1986 (5) TMI 16 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement to deduction under section 80M of the Income-tax Act, 1961.
2. Computation of income with respect to business loss and depreciation.
3. Set off of business loss against income from other heads.
4. Proper interpretation of "gross total income" under section 80B.
5. Applicability of judicial precedents and circulars in the context of fiscal enactments.

Detailed Analysis:

1. Entitlement to Deduction under Section 80M:
The primary issue was whether the assessee was entitled to a deduction under section 80M of the Income-tax Act, 1961, for the assessment year 1971-72. The Tribunal had rejected the assessee's contention, stating that since the net income was a loss, the deduction under section 80M could not be allowed. The court upheld this view, emphasizing that the gross total income must be computed without considering deductions under Chapter VI-A, which includes section 80M. Thus, the assessee was not entitled to any deduction under section 80M as the gross total income was a loss.

2. Computation of Income with Respect to Business Loss and Depreciation:
The assessee argued that depreciation should not be set off against the business loss but should be carried forward under section 32(2) of the Act. The Tribunal and the court held that depreciation must be included in the profit and loss account of the business for the relevant year. The court noted that section 32(2) applies only when there are no other sources of income. Therefore, the computation by the Income-tax Officer, which included depreciation in the business loss, was correct.

3. Set Off of Business Loss Against Income from Other Heads:
The assessee contended that only 40% of the dividend income should be set off against the business loss under section 80M. The Tribunal and the court rejected this argument, stating that under section 71 of the Act, the entire business loss can be set off against income from other heads. The court emphasized that partial set off is not permissible and that the entire loss must be considered for set off against other incomes, including dividend income.

4. Proper Interpretation of "Gross Total Income" under Section 80B:
The court clarified that "gross total income" as defined in section 80B(5) means the total income computed in accordance with the provisions of the Act before making any deductions under Chapter VI-A. The court referred to the Supreme Court decision in Distributors (Baroda) P. Ltd. v. Union of India, which established that deductions under section 80M are to be made from the income computed under the Act. Therefore, the assessee's argument that only 40% of the dividend income should be considered was rejected.

5. Applicability of Judicial Precedents and Circulars:
The court considered several judicial precedents and a circular issued by the Central Board of Revenue. The court noted that the principles laid down in these precedents supported the view that the entire business loss must be set off against other heads of income and that deductions under section 80M are to be made only after computing the gross total income. The court cited cases such as National Engineering Industries Ltd. v. CIT and Aluminium Corporation of India Ltd. v. CIT to support its conclusions.

Conclusion:
The court concluded that the assessee was not entitled to a deduction under section 80M as the gross total income was a loss. The entire business loss, including depreciation, must be set off against other heads of income, and partial set off is not permissible. The gross total income must be computed without considering deductions under Chapter VI-A, and only then can the question of relief under section 80M arise. The court answered the reference in the negative, in favor of the Revenue, with no order as to costs.