1978 (4) TMI 1 - SC - Income Tax

Income from business of generation and distribution of electricity - assessee sold some of its old machinery and buildings resulting in balancing charges contemplated by section 41(2) which the Income-tax Officer worked out at ₹ 7,55,807 - both the Tribunal and the High Court were right in taking the view that the item of ₹ 7,55,807 was required to be taken into account while computing the deduction of 8% contemplated by section 80E(1)

Issues Involved:
1. Whether the profits under section 41(2) of the Income-tax Act, 1961, arising from the sale of machinery and building, should be taken into account while computing the deduction of 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: Profits under Section 41(2) and Deduction under Section 80E(1)
The first issue revolves around whether the profits arising from the sale of machinery and buildings under section 41(2) should be included in the computation of the 8% deduction under section 80E(1). The Income-tax Officer included the balancing charge of Rs. 7,55,807 as profits attributable to the business of generation and distribution of electricity and allowed the deduction under section 80E(1). However, the Additional Commissioner of Income-tax disagreed, arguing that the balancing charge should not be included for the purpose of the 8% deduction. The Tribunal and the High Court upheld the view that the balancing charge should be included.

The Supreme Court, upon examining the legislative intent and the language of section 80E(1), held that the balancing charge arising under section 41(2) must be included in the total income before computing the 8% deduction. The Court emphasized that the term "attributable to" used in section 80E(1) is of wider import than "derived from," thus covering receipts from sources other than the direct conduct of the business. Therefore, the item of Rs. 7,55,807 should be taken into account while computing the deduction of 8% under section 80E(1).

Issue 2: Deductibility of Unabsorbed Depreciation and Development Rebate
The second issue concerns whether unabsorbed depreciation and development rebate should be deducted before arriving at the figure eligible for the 8% deduction under section 80E(1). The Tribunal initially held that these items could not be deducted, but the High Court reversed this view, stating that unabsorbed depreciation and development rebate must be deducted before computing the 8% deduction.

The Supreme Court agreed with the High Court, stating that section 80E(1) requires the computation of total income in accordance with the other provisions of the Act, which includes sections 30 to 43A. This means that unabsorbed depreciation and development rebate must be deducted before arriving at the figure eligible for the 8% deduction. The Court rejected the contention that the term "total income" in section 80E(1) has a commercial sense, affirming that it must be computed as per the Act's provisions, including the carry-forward of unabsorbed depreciation and development rebate.

Conclusion:
The Supreme Court dismissed both appeals, affirming that:
1. The balancing charge of Rs. 7,55,807 should be included in the total income before computing the 8% deduction under section 80E(1).
2. Unabsorbed depreciation and development rebate must be deducted before arriving at the figure eligible for the 8% deduction under section 80E(1).

Both appeals were dismissed without any order as to costs.

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