1 to 5(ii). [These paras are not reproduced here as they involve minor issues.) 6(1) Before the Commissioner (Appeals), the assessee's representative submitted that the profit before deduction of depreciation and investment allowance are sufficient to cover Section 80J of the Income-tax Act, 1961 ('the Act') relief except in the Dye Casting Division, Bangalore. The following figures were submitted :Name of the division Profit before Profit 80J relief deduction of after deduction admissible depreciation of depreciation inclusive of and and deficiency investment investment of past years allowances allowancesWatch Factory III, Rs Rs RsSrinagar 62,17,831 21,58,739 47,02,207Horologicaldivision, Bangalore.
10,77,267 (--)l,04,581 10,36,147Hair springs,division, Bangalore 14,18,784 (--)4,99,855 57,701Dye casting 6(2) According to the assessee, where the income from the new units was positive before deduction of depreciation and investment allowance and the profit of the assessee from other businesses or under the other heads of income were sufficient to absorb such allowances, the assessee was entitled to relief under Section 80J in the light of the decision of the Punjab and Haryana High Court in CIT v. Patiala Flour Mills Co.
(P.) Ltd.  127 ITR 301. Alternatively, it was also contended that relief under Section 80J must be admitted on the basis of the commercial profits of the new industrial undertaking by which it meant the profits according to the audited statements. The following figures were submitted before him :Name of the Unit Net profit Depreciation per as as charged toWatch Factory III, Rs Rs RsSrinagar 25,37,141 36.80,690 62,17,831HorologicalBangalore, 5,11,237 5,66,030 10,77,267Die casting division,Bangalore (--)4,72,716 (--)8,91,741 4,19,025Hair springs, main The submission was that there being positive figures of income for three units according to the audited statements, to that extent relief under Section 80J was admissible to the assessee.
7. The Commissioner (Appeals) observed that the question for consideration before the Punjab and Haryana High Court in CIT v.Patiala Flour Mills Co. (P.) Ltd. [1981) 127 ITR 301 was whether development rebate should be deducted from the profits and gains of an industrial undertaking before consideration of relief under Section 80J. He held that the decision of the High Court was in favour of the assessee, Relevant portion of his order is reproduced below : There can be no dispute that the deduction for investment allowance under Section 32A stands on the same footing as a deduction for development rebate under Section 33. IN accordance with the decision of the Punjab and Haryana High Court in CIT v. Patiala Flour Mills Co. (P.) Ltd. reported at  3 Taxman 166, I hold that the deduction under Section 80J should be allowed to the appellant on such of its new industrial undertakings as are found to have positive figures of income before the deduction of investment allowance on plant and machinery." The claim for relief under Section 80J even before deduction for current depreciation was, however, rejected by the Commissioner (Appeals). He held that the appellant will not be entitled to the claim of relief under Section 80J in respect of its undertaking which has no positive figures of income after deduction of allowance for current depreciation.
8. He next considered whether depreciation to be deducted is the one under the Act or depreciation as deducted by the auditors of the company on commercial principles. Having regard to the Circular of the CBDT--Circular No. 2-P(LXXX-5), dated 15-5-1963 [see Taxmann's Direct Taxes Circulars, Vol. 1, 1980 edn., p. 86] with regard to Section 11 and further introduction of Section 80AB of the Act by the Finance (No.2) Act, 1980, clarifying that the profits and gains for purposes of Section 80J were those determined in accordance with the Act, he held that prior to this amendment profits and gains for purposes of Section 80J could only be commercial profits and, accordingly, directed the ITO to grant relief on that basis. The revenue is in appeal.
9. The learned departmental representative submitted that Section 80J envisages computation of the income of each industrial unit separately for the purposes of relief. He, therefore, submitted that the depreciation, development rebate, investment allowance, etc., allowable in respect of each unit have to be deducted before ascertaining the income from that unit. If such allowances relatable to one unit are deducted from the income of some other unit or the income from some other source or head of income, the assessee will get a larger relief under Section 80J which is not the intention of the Legislature. The relief is in respect of the income earned by the particular unit. This income has to be calculated in accordance with the Act. Otherwise, debiting allowances relating to one unit against some other unit or head or source will give a distorted picture of the income from units entitled to relief under Section 80J. Although the ITO had debited all the allowances towards depreciation, investment allowance, etc., in one lump at the end of the computation of the gross total income, that by itself did not mean that the ITO had acquiesced with the assessee's claim that income of the various units, entitled to relief under Section 80J, has to be arrived at without debiting current depreciation, development rebate, etc. Moreover, it is axiomatic that while arriving at the total income current depreciation is to be deducted first when there is sufficient income to absorb it. The sequence in which the various allowances and losses have to be set off before determination of what is to be carried forward clearly supports the revenue's contention. In that event the income from the various units will be negative figures with no case for absorbing relief under Section 80J with the inevitable result that such Section 80J relief has to be carried forward.
10. The learned departmental representative then referred to the decision of the Punjab and Haryana High Court in Patiala Flour Mills Co. (P.) Ltd.'s case (supra) and submitted that this decision did not notice the difference in facts in the case before them and the earlier decision of the Supreme Court in the same case--CIT v. Patiala Flour Mills Co. (P.) Ltd.  115 ITR 640. The Calcutta High Court in CIT v. Orient Paper Mills Ltd.  139 ITR 763 did not notice the difference in facts in the case before them and that before the Supreme Court. He submitted that in Patiala Flour Mills Co. (P.) Ltd.'s case (supra) as also Rajapalayam Mills Ltd.'s case (supra), current depreciation, etc., had already been allowed in the assessment. The depreciation and development rebate relating to the unit entitled to relief under Section 80J for the earlier years had already been set off against other incomes. The revenue authorities attempted to resurrect what had already been set off in the earlier years and again set it off against the income of the particular unit itself and, hence, attempted to reduce the income on which relief was available, which the Supreme Court held was not permissible. In the present case, there is no such complication. He urged that the income of each unit has to be determined separately by giving due deductions and then if there is still a positive income, the assessee would be entitled to relief.
11. He also objected to the finding of the Commissioner (Appeals) that relief should be given on the basis of the determination of profits and gains derived from a new industrial undertaking on commercial principles. He submitted that reference to Circular No. 2-P(LXXX-5), dated 15-5-1963 was misplaced. The circular was dealing with Section 11 and in Section 11 application of income assumes importance as income applied for charitable purposes alone would get exemption. The institution should be in possession of income which it could apply for charitable purposes.
In that context, the Board directed that income for the purposes of Section 11 cannot have the same meaning assigned to it in Section 2(45) of the Act. Further, he submitted that there was no direct circular of the Board regarding interpretation of 'income' for purposes of Section 80J. A circular issued on some other section in a different context cannot by analogy be applied to the case on hand. He further argued that since total income is computed under the Act for purposes of taxation, relief should also be given on the income similarly computed and there cannot be two different incomes, one for purposes of computation and the other for giving relief on a part of such income unless the wordings of the section indicated to the contrary. The amendment to Section 80J to the effect that profits and gains for purposes to Section 80J relief means the profits and gains as determined under the Act was clarificatory and the position regarding Section 80M of the Act was different. On the above lines, he submitted that the order of the Commissioner (Appeals) should be reversed.
12. The learned counsel for the assessee, while relying on the order of the Commissioner (Appeals), urged the following point: In Patiala Flour Mills (P.) Ltd.'s case (supra) the High Court had held that if depreciation and development rebate had already been adjusted against the profits or income from other business concerns, the same cannot again be adjusted against the income from newly established industrial undertakings. In that case the assessee, which owned two flour mills, started a cold storage unit in the previous year relevant to the assessment year 1967-68. For the assessment year 1971-72, the income of the assessee was computed at Rs. 10,60,240 after deduction of development rebate of Rs. 41,174 in respect of the cold storage unit. The profit attributable to the unit was Rs. 47,027 and there was a deficiency of Rs. 1,09,329 for the purposes of Section 80J relief. The assessee claimed that deduction under Section 80J should be allowed before considering the deficiency of the earlier assessment years. It further contended that as the ITO had worked out the total income by allowing deduction of development rebate relating to that unit, the same amount should not be reduced while working out the profit from the industrial undertaking for the purpose of relief under Section 80J. The Tribunal and the High Court upheld the assessee's claim. Shri K.P. Kumar submitted that this case was on all fours with the case in hand and so the order of the Commissioner (Appeals) should not be disturbed. He further referred to the observations of the Calcutta High Court at page 770 in the case of CIT v. Orient Paper Milts Ltd.  139 ITR 763. According to the Calcutta High Court if the gross total income computed in that manner includes profits and gains attributable to priority industry, then such profits and gains must be computed in the commercial sense and not in accordance with the provisions of the Indian Income-tax Act, 1922. He submitted that the order of the Commissioner (Appeals) should be upheld.13. We have considered the rival submissions. The issues before us are : 1. Whether the income of each unit has to be computed separately in accordance with the provisions of the Act before giving relief under Section 80J 2. Whether the profits of each unit entitled to relief under Section 80J is the commercial profit and not the profit computed in accordance with the Act after due allowance of depreciation, according to rules 14. We take up the first issue. The decision of the Punjab and Haryana High Court in Patiala Flour Mills Co. (P.) Ltd.'s case (supra) is directly in favour of the assessee. The facts of this case have already been stated earlier. In the present case, we find that the assessee was assessed on a total income of Rs. 4,11,69,770 prior to deductions under Chapter VIA of the Act. While arriving at this figure, the entire amount of investment allowance and development rebate, etc., have been allowed. This only means that there were enough profits to absorb depreciation and other allowances relatable to Section 80J units. The High Court observed as follows : ... Keeping in view the provisions of Section 14 of the Act, the total income of an assessee is the aggregation of the income computed under various heads of income as specified therein.
Business income derived from an undertaking has to be computed under a single head and in this computation the industrial undertaking is not regarded as a separate business for the purposes of the computation of assessable income under that head, except for the purposes of the grant of a special allowance under Section 80J of the Act itself. In our considered opinion, since the development rebate reduces the total income which aggregates the assessable income under the various heads, it is the assessee's right to claim the particular head or the particular business against which the development rebate allowance be made in the process of aggregation.
There is no warrant in law in construing the expression 'income, profits and gains derived from an industrial undertaking' as 'profits and gains otherwise determined but reduced by the allowance for development rebate', which is a charge on total income and not on the profits of a particular business. It is not disputed that the development rebate is not a deduction from the profits of any business in which the plant and machinery are installed. It is a special allowance in the nature of an incentive to encourage the growth of new industrial undertakings, which reduces the total income of an assessee for a particular year. Thus, the contention that while working out the profit or loss under the head 'Profits and gains of business or profession', the profits or losses qua each particular business have to be worked out, is without any merit.
The matter can be viewed from another angle. It is not disputed that the deduction in respect of profits and gains from a newly established industrial undertaking are to be calculated on the figure arrived at called 'gross total income'. The terra 'gross total income' has been defined in Section 80B(5) of the Act as follows : 'gross total income' means the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter or under Section 280-O. From this definition itself, it is to be noticed that the figure of gross total income has to be arrived at after computation of total income in accordance with the provisions of this Act, before making any deduction under Chapter VI-A or under Section 280-O of the Act.
It would thus be seen that while calculating gross total income the benefits as are permissible under Section 33(1)(c) and 33(2) of the Act, are to be allowed and only then the figure regarding gross total income will be arrived at. It is on this figure that the deduction in respect of profits and gains from a newly established industrial undertaking are to be allowed. If the deductions, as are permissible as depreciation or development rebate, have already been adjusted against the profits or income from other business concerns, the said development rebate cannot again be readjusted against the income from the newly established industrial undertaking. In the facts of the present case, the ITO himself in the computation deducted the entire development rebate allowance in respect of the entire business carried on by the assessee from the total income.
Having done so, it is the assessee's right to claim that the component of the profits derived from the industrial undertaking (cold storage) included in such reduced total income, is the whole profit of Rs. 47,027 which the ITO himself had so computed and indicated in the chart. It is also equally well established that if two choices are open to the assessee the right of the assessee to claim assessment under the head which leaves him with a lighter burden cannot be restricted. From whatever angle it may be looked into, we are clearly of the opinion that the Tribunal was right in concluding that the sum of Rs. 41,174, being the development rebate deducted in terms of Section 33 of the Act, by the ITO, while determining the gross total income, could not again be deducted from the sum of Rs. 47,027 which was claimed as deduction from the gross total income under Section 80J(1) of the Act. Question No. 2 is also, therefore, answered in the affirmative, in favour of the assessee and against the revenue." (p. 307) 15. As against the argument of the learned departmental representative that the facts in Patiala Flour Mills Co. (P.) Ltd.'s case (supra) were different from the facts in the present case, inasmuch as in Patiala Flour Mills Co. (P.) Ltd.'s case (supra) current depreciation had already been debited to the accounts and as such the decision was not applicable and inasmuch as the later decision in Patiala Flour Mills Co. (P.) Ltd.'s case (supra) did not notice this distinction, we have to state that the later decision of the Punjab and Haryana High Court is based on the observations of the Supreme Court in Patiala Flour Mills Co. (P.) Ltd.'s case (supra). No doubt, the learned departmental representative placed stress on the following sentence : ... The proper construction of Sub-section (1) of Section 80J must, therefore, be taken to be that the profits or gains of the new industrial undertaking must be computed in accordance with the provisions of the Act in the same manner as they would be in determining the total income chargeable to tax....
... and it must follow a fortiori that if the losses, depreciation allowance and development rebate in respect of the new industrial undertaking for the past assessment years have been fully set off against the profit of the assessee from other businesses or for the matter of that, against the income of the assessee under any other head by reason of Sections 70 and 71 read with Sub-section (2) of Section 32 and Sub-section (2) of Section 32A, no part of such losses, depreciation allowance or development rebate would be liable to be adjusted over again in computing the profits or gains of the new industrial undertaking for applying the provision contained in Sub-section (1) of Section 80J....
Therefore, we have to understand the context in which the Supreme Court made those observations. Further, the Supreme Court was categorical in stating that the profits or gains of the new industrial undertaking cannot be computed as if the new industrial undertaking were the only business of the assessee right from the date of its establishment and the losses and allowances were not to be set off against the profit from other businesses. The following observations of the Supreme Court make the position clear : ... It is impossible to see how, by any process of construction, even by turning and twisting the language of Sub-section (1) of Section 80J, it can be held that for the purpose of allowing the deduction contemplated under that section the profits or gains of the new industrial undertaking must be computed in a manner different from that in which they would be computed in determining the total income chargeable to tax. Sub-section (1) of Section 80J does not create a legal fiction that for the purpose of applying the provision contained in that sub-section, the profit or gains of the new industrial undertaking shall be computed as if the new industrial undertaking were the only business of the assessee right from the date of its establishment or the losses, depreciation allowance or development rebate in respect of the new industrial undertaking for the past assessment years were not set off against the profit from other businesses....
In the case before the Supreme Court the losses, depreciation and other allowances of earlier years had already been set off in computing the total income of the assessee for those years. The Court held that such allowances and losses cannot be resurrected in a future year just to reduce the profits of the units which are otherwise entitled to relief under Section 80J. What applies to such previous losses and allowances will also apply to current allowances and losses. The only distinction is that instead of losses, etc., having been set off in an earlier year, the same are set off against the profit of some other unit or business or income from other source in this very year itself. We, therefore, agree with the finding of the Commissioner (Appeals) on this point.
16. We now take up the second issue. In this context the new Section 80AB introduced by the Finance (No. 2) Act, 1980, with effect from 1-4-1981 is relevant. The section reads as follows : 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 section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income." It is to be noticed that the section is not made retrospective.
Therefore, in the period prior to 1-4-1981, it is possible to take the view that the gross total income of the assessee for the purposes of Section 80J relief is not the income computed in accordance with the Act but the commercial profits. It is, thus, obvious that two interpretations regarding the application of Section 80J insofar as it related to computation of profits is concerned, were possible before 1-4-1981 and after 1-4-1981 only the interpretation as set out in Section 80AB prevails. Hence, for the year under appeal there were two interpretations regarding the profit entitled to relief under Section 80J. One is, for the purposes of Section 80J, on which relief is given, the profit computed according to the provisions of the Act and the other is the profit computed according to commercial principles. It is axiomatic that in such circumstances the interpretation favourable to the assessee is to be followed. [CIT v. Vegetable Products Ltd.  88 ITR 192 (SC)] 17. The view finds further support from the decision of the Calcutta High Court in the case of Orient Paper Mills Ltd. (supra). The Calcutta High Court was interpreting Section 80-1 of the Act which dealt with profits of priority industries. Section 80-1(1), as it then stood, read as follows : 80-I. Deduction in respect of profits and gains from priority industries in the case of certain companies.--(1) In the case of a company to which this section applies, where the gross total income includes any profits and gains attributable to any priority industry, 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 eight per cent thereof, in computing the total income of the company." The words used in Section 80J are 'Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking'. Although there is slight difference in the wordings of the two sections, Section 80J does not also categorically state that the profits and gains derived by the industrial unit have to be computed in accordance with the Act. At page 769 the Court observes that it is a well known concept in the taxation law that the term 'profits' in the various sections of the Act has not got the same meaning. Section 80J has not used the words 'Where the gross total income of an assessee includes income derived from an industrial undertaking' but 'profits and gains derived from an industrial undertaking'. While dealing with Section 80-1 the High Court held as follows : ... But, if the gross total income computed in that manner includes, and it is important to emphasise, not the income attributable to priority industries but on the expression used by the Legislature, 'profits and gains attributable to priority industry', in such a case, in respect 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 Income-tax 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....
18. In the result, we agree with the Commissioner (Appeals). Since the Commissioner (Appeals) has held that current depreciation has to be set off before Section 80J relief is considered and the assessee has not challenged this in appeal, we wish to clarify that Section 80J relief has to be worked out after debiting current depreciation and not other debits towards investment allowance, initial depreciation, development rebate, etc.
19. Before parting with this appeal, we wish to place on record our appreciation for the competent manner in which the learned departmental representative presented his arguments as also the assistance rendered by Shri Kumar, the learned counsel for the assessee.