1981 (2) TMI 26 - HC - Income Tax

Summary

Issues Involved:
1. Interpretation of the term "such profits" under Section 80-I of the Income Tax Act, 1961.
2. Mode of computation of deduction under Section 80-I.
3. Applicability of losses from non-priority businesses in determining deductions for priority industries.

Detailed Analysis:

1. Interpretation of the Term "Such Profits" Under Section 80-I:
The primary issue revolves around the interpretation of the term "such profits" in Section 80-I of the Income Tax Act, 1961. The court examined whether "such profits" referred to the profits and gains attributable to any priority industry without deducting losses from non-priority businesses.

The court noted that Section 80-I, as it stood at the relevant time, allowed a deduction of 8% from the profits and gains attributable to any priority industry. The term "gross total income" was defined under Section 80B(5) as the total income computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A.

The court emphasized that the legislative intent was to encourage the development of priority industries by allowing deductions from the profits of such industries. The expression "such profits" was interpreted as descriptive of the profits of the priority industry entitled to relief, and not subject to deductions for losses from non-priority businesses.

2. Mode of Computation of Deduction Under Section 80-I:
The court analyzed the mode of computation of the deduction under Section 80-I. The Income Tax Officer (ITO) had allowed the deduction at 8% on the net profit of Rs. 3,78,573 after setting off losses from non-priority businesses against the profit of Rs. 15,53,761 from the priority industry.

The Tribunal, relying on decisions from the Kerala High Court (Indian Transformers Ltd., 86 ITR 192) and the Mysore High Court (Balanoor Tea and Rubber Co., 93 ITR 115), held that the deduction should be based on the profit of Rs. 15,53,761 from the priority industry without considering losses from non-priority businesses.

The court agreed with the Tribunal's interpretation, stating that the deduction should be computed on the profits of the priority industry alone. This view was supported by the Supreme Court's decision in Cloth Traders (P.) Ltd. v. Addl. CIT (118 ITR 243), which held that deductions should be calculated with reference to the full amount of income from the specified source.

3. Applicability of Losses from Non-Priority Businesses in Determining Deductions for Priority Industries:
The court addressed whether losses from non-priority businesses should be set off against the profits of priority industries when computing deductions under Section 80-I. The revenue argued that the gross total income should include profits and gains attributable to any priority industry, computed in accordance with the provisions of the Act, including setting off losses.

The court rejected this argument, stating that such an interpretation would defeat the purpose of Section 80-I, which aimed to provide relief to priority industries. The court noted that allowing deductions for losses from non-priority businesses would minimize the relief intended for priority industries, contrary to legislative intent.

The court referenced various High Court decisions, including the Mysore High Court in Balanoor Tea and Rubber Co. and the Kerala High Court in Indian Transformers Ltd., which supported the view that deductions should be based on the profits of the priority industry alone.

The court also considered the Gujarat High Court's contrary view in CIT v. Cambay Electric Supply Industrial Co. Ltd. (104 ITR 744) and CIT v. Amul Transmission Line Hardware P. Ltd. (104 ITR 771), which allowed setting off losses from non-priority businesses. However, the court respectfully disagreed with the Gujarat High Court's interpretation, emphasizing the legislative intent to provide relief to priority industries without such set-offs.

Conclusion:
The court concluded that the Tribunal was justified in holding that for the purposes of allowing deduction under Section 80-I, the words "such profits" mean the profits and gains attributable to any priority industry without deducting losses from non-priority businesses. The question referred to the court was answered in the affirmative and in favor of the assessee, with each party bearing their own costs.