Govinda Bhat, J.
1. This reference relates to the assessment year 1963-64. The assessee is a Government of India undertaking engaged in the manufacture of electric equipments. It has four divisions : (a) equipment, (b) valveses, (c) transistors and (d) capacitors. Of these, the last three are 'newly established industrial undertakings' entitled to the benefit of tax exemption under section 84 of the Income-tax Act, 1961 (hereinafter called 'the Act') as it stood before the section was deleted by the Finance Act, 1967. The original assessment was taken up in appeal by the assessee before the Appellate Assistant Commissioner who modified the Income-tax Officer's order and as a consequence of the order on appeal, the Income-tax Officer passed an order under section 155 in which the total income was determined at Rs. 2,07,466 as shown below :
Rs. Rs.Profit from valveses division ... 11,27,000Loss from :Equipment division 3,43,534Transistor division 2,86,000Capacitor division 2,90,0009,19,534Net income 2,07,466
2. Six per cent. of the capital employed in the valveses division amounted to Rs. 4,19,040. Since the income was less than six per cent. of the capital employed in the valveses division, the Income-tax Officer determined the tax payable at 'Nil'.
3. The assessee by letter dated October 15, 1965, claimed that there was a loss of Rs. 2,11,574 and the same should be carried forward and required the Income-tax Officer to amend his order passed under section 155. The assessee's claim was based on the following figures :
Rs. Rs.Loss in three divisions of equipment,transistor and capacitors 9,19,534Profit in valves division ... 11,27,000Exempt income u/s. 84 ... 4,19,0407,07,960Net loss to be carried forward 2,11,574
4. The Income-tax Officer rejected the assessee's claim relying on the ratio of the decision in Commissioner of Income-tax v. National Electrical Industries Ltd. ( 37 I. T. R. 131 (Bom.)).
5. The assessee appealed to the Appellate Assistant Commissioner who allowed the appeal and upheld the claim of the assessee. The Appellate Assistant Commissioner relied on the decision in Seth Jamnadas Daga v. Commissioner of Income-tax : 41ITR630(SC) .
6. The department appealed to the Income-tax Appellate Tribunal, Madras Bench. The Tribunal was of the view that the ratio of the decision in Daga's case : 41ITR630(SC) has no application to the facts of the instant case and that the ratio of the decision in National Electrical Industrial Case ( 37 I. T. R. 131 (Bom.)) fully governess the matter. Accordingly, the Tribunal allowed the department's appeal and restored the order of the Income-tax Officer.
7. On the application of the assessee under section 256(1) of the Act, the Tribunal has referred the following question to this court :
'Whether, on the facts of the case, it has been rightly held that the assesses company was not entitled to relief under section 84 of a sum of Rs. 4,19,040 on the basis of the interpretation of section 84 and section 110 of the Income-tax Act, 1961, but only entitled to a relief of Rs. 2,11,574 ?'
8. Section 84 of the Act which has been deleted by the Finance Act of 1967 with effect from 1st April, 1968, provided that :
'...... income-tax shall not be payable by a assessee on so much of the profits and gains derived from any industrial undertaking, etc., to which the section applies, as does not exceed six per cent. per annum on the capital employed in such undertaking computed in the prescribed manner.'
9. The object of the section was to give what is called a 'tax holiday' in respect of newly established industrial undertakings, etc.
10. Section 84 of the Act is in pari materia with section 15C of the Indian Income-tax Act, 1922. The scope of section 15C of the 1922 Act came up for consideration before the Bombay High Court in National Electrical Industrial Ltd.'s case ( 37 I. T. R. 131 (Bom.)) and before the Delhi High Court in Orissa Cement Ltd. v. Commissioner of Income-tax : 80ITR101(Delhi) . No other decision directly bearing on the question before us has been brought to our notice. The ratio of both the decisions is against the claim of the assessee.
11. Sri Ramamani, learned counsel for the assessee, submitted that the only way of giving relief to the assessee under section 84 of the Act is to determine the loss after giving full deduction for the exempted income so that the loss can be carried forward. In support of his contention, he cited the following decision :
Ambica Silk Mills Co. Ltd. v. Commissioner of Income-tax ( 22 I. T. R. 58 (Bom.)), Commissioner of Income-tax v. C. S. Sastri ( 35 I. T. R. 476 (Mad.)) and Seth Jamnadas Daga v. Commissioner of Income-tax : 41ITR630(SC) .
12. In our opinion, the above decisions are of no assistance for answering the question referred.
13. In Jamnadas Dasga's case : 41ITR630(SC) , the assessee was partner in two registered firms and an unregistered firm. During the relevant period the registered firms incurred losses and the unregistered firm showed profit which was taxed on the firm in accordance with section 23 (5) (b) of the 1922 Act. The share of the assessee in the profit of the unregistered firm amounted to Rs. 26,110 and his share of the losses in the registered firms amounted to Rs. 13,167. The assessee had a small income of Rs. 262 which had to be taxed at the rate applicable to his total income. The assessee contended that his share of the profit in the unregistered firm should be ignored entirely in ascertaining his total income and that he was entitled to carry forward the loss of Rs. 13,167 to the succeeding year under section 24 (2) of the 1922 Act. It was held that the assessee's share of losses in the registered firms had to be set off against his share of the profits in the unregistered firm to ascertain his total income. But he was held entitled also to carry forward his share of the loss in the registered firms to the succeeding year section 24 (2).
14. The learned counsel for the department relied on the decision of the Bombay High Court in National Electrical Industries case ( 37 I. T. R. 131 (Bom.)) and the decision of the Delhi High Court in in Orissa Cement case : 80ITR101(Delhi) . In National Electrical Industries case ( 37 I. T. R. 131 (Bom.)), the assesses company had suffered a loss of Rs. 1,15,220, for the assessment year 1950-51 and this loss was carried forward to the next year. The company was also unable to fully avail of the depreciation allowance in 1950-51 and 1951-52. The assesses company was a newly established industrial undertaking and as such entitled to exemption from payment of tax to the extent prescribed by section 15C of the 1922 Act. In the year of account 1951-52 the assesses company made a profit of Rs. 3,65,940, but after making allowance for the unabsorbed depreciation of the previous years and also the loss carried forward from the previous year, there remained no tax able income and accordingly no demand for tax was made for the assessment year 1952-53. In assessing the total income, the Income-tax Officer did not give the benefit exemption from payment of tax under section 15C. The Income-tax Officer deducted out of the net profits the unabsorbed loss of the previous years and the depreciation and when it was found that the total income for the assessment year 1952-53 was exhausted, the benefit of section 15C was not given. If the benefit of exemption from the payment of tax was given to the assessee before the loss carried forward from the previous year and the unabsorbed depreciation of the previous year were allowed out of the profits, full provision could not be made for the latter allowance in the year of assessment. But the assessee would have been permitted to carry forward the loss to the next assessment year and the unabsorbed depreciation could be treated as depreciation for the subsequent year. The question referred was' whether, on the facts and circumstances of the case, the loss brought forward from the proceeding year amounting to Rs. 1,15,220 should be set off against the profits of the year of account before allowing the assessee the benefit of section 15C of the Income-tax Act ?' Shah J. (as he then was) stated ( 37 I. T. R. 131, 134, 135 (Bom.)) :
'.... by enacting section 15C, the legislature has not prescribed for the exclusion of a percentage from the head of profits of a new industrial undertaking in the computation of total income but has merely provided a partial exemption from payment of tax by newly established undertakings and, in the natural sequence of computation of tax, the amount of losses carried forward is liable to be deducted out of the income of the year of account and it is only after the question of tax is ascertained, exemption from payment of the prescribed extent will be given by the taxing authorities..... The exemption is, in terms, payment of tax and it is not an exclusion of income in the computation of the total income...... The exemption from payment of tax under section 15C and the privilege of carrying forward losses are, however, not benefits of the same categories and become allowable to the assessee at different stages of assessment.... The absence of an express provision postpone ng the exemption from tax under section 15C to a set-off for losses of previous years carried forward does not, therefore, justify the view that the scheme of computation of total income for purposes of assessment was intended to be recersed.'
15. The question referred was answered in the affirmative and against the assessee.
16. In Orissa Cement case : 80ITR101(Delhi) , the question was whether the balance of unabsorbed exemption computed under section 15C could be carried forward to be set off against future profits. The court observed that there is a well-recognized distinction between a permissible deduction from income and exemption of a certain income from taxation and that the two are not benefits of the same category and become allowable to the assessee at different stages of assessment. It was pointed out that the basis of eligibility for exemption is the existence of profits and gains from a newly established industrial undertaking and that the benefit of exemption cannot be the year when it does not make any profits.
17. Section 84 of the Act provides for exemption from tax of the profits and gains derived from newly established industrial undertakings to the extent of six per cent. of the capital employed in such undertakings computed in the prescribed manner. Exemption granted under the Act is of two Kinds : (a) income exempted from tax and also excluded from the computation of total income, (b) income exempted from tax to be included in the assessee's total income. Exemption under section 84 belongs to the second category. The said section was found in Chapter VII of the Act. Section 66 expressly provides that sums exempted from tax under the provisions of Chapter VII should be included in the assessee's total income.
18. Section 70 to 80 provide for set-off of loss from the one source against income from another source or set-off of loss from one head against income from another or carry forward of loss and set-off. Section 110 provides the mode of computing tax in cases where exempted income is included in the total income. According to section 110, where there is included in the total income of an assessee any income on which no income-tax is payable under the provisions of the Act, the assessee shall be entitled to a deduction from the amount of income-tax with which he is chargeable on his total income, of an amount equal to the income-tax calculated at the average.'Average rate of income-tax' has been defined under section 2 (10) as follows :
' 'average rate of income-tax' means the rate arrived at by dividing the amount of income-tax calculated on the total income, by such total income.'
19. In other words, section 110 provides for allowing rebate on income on which no income-tax is payable. Where the total income includes income on which no tax is payable, as under section 84, the mode of calculation of tax is as under section 110 by working out the tax payable as well as the rebate to be given on the exempted income.
20. Section 84 was debated by the Finance Act of 1967 and substituted by section 80J with effect from April 1, 1968. In section 80J, the legislature has expressly provided for deduction of six per cent. on the capital employed in the newly established industrial undertakings from the profits and gains of such undertakings. Sub-section (3) of the said section has provided that where such amount of profits and gains falls short of the relevant amount of capital employed during the previous year, the amount of such shortfall or where there are no such profits and gains, an amount equal to the relevant amount of capital employed during the previous year shall be carried forward and set off against the profits and against referred to in sub-section (1) to the next following assessment year but the sub-section expressly provides that such carry forward shall be allowed only in respect of the previous year relevant to the assessment year, commencing on or after 1st of April, 1967. Th e legislative intention, therefore, clearly was to allow the benefit of carry forward only in respect of the previous year relevant to the assessment year commencing on or after 1st April, 1967, and not before. By section 80J introduced into the Act by the Finance Act, 1967, the legislature has given important concessions not available earlier with regard to the 'tax holiday' by allowing deduction of the amount of six per cent. on the capital employed from the profits and gains from the newly established industrial undertakings and by further allowing any shortfall or deficiency to be carried forward. Section 84, unlike section 80J, did not allow deduction of the amount of six per cent. on the capital employed but merely provides for exemption of such amount provided the total income included any profits and gains from newly established undertakings. Such exemption has to be worked out in the manner provided by section 110.
21. The claim of the assessee in the instant case amounts to asking for the concessions of section 80J which are not available for the assessment year 1963-64.
22. In our judgment, the Tribunal was right in the view it has taken that the assessee is not entitled to carry forward the shortfall of the sum of Rs. 2,11,574.
23. Accordingly, we answer the question referred in the affirmative and against the assessee. The assessee will pay the costs of this reference. Advocate's fee Rs. 250.