1. These two appeals filed by the same assessee are heard together and disposed of by this common order for the sake of convenience.
2. We first take up Appeal No. 1367 (Cal.) of 1983, which relates to the assessment year 1978-79. The assessee is a limited company. It derives income from business and other sources. During the year under consideration, it had some long-term capital loss as well as short-term capital loss. The short-term capital loss amounted to Rs. 8,10,000. In the assessment order, the ITO computed the business income before depreciation at Rs. 8,21,405. Then, he allowed depreciation for the year amounting to Rs. 10,80,284. Thus, he arrived at a business loss of Rs. 2,58,879. In arriving at this figure, the ITO had already set off the short-term capital loss of Rs. 8,10,000 against the business income before arriving at the aforesaid business income of Rs. 8,21,405. Then the ITO found that the assessee was entitled to investment allowance of Rs. 4,59,554 under Section 32A(3) of the Income-tax Act, 1961 ('the Act'). As the income of the assessee from business after adjusting the short-term capital loss but after allowing the investment allowance came to a loss figure, the ITO observed that the investment allowance due to the assessee for the year under consideration shall be carried forward in accordance with the provisions of Section 32A(3). He completed the assessment, accordingly. It may be stated that the ITO separately assessed the long-term capital gains at Rs. 54 and the net dividend income, after allowing relief under Section 80K of the Act at Rs. 2,641, as neither of these two items could beset off against the business loss. However the dispute in this appeal does not relate to the assessment of long-term capital gains or the dividend income at all. The important point to note in the assessment made by the ITO is that he set off the short-term capital loss against the business income and considered the balance so arrived at for the purpose of allowing of carrying forward of the investment allowance under Section 32A(3).
3. Subsequently, the Commissioner scrutinised the records and came to hold the view that the ITO made a mistake in the assessment order.
According to the Commissioner, the investment allowance should have been first allowed from the business income before setting off the short-term capital loss. If that is done then what would be carried forward to the future year is the short-term capital loss, which could not be set off after allowing investment allowance. On the other hand, as per the assessment made by the ITO, the short-term capital loss has already been set off during the year under consideration and what is to be carried forward is the unabsorbed investment allowance. The significance of this difference is that while brought forward investment allowance can be set off against future business income, brought forward short-term capital loss can be set off only against future short-term capital gains and not against future business income because of the provisions of Section 74 of the Act. The Commissioner issued a show-cause notice to the assessee and after overruling the objection of the assessee passed the order under Section 263 of the Act dated 3-1-1983, directing the ITO to set off the investment allowance and carry forward the short-term capital loss to the future years.
4. The assessee is in appeal before us against the aforesaid order dated 3-1-1983 under Section 263 relating to the assessment year 1978-79. Sri A.K. Jhurijhunwalla, the learned representative for the assessee, urged before us that the Commissioner erred in his decision.
He took us through the provisions of Section 32A(3), which reads as below : Where the total income of the assessee assessable for the assessment year relevant to the previous year in which the ship or aircraft was acquired or the machinery or plant was installed, or, as the case may be, the immediately succeeding previous year (the total income for this purpose being computed after deduction of the allowances under Section 33 and Section 33A, but without making any deduction under Sub-section (1) of this section or any deduction under Chapter VI-A) is nil or is less than the full amount of the investment allowance.
Then he referred to the definition of 'total income' as contained in Section 2(45) of the Act. Here, 'total income' has been defined to be the total amount of income referred to in Section 5 of the Act, computed in the manner laid down in this Act. He urged that for the purpose of Section 32A(3), one has first to compute the 'total income' as defined under Section 2(45), that is to say in accordance with the provisions of the Act. This provision included Section 71(3) of the Act, which states that short-term capital loss has to be set off against the business income of the same year. If that is done then there is no positive business income left, against which investment allowance could be allowed. Hence, the investment allowance had to be carried forward under Section 32A(3) as was done by the ITO. In this connection, he pointed out that in Section 32(2), which deals with the carry forward of depreciation, the Legislature has used the words 'profits or gains' and not the words 'total income'. His point was that total income in Section 32A(3) must not mean the total income as defined in Section 2(45) but as modified by the language used in Section 32A(3) itself. If that is done, then there was no mistake in the order of assessment passed by the ITO. So, he contended that the order under Section 263 passed by the Commissioner deserved to be cancelled.
5. Shri K. Subba Rao, the learned representative for the department, on the other hand, supported the order of the Commissioner. He stated that the Commissioner has based his order on the provisions of Section 74 of the Act which clearly states that short-term capital gain has to be carried forward to the future years. Coming to Section 32A(3), he contended that the total income for the purpose of this section has been defined therein and that definition has to be confined to the sections dealing with the computation of business income as stated by the Commissioner in his order. According to him, the total income for the purpose of Section 32A(3) cannot be extended beyond the sections dealing with the computation of business income.
6. We have considered the contentions of both the parties as well as the facts on the record. The question that is raised in this appeal concerns the meaning of the words 'total income', as appearing in Section 32A(3). If the meaning of this phrase is to be gathered in accordance with the definition given in Section 2(45), then the income has to be computed in accordance with the provisions of the Act but ignoring some sections, viz., the deductions under Chapter VIA. This will give the definition in Section 2(45) the special modification stated in this sub-section itself and this modification is confined to the purpose of this sub-section. In spite of this modification, the fact will remain that the total income has to be computed in accordance with the definition under Section 2(45), viz., in accordance with the provisions of the Act, which, in turn, would mean after setting off the short-term capital loss of this year, as provided for in Section 71(3).
This is the case of the assessee. On the other hand, if the meaning of the phrase 'total income' appearing in Section 32A(3) is to be understood without reference to the definition in Section 2(45), then total income would remain undefined for the purpose of Section 32A(3).
It is that undefined total income which has to be further modified by the express language of Section 32A(3). This is the case of the learned Commissioner. In our opinion, the reasonable way to understand the meaning of the words, 'total income' appearing in Section 32A(3) is to follow a method of interpretation that is workable vide the decision in CIT v. S. Teja Singh  35 ITR 408 (SC). The Act has already defined the term 'total income' in Section 2(45). This phrase will connote that meaning everywhere in the Act unless the context otherwise requires. The only modification introduced in Section 32A(3) is that the deductions under Chapter VIA are to be ignored. Subject to that modification, the context does not indicate any other interpretation.
Hence, we are inclined to hold that the words 'total income' in Section 32A(3) have to be understood in accordance with the definition given in Section 2(45) so that the order of the ITO was quite correct and there was no scope for any, interference by an order under Section 263. We find force in the contention raised by the assessee that in Section 32(2), the words used are 'profits and gains' and not 'total income'.
If the intention were to confine the portion of Section 32A(3) to the sections dealing with the computation of business income alone, then it stands to reason that the Legislature would have used the words 'profits and gains' as has been done in Section 32(2). We also find that Section 80B(5) of the Act defines 'gross total income' in terms of 'total income', wherein it has been stated that the total income should be computed in accordance with the provisions of this Act. The words 'in accordance with the provisions of this Act', were not necessary to be introduced in Section 32A(3) because it was not defining a new term like 'gross total income'. Section 32A(3) deals with the concept already denned in Section 2(45) and does not deal with a new concept like 'gross total income'. Considering all the facts and circumstances of the case and the plain language of Section 32A(3), we are inclined to hold that the order of the Commissioner under Section 263 was not called for in this case. In any case, the best case for the department can only be that there is a doubt about the meaning of the words 'total income' used in Section 32A(3). It is now well settled that in case of a genuine doubt leading to two reasonable interpretations, the one favourable to the assessee has to be preferred vide the decision in the case of CIT v. Vegetable Products Ltd.  88 ITR 192 (SC). In this view of the matter also, the case of the assessee, in our opinion, deserves to be upheld.7. IT Appeal No. 1368 (Cal.) of 1983 relates to the assessment year 1979-80 and is merely consequential to the order dated 3-1-1983 passed by the Commissioner for the assessment year 1978-79. On the same day, the Commissioner has passed an other order under Section 263 for the assessment year 1979-80 also as a consequence. As we have held that the order of the Commissioner for the assessment year 1978-79 is not sustainable in law, we also hold that the order of the Commissioner for the assessment year 1979-80 is also not similarly sustainable. We, therefore, cancel both the orders under Section 263 passed by the Commissioner for the two years under consideration.