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TMI Blog1975 (12) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... cified 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." Corresponding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit or gain attributable to the business of generation or distribution of electricity within the meaning of section 80E(1) and should, therefore, have not been added to the business income of Rs. 46,319 for the purpose of giving 8% deduction contemplated by the said section. He also found that for the purpose of calculating deduction of 8% under section 80E, set-off for the unabsorbed depreciation and development rebate should also not have been given by the Income- tax Officer. On this calculation, the Additional Commissioner of Income-tax came to the conclusion that the assessee was not entitled to any deduction. The Additional Commissioner of Income-tax carried out the assessment in the manner stated as under : Since under section 41(2) of the Act, the excess over written down value up to the amount of the original cost of machinery and plant, which was sold during the accounting period, was required to be added to the business income earned by the assessee during the accounting period, the Additional Commissioner of Income-tax computed the total income of the assessee at Rs. 8,02,126. From this amount, he first set off the unabsorbed depreciation and development rebate of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 80E(1) of the Act ? " We shall first take up for our consideration the question whether the profit of Rs. 7,55,807 added to the profits and gains of business under section 41(2) on account of sale of old machinery and building should be taken into account while working out the deduction under section 80E or not. On this question the contention raised by Shri Kaji on behalf of the revenue was that since the addition of Rs. 7,55,807 is on account of the balancing charge made under section 41(2) of the Act, the nature of this addition does not amount either to profits or gains from business. According to him, in its real nature, this amount is the return of the depreciated capital and if it is treated as profit under section 41(2) of the Act, it is merely because of the fiction created by section 41(2) of the Act. According to Shri Kaji, such a fiction should not be carried further than what is absolutely necessary for carrying out its purpose. According to him, therefore, while computing the deduction at 8% under section 80E, this amount should not be taken into consideration. In support of the above proposition Shri Kaji has put strong reliance upon the decision given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt and the third decision of this court in Commissioner of Income-tax v. Bai Vina were given. In Commissioner of Income-tax v. Bipinchandra Maganlal Co. Ltd. the question which was involved was with reference to the working out of the provisions of section 23A(1) of the Act of 1922. The company in that case had distributed its profits without taking into account the difference between the written down value of the asset which was sold and the price realised by the sale thereof and the question arose whether such distribution was justified by smallness of profits earned by the company excluding the said difference. If the above stated difference between the written down value and the sale price was added then the profit which was distributable could not be considered small. On behalf of the revenue it was contended in that case before the Supreme Court that the expression " smallness of profit " means no more than smallness of the assessable income, and in that event, in the computation of profits, the amount realised by sale of the machinery in the year of account in excess of its written down value was liable to be included in considering whether the condition relating to " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the written down value of an asset and the price realized by sale thereof though not profit earned in the conduct of the business of the assessee is notionally regarded as profit in the year in which the asset is sold, for the purpose of taking back what had been allowed in the earlier years." (emphasis supplied by us). Relying upon these observations, Shri Kaji contended that the addition of the amount of Rs. 7,55,807 under section 41(2) of the Act is nothing but the return of capital and, therefore, it should not be considered either as profits or as gains of the business of the assessee. The above decision given by the Supreme Court has been considered by this court, as stated above, in Commissioner of Income-tax v. Bai Vina. It is, therefore, necessary to refer to that decision in order to know how the above ratio of the Supreme Court has been applied by this court. In this case, the question which arose for consideration was relating to the construction of section 2(6A)(c) of the Act of 1922. This section of the Act of 1922 describes what should be included in the term " dividend ". Clause (c) of that section says that the word " dividend " includes " any distribution ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale price over the written down value is to be deemed to be the profit of the assessee to the extent of the total depreciation allowance granted in the past and it is to be deemed to be such profit in the year of account in which the capital asset is sold. It would be seen that a deeming provision is enacted in this proviso and the object clearly is to convert that which is not profit into profit. When a capital asset is sold what is received by the assessee is capital return and not profit. Of course when we say this we are referring only to so much of the sale price as does not exceed the cost of the capital asset. The excess of the sale price over the cost would certainly be capital gain but the sale price to the extent to which it does not exceed the cost would be nothing but return of capital and no part of it even in excess of the written down value can be said to partake of the character of profit. The receipt of excess over written down value down value on sale of capital asset would, therefore, be in the nature of capital return and not profit. But the legal fiction in the second proviso to section 10(2)(vii) converts it into profit for the purpose of assessment of the ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e written down value up to the original cost to the assessee realised on the sale of machinery used in his business might be brought to tax as profit of the business under the second proviso to section 10(2)(vii) of the Act, it was necessary that the machinery should have been sold when the business was being carried on. The Supreme Court further held that as the machinery was sold in this case after the business of the Free Press Co. was closed and during the winding-up proceedings, the second proviso to section 10(2)(vii) did not apply. Therefore, the sum of Rs. 2,14,090 which was excess over the written down value up to the amount of cost, could not be brought to tax. Now, while giving this decision, the Supreme Court construed the second proviso to section 10(2)(vii) of the Act and observed as under : " We are concerned with the second proviso to section 10(2)(vii) of the Act. The substantive clause grants a balancing allowance in respect of building, machinery or plant which has been sold or discarded or demolished or destroyed. The allowance represents the excess of the written down value over the sale price. Under the proviso, if the sale price exceeds the written down va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 41(2) of the Act, we are of the opinion that truly speaking there is no conflict between these two decisions. We find that while the decision given by the Supreme Court in Bipinchandra Maganlal Co. emphasises the original and real character of the charges in question, the decision. given by the Supreme Court in Express Newspapers Pvt. Ltd. emphasises the incidence or the resultant effect of that charge. This will be clear if we examine the intrinsic character of the depreciation allowance as well as the balancing charges contemplated by the Act. The plant or the machinery which is used for running the business is bound to suffer from wear and tear on account of its user. It, therefore, necessarily depreciates in value by its use in business. Really speaking, such depreciation is reduction in its capital value. In ordinary course, reduction of capital value of a fixed asset would be treated as having a capital nature and would be taken on the capital account. But when there is reduction in capital value on account of depreciation resulting from the use of that fixed asset for running a business, the said reduction must be treated on the revenue account, and hence, on strict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... caped tax, should not (sic) be brought to tax in the accounting period by adding it to the business income. It is thus clear that when the above referred amount of Rs. 600 was deducted from the profits, it was deducted on the footing that it was revenue loss, though, in fact, it was loss of capital. In the same manner when it is again added under section 41(2) to the business income, it is added on the same footing that it is profit or gain in revenue though, in fact it was nothing but the return of loss in capital which occurred in the previous years. When it was deducted as depreciation, its incidence or resultant effect fell on the revenue with the result that profits from business suffered to the extent of the depreciated value. In the same manner, when the same amount was added back, for working balance charge, its incidence fell on the revenue, because profits from business swelled to the extent of that charge. Thus, at both the ends the sufferer and the gainer is the revenue account as the profits and gains of business even though the loss or the gain was really referable to an asset which was of capital nature. If the matter is viewed from this aspect, it will be clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own field and the courts held that that was not permissible. But, here, we are carrying the fiction to its logical conclusion by keeping it within its own purpose and field. In our opinion, therefore, the decision in both these cases can be reconciled with our decision because we are not treating the excess over written down value in this case as anything but the return of capital but since this return of capital had previously also its resultant effect on the revenue account, the said effect is merely carried to its logical conclusion. In this connection, we may profitably refer to the decision given by the Supreme Court in Donald Miranda v. Commissioner of Income-tax, wherein it is observed that when any portion of the tax collected on excess profits is refunded under the provisions of the Indian Finance Act, 1942, or the Excess Profits Tax Ordinance, 1943, it necessarily has the same quality which it had before the amount which was charged with the payment of the tax had under the provisions of those Acts. It was further observed with reference to the facts of that case that when the tax was deposited with the Central Government it was a portion of the profits of the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preciation of the current year under section 32(2) of the Act, and, therefore, before working out what is the exact figure of the profits and gains of the business for the current year, it must be deducted. So far as the unabsorbed depreciation of Rs. 1,42,955 is concerned, we find that, apart from the legal aspect of the matter, on consideration of the peculiar facts of this case, the unabsorbed or carried forward amount of depreciation must be deducted according to law before 8% deduction under section 80E is worked out. We propose to discuss this aspect of the matter first. We have already held above that the profit of Rs. 7,55,807 which is worked out under section 41(2) of the Act should be taken into consideration and added to the business income of the assessee for the purpose of working out 8% deduction. Obviously, this profit of Rs. 7,55,807 is worked out as a result of particular written down value in the books with regard to the machinery and the buildings in question. Now, this written down value is written down irrespective of the question whether depreciation of a particular year is fully or partially absorbed. In this connection we may point out to the provisions c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his expression should be understood in the same sense while interpreting the provisions of section 80E(1). Shri Kaji also drew our attention to the provisions contained in sections 28 and 29 of the Act. Section 28 enumerates the income which shall be chargeable to income-tax under the head " profits and gains of business or profession " while section 29 says that income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43A. Drawing our attention to these sections, Shri Kaji contended that sections 32 and 33 under which the depreciation allowance and the development rebate are granted are two of the sections referred to in section 29, and, therefore, when you are working out the total income " as computed in accordance with the other provisions of the Act ", you must first work out the figures of the total income after deducting the depreciation allowance and the development rebate as contemplated by sections 32 and 33. As against this, the contention of Shri Shah appearing for the assessee was that the expression " total income " appearing in section 80E(1) is used in its commercial sense, and neither the carried forward depre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out our view about the correct interpretation of section 80E of the Act as under : Section 80E finds its place in old Chapter VI-A which provided for "deductions to be made in computing total income ". This Chapter is now replaced by a new Chapter bearing the same number and similar provisions, by Finance (No. 2) Act of 1967, with effect from 1st April, 1968. Provisions corresponding to section 80E of the old Chapter VI-A are found in section 80-I and section 80B(5) of the new Chapter VI-A. The difference between the two provisions is not of any substance as it consists only in the arrangement of legal provisions. While section 80E is a composite and a self-contained provision regarding the deduction of 8%, section 80-I refers merely to the said deduction of 8% in the case of a priority industry, and its first part refers to " gross total income instead of " total income ". The. expressions " gross total income " and " priority industry " are then defined in section 80E. Thus, the total effect of section 80-I of the new Chapter VI-A can be known only after reading the definitions given in section 80B. It should be noted that the expression "gross total income " is defined in cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meaning of the expression " total income " which is used in the first part of the section. The question then is, whether this expression is used in its commercial sense as contended by the assessee, or in its statutory sense, as contended by the revenue. We do not encounter with any difficulty in finding the sense in which this expression is used in view of the parenthetical words to " as computed in accordance with the other provisions of this Act " which follow it. If we construe the expression " total income " in its commercial sense, then these parenthetical words become redundant and without any effect. A construction which ignores the words used by the legislature and which renders these words purposeless and redundant, is never permissible. A contention, such as this, was advanced on behalf of the assessee in Addl. Commissioner of Income-tax v. Cloth Traders (P.) Ltd. decided by this Bench with reference to the mode of computation of deduction in respect of intercorporate dividend contemplated by section 85A (now section 80N) of the Act, but the same was rejected holding that unless the context shows otherwise, the expression " total income " should be construed only in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... include sections 32 and 33. Now, section 32 is with regard to the depreciation allowance and section 33 is with regard to development rebate. Therefore, at the time of working out the computation of the income under the head " profits and gains of business ", all the implications of section 32 and section 33, which are with regard to the depreciation allowance and development rebate, must be worked out. This means that a correct figure of " total income " as computed in accordance with the provisions of the Act cannot be had without working out depreciation allowance and development rebate (current as well as carried forward) in terms of all the provisions of sections 32 and 33. The above reference to different relevant sections of the Act reveals two important aspects of the matter, namely, (1) total income of an assessee cannot be computed in accordance with the provisions of the Act without computing his income under different heads prescribed by section 14, and (2) computation of income under the head of " profits and gains of business " cannot be made without reference to the provisions contained in sections 32 and 33. The purpose for which section 80E is enacted is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 80E which does not admit of any complications. This scheme is definitely suggestive of the fact that working out of the total income contemplated by the first part of the section is a condition precedent to the working out of 8% deduction contemplated by its second part. It was contended on behalf of the assessee that even if it is found that the total income of the assessee is to be computed for the purpose of the first part of section 80E in the manner stated above, the deduction of 8% should be made from the profits and gains attributable to the business of generation or distribution of electricity without making any deduction on account of depreciation allowance or development rebate under sections 32 and 33 of the Act. It was contended that when the latter part of the section contemplates the deduction of 8 % from profits and gains, it refers to those profits and gains which were gross, i.e., which were not reduced either by depreciation allowance or by development rebate. We find that on a plain reading of section 80E, no such construction is possible. It is important to note that profits and gains from which 8% deduction is required to be made under section 80E a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it. The court, therefore, construed the effect of the expression " on income so included " in the following words : " The second part of the section says that the deduction shall be from the income-tax with which the company is chargeable on its ' total income '. But still the question is how much deduction should be given. The second part provides an answer to this question by saying that the deduction should be on that amount of tax, calculated at the average rate on the dividend income included in the ' total income ', which exceeds 25 % of the income so included. The point to be noted is that the second part contemplates deduction of tax 'on income so included '. The words ' so included ' have reference to the inclusion in the 'total income' contemplated by the above-referred second condition of the first part of the section. In other words, only that tax can be deducted which could be assessed on the dividend income which is included in the' total income' of the assessee-company. To put it differently, the said dividend income is that income which has become one of the component parts of the' total income'. If that be so, gross dividend income can form the base of the deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case before us, there is no question of adjustment of profits and gains from non-priority business against the profits or gains from priority business. In the Kerala case, the question was whether carried forward " loss " from the earlier years could be deducted from the income earned by the assessee before deduction at the rate of 8% was calculated under section 80E. In this reference, there is no question of deduction or otherwise of any carried forward " loss". In our opinion, the question whether the loss incurred in non-priority business, or the carried forward loss can be set off against the income derived from priority business before calculating 8% deduction under section 80E, would stand on different principles, the debate on which is not necessary in this reference. We have arrived at our conclusions quite independently of what is stated in the above two decisions of the Mysore and Kerala High Courts. In that view of the matter, it is not necessary to deal with these two decisions in this reference. The result of the above discussion is that the addition of Rs. 7,55,807 as profit under section 41(2) should be made to the business profits of the year amounting to Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X
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