TMI Blog1981 (3) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... ---------------------- --------------------------- Total income: Rs. 2,31,02,004 Round off to: Rs. 2,31,02,000 " There was an appeal before the AAC. The AAC, relying upon the decision in the case of Indian Transformers Ltd. [1972] 86 ITR 192 (Ker) and Gurjargravures Pvt. Ltd. [1972] 84 ITR 723 (Guj), directed the ITO to allow relief to the assessee under s. 80-1 on the gross total income before setting off of the carried forward losses and development rebate. Being aggrieved by the order on this aspect, the Revenue went up in appeal before the Tribunal. The Tribunal had observed that similar issue arose in the assessment year 1970-71, in which it had held that the assessee was entitled to the relief under s. 80E on the profits of priority industry before setting off of the unabsorbed development rebate. In this connection, it should be proper to refer to the order of the Appellate Tribunal which, inter alia, observed as follows: " In ground No. 6 the Department has objected to the allowance of relief under section 80-I on the gross total income before setting off of the unabsorbed development rebate. Similar issue arose in the assessment year 1970-71. In that year, we hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rect itself, in law, in holding that the sum of Rs. 8,623 being cash allowance paid to the employees of the assessee did not amount to perquisites. The Tribunal was, therefore, justified in deleting the disallowance of this sum made by the Revenue authorities. The question is, therefore, answered in the negative and in favour of the assessee. It is now necessary for us to examine the first question. This question, we must first make it clear, deals with the question whether the profits of priority industry could be set off against the unabsorbed development rebate of priority industry itself. What would be the position in the case of a claim for setting off depreciation, and carried forward losses in respect of non-priority industry was the subject-matter of a decision before us in the case of CIT v. Belliss Morcon (I.) Ltd. (I.R. Reference No. 225 of 1976) judgment in which was delivered by us on February 18, 1981-[1982] 136 ITR 481. But here, in the instant case, we are concerned with the question of setting-off of the profits of the priority industry against the unabsorbed development rebate of priority industry itself for the purpose of eligibility under s. 80-I of the I.T. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention on certain factors. The section had the heading which indicated that it dealt with the question of deduction in respect of profits and gains from priority industries in the case of certain companies. It is indisputable that the present company of the assessee with which we are concerned comes within the ambit of the provisions of this section. It next appears that in the case of such a company in order to be eligible for the deduction the " gross total income " must include " any profits and gains " attributable to priority industries " and if it does then the section enjoins that there shall be allowed in accordance with and subject to the provisions of this section a deduction from " such profits and gains of an amount " equal to 8 per cent. thereof in computing the total income of the company. For our present purpose, it is not relevant to refer to sub-s. (2) or (3) of s. 80-I. We may, however, mention that sub-s. (3) of s. 80-I was designed to avoid double benefit in respect of certain contingencies for priority industries. Therefore, the expressions de gross total income ... ... profits and gains attributable to priority industries " as also the expressions " deductions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits in the commercial sense and not assessable or taxable profits liable to tax as income under the 1922 Act. It was a well-known concept in the taxation law that the term "profits" in the various sections of the income-tax Acts had not got the same meaning. In the context, sometimes it meant the assessable profits and sometimes it meant commercial profits. The gravamen of the argument on behalf of the assessee, in that case had been that the development rebate deductible from the assessable profits of the company was also a type of outgoing expenditure or out of pocket cost which was deductible while ascertaining the profits of the company in the commercial sense. It was submitted that it was in the nature of a depreciation allowance and was identical with the initial depreciation. It should, therefore, be deducted from the commercial profit of the company. The Supreme Court noted that depreciation allowance had been allowed to be deducted from the assessable profits of the assessee under s. 10(2)(vi) of the 1922 Act, corresponding to s. 32 of the 1961 Act. It would appear from the report of the Taxation Enquiry Commission, 1953-54, Vol. 11, as to what was the nature of deprecia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of such profits and gains, an amount equal to 8 per cent. would be allowed in computing the total income of the assessee-company which must be computed in accordance with the provisions of the Act. Therefore, the language of the section makes it clear, in our opinion, the significant differences in the expressions "gross total income", "income" and " profits and gains attributable to priority industry " that " the profits and gains attributable to priority industry" must be computed in the commercial sense and not in accordance with the provisions of the Indian I.T. Act, otherwise the Legislature would not have used the expression " profits and gains attributable to priority industry " if not in contradistinction to, at least differently from the expression" total income" in " gross total income ". Furthermore, the Legislature had not made the expression " gross total income " or " total income " synonymous with the " profits and gains attributable to priority industry " because that would have defeated the purpose of giving such relief or incentive to priority industry, as we have mentioned hereinbefore. This question, however, has been the subject-matter of several decisions. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the profits and gains of a particular type of industry to which the Legislature desired to give the special treatment should be computed in accordance with the provisions of the Indian I.T. Act, 1922, and not in accordance with the notions of commercial profits. The Legislature has expressly provided so in the language used in the said provision. It is in this light, we may examine some of the decisions of the Supreme Court. In the case of CIT v. S. S. Sivan Pillai [1970] 77 ITR 354 (SC), the question was whether the exemption under s. 15C(1) of the Indian I.T. Act, 1922, from payment of income-tax of a part of the profits of new industrial undertaking was not related to the business profit or was relate to the taxable profit. The Supreme Court was of the view that the language of sub-s. (3) was clear that the profits of industrial undertakings had to be determined under s. 10 of the Act. Even if the undertaking had earned profits out of its commercial activity, if it had no taxable profits, it could not claim exemption from payment of tax under s. 15C(1) and, therefore, if the undertaking could not claim the benefit under sub-s. (1), the shareholders would not get the benefit un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd gains, unless it has remained unabsorbed by reason of inadequacy of the total income chargeable to tax in the past assessment years and, as pointed out above, by total income we mean not only profits or gains derived from the new industrial undertaking but the totality of profits or gains computed under various heads and is carried forward to the assessment year in question. There is nothing in sub-section (3) of section 15C or in any other provision of the Act which requires that in computing the profits or gains of a new industrial undertaking under section 10, depreciation allowance or development rebate in respect of the new industrial undertaking for the past assessment years should be taken into account, even if it has been set off fully against the profits or gains of any other business carried on by the assessee or against income under any other head and there is no unabsorbed depreciation allowance or development rebate to be carried forward. It is indeed difficult to see how effect can be given to depreciation allowance and development rebate twice over, once in the past assessment years and again in the assessment year in question. To give effect to depreciation allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect of the language used in sub-section (3) of section 15C. Indeed, the language is so clear and unambiguous that it is impossible to place any other construction upon it. But, apart from the language of the section, it may be noted that if the construction contended for on behalf of the Revenue and upheld by the High Court as well as the Tribunal were accepted, it would lead to the highly anomalous result that, though for the purpose of computing the total income chargeable to tax, the depreciation allowance and development rebate which have been set off against the other income of the assessee for the past assessment years would not be liable to be taken into account, they would have to be deducted in computing the profits or gains of the business for the purposes of applicability of sub-section (1) of section 15C. Thus, there would be two different modes of determining the profits or gains of the business, one for computing the total income chargeable to tax and the other for applying the provisions of sub-section (1) of section 15C. We cannot imagine that such a consequence could ever have been intended by the Legislature." With this background in view it would be necessary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court, to the quantum of the income included, but referred only to the category of income included, that is to say, income by way of dividend from an Indian company. The Supreme Court was of the view that the deductions permissible under s. 80M was to be calculated with reference to the full amount of dividend received from a domestic company and not with reference to the dividend so computed in accordance with the provisions of the Act, i.e., after making the deduction provided under the Act. The words " where the gross total income of an assessee... includes any income by way of dividends from a domestic company " in s. 80M merely prescribed a condition for the applicability of the section, that is to say, that the gross total income must include this category of income described by the words " income by way of dividend from a domestic company ". If the gross total income included this particular category of income, whatever might be the quantum of such income included, the condition, according to the Supreme Court, would be satisfied and the assessee would be eligible for deduction of the whole or 60 per cent. of such income, as the case might be. The words " such income " could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of the Act before making any deduction under Chap. VI-A or under s. 280D. What s. 80A, sub-s. (1), requires is that, first, the total income of the assessee must be computed in accordance with the provisions of the Act without taking into account the deductions required to be made under Chap. VI-A or under s. 280D and then from the gross total income thus computed, the deductions specified in ss. 80C to 80VV must be made in order to arrive at the total income. But sub-s. (2) of s. 80A provides that the aggregate amount of the deductions required to be made under Chap. VI-A shall not exceed the gross total income of the assessee so that the total income arrived at after making the deductions specified in ss. 80C to 80VV from the gross total income can never be a minus or negative figure. This provision imposing a ceiling on the deductions which may be made under ss. 80C to 80VV clearly postulates that in a given case the aggregate amount of these deductions may exceed the gross total income. It is in the context of this background that we have to determine the true interpretation of s. 80M, which, as the marginal note indicates, provides for deduction in respect of certain inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f plain grammar must be substituted by the words 'income by way of dividends from a domestic company' in order to arrive at a proper construction of the section and if that is done, it would be obvious that the deduction is to be in respect of the whole or 60 per cent. of the 'income by way of dividends from domestic company', which can only mean the full amount of dividends received from a domestic company. The deduction permissible under the section is, therefore, to be calculated with reference to the full amount of dividends received from a domestic company and not with reference to the dividend income as computed in accordance with the provisions of the Act, that is, after making deductions provided under the Act. This was the view taken by the Madras High Court in Madras Auto Service v. ITO [1975] 101 ITR 589 and it meets with our approval. It is true that the Gujarat High Court has taken a contrary view in Addl. CIT v. Cloth Traders P. Ltd. [1974] 97 ITR 140 which is the subject-matter of Civil Appeals Nos. 117 and 118 of 1975, but we think it proceeds on an erroneous interpretation of the language of s. 80M, sub-s. (1). It wrongly construes the words 'such income' to be ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : " 80AA. Computation of deduction under section 80M.-Where any deduction is required to be allowed under section 80M in respect of any income by way of dividends from at domestic company which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, the deduction under that section shall be computed with reference to the income by way of such dividends as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) and not with reference to the gross amount of such dividends." Section 80AB was also inserted by the Finance (No. 2) Act of 1980 and which reads as follows : " 80AB. Deductions to be made with reference to the income included in the gross total income.Where any deduction is required to be made or allowed under any section (except section 80M) included in this Chapter under the heading 'C-Deductions in respect of certain incomes' in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vidends has necessarily to be calculated with reference to the amount of dividend which forms part of the 'gross total income'. In other words, it has always been the intention to grant the deduction at the specified percentage on the net amount of such dividends and not the gross amount thereof. 79. However, recently, the Supreme Court has held that the deduction admissible for the inter-corporate dividends has to be calculated with reference to the gross amount of dividends received by a domestic company from an Indian company and not with reference to the dividend income as computed in accordance with the provisions of the Income-tax Act, i.e., after making the deductions provided under the Act.. The Supreme Court, further held that if the gross total income of the taxpayer includes any particular category of income, whatever be the quantum of such income included, the taxpayer would be eligible for the deduction of the whole, or, as the case may be, the specified percentage of such income. 80. The effect of the Supreme Court's decision may be explained by taking a hypothetical example. Suppose, a domestic company receives dividends amounting to Rs. 2 lakhs from another dome ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the net amount of income and the retrospective operation of the new section 80AA would be fully justified. However, the retrospective operation of the provision may cause hardship in case of persons who have developed scientific skills and technology and helped in making our technology popular in other countries as well as in India. Some of the other provisions in Chapter VIA have no significant revenue implications. Having regard to these consideration, I propose to give retrospective effect to this provision only in relation to inter-corporate dividends eligible for deduction under section 80M. So far as other sources of income mentioned in Part C of Chapter VIA are concerned, the relevant provision in the Bill will apply only prospectively, that is, with effect from April 1, 1981." Therefore, it appears that the Legislature understood the effect of the decision in the case of Cloth Traders (Pt.) Ltd. v. CIT [1979] 118 ITR 243 (SC), that profits and gains attributable to the types of industries to which the relief was contemplated in Chap. VI of the Act was to be understood in the commercial sense and was not to be computed in the light of the computation of total income in acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charge in respect of machinery used in priority industry under s. 41(2) of the I.T. Act, 1961, could be said to be an income attributable to such industry. The Gujarat High Court, in this connection, examined the difference between the expressions " attributable to " and " derived from " and was of the opinion that such balancing charge from the priority industry could be treated as an income attributable to priority industry. The next question was whether in computing the relief under s. 80E(1) of the I.T. Act, 1961, deduction in respect of such balancing charge and other unabsorbed depreciation had to be made before giving relief under s. 80E. There, the assessee-company was carrying on business of generation and distribution of electricity and was, therefore, covered by the provisions of s. 80E of the I.T. Act, 1961, as it stood prior to the amendment in 1968. According to this section, the assessee was entitled to claim deduction at the rate of 8 per cent. on the amount of profits and gains attributable to its business of the generation and distribution of electricity. During the assessment year 1967-68, the accounting year for which was the financial year 1966-67, the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he computation of total income referred to in the first part was to be made before the deduction of 8 per cent. was worked out and the computation was to be worked out with reference to the other provisions of the Act except the provisions of s. 80E. In this connection, it may be material to refer to the contentions urged on behalf of Revenue, in this case, in the words of the Division Bench which are as follows (p. 762 of [1976] 104 ITR 744): " On this point, the contention of the Revenue is that if a reference is made to the scheme of section 80E(1) it is found that it first contemplates the working out of the total income of the assessee 'as computed in accordance with other provisions of the Act'. It was contended by Shri Kaji, on behalf of the Revenue, that the expression 'total income' as defined by clause (45) of section 2 means 'income computed in the manner laid down in the Act' and that this expression should be understood in the same sense while interpreting the provisions of section 80E(1). Sri 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 he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, the real question is what is included in the computation of total income. Is it the gross amount of profits and gains or the net amount of profits and gains (arrived at after deducting depreciation allowance and development rebate) which is included in the computation of 'total income'? The correct answer to this question can be obtained only if we find out what becomes a constituent part of the 'total income' which is computed in accordance with the provisions of the Act. Can it be said that when you are computing the 'total income' in accordance with the provisions of the Act, you can take the gross amount of profits and gains as one of its components? In our opinion, a clear and unequivocal answer to this question is in the negative, because, if you do so, you are taking the 'total income' which is not in accordance with the provisions of the Act. This particular aspect has been exhaustively examined by this court in the above referred case of Addl. Commissioner of Income-tax.Cloth Traders(P.)Ltd.[1974] 97 ITR 140(Guj). The question which was involved in that case was whether, while computing deduction of tax on inter-corporate dividend under section 85A of the Act o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l income " and not otherwise. The discussion which follows shows that it is the net dividend income and not the gross one which can become a component of " total income".' These observations apply fully to the facts of the present case, because even section 80E, with which we are concerned in this reference, contemplates the deduction of 8% from such profits and gains which are included in the total income computed under the first part of the section. In other words, 8% deduction is to be calculated on that component which has gone to make up the 'total income' contemplated by the first part of the section. Therefore, the contention of the assessee that 8% deduction should be on the gross profits and gains of business irrespective of what happens when 'total income' is computed, is wholly unacceptable." Now, out of this decision, the matter went up to the Supreme Court and the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd v. CIT [1978] 113 ITR 84. It may be mentioned that the Bench consisted of two learned judges. There, the Supreme Court held that in computing the total income of the assessee carrying on the business of the industry spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under s. 15C(1) was involved, (was cited), nor, the decision of the Supreme Court in the case of Rajapalayam Mills Ltd. v. CIT [1978] 115 ITR 777 (could have been cited) before the Supreme Court in the case of Cambay Electric Supply [1978] 113 ITR 84. The Supreme Court observed at pp. 90-91 of the report as follows: " It was further not disputed before us that the assessee being an Indian company engaged in the business of generation and distribution of electricity is a company, to which the section applies and is entitled to claim the deduction of 8% contemplated by that provision and the only question is how and in what manner the said deduction should be computed. On reading sub-section (1) it will become clear that three important steps are required to be taken before the special deduction permissible thereunder is allowed and the net total income exigible to tax is determined. First, compute the total income of the concerned assessee in accordance with the other provisions of the Act, i.e., in accordance with all the provisions except section 80E; secondly, ascertain what part of the total income so computed represents the profits and gains attributable to the business of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 legislative mandate as to how the total income of which the profits and gains attributable to the business of the specified industry forms a part of the concerned assessee is to be computed and according to the parenthetical clause, which contains the key words, the same is to be computed in accordance with the provisions of the Act, except section 80E and since in this case, it is income from business the same will have to be computed in accordance with sections 30 to 43A which would include section 33(2) (which provides for carry forward of depreciation) and section 33(2) (which provides for carry forward of development rebate for 8 years). In other words, in computing the total income of the concerned assessee, items of unabsorbed depreciation and unabsorbed development rebate will have to be deducted before arriving at the figu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erned assessee in accordance with the other provisions of the Act, it may be pointed out that this position, with respect, is indisputable. The second step is to ascertain what part of the total income so computed represents the profits and gains attributable to the business of the specified industry. This is also a legitimate step and the third step is that if there were profits and gains so attributable, deduct 8 per cent. thereof from such profits and gains. It seems that it was not seriously argued before the Supreme Court that the expression 'profits and gains' should be understood in the commercial sense and not in the sense of computation of the total income. The statute provides in accordance with the other provisions of the I.T. Act specifically for that. That was not the contention urged before the Supreme Court as appearing from the arguments advanced before the Supreme Court as noted therein. In that respect, it may be said that there is no warrant in the statute for treating the expression " gross total income " or " total income computed " in accordance with the provisions of the Act as synonymous with the profits and gains attributable to the specified industry. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . as contemplated by s. 80E(1) without a deduction of the unabsorbed depreciation and development rebate in the priority industry. In this connection, it appears to us that in so far as the effect of the expression as mentioned by the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT there is some apparent conflict with the subsequent "decision" (sic) of the Supreme Court in the case of Cloth Traders (P.) Ltd. v. Addl. CIT. In such a case, as the decision of Cloth Traders (P.) Ltd. was a decision of a larger Bench and in the later decision though the previous decision was not considered, we are bound to follow the ratio of the decision of the larger Bench. In this connection reference may be made to the observations of the Supreme Court in the case of Mattulal v. Radhe Lal, AIR 1974 SC 1596, as well as the decision of the Supreme Court in the case of State of U.P. v. Ram Chandra Trivedi, AIR 1976 SC 2547. In the last mentioned case, the Supreme Court noted with approval the observations from the unreported decision of the Supreme Court in Civil Appeal No. 212 of 1975 since reported Union of India v. K. S. Subramanian, AIR 1976 SC 2433, 2437), where th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ruled its earlier decision in Cambay Electric Supply. " This observation in the decision of this court, in our opinion, is obiter because the court held that two views were possible, and under s. 154 of the Act, therefore, the ITO had no jurisdiction to pass the impugned order. Secondly, it appears, that before the Division Bench the legislative interpretation of the Bench decision of the Supreme Court in Cloth Traders (P.) Ltd. was not there. In that view of the matter, in our opinion, the said observation of the Division Bench cannot in any way affect the decision of the issue before us which is directly in issue. Learned advocate for the Revenue mainly stressed on the structure and language used of the section. He is quite right in emphasising that primarily the language used must be resorted to in resolving the controversy at issue. But in this case as we have indicated the language used dichotomy, namely, the expression " total income " or " gross total income " on the one hand, and " profits and gains " attributable to priority industry on the other. Therefore, it must be presumed that the Legislature intended to convey two different ideas by two different kinds of expres ..... X X X X Extracts X X X X X X X X Extracts X X X X
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