Meaning of “Capital employed”

The meaning of capital employed under section 80J of the Income Tax Act is not defined in the act itself. But we can take guidance from decisions by various high courts. Here are excerpts of courts orders in which the Hon’ble High Court tried to explain the meaning of capital employed.

Meaning of capital employed defined by court

The phrase ‘capital employed’ used in section 80J of the Income Tax Act came up before various high courts as detailed under :

1. Hon’ble Himachal Pradesh High Court explained the meaning of ‘capital employed‘ while delivering judgment in CIT vs. Mohan Meakin Breweries Ltd. [1980] 122 ITR 203 (HP) as under :

Meaning : The expression ‘capital employed’ found in the section itself cannot be cons-tructed as carrying the meaning ‘capital used or utilised’. Any asset purchased for the undertaking is ‘capital employed’ in that undertaking.

2. Hon’ble Madhya Pradesh High Court explained the meaning of ‘capital employed‘ while delivering judgment in CIT Vs. Anand Bahri Steel & Wire Products [1982] 133 ITR 365 (MP) as under :

Meaning : The word ‘capital’ in the business world means the net worth of an enterprise and thus necessarily excludes the borrowings. In batliboi’s advanced accounting, 19th edn., P. 78 It is stated that ‘capital is the excess of a trader’s assets over his liabilities’. Similarly, in encyclopaedia britannica (macropaedia), vol. 3, P. 799, It is observed that ‘in the business world the word ‘capital’ usually refers to an item in the balance sheet representing that part of the net worth of an enterprise that has not been produced through the operation of the enterprise’.

It is, therefore, wrong to assume that the expression ‘capital employed’ is not open to construction and that it does not embrace moneys borrowed by the assessee and invested in the industrial undertaking. It may be that in some context the expression ‘capital employed’ may include the borrowed moneys or borrowed capital; but that in the context of section 80j the expression does not include borrowed moneys, and debts, as it is in this sense that this expression has been understood right from 1949.

Section 80J of Income Tax Act

Deduction in respect of profits and gains from newly established industrial undertakings or ships or hotel business in certain cases.

80J. [Omitted by the Finance (No. 2) Act, 1996, w.r.e.f. 1-4-1989.]

In this article, you can get guidance from high courts on the meaning of capital employed under section 80J of the Income Tax Act.

Updated up to Finance Act 2021