1970 (4) TMI 11 - SC - Income Tax

New Industrial Undertaking - Unabsorbed Depreciation - assessees are not entitled to the benefit of s. 15C(4) in respect of the dividend income received - Revenue s appeal allowed

Issues Involved:
1. Entitlement to exemption under section 15C(4) of the Income-tax Act, 1922, for dividends received by shareholders.
2. Interpretation of section 15C of the Income-tax Act, 1922.
3. Computation of taxable profits under section 10 of the Income-tax Act, 1922.
4. Treatment of unabsorbed depreciation in computing taxable profits.

Detailed Analysis:

1. Entitlement to exemption under section 15C(4) of the Income-tax Act, 1922, for dividends received by shareholders:
The core issue was whether shareholders of Sri Ganapathy Mills Co. Ltd. were entitled to the benefit of section 15C(4) in respect of the dividend income received. The Income-tax Officer rejected the shareholders' claim for exemption, and this decision was upheld by the Income-tax Appellate Tribunal. The High Court of Madras, however, answered the question in the affirmative, leading to the appeal by the Commissioner of Income-tax to the Supreme Court.

2. Interpretation of section 15C of the Income-tax Act, 1922:
Section 15C(1) provides that tax shall not be payable by an assessee on so much of the profits or gains derived from any industrial undertaking as do not exceed six percent per annum on the capital employed. Section 15C(3) mandates that the profits or gains of an industrial undertaking be computed in accordance with the provisions of section 10. Section 15C(4) exempts shareholders from tax on dividends attributable to profits or gains on which the tax is not payable under section 15C(1). The Supreme Court held that for the shareholders to benefit from the exemption under section 15C(4), the company must first qualify for the exemption under section 15C(1).

3. Computation of taxable profits under section 10 of the Income-tax Act, 1922:
The company had no taxable profits in the relevant assessment years due to the large balance of unabsorbed depreciation. The Supreme Court emphasized that the profits or gains derived from an industrial undertaking within the meaning of section 15C(1) are taxable profits computed in accordance with section 10. The Court clarified that even if a company earns commercial profits, it cannot claim exemption if it has no taxable profits. Consequently, if the company cannot claim the benefit under section 15C(1), the shareholders cannot claim the benefit under section 15C(4).

4. Treatment of unabsorbed depreciation in computing taxable profits:
The Supreme Court disagreed with the High Court's view that unabsorbed depreciation should not be taken into account in computing the profits of an industrial undertaking under section 10. The Court reiterated that unabsorbed depreciation from previous years must be added to the depreciation for the current year and deemed part of the depreciation allowance for the year of assessment. The Court cited the case of Commissioner of Income-tax v. Jaipuria China Clay Mines (P.) Ltd., which established that unabsorbed depreciation must be set off against the profits from other heads. In the case at hand, the company had no taxable profits in the two relevant years due to the unabsorbed depreciation exceeding the business profits.

Conclusion:
The Supreme Court concluded that the company had no taxable profits in the relevant years and, therefore, could not claim exemption under section 15C(1). Consequently, the shareholders were not entitled to the benefit of section 15C(4) for the dividends received. The Supreme Court allowed the appeals, overturning the High Court's decision, and ruled that the parties would bear their own costs in both the Supreme Court and the High Court.

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