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Commissioner of Income-tax, Mysore Vs. Balanoor Tea and Rubber Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKarnataka High Court
Decided On
Case NumberIncome-tax Reference No. 8 of 1970
Judge
Reported in[1974]93ITR115(KAR); [1974]93ITR115(Karn)
ActsIncome Tax Act, 1961 - Sections 2(45), 4, 5, 14, 28 to 43, 70, 71, 72, 80E, 80E(1) and 80-I
AppellantCommissioner of Income-tax, Mysore
RespondentBalanoor Tea and Rubber Co. Ltd.
Appellant AdvocateS.R. Rajasekhara Murthy, Adv.
Respondent AdvocateS.P. Bhat, Adv.
Excerpt:
.....is barred. finding of the tribunal was upheld. - a reading of the section clearly pointed to this interpretation. 5,608. 12. appeal preferred by the assessee to the appellate assistant commissioner was unsuccessful. , on which strong reliance was placed by the department before the tribunal, has no relevance to the facts of the present case. the business income of a company may consist of profits from the specified priority industries as well as profits from other business activities, and the company may also have a loss in the same previous year under a head of income other than 'profits and gins of business or profession' or a business loss carried forward from earlier years and eligible for set-off against the business profits of that previous year......gains of an activity specified in the list in the 5th schedule. the said deduction is not on the total income as determined, but is restricted to the profit which is attributable to the activity as specified in the 5th schedule. reliance in this context was placed on the decision of the madras high court in the case of sivan pillai's case their lordships were concerned with the dividend that was declared by a company which was entitled for a relief under section 15c on the shareholder's assessment. he thus considered that the ration of the ratio of the decision was not applicable to the facts of the present case, in his view the nearest case in point was that of the national electrical industries ltd., decided by the bombay high court which appear at page 134 and which are as unde :.....
Judgment:

Govinda Bhat, J.

1. The learned judge set out the statement of the case which ran as follows] - The assessee is a public limited company which owns tea. Coffee and rubber plantations. The assessee further manufactures plastic bags and polythene pipes that are used for spraying, etc. The assessment year is 1966-67 for which the corresponding account year is the year ended March 31, 1966.

2. The assessee claimed a deduction of an amount equal to 8% of the profits which were attributable in respect of an activity mentioned in The 5th Schedule to section 80E of the Income-tax Act.

3. The profits attributable to the business of tea plantation amounted to Rs. 1,18,214. On this amount the assessee claimed a deduction equal to 8%. The relief claimed by the assessee worked out to Rs. 9,457. As against this the Income-tax Officer, however, allowed only a sum of Rs. 5,608. The relief as claimed by the assessee and the relief admissible as per Income-tax Officer is as unde :

-------------------------------------------------------------------Item Appellant'sWorking-------------------------------------------------------------------Rs.Tea income liable to charge 1,18,214Les : Relief under section 80E @ 8% 9,457----------1,08,757Les : Loss in plastic business 48,105----------Rs. 60,652----------The Income-tax officer's working is as unde :-------------------------------------------------------------------Item Income-tax Officer'sWorking-------------------------------------------------------------------Rs.Tea income liable to charge 1,18,214Les : Loss in plastic business 48,105------------Balance 70,109Les : Relief under section 80E @ 8% 5,608------------64,501------------

In so arriving at the amount of relief the Income-tax Officer has deducted from the tea business profit of Rs. 1,18,214, the amount of Rs. 48,105 which was the loss incurred by the assessee in its plastic manufacturing business.

4. The assessee felt aggrieved by the order of the Income-tax officer and took up the matter in appeal before the Appellate Assistant Commissioner. It was, inter alia, contended that under section 80E the assessee was entitled to a deduction at the rate of 8% from the profits and gains of an activity specified in the list in the 5th schedule. The said deduction is not on the total income as determined, but is restricted to the profit which is attributable to the activity as specified in the 5th Schedule. Reliance in this context was placed on the decision of the Madras High Court in the case of Sivan Pillai's case their Lordships were concerned with the dividend that was declared by a company which was entitled for a relief under section 15C on the shareholder's assessment. He thus considered that the ration of the ratio of the decision was not applicable to the facts of the present case, in his view the nearest case in point was that of the National Electrical Industries Ltd., decided by the Bombay High Court which appear at page 134 and which are as unde :

'Apparently, by enacting section 15C the legislature has not prescribed for 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 to the prescribed extend will be given by the taxing authorities.'

5. The Appellate Assistant Commissioner considered that section 80E(1) specifically provided that before allowance was made under this section the total income should be computed as in accordance with the other provisions of the Act. The total income, according to him, is computed by aggregating the profits and losses of different businesses carried on by an assessee. Section 80E(1), in his opinion, provides, as it does. That every allowance has to be made first and thereafter the allowances under section 80E(1) are taken into consideration. In that view of the matter, he confirmed the order of the Income-tax Officer.

6. The assessee came up in further appeal before the Appellate Tribunal. It was contended that deduction under section 80E at 8% of the profits and gains attributable to the manufacturing business should have been accorded. The Income-tax Officer's action in deducting from the income attributable to an activity specified in the 5th Schedule of a loss from another activity not mentioned therein could not be justified on any grounds. It was further contended that for the purpose of deduction under section 80E profit of the tea business as determined under the Income-tax Act should have been considered and not the net income after setting off the losses from another business.

7. The Appellate Tribunal examined the position. In this context it referred to the provisions of section 80E which are in the following term :

'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 from 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.'

In the opinion of the Appellate Tribunal the opening words of this section provide for the computation of the assessee's total income in accordance with the various provisions of the Act. The section further postulates that if such a total income 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 5th Schedule, there shall be allowed a deduction from such profits and gains of an amount equal to 8% thereof in computing the total income of the company. In the opinion of the Appellate Tribunal the words 'such profits' refer to the profits and gains attributable to the activities enumerated in the section itself and specified in the list provided in the 5th Schedule annexed to the Act. A reading of the section clearly pointed to this interpretation.

8. The decision relied upon by the learned departmental representative was distinguished on the ground that it was in connection with the operation of a provision which did not create such a differentiation. Section 15C of the Indian Income-tax Act, 1922, and section 80E, in the opinion of the Appellate Tribunal, had no similar connotation. It affirmed the fact that in computing the total income liable to tax various factors have to be taken into consideration. In the ordinary course, in computing the total income the losses arising t an assessee from another business have to be given allowance for. As, in this case, the section itself provided for relief in respect of activities enumerated in the section and the Schedule annexed thereto, the deduction of an allowance of 8% was provided from the profits of the very same activity. It accordingly was of the opinion that deduction had to be made on such profits which were attributable to such an activity. In that view of the matter, the Appellate Tribunal held that the assessee was entitled to a relief of Rs. 9,457 and not Rs. 5,608 as accorded to it by the Income-tax Officer.

9. From the aforesaid order of the Appellate Tribunal, the following question of law arise :

'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that for the purpose of allowing a deduction under section 80E of the Income-tax Act, 1961, the words 'such profits' occurring in that section mean 'the profits and gains attributable to an activity as specified in the 5th Schedule' before deducting any loss incurred in any business activity ?'

10. This is a reference under section 256(1) of the Income-tax Act, 1961, hereinafter called 'the Act'. In relates to the assessment year 1966-67.

11. The assessee is a limited company which owns tea, cuffed and rubber plantations from which it derived income during the relevant accounting year. It also carries on the business of manufacture of plastic bags and polythene pipes used for spraying, etc. The assessee derived an income of Rs. 1,18,214 from the tea plantation industry which is a 'priority industry' entitled to the benefits of section 80E of the Act as it stood during the relevant assessment yea. The ASSESSEE incurred a loss of Rs. 48,105 from its business of manufacture of plastic bag's and polythene pipes. Section 80E of the Act as it stood at the relevant period allowed to an assessee a deduction of 8 per cent. of the profits and gains attributable to the priority industry, accordingly, the assessee claimed a deduction of Rs. 9,457 computing the deduction at 8 per cent. on the aforesaid profit of Rs. 1,18,214. According to the Income-tax officer, the loss of Rs. 48,105 has to be deducted for the profit or Rs. 1,18,214, and the deduction at 8 per cent. has to be computed on the balance some of Rs. 70,109 only which works out at Rs. 5,608.

12. Appeal preferred by the assessee to the Appellate Assistant Commissioner was unsuccessful. Then a second appeal was taken before the Income-tax Appellate Tribunal, Bangalore Bench, in I.T.A. No. 15079 of 1967-68. The Tribunal agreed with the contention of the assessee and allowed the deduction of Rs. 9,457 under section 80E of the Act. Then the department obtained a reference to this court of the following question of la :

'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that for the purpose of allowing a deduction under section 80E of Income-tax Act, 1961, the words 'such profits' occurring in that section mean 'the profits an gains attributable to activity as specified in the 5th Schedule' before deducting any loss incurred in any business activity ?'

13. Sri S. R. Rajasekhara Murthy, learned counsel for the department, conceded, and in our opinion rightly, that the decision of the Bombay High Court in Commissioner of Income-tax v. National Electrical Industries Ltd., on which strong reliance was placed by the department before the Tribunal, has no relevance to the facts of the present case. The learned counsel on both sides submitted that there is no decision of any court on the question before us. The answer to the question rests on the interpretation of subsection (1) of section 80E which was introduced by the Finance Act of 1966. The said section has now been replaced by section 80-I. Sub-section (1) of section 80E reads thu :

'80E. Deduction in respect of profits an 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 their Act) includes any profits and gains attributable to the business of generation or distribution of electricity or any other from job power of the articles or things specified in the list in the Fifth Schedule, there shall be allowed a deduction form such profits and gains of an amount equal to eight percent. thereof, in computing the total income of the company.'

14. Briefly state, the argument of Sri Rajasekhara Murthy was that the effect of this provision it that the deduction under section 80E will be allowed from the profit from the specified priority industries as computed after allowing all the deduction admissible in computing the business income under sections 30 to 43 of the Act, and also after giving effect to the relevant provisions for set-off or carry-forward of loss contained in Chapter VI of the Act. According to him, the first stage is the computation of the 'total income' in accordance with the provisions of the Act. 'Total income' has been defended in section 2(45). Section 4 which is the charging section leaves tax off the 'total income' of the previous year of every person, section 5 states the scope of total income. Section 14 classifies all income in under one head. Section 28 states what all income falls under the head 'profits any gains of business or profession'. Section 28 states what the income falls under the head 'profits and gains of business or profession'. Section 29 accordance with the provisions contained in sections 30 to 43A. Sections 70 to 72 provide for set-off of loss or carry-forward of loss. Section 80E is found in Chapter VI-A under the head 'other deductions' to be made in computing the 'total income'.

15. Sri Rajasekhara Murthy invited our attentions to paragraph 27 of Circular No. 4-P (LXXVI-61) of 1966 dated July 21, 1966, issued by the Central Board of Direct Taxes. It read :

(27). It will be observed that the deduction under section 80E referred to above is allowable in computing the profits and gains from the specified priority industries INCLUDED IN THE TOTAL INCOME 'AS COMPUTED IN ACCORDANCE WITH THE OTHER PROVISIONS' of the Income-tax Act. The effect of this provision is that the deduction under section 80E will be allowed from the profits from the specified priority industries, as computed AFTER allowing all the deductions admissible in computing the business income under sections 30 to 43 of the Income-tax Act, and also after giving effect to the relevant provisions for set-off or carry-forward of loss, Contained in Chapter VI of that Act. The business income of a company may consist of profits from the specified priority industries as well as profits from other business activities, and the company may also have a loss in the same previous year under a head of income other than 'profits and gins of business or profession' or a business loss carried forward from earlier years and eligible for set-off against the business profits of that previous year. In such a case, a question may arise as to whether the loss of the relevant previous year under a head other than 'Profits and gains of business or profession' or the business loss carried forward from earlier years should be set off on a proportionate basis, both against the profits from the specified priority industries and the profits from other business activities. If the loss is set often a proportionate basis the quantum of the deduction available in respect of the former profits under section 80E of the Income-tax Act may be reduced to the disadvantage of the company. The Income-tax Act does not, however, provide for the set-off of losses on a proportionate basis against income from different types or categories of business activities. It will, therefor, be permissible for the company to claim that the loss should be set off, in the first instance, against its business profits other than profits from the specified priority industrious and as to the balance, if any, against its profits form the specified priority industries.'

16. We are unable to agree with the views of the Central Board of Direct Taxes that the effect of the provision is that the deduction under section 80E will be allowed from the profits from the specified priority industries, as computed after allowing all the deductions admissible in computing the business income under section 30 to 43 of the Act. If that was the intention the legislature, sub-section (1) of section 80E would have stated that the deduction shall be made after allowing all the deductions admissible in computing the business income index sections 30 to 43 of the Act. On the contrary, the sub-section states that the deduction shall be allowed from the profits and gains of the priority industry of an amount equal to 8 per cent. thereof in computing the total income of the company.

17. The first pre-requisite condition in order to entitle the assessee to the benefits of section 80E is that income as computed in accordance with the provisions of the Act should include any profits and gains attributable to the business of a priority industry. The quantum of deductions 8 per cent. of the profits and gains attributable to the business of a priority industry and the deduction has to be made in the process of computing the total income of the company.

18. If the contention of Sri Rajasekhara Murthy were to be accepted, in the illustration given in paragraph 27 of the circular referred to above, it would be open to the assessing authority to deduct the whole of the loss from the profits and gains of the business from the specified priority industry and the assessee cannot insist that the loss should be set off in the first instance against its business profits other than the profits from specified priority industries.

19. The language of the provision is clear and the view taken by the Tribunal, in our opinion, is right. Accordingly, we answer the question referred in the affirmative and against the department. The assessee is entitled to the costs of this reference.

20. Advocate's fee, Rs. 250.

21. Question answered in the affirmative.


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