TMI Blog1978 (4) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in Income-tax Reference No. 115 of 1974 (Commissioner of Income-tax v. Cambay Electric Supply Industrial Co. Ltd. [1976] 104 ITR 744)) raise two interesting questions regarding the mode in which, and the fund from which, deduction of 8% contemplated by section 80E(1) of the Income-tax Act, 1961 (as it stood at the relevant time) should be computed. The short facts giving rise to the questions may be stated : The assessee-Cambay Electricity 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 appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directed that fresh assessment be made in accordance with law. Feeling aggrieved by the order passed by the Additional Commissioner of Income-tax, the assessee preferred an appeal to the income-tax Tribunal. In the appeal as regards the item of Rs. 7,55,807, being profits arising from the sale of old machinery and buildings under section 41(2) of the Act, the Tribunal took the view that the said item of profits could not be treated in isolation or divorced from the profits and gains of the business of generation and distribution of electricity 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 compu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the deduction of 8% under section 80E(1) of the Act. He emphasised that under that section a deduction of 8% is permissible from "such profits and gains" meaning "profits and gains attributable to the business of generation and distribution of electricity" carried on by an assessee. He contented that a balancing charge contemplated under section 41(2) is really in the nature of a return of capital and not a return of revenue and it is only by reason of the fiction created by section 41(2) that the same is deemed to be a revenue receipt and has 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 provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 8% deduction, for such extension, of the fiction would be within and for the purpose for which the same has been created. In our view the answer to the question raised before us really turns upon the proper construction of the provision contained in section 80E(1) of the Act rather than on what is the real nature or character of a balancing charge arising under section 41(2) of the Act and it would, therefore, be proper to set out the provisions of section 80E as it stood at the relevant time : " 80E. Deduction in respect of profits and gains 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om business the same as per section 29 will have to be computed in accordance with sections 30 to 43A which would include section 41(2). It is also clear that under the second step the profits and gains attributable to the business of the specified industry (here generation and distribution of electricity) forms a component of the total income spoken of in the first step. Reading these two steps together, therefore, it is obvious that in computing the total income of the concerned assessee the balancing charge arising as a result of the sale of old machinery 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 contem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus : " assume that the original cost of a machinery or plant is Rs. 100 and depreciation allowed is Rs. 25; the written down value is Rs. 75. If the machinery is sold for Rs. 100, it is obvious that depreciation of Rs. 25 was wrongly allowed. If it had not been allowed, that amount would have swelled the profits to that extent. When it is found that it was wrongly allowed, that profit is brought to charge. The second proviso, therefore, in substance, brings to charge an escaped profit or gain of the business carried on by the assessee". These apparently divergent 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 fict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and gains derived from the conduct of the business of generation and distribution of electricity. In this connection, it may be pointed out that whenever the legislature wanted to give a restricted meaning in the manner suggested by the learned Solicitor-General, it has used the expression " derived from", as, for instance, in section 80J. In our view, since the expression of wider import, namely, "attributable to", has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed by the words "as computed in accordance with the other provisions of this Act" in parenthesis and the mandate of these words clearly negatives the argument that the expression "total income" has been used in the sense of commercial profits. Secondly, the expression "total income" has been defined in section 2(45) of the Act as meaning "the total amount of income referred to in section 5, computed in the manner laid down in this Act" and when this definition has been furnished by the Act itself the expression as appearing in section 80E(1) must, in the absence 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. Commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e non-deductible for the same reasons for which unabsorbed loss could not be deducted under the earlier decision and the unabsorbed depreciation was held to be non-deductible on the basis of a priori reasoning. The question that arises for consideration, therefore, is whether the view taken in regard to non-deductibility of carried forward losses while computing the total income for the purpose of granting the 8% deduction under section 80E in the first two decisions is correct. It is true that in the instant case the question of deductibility or otherwise of carried 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 Tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpinging on the other. It will thus appear that the Kerala High Court has regarded section 72 appearing in Chapter VI as a provision unconnected with the computation of the total income of an assessee and a provision which comes into operation at a stage subsequent to the computation of the total income arising from business done in accordance with sections 30 to 43A occurring in Chapter IV of the Act and, therefore, the unabsorbed losses cannot be set off before calculating the deduction under section 80E. It is not possible to accept the view that section 72 has 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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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