1976 (9) TMI 36 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement to deduction u/s 80E of the Income-tax Act, 1961.
2. Computation of total income and set-off of earlier years' losses and unabsorbed depreciation.

Summary:

Issue 1: Entitlement to deduction u/s 80E of the Income-tax Act, 1961

The primary issue was whether the assessee-company was entitled to an 8% deduction from its income from priority industries u/s 80E for the assessment year 1967-68. The assessee, engaged in manufacturing dressers, cutting tools, and lapping wheels (a priority industry listed in Schedule V, Item 8 of the Act), claimed a deduction of 8% on its income of Rs. 2,45,431 from such priority industry. The Income-tax Officer (ITO) set off earlier years' business losses and unabsorbed depreciation, resulting in an assessable income of "nil" and denied the deduction u/s 80E. The Appellate Assistant Commissioner (AAC) reversed this decision, holding that the entire income from priority industries should be considered for the rebate, not the residuary or total income. The Tribunal upheld the AAC's view, stating that the two requirements under section 80E are: (1) there must be a total income, and (2) profits and gains from priority industries must be included in that total income.

Issue 2: Computation of total income and set-off of earlier years' losses and unabsorbed depreciation

The court examined section 80E, which allows a deduction of 8% from profits and gains attributable to priority industries included in the total income. The court agreed with the AAC and Tribunal that the total income's inclusion of profits from priority industries is sufficient for the rebate, irrespective of the total income being positive or negative. The court emphasized that the setting off of earlier years' losses or other business losses against the profits from priority industries is not contemplated by section 80E. The Kerala High Court's decision in Indian Transformers Ltd. v. Commissioner of Income-tax [1972] 86 ITR 192 (Ker) and the Mysore High Court's decision in Commissioner of Income-tax v. Balanoor Tea and Rubber Co. Ltd. [1974] 93 ITR 115 (Mys) supported this view, stating that the rebate should be computed before setting off any losses from earlier years.

The court also clarified that sections 71 and 72, dealing with the set-off and carry-forward of losses, occur in Chapter VI, which follows the computation of total income in Chapter IV. Thus, the set-off or carry-forward of losses under sections 71 and 72 succeeds the computation of profits and gains of the business and does not affect the computation itself.

Conclusion:

The court concluded that the assessee was entitled to the rebate of 8% on the sum of Rs. 2,45,431 from the priority industry income. The question referred to the court was answered in the affirmative and in favor of the assessee, with costs fixed at Rs. 500.