1986 (5) TMI 28 - HC - Income Tax

Summary

Issues Involved:
1. Interpretation of sections 80-I and 80B of the Income-tax Act, 1961.
2. Computation of deductions under section 80-I before or after setting off unabsorbed depreciation and development rebate.

Detailed Analysis:

1. Interpretation of Sections 80-I and 80B:
The primary issue was whether the Appellate Tribunal was correct in holding that the assessee was entitled to deductions under section 80-I on the profits from priority industry before deducting unabsorbed depreciation and unabsorbed development rebate brought forward from earlier years. The court examined the legislative history and the amendments of sections 80-I and 80B, noting that section 80B(5) defines "gross total income" as the total income computed according to the provisions of the Act before making any deductions under Chapter VI-A. The court also referenced the Supreme Court's observations in Rajapalayam Mills Ltd. v. CIT [1978] 115 ITR 777 and Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84, which clarified that deductions must be computed according to the Act's provisions, not on a commercial profit basis.

2. Computation of Deductions Under Section 80-I:
The court analyzed whether deductions under section 80-I should be allowed before or after setting off unabsorbed depreciation and development rebate. The Income-tax Officer had set off these amounts before allowing the deduction under section 80-I, whereas the Appellate Assistant Commissioner and the Appellate Tribunal had allowed the deduction without setting off these amounts. The court noted that the scheme of the Act requires that profits and gains of a priority industry for the purpose of deduction under section 80-I must be computed after setting off carried forward losses, depreciation, and development rebate. This view was supported by the Gujarat High Court in CIT v. Amul Transmission Line Hardware Pvt. Ltd. [1976] 104 ITR 771 and affirmed by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84.

The court further referenced the Supreme Court's decision in CIT v. S. S. Sivan Pillai [1970] 77 ITR 354, which held that unabsorbed depreciation of earlier years must be considered in computing profits for any year. Similarly, in CIT v. Patiala Flour Mills Co. P. Ltd. [1978] 115 ITR 640, the Supreme Court held that the profits or gains of a new industrial undertaking for the purpose of section 80J must be computed in the same manner as for determining the total income chargeable to tax.

The court concluded that the Tribunal erred in allowing the deduction under section 80-I before setting off unabsorbed depreciation and development rebate. This conclusion was reinforced by the Supreme Court's decision in Distributors (Baroda) P. Limited v. Union of India [1985] 155 ITR 120, which clarified that deductions under Chapter VI-A must be computed after taking into account unabsorbed depreciation and development rebate.

Conclusion:
The court answered the question in the negative, holding that the Appellate Tribunal was incorrect in its interpretation. The assessee is not entitled to deductions under section 80-I on the profits from priority industries before deducting unabsorbed depreciation and unabsorbed development rebate brought forward from earlier years. The judgment was in favor of the Revenue, with no order as to costs.