1979 (12) TMI 24 - HC - Income Tax

Summary

Issues Involved:
1. Whether relief u/s 80E should be allowed on the income of the priority industry before setting off non-priority industry losses of the same year.

Summary:

Issue 1: Relief u/s 80E and Setting Off Non-Priority Industry Losses

The assessee, a company, closed its accounts on 30th September, 1965, and was entitled to relief u/s 80E. The ITO computed the relief at 8% on the income from the business amounting to Rs. 38,45,736. The assessee contended that the relief should be given with reference to the profits attributable to the priority industry before adjustment of other trading losses. The AAC agreed with this contention, directing computation on Rs. 41,15,301, the profit earned from the priority industry. The Tribunal confirmed the AAC's order, leading to the revenue appealing to the High Court.

Section 80E was introduced by the Finance Act of 1966, allowing a deduction of 8% from profits attributable to specified industries. The Central Board of Direct Taxes (CBDT) issued a circular stating that the deduction u/s 80E is allowable after all deductions admissible in computing business income and after giving effect to the set-off or carry forward of losses.

The Kerala High Court in Indian Transformers Ltd. v. CIT [1972] 86 ITR 192 and the Mysore High Court in CIT v. Balanoor Tea and Rubber Co. Ltd. [1974] 93 ITR 115 had differing views on the interpretation of s. 80E. The Madras High Court in CIT v. L. M. Van Moppes Diamond Tools (India) Ltd. [1977] 107 ITR 386 and CIT v. Lucas-T.V.S. Ltd. (No. 2) [1977] 110 ITR 346 followed the Kerala High Court's view.

The Gujarat High Court in CIT v. Cambay Electric Supply Industrial Co. Ltd. [1976] 104 ITR 744, affirmed by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84, held that unabsorbed depreciation and development rebate must be deducted before applying the 8% deduction u/s 80E.

The Supreme Court's decision emphasized three steps for computing the special deduction u/s 80E: (1) Compute total income in accordance with other provisions of the Act, (2) Ascertain profits attributable to the specified industry, and (3) Deduct 8% from such profits. The Supreme Court doubted the correctness of the Kerala and Madras High Courts' decisions but distinguished the Mysore High Court's decision.

The Madras High Court concluded that the computation of total income must include adjustment of losses from non-priority industries. Therefore, the assessee's contention was not accepted, and the question was answered in the negative, in favor of the revenue. There was no order as to costs.