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TMI Blog1978 (4) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... ectricity Supply and Industrial Co. Ltd.-carries on the business of generation and distribution of electricity at Cambay and, as such, is covered by the provisions of section 80E(1) and is entitled to claim the deduction contemplated by the said provision. The assessment in question relates to the assessment year 1967-68, the accounting year for which is the financial year ending March 31, 1967. During the accounting period which ended on March 31, 1967, the assessee-company earned all income of Rs. 46,319 from its said business. It appears that during this period it had 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 Rs. 7,55,807. It further appears that there was unabsorbed depreciation of Rs. 1,42,955 and unabsorbed development rebate of Rs. 1,11,658 aggregating to Rs. 2,54,613 of the earlier years which were required to be set-off against the profits of that period. The Income-tax Officer, while completing the assessment, determined the deduction admissible to the assessee under section 80E(1) of the Act in the following manner: Rs. Income from business as computed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... city done by the assessee-company and that the said item will have to be regarded as profits "attributable to " though not "derived from" the business of generation and distribution of electricity and, as such, the said item was exigible to the deduction of 8% under section 80E(1) of the Act. On the question whether the unabsorbed depreciation and development rebate would be deductible in computing the profits under section 80E of the Act, the Tribunal, following the decision of the Mysore High Court in the case of Commissioner of Income-tax v. Balanoor Tea and Rubber Co. [1974] 93 ITR 115, held that these two items could not be deducted in computing the deduction admissible under section 80E of the Act. The Tribunal accordingly allowed the appeal, set aside the order of the Additional Commissioner and restored that of the Income-tax Officer. At the instance of the Commissioner of Income-tax, the Tribunal referred the following two questions to the Gujarat High Court for its opinion : " (1) Whether the Tribunal was correct in holding that the profits under section 41(2) of the Income-tax Act, 1961, arising from the sale of machinery and building, amounting to Rs. 7,55,807 should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been made chargeable to income-tax as income of the business but it is well-settled that a legal fiction is to be limited to the purpose for which it is created and should not be extended beyond its legitimate field. He urged that the very fact that a deeming provision has been made under section 41(2) shows that it is not a revenue receipt but a capital receipt in the hands of an assesse. In support of his contention he placed reliance upon a decision of this court in Commissioner of Income-tax v. Bipinchandra Maganlal & Co. Ltd. [1961] 41 ITR 290 (SC), where the real nature of the balancing charge arising under the corresponding provision of the 1922 Act has been explained by this court as being a capital return or a capital receipt. He, therefore, contended that the item of Rs. 7,55,807 which is not really any profit or gain earned in the conduct of the business of generation and distribution of electricity cannot be taken into account while computing the deduction of 8% under section 80E(1) of the Act. On the other hand, Mr. S. T. Desai, appearing for the assessee, contended that both the Tribunal as well as the High Court were right in coming to the conclusion that the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s from specified industries in the case of certain companies.- (1) In the case of a company to which this section applies, where the total income (as computed in accordance with the other provisions of this Act) includes any profits and gains attributable to the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule, there shall be allowed a deduction from such profits and gains of an amount equal to eight per cent. thereof, in computing the total income of the company. (2) This section applies to- (a) an Indian company; or (b) any other company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, but does not apply to any Indian company referred to in clause (a), or to any other company referred to in clause (b), if such Indian or other company is a company referred to in section 108 and its total income as computed before applying the provisions of sub-section (1) does not exceed twenty-five thousand rupees." It was not dispu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry and buildings and worked out as per section 41(2), irrespective of its real character, will have to be taken into account and included as income of the business. In other words, the balancing charge as worked out under section 41(2) will have to be taken into account before computing the deduction of 8% under the third step. On proper construction of sub-section (1) and having regard to the legislative mandate contained in the three steps that are required to be taken in the manner indicated above we are clearly of the view that the item of Rs. 7,55,807 will have to be taken into account before computing the 8% deduction contemplated by the said provision. The learned Solicitor-General has argued to the contrary by laying considerable emphasis on two aspects, first, the real nature of the balancing charge under section 41(2), which according to him is a return of capital and not a return of revenue and, secondly, under the second and third steps the 8% deduction is to be made from "profits and gains attributable to the business of" the specified industry (here generation and distribution of electricity). As regards the first aspect, on the question of real nature or true charac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivergent views have given rise to two rival contentions urged before us by counsel on the other side. It is unnecessary in this case to go into the question whether the divergence is real or merely apparent, for, as we have said above, the answer to the question raised before us does not depend upon the real nature or true character of the balancing charge but upon proper construction of the sub-section (1) which contains the legislative mandate with regard to the manner in which three steps indicated therein are required to be taken for computing the deduction of 8% contemplated by that provision. It is true that by a legal fiction created under section 41(2) a balancing charge arising from sale of old machinery or building is treated as deemed income and the same is brought to tax ; in other words, the legal fiction enables the revenue to take back what it had given by way of depreciation allowance in the preceding years since what was given in the preceding years was in excess of that which ought to have been given. This shows that the fiction has been created for the purpose of computation of the assessable income of the asssessee under the head "Business income". It was rightl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bution of electricity. For the aforesaid reasons and particularly on the true construction of the provision itself, we are of the view that both the Tribunal and the High Court were right in taking the view that the item of Rs. 7,55,807 was required to be taken into account while computing the deduction of 8% contemplated by section 80E(1) of the Act. The revenue's appeal, therefore, fails and is dismissed. Turning to the appeal of the assessee, being Civil Appeal No. 785(NT) of 1977, the question is whether unabsorbed depreciation and development rebate are deductible or not in computing profits under section 80E(1) of the Act. Here again the answer to the question must depend upon the construction of sub-section (1) of section 80E and the construction which we have placed on the said provision while disposing of the revenue's appeal will furnish the correct answer to the question posed. As indicated earlier, sub-section (1) contemplates three steps being taken for computing the special deduction permissible thereunder and arriving at the net income exigible to tax and the first two steps read together contain the leglislative mandate as to how the total income-of which the prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sence of anything in the context suggesting to the contrary, be construed in accordance with such definition. Since the words in the parenthesis occurring in sub-section (1) lay down the manner in which the total income of the concerned assessee is to be computed there would be no scope for excluding items like unabsorbed depreciation and unabsorbed development rebate while computing the total income on the basis that the total income spoken of by sub-section (1) means commercial profits. Counsel for the assessee next relied upon two decisions, one of the Kerala High Court in the case of Indian Transformers Ltd. v. Commissioner of Income-tax [1972] 86 ITR 192 and the other of the Madras High Court in the case of Commissioner of Income-tax v. L. M. Van Moppes Diamond Tools (India) Ltd. [1977] 107 ITR 386, in both of which a view has been taken that the deduction under section 80E(1) has to be worked out before setting off the losses brought forward from the earlier years and the further argument based on this view is that if carried forward losses are not to be deducted then carried forward depreciation and carried forward development rebate-since all the three stand on the same fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rried forward losses of earlier years in the context of section 80E has not directly arisen before us but since counsel for the assessee has raised a contention about non-deductibility of unabsorbed depreciation and unabsorbed development rebate on the basis of the view taken by the Kerala High Court in Indian Transformers' case [1972] 86 ITR 192 and the Madras High Court in L. M. Van Moppes' case [1977] 107 ITR 386, in regard to non-deductibility of unabsorbed losses of earlier years, we are constrained to express our opinion on the validity of the view taken in those two cases. In our opinion, the view taken in Indian Transformers' case and L. M. Van Moppes' case in regard to the non-deductibility of unabsorbed losses of the earlier years in the context of computing the deduction under section 80E of the Act is open to grave doubts. In the first place, such a view runs counter to the legislative mandate contained in the three steps required to be taken under sub-section (1) of section 80E as discussed earlier. Secondly, the main reasoning given by the Kerala High Court for taking such a view in Indian Transformers' case the Madras High Court in L. M. Van Moppes' case has merely f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no bearing on, or is unconnected with, the computation of the total income of an assessee under the head "Profits and gains of business or profession". Actually, section 72(1) provides that where the net result of computation under the head "Profits and gains of business or profession" is a loss and such loss cannot be or is not wholly set off against the income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off, subject to the other provisions of the Chapter, shall be carried forward to the following assessment year and shall be set off against the profits and gains, if any, of any business or profession for that assessment year. Therefore, section 72(1) his a direct impact upon the computation under the head "Profits and gains of business or profession". In other words, the correct figure of total income, which is otherwise taxable under other provisions of the Act, cannot be arrived it without working out the net result of computation under the head " Profits and gains of business or profession ". Further, the question whether special benefit under section 80E as well as the normal or usual benefit of carry f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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