1979 (1) TMI 80 - HC - Income Tax

Summary

Issues Involved:
1. Scope and interpretation of Section 80K of the Income Tax Act, 1961.
2. Entitlement to relief under Section 80J and its reflection in the certificate under Section 80K.
3. Computation of assessable profits and gains for the purpose of Sections 80J and 80K.
4. Impact of judicial precedents on the interpretation of Sections 80J and 80K.

Detailed Analysis:

1. Scope and Interpretation of Section 80K of the Income Tax Act, 1961:
The primary question in this case is the scope and interpretation of Section 80K of the Income Tax Act, 1961. The petitioners challenged the decision of the Income Tax Officer (ITO) in granting relief under Section 80K only to a portion of the exempted dividend, specifically Rs. 77,42,921, instead of the claimed Rs. 95,50,889. The petitioner-company argued that the ITO should issue a certificate showing the full exempted dividend amount for the Polyester Fibre plant and the Sulzer plant.

2. Entitlement to Relief under Section 80J and its Reflection in the Certificate under Section 80K:
The petitioner-company had established new industrial undertakings and claimed relief under Section 80J for the Polyester Fibre plant and the Sulzer plant. The ITO had previously issued certificates under Section 80K for assessment years 1975-76 to 1977-78, considering the total relief allowable under Section 80J. However, for the assessment year 1978-79, the ITO restricted the relief to the profits computed under the Income Tax Act, resulting in a lower exempted dividend percentage of 85.38% instead of 100%. The ITO excluded the Sulzer plant from the exemption due to its business loss.

3. Computation of Assessable Profits and Gains for the Purpose of Sections 80J and 80K:
The court examined the computation of assessable profits and gains under Sections 80J and 80K. Section 80J provides for a deduction of six percent of the capital employed in new industrial undertakings from the profits and gains derived from such undertakings. Section 80K allows shareholders to claim exemption on dividends attributable to profits on which the company is entitled to a deduction under Section 80J. The court emphasized that the profits and gains must be computed in accordance with the provisions of the Income Tax Act, excluding Chapter VI-A and Section 280-O.

4. Impact of Judicial Precedents on the Interpretation of Sections 80J and 80K:
The court considered various judicial precedents, including the Supreme Court's decisions in Cambay Electric Supply Industrial Co. Ltd. v. CIT, CIT v. S. S. Sivan Pillai, and Union of India v. Coromandel Fertilizers Ltd. The court noted the distinction between the actual deduction and the entitlement to deduction under Section 80J. The Supreme Court in Coromandel Fertilizers' case emphasized that the entitlement to deduction under Section 80J is sufficient for shareholders to claim relief under Section 80K, even if no actual deduction was made in the assessment year.

However, the court also considered subsequent decisions by larger benches of the Supreme Court, such as Rajapalayam Mills Ltd. v. CIT and CIT v. Patiala Flour Mills Co. P. Ltd., which clarified that the profits and gains for the purpose of Section 80J must be computed in accordance with the provisions of the Act. The court concluded that the words "profits and gains derived by the company from an industrial undertaking" in Section 80K must be understood as assessable profits and gains computed under the Act, excluding Chapter VI-A and Section 280-O.

Conclusion:
The court held that the ITO's decision to restrict the relief under Section 80K to the Polyester Fibre plant and exclude the Sulzer plant was correct, as the Sulzer plant had no assessable profits and gains for the relevant assessment year. The court dismissed the petition and discharged the rule with costs. The court granted leave to appeal to the Supreme Court, recognizing the substantial question of law involved.