1975 (12) TMI 70 - HC - Income Tax

Balancing Charge, Depreciation And Development Rebate, Income Tax Act, Total Income, Unabsorbed Depreciation

Issues Involved:
1. Whether the profits under section 41(2) of the Income-tax Act, 1961, arising from the sale of machinery and buildings, should be taken into account while computing the deduction at 8% under section 80E(1) of the Act.
2. Whether unabsorbed depreciation and development rebate are deductible in computing profits under section 80E(1) of the Act.

Detailed Analysis:

Issue 1: Inclusion of Profits under Section 41(2) for Deduction under Section 80E(1)

The primary contention was whether the profit of Rs. 7,55,807, added under section 41(2) due to the sale of old machinery and buildings, should be considered while calculating the 8% deduction under section 80E(1). The revenue argued that this amount is essentially a return of depreciated capital and not actual business profit, relying on the Supreme Court's decision in *Commissioner of Income-tax v. Bipinchandra Maganlal & Co. Ltd.*, which held that such balancing charges are capital returns treated as revenue due to a legal fiction.

Conversely, the assessee argued, supported by *Commissioner of Income-tax v. Express Newspapers Ltd.*, that these balancing charges represent escaped profits from previous years and should be considered business profits for the purpose of section 80E.

The court found no conflict between the two Supreme Court decisions. It concluded that while the Bipinchandra case emphasized the intrinsic character of the balancing charge, the Express Newspapers case focused on its effect on revenue. The court decided that the balancing charge should be treated as part of the business income for calculating the 8% deduction under section 80E, as it represents profits that had previously escaped taxation due to depreciation allowances. Therefore, the court answered in the affirmative, in favor of the assessee.

Issue 2: Deductibility of Unabsorbed Depreciation and Development Rebate Before Calculating Deduction under Section 80E(1)

The second issue was whether unabsorbed depreciation and development rebate should be deducted before computing the 8% deduction under section 80E(1). The revenue argued that the total income should be computed in accordance with all provisions of the Act, including sections 32 and 33, which pertain to depreciation and development rebate. The assessee contended that section 80E refers to commercial profits, and such deductions should not be considered.

The court analyzed section 80E and concluded that the total income must be computed in accordance with the other provisions of the Act before applying the 8% deduction. This means that the unabsorbed depreciation and development rebate must be deducted first. The court emphasized that the scheme of section 80E does not allow for double benefits on the same amount, which would occur if the gross profits were used for the 8% deduction without first deducting depreciation and development rebate.

The court also referred to the statutory definition of "total income" and the provisions of sections 28 and 29, which mandate that income under the head of "profits and gains of business" must be computed in accordance with sections 30 to 43A, including sections 32 and 33.

Thus, the court concluded that the unabsorbed depreciation and development rebate must be deducted before calculating the 8% deduction under section 80E. The court answered this issue in favor of the revenue.

Conclusion:

The court held that:
1. The profits under section 41(2) arising from the sale of machinery and buildings should be taken into account while computing the deduction at 8% under section 80E(1).
2. Unabsorbed depreciation and development rebate must be deducted before computing the 8% deduction under section 80E(1).

The reference was disposed of without any order as to costs.

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