebts. Similarly in the Companies (Profits) Sur Tax Act !964 also, the word 'compµted' has been .used in the same sense. Of co.urse it. may be pointed out that in this statute th.e word • 'computed' has.been usedin. relation to the 'capital ofthe company' and .not in .r~lation to the 'capital employed' but that would make no difference, because .what we are concerned with here is •the H I\ sei;i,w in "1¥.h.ich the. wore! ~computed' has been .used and· whetMll·it

. loil1A MACHINEs v, UNION (Bhagwati, J.) involves the process of exclusion as well as inclusion and on that point, the Act analo3ically throws considerable light; The s(atutory , dedu~tion which roust be made from the char&eable profits for the •.( purpose of determining the charge of Sur Tax under this statute is defined to mean "an amount equivalent .to ten per cent of the capital of th'e company as computed in accordance with the provisions of the Second Schedule'; and the Second Schedule after its amendment by Finance Act 66 of 1976 does not provide for, inclusion of borrowed monies and dabts in 'computation of the capital of the company • thoqgh it. provides for inclusion of the. paid U{l share capital and reserves. It will thus be seen that there is legislative hisiory behind · the use of the word 'computed' in relation to the 'capital employed l c and It has.been legislatively recogojsed as involving, .as part of the process of computation. both inclusion as well .as exclusion·<][ items which may otherwise be regarded as forming part of the 'capital eropl0yed'. It is in the context of this background and not by way , of a virgin attempt that the word 'computed' bas been used by the D Legislature in relation to the 'capital employed' in Section 801 sub· (I section (I).

It-may be noted that even in the Income Tax Act, 1961 the word 'computed' ha• been consistently used in relation to 'income' in the sense of involving b'oth inclusion and excltrSian · of items of income: Section 2 clause {46) defines 'total income' to ·mean the total- amount of income referred to in Section 5 "computed·in the manner laid down in 'this Act." Now, if we look at the provisions in the Incl:line Tax Act, l 961, which lay down the manner of computation of the total income, it would be cleanhat the prodess of computation· of•tt>tal ineome involves bbth indusion and exclusion of varrous items F, ' of'filcome-. Section·!O pr6vides that in computing the·tbtal illcon'le of a pteviOus year of any person, any mcome falling within any of the clauses of that sectiotr shill! not be included In the total income, th6ugh ~tich income whi_ch in'equired to be excluded is undoubtedly income and therefore part of ibtal incollle according to the plain natural connotation of that expression, ·But it is tequited t() be ,: exciuded in lleteh'rli!ling the cbnrge of fax because·, 'tdtal income' is defined as'total arlto\int df il\come, "computed in· the manner laid down in the Act".

The same position obtains ·also in regard to Section l l and i_t excludes. certain categories of income in computation. of the total income:. then, we may refer to Section 29 which provides tha:t'the I('

. SUPREM~ doURf REPoRTS [19ssj 2s.c.a.

income from profits· and gains of business and profession shall be computed in accordance with the provisions contained in Sections 30 to 4-1A. These Seet1on provide for inclusion and exclusion of various items in computing the total income. Sections 80A to 80VV also provide for deductions to be made in computing the total income and under sections such as 80HH, 80JJ and 80 0, even an item which B indisputably forms part of incomo of an assessee, is required to be excluded in computing the total income chargeable to tax. No one has ever argued and indeed it is impossible even to conceive of such an argument, that when Section 2 clause (45) defines total income as • the total !!mount.of income computed in accordance with the provi- c sions of the Act, what is indubitably part of income cannot be excluded in the computation. However, the argument of Mr. Palkhi- \>ala was that in the case of definition of 'total income' the exclusion of items of income in the process of computation is provided for by the Legislature itself and is not purported to be done by any rule making authority. The Legislature, stated Mr. Palkbivala, ca.n cut down· the width and amplitude of the expression "total amount of income" by expressly providing that particular item or items shall be excluded in the computing of the total amount of income, but the rule making authority cannot do so, because by doing so, it would be derogating from the provisions pf the statute. Now we have already pointed out that since the expression 'capital employed' has a variable. E · meaning which in a- given case may or may not include borrowed monies, the Central Board of Revenue, could, in exercise of its rule making power, exclude borrowed monies in computation of the 'capital employed' and.in doing so it would not in any way be acting contrary to the mandate of the statute. But the point which we wish to emphasise here, while referring to the definition of 'total income' in .Section 2 clause (45), is that the word 'computed' has been used by the Legislature as comprehending with.in its scope not only inclusion but also exclusion of certain items of income which are admittedly and with.out doubt, part of the income of the assessee. We find that even in some of the sub-sections of Section 80J the word G 'computed' has been used in the same sense as involving bOth inclu- sion. and exclusion: The second proviso to sub-section (4) of Section 80J. provides that where any building or part thereof previously used for any purpose is transferred to the business of the industrial undertaking, the value of the building or part so transferred shall not be ·taken into account in computing the 'capital employed' in the industrial undertaking. So also Explanation 2 to the same sub- section enacts in so many terms that in a case falling within its scope · H

LOHIA MACHINES v. UNION (Bhagwati, J.) A and ambit, "the total valne of the machinery or plant or part so transferred shall not be taken into account in computing the 'capital employed in the. industrial undertaking." Then again, the Expla- nation to sub-section (6) of Section 80J makes a similar provision for exclusion of "total value of the building machinery or plant or B. part so transferred" in computing the 'capital employed' in the case of business of a hotel. It will thus be seen that; even according to these provisions in Section 80J, the process of computation of .the 'capital employed' can legitimately exclude item or items which are plainly and indubitably part of the 'capital employed'. Of course the exclusion enacted by these provisions fa made by the Legislature c and not by the rule making authority, but again, if we maiempba· sise, the point is not whether an exclusion is made by the Legislature or by the rule making authority but whether such exclusion is implicit in the process of computation so as to be comprised in it. And on this poiut not only the provisions of the Excess Profits Tax Act, 1940, the Business Profits Tax Act, 1947 'the Super Profits Tax Act, 1963. and the Companies (Profits) Sur Tax Act, 1964 but also the various provisions of the Income Tax, Act, 1961 referred to by us, clearly indicate that the word 'computed' bas been used by the Legfalature in sub-section (I) Section iOJ as involving not only inclusion but also exclusion of items which may otherwise be regarded as falling within the expression 'capital employed'. It is left by the Legislature to the Central Board of Revenue as rule making authority to prescribe the manner in which the 'capital employed' shall be computed and in so prescribing, the Central board of Revenue may include or exclude items which may be regarded as forming part of the 'capital employed', F

Mr. Palkhivala, however, contended, relying on the expression "c~mputed in the perscribed manner", that what is left by the Legislature to the Central Board of Revenue is merely to prescribe the manner in which the 'capital employed' shall be computed and G 'manner' can only mean mode in which the computation has to be made and under the guise of prescribing the mode of computation, the Central Board of Revenue cannot, to use the words of Mr. Palkhivala, "encroach upon the substance of the statutory subject matter" or "remould the substance of the capital employed". Mr. Palkhivala in support of this contention relied on the meaning of the word 'manner' given in various dictionaries and also referred to various decisions including the decision of the Privy Council.in Utqh H

796 ' Sttl'REMB COURT RllPOllTS [1985) 2 s.c.R.

Co11struq./ian v. Pataky{\),11niJ the detisio11.of this Court in S~les Tax \- Qffic~r v., KL Abraham(~). Bnt we do not ti;\ink tl\ere is any substaµce in this, cpntentipn of Mr. P'!lkbiva]l}. When the Central llollrd ofRevonu<l prescribes by making rule or rules what items, sbi\ll \'e inclu,ded and what. items e11cludei:I in computation of tl\e 'capital employed', there. qan be n,o doubt thl!,t, ru;cc;mling to. the plain gram· matical meaning oC the .wqrds used, what the Central 8Qard of Re,venue daesjs ,to prescribe the manner oJ mode of comput11tion of the 'capital employed' by I11yii;tg dowlJ.,M·to how the 'capital emptp· yed',shall be comp!1ted anq _tl)a(Jvould. b~ cJearlY witllin th~ rule ml\l>ing.authority conferred upon the Central Board of Revenue, c '!:he; enti,re premise of t]je argun:iqnt Qf Mr ..P11lkqivala was t]jat by CJ1cb1ding long term borro;v,ingsfrom t.be computation of the ',:apjtal employed',, tlie Central. Bo11rd .of. Revenue woulg. be encroaclring upon.or remoulding .the substa1we..of.tb.e '~apital employed' but; as we have already pointed O!Jt, the expression '\)llpital employed' bas a vaiiable.meaning which llll\Y or may not incluqe> Jong-tecni borrow• ings1111d tl:lerefQre, if the Central j3oard of Revenue. lllllkes r11Je or. rut~ providing.for exclusion 0 f )png-term borrowings in cpnipu.- tatiop of tbe 'capital emplqyed', t])ere can, be no q\lcstion of encro.a· ching upon or ren;ic;mlcling tbc sµb~tance of the '.capital employed!. Ib~t.would be.clearly. wi.thin the authority ofthl' central Board pf ( E ~evenue .to prescri!:>.e the manner or moqe of computation of the 'capital,emplo~ed'., The conclusiol) must therefore inevitably follow, •, t])at even if long-term borrowil)gS . could be said to form part of 'capit11I employed'-and·indeed as pointed by us, they, can in a given context-form part of the 'capital employed'-it ,was competent to the Central Board of Revenue in exercise of its rule making power to F' prescribe that, in computing the 'capital employed', borrowed monies and debt& shall be excluded.

It may be pointed iont that.the Central Bliard of Revenue, iii making~ub-rule{3)<>f Rule;l9Nhad earlier precedents fot it ·and did-not write on a clean.slate .. Thtearliest precedent·was tht ·Bxcess· Profits Tax Act 1940; where'as pointed out·above; an express enact' ment was made in Second Schedule providing for exclusion ofborro. wed monies and debts·in computing the average amount of 'capital eiltployed' for the purpose of determining the standard profits.· The , same scheme was replicated in the Business Ptofits . Tax Act 1947

(I) [1965] 3 All E.R.f 650. '(i • (2)• [19&7)'3S.C.R. 518:

' LOIDA MACHINES i>. UNION (Blragwati, J.)

where again an express provision· was made in the Second Schedule to ., T that Act thaMhe oapital of the company shall consists of "its paid up share capital of the company shall consist of "its paid up share capital and its reserves", thus excluding borrowed monies and debts. Similarly under the Super Profits Tax Act 1963 also a specific pr0> vision was enacted in the Second.Schedule to that Act that the capita oftbe company shall be computed on the basis of its paid up capital plus reserves so that, in consequence, borrowed monies and debts shall be excluded in computation of the capital of the company. What the· Central Board of Revenue did in enacting sub-rule (3) of Rule !9A was to follow the precedent set in these three statutes and to make a similar provision excluding borrowed monies and debts in computation of the 'capital employed'. The Central Board of Reve- nue could not in the circumstances be said to have acted arbitraily or whimsically or in an irrational or. unusual manner in enacting sub-rule (3) of Rule !9A as alleged by Mr. Palkhivala.

It may be noted that under all the above three statutes namely the Excess Profits Tax Act 1940, the Business Profits A.ct 1947 and the Super Profits Act 1963, interest on borrowed monies and debts was deductible in computing the profiits and gains of the business and it appears that it•1ns in consequence of this provision for deduc- tion of interest in computation of the profis and gains of the business that borrowed monies and debts were excluded in computation of the ' 'capital employed' or the capital of the company, as the Cl\Se may be. This becomes abundantly clear if we consider the provisions of ano- ther statute enacted by the Legislature, namely, the Companies (Pro- fits) Surtax Act 1964. This Act has undugone severaltamendments from time to time and is still in force. It imposes a special tax on the profits of certain companies and in Section 4 it provides that there shall be charged on every company for every assessment year com- mencing on and from !st April 1964 a tax called Surtax in· respect of so much of its chargeable profits of the previons year as, exceed the statutory deductioll' at the rate 'or rates specified in the Third Sche- G dule. The ~xpression 'chargeable profits' is defined in sub·section (5) of Section 2 to mean the total income of an assessee computed under Income TaxAct 1961 for any previous year and adjusted in accor- dance with the provisions of the First Schedule. The definition of "statutory deduction" is to be found in sub-section (8) of SectiOn 2 where it is defined as "an amount equal to ten per cent of the capital of.the company as computed in accordance with the provisions of the Second Scbedule·or an [amount of two bun6red thousands rupees H

738 SUPREME COURT REPORTS (1985) 2 S.C.R.

which ever is greater" .. The First Schedule lays down the rules for computing the chargeable profits and prior to the amendment of the Act by Finance Act 66 of 1976, Rule 3 of the First Schedule provi- ded that the net amount of income calculated in accordance with Rule 2 shall be increased intet a/ia by "the amount of any interest B payable by the company in respect of debentures referred to in Clau- se· (iv) or monies referred to in Clause (v) of Rule l of the Second Schedule for the previous year relevant to the assessment year allowed as a deduction in computing its total income". The Second Schedule sets out the Rules for computing the capital of a company and Rule '4. -' I as it stood prior to the amendment provided that the capital of a c company shall be the aggregate of the amounts, as on the first day of .)'

the previous year relevant to the assessment year, of its paid up share capital and reserves as set out in clauses (i} to (iii) and of : .

"(iv) the debentures, if any, issued by it to the public; D Provided that according to the terms and conditions of issue of such debentures, they are not redeemable before the expiry of a period of seven years from the date of issue thereof ; and

E (v) any moneys borowed by it from Government or the Industrial Finance Corporation of India or the Indus- trial Credit and Investment Corporation of India or any other financial institution which the Central Govern- ' ment may notify in this behalf in the Official Gazette or any banking institution (not being a financial institution F notified as aforesaid) or any person in a country ouside India :

Provided that such moneys are borrowed for the crea- tion of a capital asset in India and the agreement under which such mpneys are borrowed provides for the repay- G ment thereof during a period of not less than seven years."

Thus it will be .seen that when the amounts of the debentures and long term borrowings from approved sources were included in .. computation of the capital of a company, the amount of interest payable by the company in respect of such debentures and long term borrowings was required to be added back to the total income for the purpase of arriving at the chargea~le profits liable to sur-tax. But by Secti~n 29 of Finance Act 66 of 1976 Cla11ses (iv) and (v) of Rule l

LOHIA MACHINES v. UNION )Bhagwati, J.) 739 A of the Second Schedule were deleted with the result that the endeb- • J tures, if any, issued by a company as also long term borrowings from a proved sources were no longer includible and were consequen- tly excluded in computing the capital of the company. It is significant to note that when this exclusion of debentures and long term borro· wings from approved sources was made, Rule 3 of the First Schedule B was also simultaneously :<mended by Section 29 of Finance Act 66 of 1976 and the provision for adding back the amount of interest pay • • able by the company in respect of debentures and long term borrow- ings from approved sources was deleted It is obvious from this amendment of the Companies (Profits) Surtax Act 1964 as also from the provisions in the earlier three statutes that the consistent practice c adopted by the Legislature over the years has been-and this practice reflects the legislative intent and will that whenever interest payable on borrowed monies is either not deducted or if deducted is added

. > back in computing the total income. such borrowed monies are inclu- ded in computation of the 'capital employed' or capital of the company and similarly when interest payable Qil borrowed monies is deducted in computing the total income is not added back, such borrowed monies are excluded in computation of the 'capital emplo· yed' or capital of the company. Here in the present case, so far as sub-section (I) of Section 80 J is concerned, interest payable on borrowed monies is 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 practice adopted and recognised by the Legislature in these various statutes, to exclude long term borrowings in compu- tation of the 'capital employed', for the purpose of allowing relief under sub-section (l) of Section 80J. F

Mr. Palkhivala, however, contended that there was a vital distinction between the Excess ·Profits Tax Act 1940, Business Profits Tax Act 1947, Super Profits Tax Act 1963 and Companies (Profits) Surtax Act 1964 on the one hand and sub-section (l) of Section 80J G on the other, in that the object of each of the four statutes above referred to was the exact opposite of that of sub-section (I) of Section 80 J. These four statutes, urged Mr. Palkhivala, aimed at levying additional tax over and above income tax in respect of excess profits or supper profits made by a company and since super profits or excess profits are profits in excess of a fair return on the owner's capital staked in the business, each of the four statutes, for determing the excess profits or[super profits, provided specificall~ that, the tt

740 SUPRE)l!E COTRT REPORTS (1985] 2 S.C.R. A abatement from the profits shall be calculated by reference only to the assessees own capital without taking into account any borrowed monies and debts Mr. Palkhiva!a contended that since the legislative • intent was to give ahatement from the profits only by reference to the assessees own capital the abatement was rightly calculated by refe- B rence only to the paid up capital and reserves, though in the case of the Companies (Profits) Surtax Act 1964 as it stood prior to its amendment by Finan~e Act 66 of 1976, the Legislature chose to be more liberal and allowed even debentures and long term borrowings • from certain approved sources to be taken into account in computing the capital of the company, But, said Mr. Palkhivala, the position c is entirely different under sub-section (1) of Section 80J because the principal object of this statutory provision is to offer tax incentive and it could not have been intended by the Legislature that the tax incentive should be limited only to statutory percentage of the asses- see's own capital and not take into account 'borrowed capital'. This .. ,, contention of Mr. Palkhivala, plausible though it may seem, is totally unfounded Mr. Palkhi¥f1la, in our opinion, is trying to make a distinction which does not exist, and we must reject his contention based on such supposed distinction.

E It is no doubt true that the object of the Excess Profits Tax Act 1940, Business Profits Act 1947, Super Profits Tax Act 1963 and the Companies (Profits) Sur Tax Act 1964 is different from that of sub- section (I) of Section 801 in that the· four statutes belonging to the former group seek to tax excesss profits or super profits while the statutory provision in the latter group seeks to offer tax incentive by exempting a certain portion of the profits. But so far as the question of computation of the 'capital employed' is concerned, we are unable to see any distinction between the above-mentioned four statutes on the one hand and sub-section (I) of Section 80J on the other. In the case of the former what are sougnt to be taxed are the excess profits over what may be regarded as fair return on 'capital employed' and in the case of the latter also, it is the fair return on 'capital employed' that is sought to be exempted from tax. Though the object of the two sets of provisions is different, the concept of fair return on 'capi- ta! employed' lies at the base of both sets of provisions. If for the purpose of determining the excess profits liable to the charge of addi- tional tax under any of the afore-mentioned four statutes, fair 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

LOH!A MACHINES v. UNION (Bhagwati, J.) 741

fair return on the 'capital employed' which is to be exempted from A ._ ~ tax under sub-section ( i) of Section 801, the ownter's capital alone should be taken into account and borrowed monies should be excluded. Even in regard to the provisions of the abovementioned four sta\utes, an argument could well be advanced that borrowed monies are as much part of capital employed in the undertaking as ll the owner's capital and when monies are borrowed on payment of interest by way of hire charges, they become part of the owner's • capital originally brought in by the owner and there is no reason why capital partaking of the samd characteristics as the fair return should nat he allowed on it. This has precisely been the argument advanced on behalf of the assessees in support of their c contention that 'capital employed' must include borrowed monies in sub-section (I) of Section 801 But this argument has not prevailed with the Legislature in the enactment of any of the above-mentioned four statutes and despite this argument the Legislature has chosen to exclude borrowed monies in computing the 'capital employed' or the capital of the company for determining what should be regarded as D fair return, so that profits in excess of such fair return may be subjec- ted to additional tax. The Central Board of Revenue cannot therefore be accused of any irrationality or whimsicality in providing that fair return on the 'capital employed' eligible for exemption under sub- section I) of Section 801 should be calculated by applying the statu- tory percentage to the owner's capital, that is, the paid up share capi- E tal and reserves without taking into account long term borrowings or • for the matter of that, any borrowed monies and debts. We cannot appreciate the contention of Mr. Palkhivala that when the Legislature was offering a tax incentive it could not have intended that the tax incen- tive should bemeasureable by reference only to the owner's capital and that borrowed capital should be left out of account, because that would, in the submission of Mr. Palkhivala, result in favouring the aflluent assessees who are able to employ their own capital and discriminate against the indigent who have to borrow funds to finance their under- takings. Having regard to the legislative parctice and usage referred to by us, it is obvious that if the Legislature intended that the capital employed' must include long term borrowings, the Legislature would not have used the flexible expression 'capital employed' but would have expressed itself unambiguously by providing that the 'capital employed' shall include long term borr,1wings. It is clear from the language used by the section that the Legislature proceeded on the ' -1' basis that the expression 'capital employed' has no fixed definite \ meaning including or excluding long term borrowings and delibera- tely chose to leave it to the Central Board of Revenue to prescribe H

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

A how the 'capital employed' shall be computed or in other words, what items shall be included and what items excluded in computing the 'capital employed' and by incorporating \ . Rule l 9A with retrospective effect in Section 80J by the Finance (No. 2) Act 1980, the Legislature clearly expmsed its ap- roval of the manner of computation of the 'capital employed' pres- B cribed by the Central Board of Revenue by making sub-rule (3) of Rule J9A. The consequence of this interpretation would undoubtedly ~ be that the assessees would get relief only with reference to their own • I capital and not with reference to any monies which might have been borrowed by them for employment in the undertaking but that is a c matter of policy which clearly falls within the province of the Execu- tive and the Courts are not concerned with it. It is obvious that the Central Board of Revenue intended-and having regard to the retros- pective amendment of Section 80J by Finance Act (No. 2) of 1980 that must also be taken to be the intention of the legislature-that the assessees should be given relief only with reference to their own capital and not with reference to any borrowed monies, presum- ably because the object of giving relief was to encourage assessees to bring out their own monies for starting new industrial undertakings and the intention was not that the assessees should be given relief with reference to monies which did not belong to them but which were borrowed from financial institutions and other parties and which would have to be repaid.

Mr. Palkhivala then contended that if sub-section (I) of Section 80J were construed as leaving it to the Central Board of Revenue to prescribe what items shall be included and what items excluded in computation of the 'capital employed' it would be vulnerable to attack on the ground of excessive delegation of legislative power and would consequently be void. We do not think there is any substance in this contention, for there is in the present case no question of excessive delegation of legislative power. The essential legislative policy of allowing relief to an assessee who starts a new industrial undertaking or business of a hotel and declaring the period for which such relief shall be granted, is laid down by the Legislature itself in the various sub-sections of Section SOJ and all that is left to the Central Board of Revenue to prescribe is the manner of computation of the 'capital employed' with reference to which the quantum of the relief is to be calculated. It is only the details relating to the working of the exempting provision contained in Section 801 which are left by the H Legislature to be determined by the Central Board of Revenue. This

LOHIA MACHINES I'. UNION ( Biiagwati, f) 743 is clearly permissible without offending the inhibition against exces- A sive delegation of legislative power. It must be remembered that Section 80J enacts an exemption in a taxing statute and a certain margin of latitude is always allowed to he Executive in working out the details of exemption in a such taxing statute. It was laid down by this Court as far as back as 1959 in Pt Banaarsi Dass Bhanot v. State B of Madhya Pradesh(1) .

• "Now, the authorities are clear that it is not unconsti- tutional for the legislature to leave it to the executive to determine details relating to the working of taxation laws, such as the selection of persons on whom the tax is to be .. c laid, the rates at which it is to be charged in respect of different classes of goods, and the like."

So also in Sitaram Bishambardas and Ors. v. State of U.P. and > Ors.(2) this Court upheld the validity of Section 30 (I) of the U.P. D Sales Tax Act 1948 which authorised the levy of a tax on the turn- over of first purchases made by dealer or through a deaLr acting as a purchasing agent, in respect of such goods or class of goods and at such rates, subject to a maximum, as may from time to time be noti- fied by the State Government and Hegde, J. speaking on behalf of the Court observed : E

• "It is true that the power to fix the rate of a tax is a legislative power but if the legislature lays down the legisla- tive policy and provides the necessary guidelines, that power can be delegated to the executive. Though a tax is levied primarily for the purpose of gathering revenue, in selecting the objects to be taxed and in determining the rate of tax, various economic and social aspects, such as the availability of the goods, administrative convenience, the extent of eva- sion, the impact of tax levied on the various sections of the society etc. have to be considered. In a modern society taxation is an instrument of planning. It can be used to achieve the economic and social goals of the State For that reason the power to tax must be a flexible power. It must he capable of being modulated to meet the exigencies of the situation. In a Cabinet form of Government, the executive

(I) (1959] S.C.R. 427. (2) [1972] 2 S.C.R. 141. H

744 SUPREME COURT REPORTS [19851 2 s.c.R. A is expected to reflect the views of the legislatures. In fact in most mattters it gives the lead to the lcgisatlure. However, much one might deplore the "New Depotism" of the exe- cutive, the very complexity of the modern society and the demand it makes 0n its Government have set in motion B forces which ha e made it absolutely necessary for the legis- latures to entrust more and more powers to the Executive. Text book doctrines evolved in the I 9th century have become out of date. Present position as regards delegation of legis- • lative power may not be ideal, but in the absence of any better alternative, there is no escape from it. The legisla- c tures have neither the time, nor the required detailed infor- mation nor even the mobility to deal in detail with the innumerable problems arising time and again. In certain matters they can only lay down the policy and guidelines in as clear a manner as possible."

D The validity of Section 3D of the U.P. Sales Tax Act 19<8 was again challenged beforo this Court in Hirata/ Ratan Lal v. State of U.P. and Anr (') the same ground that it suffered from the vice of legislative power and again, the challenge was negatived by this Court with the following observations : .E "The only remaining contention is that the delegation ma4e to the executive under s. 30 is an excessive delega- • tion. It is true that the legislature cannot delegate its legislative function, to any other body. But subject to that qualification, it is permissible for the legislature to delegate F the power to select the persons on. whom the tax is to be levied or the goods or the transactions on which the tax is to be levied. In the Act, under s. 3 the legislature has sought to impose multi-point tax on all sales and purchases. After having done that it has given power to the executive, G a high authority and which is presumed to command the majority support in the legislature; to select for special treatment dealings in certain class of goods. In the very nature of things, it is impossible for the legislature to ennumerate goods, dealings in which Sales. Tax or Purchase tox should be imposed. It is also impossible for the legislature to select the goods which ohould be subjected to

H (IJ [1973) 2 S.C.R. 502.

LOHIA MACHINES V, UNl'JN (Bhagwati, J,) 745 A a single point sales or purchase tax. Before making such selections several aspects such as the impact of the levy on the society, economic consequences and the administrative convenience will have to be considered. These factors may change from time to time, Hence in the very nature of things, these details have got to be left to the executive," B

The principles laid down in these observations from the decided • cases clearly govern the present case and conclusively repel the conten- tion or Mr. Palkhivala that if sub-section ( l) of Section 80J were construed in the manner suggested by the learned Attorney General on behalf of the Revenue, it would be rendered void on the ground c of excessive delegation of legislative power, The Legislature having laid down the legislative policy of giving relief to an assessee who is starting a new industrial unpertaking or the business of a hotel, had necessarily to leave it to the Central Board of Revenue to determine what should be the amount of capital employed that should be required to be taken into that account for the purpose of determining D the quantum of the relief allowable under the Section. What should be the quantum of the relief allowable to the assessee would necessa- rily depend upon diverse factors such as the impact of relief on the industry as a whole, the response of the industry to the grant of the relief, the adequacy or inadequacy of the relief granted in promoting E • -· the growth of new industrial undertakings, the state of the economy prevailing at the time, whether it is buoy"'t or depressed and administrative convenience. These are factors which may change from time to time and henoe in the very nature of thin~s, the working out of the mode of computation of the 'capital employed' for the purpose of determining the quantum of the relief must necessarily be left to the Central Board of Revenue which would be best in a position to consider what should be the quantum of the relief necessary t<> be given by way of tax incentive in order to promote setting up of new indus- trial undertakings and hotels and for that purpose, what amount of the 'capital employed' should form the basis for computation of such relief. G

Moreover, it may be noticed that under Section 296 of the Income Tax 1961 every Rule made under the Act is required to be laid before each House of Parlia.nent so that both Houses of Parlia- ment have an opportunity of knowing what the rule is and conside- ring whether any modification should be made in the rule or the rule should not be made or issued and if both Houses agree in making any modification in the rule or both Houses agree that the H

146 SUPREME COURT REPOi!.TS (1985) 2 S.C.R. A Rule should not be made or issued, then the Rule would thereafter have effect only in such modified form or have no effect at all. as the case may be. 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. This is a strong circumstance which militates B against the argument based on excessive delegation of legislative power. This view receives considerable support from the decision of the Privy Council in Powell v. Appo//o Candle Company Limited(') > ' . where the Judicial Committee, while negativing the challenge to the I constitutionality of Section 133 of the Customs Regulation Act of 1879 which conferred power on the Governor to impose tax on c certain articles of import, observed as follows:

"It is argued that the tax in question has been imposed by the Governor and not by the Legislature who alone had power to impose it. But the duties levied under the Order-in D Council are really levied by the authority of the Act nnder which the Order is issued. The Legislature has not parted with its perfect control over the Governor, and has the power, of course, at any moment, of withdrawing or altering the power which they have entrusted to him. In these cir- cumstances, their Lordships are of opinion that the judgment E of the Supreme Court was wrong in declaring Section 133 of the Customs Regulation Act of 1879 to be beyond the pow.er of the Legislature. •

The same approach was adopted by this Court in D. S. Grewal F v. State of Punjab( 2) where upholding the validity of Section 3 of the All India Services Act 1951 which was challenged on the ground of excessive delegation of legislative power, Wanchoo, J. speaking on behalf of the Court said:

"Further, bys. 3 the Central Government was given G the power to frame rules in future which may have the effect of adding to, altering, varying or amending the rules accep- ted under s.4 as binding. Seaing that the rules would govern the all-India services common to the Central Go{ernment and the State Government provision was made by s.3 that rules should be framed only after consulting the State

(!) [1885) 10 A.C. 282. H (2) (19,9] Supp. I S.C.R. 792.

Loli1A MACHINES v. UNION (BhagMati, i) 141

Governments. At the same time Parliament took care to see that these rules were laid on the table of Parliament for fourteen days before they were to come into force and they were subject to modification, whether by way of repeal or amendment on a motion made by Parliament during the session in which they are so laid. This makes it perfectly clear that Parliament has in no way abdicated its authority, but is keeping strict vigilance and control over its delegate.

It will thus be seen that there is no question of excessive delegation of legislative power in the present case and, even on the view as to interpretation taken by us, sub-section (I) of Section 80J c cannot be assailed as unconstitutional on the ground of excessive delegation of legislative power. We must therefore hold that sub- rule (3) of Rule I 9A in so far as it provided for exclusion of borrowed monies and debts and particularly long-term borrowings in computation of the 'capital employed' could not be said to be ' outside the rule making authority conferred on the Central Board of D Revenue under sub-section (I I of Section 80J and was a perfectly valid piece of subordinate legislation.

That takes us to the second point urged by Mr. Palkhivala relating to the dimension of time in regard to the expression 'capital E

.. employed'. The argument of Mr. Palkhivala was that the concept of 'capital employed' in respect of the previous year is a concept which compels attention to the reality of the capital used during the whole year and not merely on the first day of the computation period and therefore Rule 19A in so far as it provided for computation of the F 'capital employed' as on the first day of the computation period was ultra vires the rule making authority of the Central Board of Revenue under sub-section (I) of Section. 80J This argument of Mr. Palkhivala is also unsustainable and must be rejected. It may be noted that when sub-section (I) of Section 80J speaks of 'capital employed' in an industrial undertaking or business of a hotel, it does G 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 the expression "during the previous year" and the expression "m connection with the previous year". The argument of Mr. Palkhivala would have had great force if the reference in sub-section (I) of Section 80J would have been to 'capital employed' during the previous year. Then it could have been con- tended with considerable plausibility that the 'capital employed' H

748 SUPREME COURT REPORTS [19851 2 s.c.R. A cannot be computed as on the first day of the preivous year, but it should be taken to be the average amount of 'capital employed' during the previous year. But the expression used by the Legislature )n sub-section (I) of Section SOJ being "capital employed ..... com- puted in the prescribed manner in respect of the previous year", the B computation has to be in respect of the previous year and it need not take into account the average 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' so computed would clearly fall within the expression "capital employed ......... computed c in the prescribed manner in respect of the previous year". Mr. Palkhivala relied on the description given in the parenthetical portion at the end of sub-section (I) of Section 80J which describes the amount calculated by applying the statutory rate of six per cent to the 'capital employed' computed in the prescribed manner in respect of the previous year as "the relevant amount of capital employed during the previous year", but that is merely a description given to the amount calculated as provided in the main part of sub-section (I) of Section 80J and in the main part, we find the words "in respect of the previous year" and not "during the previous year". It may be pointed out that the words "in respect of the previous year" were introduced for the first time when Section 80J came to be enacted as a result of the Report of Shri S. Boothalingam, where he recom- mended that the prevailing "base for the calculation of profits. nemely, average 'capital employed' in the business during each year" was complicated and difficult to establish and it was therefore desirable to adopt the basis of computation of the 'capital employed' F as "at the beginning of the year but ignoring the fresh introduction of capital in the course of the year". It was following upon the introduction of the words "'in respect of the previous year" in sub- section (I) of Section 80J that Rule 19A was made providing for computation of the 'capital employed' as on the first day of the computation period. Moreover, if we refer to the definition of G 'statutory deduction' in sub-section (8) of Section 2 and Rule I of the Second Schedule of the Companies (profits) Surtax Act 1964, it would be apparent that, according to the Legislature, the process of computation of the capital of the company includes also the specification of the point of time as on which the capital of the company shall be computed. Therefor<, even if the words "in respect of the previous year" were absent, it would have been competent to the Central Hoard of Revenue as the rule making authority to H provide for the computation of the 'capital employed as on the

LOli!A MACHINES v. UNION (A.N. Sen, J.) 749 A first day of the computation period, as was done by the Legislature in the case of the Companies (Profits) Surtax Act 1964. The words "in respect of the previous year" are facilitative of the computation of the 'capital employed' being prescribed as on the first day of the computation period. We cannot therefore accept the contention of Mr. Palkhivala that Rule 19A in so far as it provided for com- B putation of the 'capital employed' as on the first day of the computa- tion period was outside the rule making authority of the Central Board of Revenue under sub-section (I) of Section 80J.

We are therefore of the view that Rule I9A in so far as it excluded borrowed monies and dabts in computatipn of the 'capital c employed' and provided for computation of the 'capital employed' as on the first day of the computation period was not ultra vires Section 80J and was a perfectly valid rule within the rule making authority conferred upon the Central Board of Revenue. So also, for the same reasons, Rule 9A in so far as it provided that the 'capital D j employed' in a ship shall 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 dabts incurred in acquiring that ship must be held to be valid as being within the rule making authority of the Central Board of Revenue. Since, on the view taken by us, Rule I 9A did not suffer E from any infirmity and was valid in its entirity, Finance Act (No.2) of 1980 in so far as it amended Section 80J by incorporating Rule 19A in the Section with retrospective effect from lst April 1972, was merely clarificatory in nature and must accordingly be held to be valid. F The writ petitions will therefore stand dismissed but having rogard to the importance of the questions involved in the writ petitions, we think it would be fair and just to direct each party to bear its own costs of the writ petitions. G A.N. SEN, J. I have had the benefit of reading the judgment prepared by my learned brother Bhagwati, J. I regret I cannot pursua<le myself to agree.

The material facts have been fully stated in the judgment of my learned brother. My learned brother in his judgment has set out all the relevant provisions of the Income Tax Act and the Income Tax Rules. He has also traced the legislative history of S.80J of the Ii

?so SUPREME COURT REORTS [1985] 2 s.c.fl. A Jncome Tax Act, 1961 and has noted the various amendments effec- ted to that section from time to time. It does not, therefore, become necessary to reproduce the same at any length in my judgment. The two questions which fall for determination are:-

(1) Whether rule 19A of the Income-Tax Act Rules inso- B far as the said rule excludes borrowed capital and fixes the first day of the year in the matter of computation of capital employed for the purpose of reltef under section 80J is valid.

(2) Whether the amendment introduced in S. 80J by the c Finance (No.2J Act of 1980 incorporating in the section the provisions of the rule in relation to the exclusion of borrowed capital and the fixing of the first day of the year for the purpose of computation of the capital employed for granting relief under S. 80J with retros- a pective affect from I st April, 1972 is valid ?

The material provisions of Rule l9A read as follows:-

(!) For the purposes of S. 80J, the capital employed in an industrial undertaking or the business of a hotel shall be computed in accordance with sub-rules (2) to (4), and the capital employed in a ship shall be computed in accordance with sub-rule 5). ... ( 2) 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 tbe case of assets entitled to depreciation, their written down value; G (ii) in the case of assets acquired by purchase and not entitled to depreciation, their actual cost to the assessee;

(iii) in the case of assets acquired other-wise then by purchase and not entitled to depreciation, the value of the assets when they became assets of the 11 business;

WHIA MACHINF.S V. UNION (A..N. Stn, J.) 751 A . ..., . ) (iv) in the case of assets being debts due to the person 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. B

Explanation 1: In this rule, ''Computation period" means the period for which profits and gains of the indus- trial undertaking or business of the hotel arc com- puted under sections 28 to 43A. c

Explanation 2: The value of any building, machinery or plant or any part there of as is referred to in cl. (a) or clause (bl of the explanation at the end of sub- section (6) of section 80J shall not be taken into account in computing the capital employed in n the industrial undertaking or, as the case may be, the business of the hotel.

Explanation 3: Where the cost of asset has been satisfied other- wise than in cash, the then value of the consi- E deration actually given for the asset shall be treated as the actual cost of the asset.

(3) From the aggregate of the amount 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 amount due towards any liability in respect of tax )

G Rule 19A forms a part of the Income-Tax Rules 1962 which have been framed by virtue of the authority conferred under section '.<95 of the Income-tax Act 1961. Section 295 lays down :

"(I) The Board may subject to the control of the Central Government, by notification in the Gazette of India, make rules for the whole or any part of India for carrying out the purposes of this Act;

752 SUPREME COURT REORTS [1985] 2 s.c.R. A ( 2) In particular, and without prejudice to the gene- rality or the foregoing power, such rules may provide for all or any of the following matters:- X X X It may be noted that the matters mentioned in sub-section (2) B do not refer to section 80J of the Act

The relevant provisions or S. 80J as it stood prior to the ). • impugned amendment by the Finance Act 2 of 1980 material for the 1 purpose of the present proceedings may be set out : c "( l). 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 com- D puting the total income of the assessee, a deduction from such profits and gains (reduced by the aggregate of the deducthns, 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 indus- E trial undertaking or 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 em- ployed during the previous year) ... F (2) The deduction specified in sub-section (l) shall be allowed in computing the total income in respect of the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or to operate its cold storage plant or plants or the ship is first brought into use or the business of the hotel starts functioning (such assessment year being hereafter, in this section, referred to as the initial assessment year) and each of the four assessn'ent years immediately succeeding the initial assessment year. x x x (4) This section applies to any industrial undertaking which ft1lfills all the following .conditions, namely:-

LOHIA MACHNES v. UNION (A.N. Sen, J.) 753 A (i) it is not formed by the splitting up, or the recons- truction, of a business already in existence;

(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any

., purpose;

(iii) it manufactures or produced articles, or operates B

·" one or more cold storage plant or plants. in any part of India, and has begun or begins to manu- facture or produce articles or to operate such plant or plants, at any time within the period of (thirty- c three yearsJ next following the fst day of April, 1948, or such further period as the Central Govern· ment may, by notification in the official Gazette, specify with reference to any particular industrial undertaking; D (iv) in a case where the industrial undertaking manu· factures or produces articles, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power : E

Provided that the condition in clause (i) shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial under- taking as is referred to in S. 33B, in the circumstances and F within the period specified in that section;

Provided further that, where any building or .any part thereof previously used for any purpose is transferred to the business of the industrial undertaking, the value of the building or part so transferred shall not be taken into .G account in computing the capital employed in the indus- trial undertaking:

Provided also that in the case of an industrial under· taking which manufactures or produces any articles spacified in the list in the Eleventh Schedule, the provisions of clause (iii) shall have effect. as if for the words 'thirty-three years', the word 'thirty-one years' had been substituted." I!

754 SUPR3ME COURT REPORTS [1985) 2 S.C R. A I propose to take up first the question of. the validity of the Rule. I consider this will be the proper course to adopt If the Rule is held to be valid, the question of the amendment with retrospec- tive effect may not require any consideration at all. If, on the other hand, the Rule is held to be invalid, the question of the validity of B the amendment assumes vital importance. The invalidity of the Rule, on the basis of the arguments advanced, may also have a bearing in deciding the validity or otherwise of the amendment.

The rule must be held to be valid, if the rule is found to be in •. " conformity with and consistent with the section. If, however, the • c rule is found to be inconsistent with and contrary to the provisions of the section, the rule has to be pronounced invalid.

Whether the rule is in conformity with and is consistent with the section or whether the rule is inconsistent with and contrary to the provisions of the section, must necessarily be determined on D a proper interpretation of the section.

Principles of construction of any statute or any statutory provision are well-settled. The purpose of ir;terpretation of any statute is to gather the true intention of the Legislature. It is well- settled that "if the words of a statue are clear and unambiguous, E they themselves indicate what must be taken to have been the intention of Parliament and there is no need to look elsewhere to discover their intention or their meaning". (See Halsbury's Laws of England, 4th Edn. Vol. 44 at P. 522). When the words of a statue are clear, plain or unambiguous, it becomes the duty of the Court F to expound those words in their natural and ordinary sense, as the words used themselves best declare the intent of the Legislature. If on a fair reading of a section, the words used appear to be plain and unambiguous and are reasonably susceptible to one meaning only, Courts must give effect to that meaning, unless such a meaning makes a non-sense of the section or leads to absurdity. The Court is G not concerned with the policy involved or with the results, injurious or otherwise, which may follow from giving effect to the language used. Jn Emperor v. Banoari Lal Sarma,(l) Viscount Simon, L.C. observed at P.55:-

"Again and again, this Board has insisted that in enacted words we are not concerned with the policy involved

(!) A.I.R. 19451P.C.J48.

LOHIA MHOHINES v. UNION (A.N. Sen' J,) 755

construing or with the results, injurious or otherwise, which may follow from giving effect to the language used".

In Kanti Lal Sur v. Paramnidhi Sadhukhan,(I) this Court at P. 910 held:-

"If the words used are capable of one construction only, then it would not be open to the Comts to adopt any other hypothetical construction on the ground that such hypothetical construction is more consistent with the alleged object and policy of the Act".

If, however, the words of a statute are not clear and are c ambiguous; different considerations may apply in interpreting the provisions for gathering the true intention of the law-giver. It is stated in Halsbury's Laws of England, 4th Edn. Vol. 44, in para 858 at P. 523, as follows:

"If the words of a statute are ambiguous, the inten- D tion of Parliament must be sougth first in the statute itself, then in other legislation and contemperaneous circumstances and finally in the general rules laid down long ago, and often approved namely, by ascertaining (I) what was the common law before the making of the Act; (2) what was

- the mischief and defect for which the common law did not provide; (3) what remedy Parliament resolved and appointed to cure the disease of the commonwealth, and (4) the true · • reason of the remedy" •

As on a fair reading of S. 80J, I am satisfied that the section is sufficiently clear and the language used therein suffers from no ambiguity, it does not become necessary for me in the instant case to consider at length the principles of interpretation which are requ· red to be observed in construing an ambiguous statute.

The material provisions of S. SOJ of the Income-tax Act, prior to the impugned amendment by the Finance Act, 1980, have been earlier set out. The relevant provisions of the said section provide that where the gross total income of an assessee includes profits and gains derived from an industrial undertaking or ship or the business ~ of a hotel to which the section applies, there shall, in accordance -1._ with and subject to the provisions of the section, be allowed in

(I) A.LR. 1957 S.C. 907. H

756 SUPREME COURT REPORTS [1985] 2 S.C.R.

A computing total income of the assessee, a deduction from such profits-and gains (reduced by the deduction, if any, admissible to I y- the assessee under S. 80HH or S. 80HHA) of so much of the amount thereof as does not exceed an amount calculated @ 6 % per annum on the capital employed in the industrial undertaking or ship or business of tbe hotel as the case may be, computed in the manner prescribed in respect of the previous year relevant to the assessment year (the amount calculated aforesaid being hereinafter, in thi connection referred to as the relevant amount of capital employed \ '- • during the previous year).

c For qualifying for relief under this section, an assessee must derive profits and gains from an industrial undertaking or ship or the business of a hotel to which the section must be applicable. It is not in dispute that the assessees who have approached the Court have derived profits and gains from industrial undertaking set up by them and they qualify for relief under this section. D A plain reading of the section with reference to the language used therein clearly postulates that relief as contemplated in the section is to be allowed on the capital employed in the undertaking in the previous year, producing the profits and gains of the under- taking in the previous year. An undertaking might have had capital

- which might not have been employed in the undertaking in previous year for earning profits and gains which were earned in the previous year. Such capital, though forming part of the capital of the under- taking, will not be entitled to the benefit of the relief under this section. Relief is contemplated only on the capital which was emp- loyed in the undertaking in the previous year and which produced in the previous year the profits and gains of the undertaking which were included in the total income of the assessee in the previous year. Relief under this section for the undertaking is clearly intended on the capital employed in the undertaking which produced the profits and gains of the undertaking in the previous year. This intention is made manifestly clear, as relief has to be granted on the basis of the profits and gains earned by the undertaking in the previous year by virtue of employment of capital in the undertaking in the previous year. The. capital empl?yed in the undertaking which qualifies for relief under this Section clearly refers to and must necessarily be the capital employed in the undertaking in the previous 1' year for the purpose of earning the profits. If the capital employed ,r in the undertaking is own capital, such capital qualifies for relief. If capital employed is borrowed capital, sue\! capital will equally

LOHIA MACHINES v. UNION (A.N. Sen, J,) 757 A •• 1 qualify for relief. If capital employed consists of assessee's own _, capital and also his borrowed capital, the capital so employed, assessee's own and borrowed, will both qualify for the relief. The capital employed in the undertaking in the previous year which qualifies for relief under this section has to be computed in the 8 manner prescribed. There is nothing in the section to suggest or .:-~ indicate that in prescribing the manner of computation of the capital • ,employed in the undertaking for the purpose of relief, any part of the capital which was employed in the undertaking for producing the profits and gains can be excluded. If the Legislature had any such intention for excluding any part of the capital employed in the c undertaking producing profits and gains of the undertaking, the Legislature would have and could have easily made suitable provi- sions. The Legislature must be presumed to have known that the ,_ capital employed in an undertaking may consist of and, in fact, ~ does consist of assessee's own capital and also capital borrowed by •the assessee. It is common knowledge that most of the undertakings D carry on their activities with borrowed capital in addition to own capital employed in the undertakings. Inspite of the knowledge of the Legislature that undertakings ate carried on with borrowed capital, the Legislature in its wisdom has in this section mentioned capital employed in the undertaking for earning profits and gains of E ~ the undertaking without making any distinction between own capital ,._, and borrowed capital and has provided for relief in respect of the 'capital employed in the undertaking on the basis of profits and gains • of the undertaking earned by virtue of employment of such capital. It is not disputed and cannot be disputed that profits and gains of the undertaking to be ultimately included in the total ir come of the assessee are produced by the capital, whether assessee's own or borrowed, employed in the undertaking in the relevant year and while ~ .i"Omputing profits and gains of the undertaking the borrowed capital • is as important as the assessee's own capital and both play the same role in earning the profits and gains of the undertaking. It is the capital employed in the undertaking which qualifies for relief under this section. irrespective of the nature and source of the capital employed in the undertaking. It is, however, to be emphasised that the capital to qualify for relief under this section, whether borrowed or own, must be employed in the undertaking in the previous year ;for earning profits and gains and any capital of the undertaking, T !Jorrowed or assessee's own which remains idle and is not employed in the undertaking for earning profits and gains dose not qualify for any relief under this section, H

758 SUPREME COURT REPORTS [1985] 2 S.C.R.