Full Judgment Text
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PETITIONER:
CAMBAY ELECTRIC SUPPLY INDUSTRIAL CO. LTD.
Vs.
RESPONDENT:
THE COMMISSIONER OF INCOME TAX, GUJARAT-IIAHMEDABAD (AND VIC
DATE OF JUDGMENT11/04/1978
BENCH:
TULZAPURKAR, V.D.
BENCH:
TULZAPURKAR, V.D.
CHANDRACHUD, Y.V. ((CJ)
CITATION:
1978 AIR 1099 1978 SCR (3) 660
1978 SCC (2) 644
CITATOR INFO :
R 1985 SC1585 (18,19,22)
E&R 1986 SC1727 (7)
ACT:
Income Tax Act, 1961 Sections 32(2), 33(2), 41(2), 72 and
80E(1)-Computation of the mode in which and the fund from
which deduction of 8% under Section 80E(1) is to be made,
explained.
HEADNOTE:
The assessee company carries on the business of generation
and distribution of electricity at Cambay and as such is
covered by the provisions of Section 80E(1) and is entitled
to claim the deduction contemplated by the said provision.
During the accounting period which ended on March. 31, 1967
i.e. assessment year 1967-68, the assessee Company earned an
income of Rs. 46,319/- from its business. The assessee
company had sold some of its old machinery and buildings
resulting in balancing charges contemplated by section 41(2)
which worked out to Rs. 7,55,807/-. There were unabsorbed
depreciation of Rs. 1,42,955/- and unabsorbed development
rebate of Rs. 1,11,658/aggregating to Rs. 2,54,613/- of the
earlier years which were required to be set off against the
profits of that period. The Income Tax Officer, while com-
pleting the assessment treated the item of Rs. 7,55,807/- as
profits attributable to the business of generation and
distribution of electricity and allowed deduction at 8%
thereon under Section 80E(1). The Income Tax Officer, thus
computed the relief/deduction admissible to the assessee
under section 80E(1) at 8% on the amount of Rs. 8,02,126/-
(46,319+7,55,807), that is to say, on the income without
adjusting or setting off the unabsorbed depreciation and
development rebate carried forward from the earlier year.
In exercise of his revisional powers under section 263 of
the Act, the Additional Commissioner of Income Tax called
for examined the records and took the view that the manner
of computing the deduction admissible to the assessee under
Section 80E(1) was erroneous and prejudicial to the
interests of the Revenue, in that the deduction of 8% on the
item of profit of Rs. 7,55,807 arising under Section 41(2)
had been wrongly allowed and that for the purpose of
calculating the deduction of 8%, the items in respect of the
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unabsorbed depreciation and development rebate should not
have been excluded and that, if proper calculations as
suggested by him were made, the assessee was not entitled to
any deduction. In the appeal, the Tribunal took the view
that the item of Rs. 7,55,807 being profits arising from the
sale of old machinery and buildings under S. 41(2) of the
Act, could not be treated in isolation or divorced from the
profits and gains of the business of generation and
distribution of electricity done by the assessee-company and
that the said item will have to be regarded as profits
,.attributable to", though not "derived from" the business
of generation and distribution of electricity and, as such,
the said item was exigible to the deduction of 8% under
Section 80E(1) of the Act. On the question whether the
unabsorbed depreciation and development rebate would be
deductible in computing the profits under Section 80E of the
Act, following 93 ITR, 115, the Tribunal held that these
items could not be deducted in computing the deduction
admissible under Section 80E. The Tribunal allowed the
appeal and set aside the orders of the Additional
Commissioner.
By its judgment, dated 11th and 24th of December 1975
disposing of the Reference, the Gujarat High Court upheld
the view of the Tribunal regarding the item of Rs.
7,55,807/- and answered in favour of the assessee. As to
the items of unabsorbed depreciation and development rebate,
the High Court held that they were deductible before
arriving at the figure that would be exigible to the
deduction of 8% under Section 80E(1) and, therefore, after
deducting the aggregate amount of Rs. 2,54,613 from Rs.
8,02.126, the balance of Rs. 547,513 was exigible to the
deduction of 8% under the said provision.
661
Both the assessee and the Revenue preferred separate appeals
against the said judgment.
Dismissing both the appeals, the Court
HELD : 1. (a) On true construction of the provision itself,
both the Tribunal and the High Court were right in taking
the view that the item of Rs. 7,55,807 was required to be
taken into account while computing the deduction of 8%
contemplated by S. 80E(1) of the Act. [668 A]
(b) Three important steps are required to be taken before
the special deduction permissible under section 80E(1) of
Income Tax Act, is allowed and the net total income exigible
to tax is determined. First, compute the total income of
the concerned assessee in accordance with the other
provisions of the Act i.e., in accordance with all the
provisions except Sec. 80E; secondly, ascertain what part of
the total income so computed represents the profits and
gains attributable to the business of the specified industry
(here generation and distribution of electricity); and
thirdly, if there be profits and gains so attributable,
deduct 8% thereof from such profits and gains and then
arrive at the net total income exigible to tax. As regards
the first step mentioned above, the important words in sub-
s. 1 are those that appear in parenthesis, namely, "as
computed in accordance with the other provisions of this
Act", and these words clearly contain a mandate that the
total income of the concerned assessee must be computed in
accordance with the other provisions of the Act without
reference to S. 80E and since in the instant case it is
income from business the same as per s. 29 will have to be
computed in accordance with Ss. 30 to 43A which would
include s. 41 (2). It is also clear that under the second
step the profits and gains attributable to the business of
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the specified industry (here generation and distribution of
electricity) forms a component of the total income spoken of
in the first step. Reading these two steps together,
therefore, it is obvious that in computing the total income
of the concerned assessee the balancing charge arising as a
result of the sale of old machinery and buildings and worked
out as per s. 41(2), irrespective of its real character,
will have to be taken into account and included as income of
the business. In other words, the balancing charge as
worked out under s. 41(2) will have to be taken into account
before computing the deduction of 8% under the third step.
On proper construction of sub-s. (1) and having regard to
the legislative mandate contained in the three steps that
are required to be taken in the manner indicated above, it
is clear that the item of Rs. 7,55,807/- will have to be
taken into account before computing the 8% deduction
contemplated by the said provision. [667 G-H, 668 A]
Commissioner of Income Tax, Bombay City v. Bipinchandra
Maganlal and Co. Ltd., (1961) 41 ITR 290 and Commissioner
of Income Tax, Madras V. Express Newspaper Ltd., (1964) 53
I.T.R. 250; discussed.
(c) It is true that by legal fiction created under S. 41(2)
a balancing charge arising from sale of old machinery or
building is treated as deemed income and the same is brought
to tax; in other words the legal fiction enables the Revenue
to take back what it had given by way of depreciation
allowance in the preceding years since what was given in the
preceding years was in excess of that which ought to have
been given. This shows that the fiction has been created
for the purpose of computation of the assessable income of
the assessee under the head ’business Income’. [669A-B]
(d) Legal fictions are created only for a definite purpose
and they should be limited to the purpose for which they are
created and should not be extended beyond their legitimate
field. The fiction under s. 41(2) is created’ for the
purpose of computation of assessable income of the assessee
under the head "business income" and under s. 80E(1), in
order to compute and allow the permissible special
deduction, computation of total income in accordance with
the other provisions of the Act is required to be done and
after allowing such deduction the net assessable income
chargeable to tax is to be determined, in other words, the
legal fiction under S. 41(2) and the grant of special
deduction in case of specified industries are so closely
connected with each other that
662
taking into account the balancing charge (i.e. deemed
profits) before computing 8% deduction under S. 80E(1) would
amount to extending the legal fiction within the limits of
the purpose for which the said fiction had been created.
[669 B-E]
(e) Whenever the Legislature wanted to give a restricted
meaning it has used the expression "derived from", as for
instance in S. 80J. Since the expression of wider import,
namely, "attributable to" has been used, the legislature
intended to cover receipts from sources other than the
actual conduct of the business of generation and
distribution of electricity. [669 G-H]
2. (a) The High Court was right in deducting unabsorbed
depreciation and development rebate aggregating to Rs.
2,54,613 from Rs. 8,02,126 and holding the balance of Rs.
5,47,513/- being exigible to the 8% deduction. [670 E]
(b) Having regard to the construction placed on sub-s. (1)
of Section 80E as above it is obvious that, in computing the
total income of the concerned assessee items of unabsorbed
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depreciation and unabsorbed development rebate will have to
be deducted before arriving at the figure that will become
exigible to the deduction of 8% contemplated by s. 80E(1)
[670D-E]
(c) In sub-s. (1) of S. 80E the expression "total income"
is followed by the words "as computed in accordance with the
other provisions of this Act" in parenthesis and the mandate
of these words clearly negatives the argument that the
expression "total income" has been used in the sense of
commercial profits. The expression "total income" has been
defined in s. 2(45) of the Act as meaning "the total amount
of income referred to in Section 5, computed in the manner
laid down in this Act" and when this definition has been
furnished by the Act itself the expression as appearing in
S. 80E(1) must be in the absence of anything in the context
suggesting to the contrary be construed in accordance with
such definition. Since the words in the parenthesis
occurring in sub-s. (1) lay down the manner in which the
total income of the concerned assessee is to be computed
there would be no scope for excluding items like unabsorbed
depreciation and unabsorbed development rebate while
computing the total income on the basis that the total
income spoken of by sub-s. (1) means commercial profits.
[670 G-H, 671 A-B]
3. S. 72(1) has a direct impact upon the computation under
the head ’profits and gains’ of business or profession. In
other words, the correct figure of total income, which is
otherwise as taxable under other provisions of the Act,
cannot be arrived at without working out the net result of
computation under the head ’profits and gains’ of business
or profession. The question whether special benefit under
s. 80E as well as the normal or usual benefit of carry
forward of losses of previous years should both be available
to an assessee without one impinging on the other must
depend upon the intention of the Legislature and such
intention has to be gathered from the language employed. In
this view of the matter it is extremely doubtful, whether in
spite of the legislative mandate contained in the three
steps provided by sub-s. (1) of s. 80E, carried forward
losses would not be deductible before working out the 8%
deduction contemplated by s. 80E and, therefore, the
contention that by parity of reasoning or on a priori
reasoning unabsorbed development rebate and unabsorbed
depreciation should be held to be lion-deductible before
working out the 8% deduction under s. 80E(1) cannot be
accepted. On proper construction of the provisions
contained in sub-s. (1) of a. 80E item like unabsorbed
depreciation and absorbed development rebate will have to be
deducted in arriving at the figure which would be exigible
to deduction of 8% under 80E(1). [673C-F]
Indian Transformers Ltd. v. Commissioner of Income Tax,
Ernakulam, ’1972) 86 I.T.R. 192. Commissioner of Income
Tax, Madras v. L. M. Van Moppes Diamond Tools (India) Ltd.,
(1977) 107 I.T.R. 386, Commissioner of income Tax, Madras v.
Lucas T. V. S. Ltd. (No. 2); (1977) 110 I.T.R. 346,
discussed and criticised.
Commissioner of Income Tax, Mysore v. Balasoor Tea and
Rubber Co. Ltd., 93 I.T.R. 115 held inapplicable.
663
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 785 and 783
of 1977.
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Appeals by Special Leave from the Judgment and Order dated
11/24-12-1975 of the Gujarat High Court in Income Tax
Reference No. 115 of 1974.
S. T. Desai, P. H. Parekh and K. Vasudev, for the
Appellant.
S. N. Kacker, Sol. Genl. J. Ramamurthi and (Miss) A.
Subhashini for the Respondent.
The Judgment of the Court was delivered by
TULZAPURKAR, J.-These two appeals by special leave, one by
the Commissioner of Income Tax, Gujarat and the other by the
assessee, against the judgment of Gujarat High Court in
Income Tax Reference No. 115 of 1974 raise two interesting
questions regarding the mode in which and the fund from
which deduction of 8 % contemplated by section 80E(1) of the
Income Tax Act, 1961 (as it stood at the relevant time)
should be computed.
The short facts giving rise to the questions may be stated :
The assessee-Cambay Electricity Supply and Industrial Co.
Ltd.,carries on the Business of generation and distribution
of electricity at Cambay and, as such, is covered by the
provisions of S. 80E(1) and is entitled to claim the
deduction contemplated by the said provision. The
assessment in question relates to the assessment year 1967-
68, the accounting year for which is the financial year
ending- March 31, 1967. During the accounting period which
ended on March 31, 1967, the assessee company earned an
income of Rs. 46,319/- from its said business. It appears
that during this period it had sold some of its old
machinery and buildings resulting in balancing, charges
contemplated by s. 41(2) which the Income Tax Officer worked
out at Rs. 7,55,807/-. It further appears that there was
unabsorbed depreciation of Rs. 1,42,955/- and unabsorbed
development rebate of Rs. 1,11,658/- aggregating to Rs.
2,54,613/- of the earlier years which were required to be
set off against the profits of that period. The Income Tax
Officer while completing the assessment, determined the
deduction admissible to the assessee under s. 80E(1) of the
Act in the following manner :
Income from business a computed Rs. 46,319
in the assessment order
Add : Profit u/s. 41 (2) in respect
of sale of machinery and
buildings Rs. 7.55,807
Total Rs. 8. 02,126
Less 8 %deduction u/s 80E (1) on
Rs. 8.02,126 Rs. 64.170
Less Unabsorbed depreciation Rs. 7 .37,956
and development rebate :
Depreciation : Rs. 1 .42,955
Development Rebate: Rs. 1 . 11, 658 Rs. 2,54,613
- -
Net Income chargeable to tax: Rs. 4,83,343
664
It will appear clear from the above computation that the
Income Tax Officer treated the item of Rs. 7,55,807/- as
profits attributable to the business of generation and
distribution of electricity and allowed deduction at 8%
thereon under s. 80E(1). It would also be clear that the
Income Tax Officer computed the relief /deduction admissible
to the assessee under s. 80E(1) at 8% on the amount of Rs.
8,02,126, that is to say, on the income before adjusting or
setting off the unabsorbed depreciation and development
rebate carried forward from the earlier year. When the
aforesaid assessment order came to his knowledge, the
Additional Commissioner of Income Tax called for and
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examined the record and proceedings in exercise of his
powers under s. 263 of the Act and after giving an
opportunity to the assessee-company to show cause, took the
view that the manner of computing the deduction admissible
to the assessee under s. 80E(1) was erroneous and prejudi-
cial to the interests of the Revenue, in that the deduction
of 8 % on the item of profit of Rs. 7,55,807 arising under
s. 41 (2) had been wrongly allowed and that for the purpose
of calculating the deduction of 8% the items in respect of
the unabsorbed depreciation and development rebate should
not have been excluded, and that if proper calculations as
suggested by him were made, the assessee was not entitled to
any deduction. He, therefore, set aside the order of the
Income Tax Officer and directed that fresh assessment be
made in accordance with law. Feeling aggrieved by the order
passed by the Additional Commissioner of Income-Tax the
assessee preferred an appeal to the Income Tax Tribunal. In
the appeal as regards the item of Rs. 7,55,807 being profits
arising from the sale of old machinery and buildings under
s. 41 (2) of the Act, the Tribunal took the view that the
said item of profits could not be treated in isolation or
divorced from the profits and gains of the business of
generation and distribution of electricity done by the
assessee-company and that the said item will have to be
regarded as profits "attributable to", though not "derived
from" the business of generation and distribution of
electricity and, as such, the said item was exigible to the
deduction of 8% under s. 80E(1) of the Act. On the question
whether the unabsorbed depreciation and development rebate
would be deductible in computing the profits under S. 80E of
the, Act, the Tribunal following the decision of the Mysore
High Court in the case of C.I.T. Mysore v. Balanoor Teti &
Rubber Co.(1) held that these two items could not be
deducted in- computing the deduction admissible under S. 80E
of the Act. The Tribunal accordingly allowed the appeal,
set aside the order of the Additional Commissioner and
restored that of the income Tax Officer.
At the instance of the Commissioner of Income Tax, the
Tribunal referred the following two questions to the Gujarat
High Court for its opinion :
" (1) Whether the Tribunal was correct in
holding that the Profits under section 41(2)
of the Income Tax Act 1961 arising from the,
sale of machinery and building, amounting to
Rs. 7,55,807/- should be taken into account
while computing the deduction of 8 per cent
under section 80F(1) of the Act ?
(3) (1964) 53 I.T.R.250.
665
(2)Whether unabsorbed depreciation and
development rebate amounting to Rs. 2,54,613
is not deductible in computing profits under
section 80E(1) of the Act ?"
The High Court by its judgment dated 11th and 24th December,
1975 disposed of the-Reference by answering the first
question in favour of the assessee and the second question
in favour. of the Revenue. In other words the High Court
upheld the view of the Tribunal on the first question while
on the second question it took the view that the unabsorbed
depreciation and development rebate were deductible before
arriving at the figure that would be exigible to the
deduction of 8% under, s. 80E(1) and therefore. after
deducting the aggregate amount of Rs. 2,54,613 from Rs.
8,02,126 the balance of Rs. 5,47,513 was exigible to the
deduction of 8% under the said provision. Civil Appeal No.
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783(NT) of 1977 has been preferred by the Revenue in so far
as the answer to the first question has gone against it
while Civil Appeal No. 785(NT) of 1977 has been preferred by
the assessee inasmuch as the second question has been
answered in favour of the Revenue.
As regards the question raised in C.A. No. 783(NT) of 1977,
the learned Solicitor General appearing for the Revenue has
contended that the item of Rs. 7,55,807/_ represents the
balancing charges arising out of the sale of old machinery
and buildings worked out under s. 41 (2) of the Act and the
same cannot be treated as any. profits or gains
"attributable to" the business of generation and distri-
bution of electricity carried on by the assessee and as such
the said item should not be taken into account while’
computing the deduction of 8% under s. 80E(1) of the Act.
He emphasized that under that, section a deduction of 8% is
permissible from "such profits and gains" meaning "profits
and gains attributable ’to the business of generation and
distribution of electricity" carried on by an assessee. He
contended that a balancing charge contemplated under s. 41
(2) is really in the nature of a return of capital and not a
return of revenue and it is only by reason of the fiction
created by s. 41(2) that the same is deemed to be a revenue
receipt and has been made chargeable to income tax as income
of the business but it is well settled that a legal fiction
is to be limited to the purpose for which it is created and
should not be extended beyond its legitimate field. He
urged that the very fact that a deeming provision has’ been
made under S. 41(2) shows that it is not a revenue receipt
but a capital receipt in the hands of an assessee. In
support of his contention he placed reliance upon a decision
of this Court in Commissioner of Income-Tax, Bombay City v.
Rivinchandra Maganlal & Co. Ltd.-,(1) where the real nature
of the balancing charge arising under the corresponding
provision of the 1922 Act has been explained by this Court
as being a capital return or a capital receipt. He.
therefore, contended that item of Rs. 7,55.807/- which is
not really any profit or gain earned in the conduct of the
business of generation and distribution of electricity
cannot be. taken into account while computing the deduction
of 8% "under s. 80E(1) of the Act. in
(1) (1961) 41 I.T.R. 290.
8315SCI/78
666
On the other hand, Mr. S. T. Desai, appearing, for the,
assessee, contended that both the Tribunal as well as the
High Court were right in coming to the conclusion that the
said item of Rs. 7,55,807/- was, on proper construction of
s. 80E(1), required to be taken into account before
computing the permissible deduction of 8% contemplated by
that provision. He pointed out that s. 80E in the first
place requires the computation of the total income of the
assessee carrying on specified industry "in accordance with
the other provisions of this Act"; secondly, such total
income so computed should include "profits and gains
attributable to the business of’ the specified industry
(here generation and distribution of electricity); and
thirdly, it is from such profits attributable-to the
business of the specified industry that the deduction of 8%
should be made. He laid considerable emphasis on the aspect
that the Legislature has used the expression "attributable
to the business of’ instead of "derived from the-business
of" and according to him the former being an expression of
’Wider import would include an item like the balancing
charge which may not be directly derived from the conduct of
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the business of the specified industry (here generation and
distribution of electricity). He also urged that in its
subsequent decision in the case of Commissioner of Income-
Tax, Madra v. Express Newspapers Ltd.,(1) this Court has
explained that the balancing charge contemplated under s.
41(2). in substance partakes the character of "escaped
profits" of the business carried on by an assessee and as
such the item of Rs. 7,55,807/- could be treated as profits
attributable to the business of generation and distribution
of electricity by the assessee. He also contended that even
if the matter were to be looked at from the angle of the
legal fiction created by s. 41 (2) of the Act, the said
fiction could be extended so as to take into account the
said item of Rs. 7,55,807/- before computing the 8%
deduction for such extension of the fiction would be within
and for the purpose for which the same has been created.
In our view the answer to the question raised before us
really turns upon the proper construction of the provision
contained in s. 80E(1) of the Act rather than on what is the
real nature or character of a balancing charge arising
under s. 41(2) of the Act and it would, therefore, be proper
to set out the provisions of s. 80E as it stood at the
relevant time :
"80E. Deduction in respect of profits and
gains from specified industries in the case of
certain companies.-(1)
In the case of a company to which this section
applies, where the total income (as computed
in accordance with the other provisions of
this Act) includes any profits and gains
attributable to the business of generation or
distribution of electricity or any other form
of power or of construction, manufacture or
production of any one or more of the articles
or things specified in the list in the Fifth
Schedule, there ’shall be allowed a deduction
from such profits and gains of an amount
equal to eight per cent, thereof, in computing
the total income of the company.
(1) (1964) 53 I.T.R. 250.
667
(2) This section applies to-
(a) an Indian company; or
(b) any other company which has made the
prescribed arrangements for the declaration
and payment of dividends (including dividends
on preference shares) within India.
but does not apply to any Indian company
referred to in clause (a), or to any other
company referred to in clause (b), if such
Indian or other company is a company referred
to in section 108 and its total income as
computed before applying the provisions of
sub-section (1) does not exceed twenty-five
thousand rupees."
It was not disputed before us that the aforesaid provision
contained in s. 80E(1) has been enacted for the purpose of
providing for certain, special deduction to be made in
computing the, total income in the case of specified
industries, over and above the other general deductions
contemplated by the Act. It was further not disputed
before. us that the assessee being an Indian company engaged
in the business of generation and distribution of
electricity is a company to which the section applies and is
entitled to claim the deduction of 8% contemplated by that
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provision and the only question is how and in what manner
the said deduction should be computed. On reading sub-s.
(1) it will become clear that three important steps are
required to be taken before the ’special deduction
permissible thereunder is allowed and the net total income
exigible to tax is determined. First, compute the total
income of the concerned assessee in accordance with the
other provisions of the Act i.e. in accordance with all the
provisions except s. 80E; secondly, ascertain what part of
the total income so computed represents the profits and
gains attributable to the business of the specified industry
(here generation and distribution of electricity); and
thirdly, if there be profits and gains so attributable,
deduct 8% thereof from such profits and gains and then
arrive at the net total income exigible to tax. As regards
the first step mentioned above, the important words in sub-
s. (1) are those that appear in parenthesis, namely, "as
computed in accordance with the other provisions of this
Act" and these words clearly contain a mandate that the
total income of the concerned assessee must be computed in
accordance with the other provisions of the Act without
reference to s. 80E and since in the instant case it is
income from business the same as per s. 29 will have to be
computed in accordance with ss. 30 to 43A which would
include S. 41(2). It is also clear that under the second
step the profits and gains attributable to the business of
the specified industry (here generation and distribution of
electricity) forms a component of the total income spoken of
in the first step. Reading these two steps together,
therefore, it is obvious that in computing the total income
of ’the concerned assessee the balancing charge arising as a
result of the sale of old machinery and buildings and worked
out as per S. 41 (2), irrespective of its real character,
will have to be taken into account and included as income of
the business. In other words, the balancing charge as
worked out under S. 41 (2) will have to be taken into
account
668
before computing the deduction of 8% under the third step.
On proper construction of sub-s. (1) and having regard to
the legislative mandate contained-in the three steps that
are required to be taken in the manner indicated above we
are clearly of the view that the item of Rs. 7,55,807/- will
have to be taken into account before computing the 8%
deduction contemplated by the said provision.
The learned Solicitor General has argued to the contrary by
laying considerable emphasis on two aspects, first, the real
nature of the balancing charge under S. 41(2), which
according to him is a return of capital and not a return of
revenue and, secondly, under the second and third steps the
8% deduction is to be made from "profits and gains
attributable to the business of" the specified industry
(here generation and distribution of electricity). As
regards the first aspect, on the question of real nature or
true character of a balancing charge two apparently
divergent views would appear to have been taken by this
Court in two decisions. In the case of Bipinchandra
Maganlal & Co. Ltd. (supra) the question that arose for
determination was whether a balancing charge which was
brought to tax on the basis of deemed income and was,
therefore, included in the assessable income of an assessee
under the second proviso to cl. (vii) of sub-s. (2) of s. 10
of the 1922 Act (equivalent to s. 41(2) of the 1961 Act)
could be taken into account while considering "smallness of
profit" for purposes of deciding whether the case attracted
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the applicability of S. 23A of the Act and this Court took
the view that the balancing charge was not real income but
was made taxable income for the purpose of computation of
the assessable income by legal fiction but on that account
it did not become commercial profit and was not liable to be
taken into account in assessing whether in view of the
smallness of profits a larger dividend would be
unreasonable; in that context this Court observed that what
in truth was a capital return was by a fiction regarded for
the purposes of the Act as income and was made chargeable to
income tax but because of that its character was not altered
and it was not converted into assessee’s business profits
and that smallness of profit in S. 23A had to be adjudged in
the light of commercial principles and not in the light of
total receipts, actual or fictional. In the subsequent
decision in the Express Newspapers case (supra) this Court
has regarded a balancing charge as being the "escaped
profits" of the business for which the assessee is made
liable to tax. At page 254 of the report the Court
explained the nature of the balancing charge by way of
illustration thus : "assume that the original cost of a
machinery or plant is Rs. 100 and depreciation allowed is
Rs. 25; the written down value is Rs. 75. If the machinery
is sold for Rs. 100. it is obvious that depreciation of Rs.
25 was wrongly allowed. If it had not been allowed that
amount would have swelled the profits to that extent. When
it is found that it was wrongly allowed that profit Is
brought to charge. The second proviso, therefore, in
substance, brings to charge an escaped profit or gain of the
business carried on by the assessee". These apparently
divergent views have given rise to two rival contentions
urged before us by counsel on other tide, It is unnecessary
in this case to go into the question whether the divergence,
is real or merely apparent, for. as we have said above. the
answer to the question raised before us does not depend upon
the real nature on
669
true character of the balancing charge but upon proper
construction of the sub-s. (1) which contains the
legislative mandate with regard to the manner in which
three steps indicated therein are required to be taken for
computing the deduction of 8% contemplated by that pro-
vision. It is true that by a legal fiction created under s.
41 (2) a balancing charge arising from, sale of old
machinery or building is treated as deemed income and the
same is brought to tax; in other words the legal fiction
enables the Revenue to take back what it had given by way of
depreciation allowance in the preceding years since what was
given in the preceding years was in excess of that which
ought to have been given. This shows that the fiction has
been created for the purpose of computation of the
assessable income of the assessee under the head "Business
Income". It was rightly pointed out by the learned
Solicitor General that legal fictions are created only for a
definite purpose and they should be limited to the purpose
for which they are created and should not be extended beyond
their legitimate field. But as indicated earlier the
fiction under s. 41(2) is created for the purpose of
computation of assessable income of the assessee under the
head ’Business Income’ and under s. 80E(1) in order to
compute and allow the permissible special deduction,
computation of total income in accordance with the other
provisions of the Act is required to be done and after
allowing such deduction the net assesaable income chargeable
to tax is to be determined; in other words, the legal
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fiction under s. 41(2) and the grant of special deduction in
case of specified industries are so closely connected with
each other that taking into account the balancing charge
(i.e. deemed profits) before computing the 8% deduction
under s. 80E(1) would amount to extending the legal fiction
within the limits of the purpose for which the said fiction
’had been created.
As regards the aspect emerging from the expression
"attributable to" occurring in the phrase "profits and gains
attributable to the business of" the specified industry
(here generation and distribution of electricity) on which
the learned Solicitor General relied, it will be pertinent
to observe that the Legislature has deliberately used the
expression "attributable to" and not the expression "derived
from". It cannot be disputed that the expression
"attributable to" is certainly wider in import than the
expression "derived from". Had the expression "derived
from" been used it could have with some force been contended
that a balancing charge arising from the sale of old machi-
nery and buildings cannot be regarded as profits and gains
derived from the conduct of the business of generation and
distribution of electricity. In this connection it may be
pointed out that whenever the Legislature wanted to give a
restricted meaning in the manner suggested by the learned
Solicitor General it has used the expression "derived
from", as for instance in s. 80J. In our view (since the
expression of wider import, namely, "attributable to?’ has
been used, the Legislature intended to cover receipts from
sources other than the actual conduct of the business of
generation and distribution of electricity.
For the aforesaid reasons and particularly on true
construction of the provision itself we are of the view that
both the Tribunal and the
670
High Court were right in taking the view that the item of
Rs. 7,55,807/was required to be taken into account while
computing the deduction of 8 % contemplated by s. 80E (1) of
the Act. The Revenue’s appeal, therefore, fails and is
dismissed.
Turning to the appeal of the assessee, being Civil Appeal
No. 785 (NT). of 1977, the question is whether unabsorbed
depreciation and development rebate are deductible or not in
computing. profits under s. 80E(1) of the Act. Here again
the answer to the question must depend upon the construction
of sub-s. (1) of s. 80E and the construction which we have
placed on the said provision while disposing of the
Revenue’s appeal will furnish the correct answer to the
question posed. As indicated earlier sub-s. (1)
contemplates three steps being taken for computing the
special deduction permissible thereunder and arriving at the
net income exigible to tax and the first two steps read
together contain the Legislative mandate as to how the total
income of which the profits and gains attributable to the
business of the specified industry forms a part-of the
concerned assessee is to be computed and according to the
parenthetical clause, Which contains the key words, the same
is to be computed in accordance with the provisions a the
Act except s. 80E and since in this case it is income from
business the same will have to be computed in accordance
with ss. 30 to 43A which would include s. 32(2) (which
provides for carry forward of depreciation) and s. 3 3 (2)
(which provides for carry forward of development rabate for
eight years). In other words, in computing the total income
of the concerned assessee items of unabsorbed depreciation
and unabsorbed development rebate will have to be deducted
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before arriving at the figure that will become exigible to,
the deduction of 8% contemplated by s. 80E(1). On this
construction, therefore the High Court, in our view, was
right in deducting unabsorbed depreciation and development
rebate aggregating to Rs’ 2,54,613 from Rs. 8,02,126 and
holding the balance of Rs. 5,47,513/- being, exigible to the
8% deduction.
The assessee attempted to challenge the aforesaid view by
raising a couple of contentions. In the first place before
the High Court it was strenuously urged, though not
seriously before us, that the expression "total income"
appearing in S. 80E(1) has been used in its commercial sense
and since neither the unabsorbed depreciation nor the
unabsorbed development rebate has anything to do with
commercial profits. attributable to the business, the said
two items would not be deductible before arriving at the
figure that would be exigible to the 8% deduction. It is
not possible to accept this contention for more than one
reason. First. in sub-s. (1) of s. 80E the expression
"total income" is followed by the words "as computed in
accordance with the other provisions of this Act" in
parenthesis and the mandate of these words clearly negatives
the argument that the expression "total income" has been
used in the sense of commercial profits. Secondly, the
expression "total income"’ has been defined in s. 2 (45) of
the Act as meaning "the total amount of income referred to
in section 5, computed in the manner laid down in this Act"
and when this definition has been furnished by the Act
itself’ the expression as appearing in S. 80E(1) must, in
the absence of any-
671
thing in the context suggesting to the contrary, be
construed in accordance with such definition. Since the
words in the parenthesis occurring in sub-s. (1)Lay down the
manner in which the total income of the concerned assessee
is to be computed there would be no scope for excluding
items like unabsorbed depreciation and unabsorbed deve-
lopment rebate while computing the total income on the basis
that the total income spoken of by sub-s. (1) means
commercial profits.
Counsel for the assessee next relied upon two decisions, one
of the Kerala High Court in the case of Indian Transformers
Ltd. v. Commissioner of Income Tax, Ernakulam,(1) and the
other of the Madras High Court in the case of Commissioner
of Income-Tax, Madras-I v. L. M. Van Moppes Diamond Tools
(India) Ltd.,(2) in both of which a view has been taken that
the deduction under s. 80E (1) has to be worked out before
setting off the losses brought forward from the earlier
years and the further argument based on this view is that if
carried forward losses are not to be deducted then carried
forward depreciation and carried forward development
rebate,-since all the three stand on the same footing-should
not be deductible while working out the deduction under s.
80E of the Act and in that behalf reliance was placed on a
later decision of the Madras High Court in Commissioner of
Income Tax, Madras v. Lucas-T.-V. S. Ltd. (No.2).(3), It may
be stated that the first two decisions did not deal with the
question of unabsorbed depreciation or unabsorbed rebate,
but merely dealt with the question of carried forward losses
in the context of s. 80E(1), while the third decision dealt
with all the three things, carried forward loss, carried
forward depreciation and carried forward development rebate
in the context of s. 80E(1) and it was held that the
deduction under s. 80E(1) will have to be worked out before
setting off or adjusting each of the three things. In that
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case the Madras High Court held that as regards carried
forward loss the point was covered by its earlier decision
in L. M. Van Moppes(2), case (supra), that unabsorbed
development rebate stood on the same footing as unabsorbed
losses and as regards unabsorbed depreciation it took the
view that since s. 72(2) itself postponed the adjustment of
unabsorbed depreciation to a stage subsequent to the set off
of business losses under S. 72(2) and set off of the losses
in speculation business under s. 73(3), the unabsorbed
depreciation cannot be. adjusted or deducted because if for
the purpose of S. 80E the previous years losses could not be
set off it will be a fortiori that the unabsorbed
depreciation could not be adjusted inasmuch as from the very
sequence the adjustment of unabsorbed depreciation could
come only after the adjustment of the unabsorbed losses of
the previous years. It will thus appear clear that in the
last mentioned case unabsorbed development rebate was held
to be non-deductible for the same reasons for which
unabsorbed loss could not be deducted under the earlier
decision and the unabsorbed depreciation was held to be non-
deductible on the basis of de priori reasoning. The
question that arises for consideration, therefore, is
whether the view taken in regard to non-deductibility of
carried for-
(1) (1972) 86 I.T.R. 192.
(2) (1977) 107 I.T.R. 386.
(3) (1977) 110 I.T.R. 346.
672
ward losses while computing the total income for the purpose
of granting the 8% deduction under s. 80E in the first two
decisions is correct. It is true that in the instant case
the question of deductibility or otherwise of carried
forward losses of earlier years in the context of S. 80E has
not directly arisen before us but since counsel for the
assessee has raised a contention about non-deductibility of
unabsorbed depreciation and unabsorbed development rebate on
the basis of the view taken by Kerala High Court in Indian
Transformer’s case (supra) and Madras High Court in L. M.
Van Moppes’ case (supra) in regard to nondeductibility of
unabsorbed losses of earlier years, we are constrained to
express our opinion on the validity of the view taken in
those two cases. In our opinion, the view taken in Indian
Transsformers’ case (supra) and L. M. Van Moppes’ case
(supra) in regard to the nondeductibility of unabsorbed
losses of the earlier years in the context of computing the
deduction under s. 80E of the Act is open to grave doubts.
In the first place such a view runs counter to the
Legislative mandate contained in the three steps required to
be taken under sub-s. ’(1) of s. 80E as discussed earlier.
Secondly, the main reasoning given by the Kerala High Court
for taking such a view in the Indian Transformers’ case
(supra) the Madras High Court in L. M. Van Moppes’ case
(supra) has merely followed the Kerala decision-does not
bear scrutiny. After pointing out that Chapter IV of the
1961 Act deals with the computation of income falling under
the various heads mentioned in s. 14 of the Act, that
Chapter VI in which s. 72 occurs deals with the aggregation
of income and set off or carry forward of loss and that s.
80E deals with deduction to be made in computing total
income, the Kerala High Court has proceeded to observe thus
"Computation as such is used only in the
heading in Chapter IV. Section 66 Also
provides that in computing the total income of
an assessee there shall be included all income
on which no income-tax is payable under
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Chapter VII, etc. What is provided in section
66 is also relating to computation.
Similarly, the same words are used in section
67. But, there are no such words in section
72. Section 72 speaks of the net result of
the computation under the bead ’Profits and
gains of business or profession’. We consider
that the set-off permitted under section 72 is
from an amount arrived at after applying the
provisions of Chapter IV along with other
sections of the Act such as sections 66 and
67, etc., dealing with computation of income
and after permitting the deductions under
section 80E."
The Court has further observed that in its opinion the
deduction under S.80 E is a ’special benefit given to a
company which satisfies the conditions under section 80E and
the deduction permissible thereunder is only from profits
and gains attributable to the specified activities and this
benefit should not be diminished by ’the other benefits
conferred by the Act, such as the right to have the previous
losses set off, that the two serve different purposes and
the benefit of both must be available to an assessee,
without the one impinging on the other. It will thus appear
that the Kerala High Court has regarded section 72 appear-,
673
ing in Chapter VI as a provision unconnected with the
computation of the total income of an assessee and a
provision which comes into operation ’at a stage subsequent
to the computation of the total income arising from business
done in accordance with ss. 30 to 43A occurring in Chapter
IV of the Act and, therefore, the unabsorbed losses cannot
be set off before calculating the deduction under S. 80E.
It is not possible to accept the view that s. 72 has no
bearing on or is unconnected with the computation of the
total income of an assessee under the head ’Profits and
gains of business or profession’. Actually s. 72(1)
provides that where the net result of computation under the
head ’Profits and gains of business or profession’ is a loss
and such loss cannot be or is not Wholly set off against the
income under any head of income in, accordance with the
provisions of S. 71, so much of the loss as has not been so
set-off, subject to the other provisions of the Chapter,
shall be carried forward to the following assessment year
and shall be set off against the profits and gains, if any,
of any business or profession for that assessment year.
Therefore, s. 72(1) has a direct impact upon the computation
under the head ’Profits and gains of business or
profession’. In other words, the correct figure of total
income. which is otherwise taxable under other provisions of
the Act, cannot be arrived at without working out the net
result of computation under the head ’Profits and gains of
business or profession’. Further the question whether
special benefit under S. 80E as well as the normal or usual
benefit of carry forward of losses of previous years should
both be available to an assessee, without one impinging on
the other must depend upon the intention of the Legislature
and such intention has to be gathered from the language
employed. In this view of the matter it is extremely
doubtful whether in spite of the Legislative mandate
contained in the three steps provided for by sub-s. (1) of
S. 80E, the carried forward losses would not be deductible
before working out the 8% deduction contemplated by s. 80E
and, therefore, the contention that by parity of reasoning
or on a priori reasoning unabsorbed development rebate and
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unabsorbed depreciation should be held to be non-deductible
before working out the 8% deduction under S. 80E(1) cannot
be accepted. As observed earlier on proper construction of
the provision contained in sub-s. (1) of s. 80E items like
unabsorbed depreciation and unabsorbed development rebate
will have to be deducted in arriving at the figure which
would be exigible to deduction of 8% under s. 80E(1).
Reference was also made by counsel for the assessee to the
decision of the Mysore High Court in the case of
Commissioner of Income Tax, Mysore v. Balanoor Tea and
Rubber Co. Ltd., (supra). In our view that decision has
nothing whatever to do with the question posed before us.
In that case the question was whether the loss incurred by
an assessee in non-priority business could be set off
against the profits and gains made by the assessee in the
priority business while computing the 8 % deduction under s.
80E and the High Court upheld the Tribunal’s view that for
the purpose of allowing a deduction under S. 80E the words
"such profits" occurring in that section mean "the profits
and gains attributable to an activity as specified in the
5th Schedule of the Act" and, therefore, the deduction was
required to be worked out with-
674
out reference to the loss incurred in non-priority business.
The decision was rendered on the language of s. 80E(1) but
it cannot avail the assessee on the point raised in the
appeal.
In the result the assessee’s appeal also fails and the same
is dismissed.
In the circumstances, there will be no order as to costs in
both the appeals.
S. R. Appeals dismissed.
675