9911796707
TMI Blog1979 (1) TMI 80X X X X Extracts X X X X X X X X Extracts X X X X ..... pany is a limited company and is engaged in manufacture of textiles, chemicals, plastics and polyester fibre. The petitioner company's shareholders number about 52,000. The relevant accounting period for the purpose of s. 80K of the I.T. Act, 1961, is the year ended 31st March, 1978, corresponding to the assessment year 1978-79. The second petitioner is a wholetime director of the petitioner-company and also holds thirteen ordinary shares of the first petitioner-company. The first petitioner-company had established new industrial undertakings by installing Polyester fibre plant at Baroda in the assessment year 1975-76, the corresponding accounting period being 1974-75. The petitioner had also installed Sulzer plant in the accounting year 1975-76 the assessment year being 1976-77. The said plant fulfilled all the conditions for the grant of necessary relief under s. 80J of the Act of 1961. Accordingly, in the course of assessment of the petitioner-company for the assessment years commencing from the assessment year 1975-76, the relief to which the petitioner-company was entitled under s. 80J of the Act was being worked out and to the extent that the profit in respect of the said p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entitled to relief under s. 80J to the extent of Rs. 1,00,35,434 and the Sulzer plant was entitled to relief to the extent of Rs. 24,07,556, aggregating in all to Rs. 1,24,42,990. This calculation was based on the capital computation arrived at without deduction of any liability therefrom, in view of the decision of the Calcutta High Court in the case of Century Enka [1977] 107 ITR 123 and 909 (Cal) and also the decision of the Full Bench of the Bombay Tribunal in the case of Amar Dye Chemicals Ltd. These two decisions took the view that in computing the capital base, r. 19A should not be applied as it was inconsistent with s. 80J. However, the actual working out of the capital base is not relevant, according to the petitioner, for the purpose of the present litigation, and in the course of arguments before us. Mr. Kaji for the petitioner has proceeded on the footing that the decisions in Century Enka's case [1977] 107 ITR 123 and 909 (Cal) and the Full Bench decision of the Bombay Tribunal in Amar Dye Chemical Ltd.'s case may not be applied to the facts of the present case. The respondent addressed a reply dated July 28, 1978, to the first petitioner-company, calling for certai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid two plants could not be worked out ignoring the liabilities. On that footing, the respondent worked out the relief allowable to the petitioner-company in respect of the said plants at six per cent. of the capital employed at Rs. 77,42,921 in respect of the Polyester fibre plant and Rs. 18,07,968 in respect of the Sulzer plant. On that basis, the exempted percentage of the dividend, according to the respondent, worked out to 85.38 per cent. as against 100 per cent. indicated by the petitioner-company. The respondent further held that the petitioner was not entitled to have the certificate on that footing of 85.38 per cent. because the working of the Sulzer plant showed a business loss of Rs. 7,20,260 as computed under the I.T. Act and, therefore, there could not be any claim for exemption under s. 80K in respect of the Sulzer plant. The respondent stated that only Rs. 77,42,921 referable to six per cent. of the capital employed in the Polyester fibre plant, as computed by the respondent, was entitled to exemption under s. 80K out of the total dividends of Rs. 1,11,86,231. On that footing under s. 80K, the respondent issued the certificate dated August 24, 1978. This certificate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otel, to which the section applied, were to be computed in accordance with the provisions of s. 10. Under sub-s. (4), tax was not to be paid by a shareholder in respect of so much of any dividend paid or deemed to be paid by the company to him of an industrial undertaking or hotel as was attributable to that part of profits or gains on which tax was not payable under that particular section. When the Act of 1961 was enacted, s. 15C became s. 84 and s. 15C(4) became s. 85. The scheme of ss. 84 and 85 of the Act of 1961 proceeded on the scheme of what was provided for in s. 15C of the Act of 1922. With effect from April 1, 1968, the provisions of ss. 84 and 85 were repealed and s. 84 was replaced by s. 80J and s. 85 was replaced by s. 80K. By this amendment which came into force with effect from April 1, 1968, a whole new chapter, Chap. VI-A, was inserted and ss. 80J and 80K were inserted with effect from April 1, 1968. One departure was made in s. 80J from s. 84 in the following manner : whereas, under s. 15C of the Act of 1922 and under s. 84 of the Act of 1961, there was no provision for carry forward of a relief which was to be granted under s. 15C and s. 84 to new undertakings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause in the light of the observations of the Supreme Court in Union of India v. K. S. Subramanian, AIR 1976 SC 2433, we find that there is an apparent conflict of decisions regarding the provisions of s. 80K between some decisions of Benches of three judges of the Supreme Court and of Benches of two judges of the Supreme Court. It may be pointed out that under s. 2(45) of the I.T. Act, 1961, " total income " means the total amount of income referred to in s. 5, computed in the manner laid down in the Act. As already stated, ss. 80J and 80K are part of Chap. VI-A of the Act of 1961. Chapter VI-A contains s. 80A to s. 80VV. Section 80B is the definition section, specially meant for Chap. VI-A and sub-s. (5) of s. 80B states : " In this chapter, ' gross total income ' means the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter or under section 280-O." Section 80J provides in sub-s. (1) : " Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to which this section applies, there shall, in accordance with and subject t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o case shall the deficiency or any part thereof be carried forward beyond the seventh assessment year as reckoned from the end of the initial assessment year; (ii) where there is more than one deficiency and each such deficiency relates to a different assessment year, the deficiency which relates to an earlier assessment year shall be set off under this sub-section before setting off the deficiency in relation to a later assessment year : ..." We are not concerned with the rest of the provisions of s. 80J in the course of this judgment. It is thus clear that there must be profits and gains derived from an industrial undertaking to which s. 80J applies and these profits and gains derived from a new industrial undertaking must be included in the gross total income of an assessee. As we have pointed out, s. 80B(5) defines " gross total income " as meaning the total income computed in accordance with the provisions of this Act, before making any deduction under this chapter or under s. 280-O. A similar provision arose for consideration before the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC). The Supreme Court there was concerned with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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." In the case before us, the phraseology is " where the gross total income of an assessee includes any profits and gains derived from any industrial undertaking ... to which this section applies ". Therefore, the profits and gains which are included in the gross total income must be, as s. 80B(5) says, total income computed in accordance with the provisions of this Act before making any deduction under Chap. VI-A or under s. 280-O. Applying the reasons of the Supreme Court in Cambay Electricity Co.'s case [1978] 113 ITR 84 (SC), the words, " profits and gains derived from an industrial undertaking to which this section applies " can only mean profits and gains computed in accordance with the provisions of the I.T. Act, 1961, barring the provisions of Chap. VI-A and s. 280-O. Therefore, they must be profits and gains assessable to tax after making the various deductions which are provided elsewhere in the Act, that is, outside Chap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar : the profits or gains of an industrial undertaking have to be determined under section 10 of the Act. Even if the undertaking has earned profits out of its commercial activity, if it has no taxable profits it cannot claim exemption from payment of tax under sub-section (1) of section 15C ; and if the undertaking cannot claim the benefit under sub-section (1) the shareholders will not get the benefit of sub-section (4), for there is no dividend paid which is attributable to that part of the profits or gains on which the tax was not payable by the undertaking. The company had no taxable profit in the year of account : it did not accordingly qualify for exemption from payment of tax under sub-section (1), and since there was no such taxable profit, the dividend received by the shareholders could not be said to be attributable to that part of the profits or gains on which the tax was not payable under sub-section (1). On the plain terms of section 15C, the shareholders cannot obtain the benefit of exemption from payment of tax." At page 359, it was observed : " We are also unable to agree with the High Court that if an industrial undertaking has distributed dividend, the shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purpose of computation of tax. The company was assessed to income-tax as an industrial undertaking for the first time for the assessment year 1969-70. Orders of assessment were passed on November 23, 1972, and January 4, 1973. The said orders disclosed a sum of Rs. 11,11,10,176, being carried forward as unabsorbed losses to the succeeding year and a sum of Rs. 9,73,93,861 being carried forward as unabsorbed depreciation to the subsequent year. The capital employed by the company in its new industrial undertaking was Rs. 48,87,38,018 and six per cent. thereof under s. 80J(1) amounted to Rs. 2,93,24,281. Out of this amount, the amount relating to the ten months of the year confined to the period during which the industrial undertaking was in operation was determined by the ITO at Rs. 2,44,36,901. As no profit was made in the assessment year 1969-70, the aforesaid " deficiency " within the meaning of s. 80J(3) was carried forward to the succeeding year 1970-71. Similarly, for the next assessment year 1970-71, it was recorded in the assessment order that the company was entitled to deduction of Rs. 2,58,31,806 under s. 80J. As there were no profits to be absorbed, the said amount had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two provisions. Broadly speaking, there was no question of ' carry forward ' from one accounting year to the succeeding year or years the sums allowable under section 15C. That feature is now prominent in section 80J in clearly providing that 'where there are no such profits and gains, an amount equal to the relevant amount of capital employed during the previous year (viz., the six per cent. of the capital employed)..... shall be carried forward and set off against profits and gains referred to in sub-section (1) ...... ' There is another vital distinction. While section 15C(4) refers to relief in case of only taxable profits, section 80K provides that in computing the total income of an assessee whose gross total income includes any income by way of dividends, there shall be allowed in computing his total income a deduction from such income by way of dividends an amount equal to such part thereof as is attributable to profits and gains derived by the company from an industrial undertaking on which no tax is payable by the company under the Act or in respect of which the company is entitled to deduction under section 80J. The expression ' or in respect of which the company is en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore it the decision of the Andhra Pradesh High Court in Coromandel Fertilizers' case [1976] 102 ITR The Madras High Court's reading of s. 80K of the Act of 1961 showed that in respect of the assessment year 1968-69 onwards, the shareholder will be entitled to the benefit of s. 80K if the company was entitled to deduction under s. 80J, whether it actually got the deduction or not. From a comparison of s. 15C(4) of the Indian I.T. Act, 1922, and s. 80J of the I.T. Act, 1961, it is clear that the same phraseology had been used in both the sections in respect of the company's profits assessable for the assessment year prior to 1968-69. But s. 80K specifically provided for the shareholders' right to deduction by a reference to the company's profits assessable for 1968-69 onwards " in respect of which the company is entitled to deduction under section 80J ". These words seem to cover cases where the deduction is not allowed to the company on account of inadequacy of profits but it is allowed to carry forward the deficiency under s. 80J(3). Unlike s. 15C(4) of the 1922 Act, in order to entitle the Shareholder to the benefit of s. 80K in or after the assessment year 1968-69, it is not ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the 1961 Act was the same. Bhagwati J., speaking for the Bench of three judges of the Supreme Court in Rajapalayam Mills' case [ 1978] 115 ITR 777, observed at page 783 of the report : " The law of income-tax in a modern society is intended to achieve various social and economic objectives. It is often used as an instrument for accelerating economic growth and development. Section 15C is a provision introduced in the Indian I.T. Act, 1922, with a view to carrying out this objective and it is calculated to encourage setting up of new industrial undertakings in the country. Sub-section (1) of this section exempts from tax so much of the profits or gains derived from a new industrial undertaking as do not exceed 6% per annum of the capital employed in the undertaking. There are rules made under the Act for computing the capital employed in a new industrial undertaking but we are not concerned with these rules in the present appeals. What is material is only the provision for exemption and, according to this provision, the profits and gains of a new industrial undertaking are exempt from tax to the extent of 6% per annum of the capital employed, and obviously, therefore, there must b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computed separately in accordance with the provisions of s. 10, the tax is chargeable under that section not separately on the profits of each business, but on the aggregate of the profits of all the businesses carried on by the assessee ...... It follows, therefore, that where the assessee carries on several businesses, he is entitled under s. 10 to set off loss in one business against profits in another. If there is any loss in a business carried on by the assessee by reason of the profits of such business not being sufficient to absorb the depreciation allowance, such loss can be set off against the profits of another business carried on by the assessee. If, however, there are no profits chargeable under the head ' Business or profession ' or if the profits chargeable under that head are insufficient to cover the depreciation allowance the amount of the allowance to the extent to which it is not absorbed can be set off against profits chargeable under any other head for that assessment year. This is the plain and undoubted effect of s. 24, sub- s. (1), as explained in CIT v. Indo-Mercantile Bank Ltd. [1959] 36 ITR 1, 6 (SC). But what would happen if still some part of the deprec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roviding that the profits or gains of the new industrial undertaking shall be computed as if the new industrial undertaking were the only business of the assessee from the date of its establishment or the past years, depreciation or development rebate had not been set off against other income of the assessee. The new industrial undertaking is not retrospectively quarantined or isolated from the other income-producing activities of the assessee for determining its profits or gains for the purpose of applicability of sub-s. (1) of s. 15C. What sub-s. (3) of s. 15C does is merely to lay down the same rule of computation for the profits or gains of a new industrial undertaking as in respect of any other business and, therefore, neither depreciation allowance nor development rebate in respect of the new industrial undertaking for the past assessment years can be allowed as a deduction in computing the profits or gains for the assessment year in question, except where and to the extent to which, it has not been set off against the total income of the assessee for those assessment years and has remained unabsorbed. " The Supreme Court in Rajapalayam Mills' case [1978) 115 ITR 777 held a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction provides for setting off the carried forward amount of deficiency of the past assessment years against the profits and gains referred to in sub-s. (1) of s. 80J, as computed after allowing, inter alia, the deduction admissible under that sub-section and, therefore, if, for the purpose of sub-s. (1) of s. 80J, the profits or gains of the new industrial undertaking are to be computed in accordance with the provisions of the Act and no part of the losses, depreciation allowance or development rebate for the past assessment years which has been fully set off against the profit from other businesses or income under any other head is liable to be adjusted over again in computing the profits or gains of the new industrial undertaking, no such adjustment would equally be permissible in applying the provision contained in sub-s. (3) of s. 80J. The facts before the Supreme Court in Patiala Flour Mills Co.'s case [1978] 115 ITR 640 were similar to the facts before us, because in that particular case, the company in question was carrying on several businesses and those businesses are referred to as old businesses. It had put up a cold-storage plant in the accounting year relevant to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstruction, even by turning and twisting the language of sub-s. (1) of s. 80J, it can be held that for the purpose of allowing the deduction contemplated under that section the profits or gains of the new industrial undertaking must be computed in a manner different from that in which they would be computed in determining the total income chargeable to tax. Sub-s. (1) of s. 80J does not create a legal fiction that for the purpose of applying the provision contained in that sub-section, the profits or gains of the new industrial undertaking shall be computed as if the new industrial undertaking were the only business of the assessee right from the date of its establishment or the losses, depreciation allowance or development rebate in respect of the new industrial undertaking for the past assessment years were not set off against the profit from other businesses. " At page 647, Bhagwati J. observed : " The same mode of computation must prevail also in applying the provision contained in sub-s. (3) of s. 80J, because that sub-section provides for setting off the carried forward amount of deficiency of the past assessment years against ' the profits and gains referred to in sub-s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessable to tax under the rest of the provisions of the Act, barring Chap. VI-A and s. 280-O. If those profits and gains amount to nil or to a negative figure when computed for the purpose of the rest of the provisions of the Act of 1961, no relief can be granted under sub-s. (1) of s. 80J and to the extent of the deficiency referred to in sub-s. (3) of s. 80J, the deficiency can be carried forward to the next assessment year subject to the overall limit of eight years from the commencement of the working of the new industrial undertaking. It is true that we are concerned with the assessment year after the assessment year 1968-69 and, therefore, for the the purpose of s. 80K, the words of s. 80K which are material are " there shall be allowed in computing his total income a deduction,' from such income by way of dividends an amount equal to such part thereof as is attributable to profits and gains derived by the company from an industrial undertaking or ship or the business of a hotel in respect of which the company is entitled to a deduction under section 80J ". Mr. Kaji emphasised the words " in respect of which the company is entitled to a deduction under section 80J " occurri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o.'s case [1978] 115 ITR 640 and, in the context of s. 80J, must mean profits and gains assessable to income-tax under the provisions of the Act other than Chap. VI-A and s. 280-O. Unless, therefore, there are assessable profits and gains derived by the company from the new industrial undertaking in the particular assessment year in question, there is no part of the dividend actually received by the shareholders which can be said to be attributable to the profits and gains derived by the company from the new industrial undertaking. To use the words of the Supreme Court in S. S. Sivan Pillai's case [1970] 77 ITR 354, no dividend having been distributed out of the taxable profits, there is no dividend attributable to that part of the profits which are exempt from tax in the hands of the shareholder. If the total amount of dividend declared by the company in question has no component of profits and gains derived by the company from a new industrial undertaking, there cannot be said to be a part of the dividend which is attributable to the profits and gains which the company derived from the new industrial undertaking. On the plain grammatical interpretation of s. 80K and also on the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the provisions of the I.T. Act, 1961, barring provisions of Chap. VI-A and s. 280-O. In the light of the interpretation placed on the scheme of s. 80J by the Bench of three judges in Patiala Flour Mills Co.'s case [1978] 115 ITR 640 (SC), which interpretation was not present before the Supreme Court in Coromandel Fertilizers' case [1976] 102 ITR 533, we are constrained to hold that the provisions. of s. 80K are not applicable when the profits and gains derived by a company from a new industrial undertaking when computed for the purposes of the other provisions of the I.T. Act barring Chap. VI-A and s. 280-O, are nil or shows loss. It was urged by Mr. Kaji that if this is the interpretation to be placed on s. 80K, the words " in respect of which the company is entitled to a deduction under section 80J " would be rendered otiose and such an interpretation as would render the words otiose should not be placed on s. 80K. This contention of Mr. Kaji cannot be accepted because it is to be borne in mind that the division between the two alternatives is on the footing of the year of assessment, that is, any assessment year commencing prior to 1st of April, 1968, on the one hand and an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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