1978 (10) TMI 4 - SC - Income Tax

Profits and gains derived from new industrial undertakings - claimed exemption of the income from the new unit to the extent of 6% of the average capital employed in it under s. 15C - profits or gains of an industrial undertaking (or a hotel) to which this section applies shall be computed in accordance with the provisions of section 10

Issues Involved:
1. Interpretation of Section 15C of the Indian Income Tax Act, 1922, and Section 84 of the Income Tax Act, 1961.
2. Computation of profits and gains for the purpose of tax exemption.
3. Treatment of unabsorbed depreciation and development rebate.

Issue-wise Detailed Analysis:

1. Interpretation of Section 15C of the Indian Income Tax Act, 1922, and Section 84 of the Income Tax Act, 1961:
The core issue in these appeals revolves around the interpretation of Section 15C of the Indian Income Tax Act, 1922, and its corresponding provision, Section 84 of the Income Tax Act, 1961. Both sections are materially identical and aim to encourage the setting up of new industrial undertakings by providing tax exemptions. Section 15C(1) exempts from tax a portion of the profits or gains derived from a new industrial undertaking, up to 6% per annum of the capital employed. The provision requires that profits or gains must be derived from the new industrial undertaking in the assessment year in question for any claim for exemption to be sustained.

2. Computation of Profits and Gains for the Purpose of Tax Exemption:
The profits or gains of a new industrial undertaking must be computed in accordance with the provisions of Section 10, as mandated by Section 15C(3). This involves deducting current depreciation and development rebate allowances. The law states that depreciation and development rebate allowances should first be set off against the profits of the particular business and, if insufficient, against profits from other businesses or other income heads. Only unabsorbed allowances can be carried forward to subsequent years. Therefore, for the assessment year 1961-62, the profits or gains of the new industrial undertaking should be computed without considering depreciation and development rebate from past years if they have already been fully absorbed.

3. Treatment of Unabsorbed Depreciation and Development Rebate:
The ITO initially rejected the assessee's claim for exemption under Section 15C(1), arguing that the new unit's profit should be computed in isolation, resulting in a loss after accounting for unabsorbed depreciation and development rebate from previous years. However, the AAC reversed this decision, stating that once the depreciation and development rebate are set off against the total income of the assessee in the earlier years, they cannot be carried forward again. The Tribunal disagreed, reinstating the ITO's decision. The High Court upheld the Tribunal's view, but the Supreme Court found this interpretation incorrect. The Supreme Court clarified that the depreciation and development rebate for past years, once absorbed, should not be deducted again in computing the profits or gains for the assessment year in question. The Court emphasized that the new industrial undertaking should not be isolated retrospectively for this computation.

Conclusion:
The Supreme Court allowed the appeals, setting aside the High Court's judgment. It held that the assessee was entitled to the benefit of the exemption under Section 15C(1) for the assessment years 1961-62 and 1962-63. The Court concluded that the entire depreciation allowance and development rebate for past years were fully set off against the total income of the assessee for those years, and no part remained unabsorbed. Therefore, the profits or gains of the new industrial undertaking for the assessment year 1961-62 amounted to Rs. 1,36,822, qualifying the assessee for the exemption. The revenue was directed to pay the costs of the assessee throughout the appeals.

Appeals Allowed:
The appeals were allowed, and the questions referred by the Tribunal were answered in favor of the assessee and against the revenue. The revenue was ordered to pay the costs of the assessee in both appeals.

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