1. In this reference under Section 256(1) of the I.T Act, 1961, the following question has been referred :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the relief under Section 80E for the assessment year 1966-67 should be allowed on the income of the priority industry before setting off of non-priority industry losses of this year ?'
2. The assessee, a company, closed its accounts on 30th September, 1965. It was entitled to the relief under Section 80E. The ITO computed the relief admissible under Section 80E at the rate of 8% on the income from the business amounting to Rs. 38,45,736. The assessee appealed against this order to the AAC contending that the profits so arrived at was after adjustment of certain losses in other trading transactions which were not attributable to the assessee's activities as a specified industry and that the relief should be given with reference to the profits attributable to the priority industry before adjustment of the other trading losses. The AAC agreed with this contention and directed computation of the 8% referred to under Section 80E on Rs. 41,15,301, which was the profit earned from the priority industry in the relevant year. The revenue appealed to the Tribunal contending that the deduction under Chap. VI-A could be given only after the computation of the total income under the provisions of the Act which means after setting off of business loss, unabsorbed depreciation and development rebate. The Tribunal did not agree with this contention and confirmed the order of the AAC. The Commissioner of Income-tax has brought this matter in dispute before this court on the question set out already.
3. Section 80E was introduced in the statute by Section 14 of the Finance Act of 1966. Before the introduction of this provision, under the Finance Act of 1965, in the case of every company the total income was chargeable to tax at the rate of 80% and a rebate was allowed if the company fulfilled the different conditions set out in the Finance Act. With reference to so much of the total income as consisted of profits and gains attributable to the business of generation or distribution of electricity or of construction, manufacture or production of any one or more of the articles or things specified in the list in Pt III of the Schedule to the Finance Act, 26% was the rebate admissible. In other words, the company would have been charged to income-tax at the rate of 54%, assuming that the company was not entitled to any other rebate as provided in the said Finance Act. In 1966, Section 80E was introduced and the provision, in so far as it is material, runs as follows:
' Deduction in respect of profits and gains from specified industries in the case of certain companies--(i) 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 form ofpower 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.'
4. The Notes on Clauses accompanying the Finance Bill which introduced this provision explained the object as follows (See 59 ITR (St.) . 90:
'Clause 15(c) seeks to introduce a new Section 80E in the Income-tax Act. The effect of the proposed new section will be that in computing the total income of an Indian company or any other company which has made the prescribed arrangements for the declaration and payment of dividends within India, a deduction will be allowed of a sum equal to 8% of the amount of the 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 the Fifth Schedule included in its total income as computed under the other provisions of the Income-tax Act. This deduction is not available in the case of a company in which the public are substantially interested and whose total income (as computed without applying the provisions of this section) does not exceed Rs. 25,000, the rate of income-tax in the case of such companies being 45% as against the rate of 55% applicable in the case of other companies. The deduction under this section is in replacement of the rebate of tax allowed to such companies in respect of their profits and gains from the aforesaid activities under the provisions of the Finance Act, 1965.'
5. The Central Board of Direct Taxes issued a circular as guidance for applying this provision to its officers. The relevant portions of the circular dated 21st July, 1966 (See : 93ITR115(KAR) , runs as follows :
' 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 gains of business or profession' or a business loss carried forward fromearlier 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 oft 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 off on 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, therefore, 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 industries and as to the balance, if any, against its profits from the specified priority industries,'
6. The earliest decision which had to go into the construction of this provision is that of the Kerala High Court in Indian Transformers Ltd. v. CIT : 86ITR192(Ker) . For the assessment year 1967-68, the total income of a company was Rs. 2,13,769 and the loss brought forward from the earlier years amounting to Rs. 87,437 was then set-off against the profits and gains arising from the business of the assessee. From the balance of the net income, viz., Rs. 1,26,332, the deduction of 8% contemplated by Section 80E was granted. The assessee wanted the 8% to be applied or calculated on the sum of Rs. 2,13,769 as against the sum of Rs. 1,26,332 taken by the ITO. This contention was upheld by the AAC, but rejected by the Tribunal. The matter was, therefore, taken on reference by the assessee to the High Court. The Kerala High Court held that in the case before them the total income consisted exclusively of profits and gains arising from the specific activities mentioned in Section 80E and that the figure arrived at after setting off the losses under s. 72 was certainly not the total income arising from the profits and gains attributable to the activities in that year. The result was that the assessee succeeded in the High Court.
7. The Mysore High Court in CIT v. Balanoor Tea and Rubber Co, Ltd. : 93ITR115(KAR) dealt with the application of Section 80E further on the following facts : The profits attributable to the business of tea plantation, which was a priority industry, amounted to Rs. 1,18,214. The assessee claimed deduction at 8% thereon. The ITO granted deduction only on Rs. 70,109 after adjustment of the losses in a business in plastics, which was not a priority industry. It may be seen that the loss that was adjusted was of the same year, and not a brought forward loss as in the Keraladecision. Before the Mysore High Court, the circular extracted earlier was relied on by the Commissioner in support of his submission that the computation as made by the ITO was not a correct computation. The Mysore High Court held that the first pre-requisite or condition in order to entitle the assessee to the benefits of Section 80E was that the total 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, that the quantum of deduction was 8 per cent. of the profits and gains attributable to the business of a priority industry, and that deduction had to be made in the process of computing the total income of the company. The language of the provision was found to be clear and the learned judges, therefore, accepted the computation as suggested by the assessee.
8. These two decisions of the Mysore and Kerala High Courts came to be considered in some of the decisions of this court. In CIT v. L. M. Van Moppes Diamond Tools (India) Ltd. : 107ITR386(Mad) , the assessee wanted the 8% mentioned in Section 80E to be applied on the income of Rs. 2,45,431 attributable to the priority industry. The ITO found that after adjusting the carried forward losses and unabsorbed depreciation of the earlier years, the assessable income was nil and he, therefore, negatived the claim of the assessee. The AAC and the Tribunal agreed with the assessee's contention. The court held that so long as the total income as computed under the provisions of the Act included profits and gains attributable to the priority industries, the assessee would be entitled to the rebate of 8 per cent. on the said profits and gains and that there was no scope for setting off of the earlier years' losses or losses arising out of other business activities of the assessee against the profits and gains attributable to the priority industry. Consequently, 8 per cent. was directed to be applied on Rs. 2,45,431 as claimed by the assessee. The Kerala High Court's decision in Indian Transformers Ltd. v. CIT : 86ITR192(Ker) and the Mysore High Court's decision in CIT v. Balanoor Tea and Rubber Co. Ltd. : 93ITR115(KAR) were cited before this court and the Kerala High Court's decision was taken as directly covering the case.
9. The Mysore High Court in the above decision expressed its disagreement with the view of the CBDT as regards the computation of profits from the priority industry to be made, after allowing all deductions, for applying Section 80E. After expressing some reservation about this part of the observation of the Mysore High Court, this court held that the profits and gains of the business of priority industry in that case on hand had been actually computed in accordance with the provisions of Sections 30 to 43, and the amount so computed would have to be the basis for the application of 8%.
10. In CIT v. Lucas-T.V.S. Lid. (No. 2) : 110ITR346(Mad) , the same problem came to be considered again. In that case, the profit in thepriority industry was Rs. 71,43,105. The unabsorbed depreciation, un-absorbed development rebate and the earlier business losses after adjustment came to Rs. 31,81,202. The ITO gave the relief at 8% on the income after adjustment of the sum of Rs. 31,81,202. The correctness of this computation was not accepted in view of the earlier decision of this court in CIT v. LM. Van Moppes Diamond Tools (India) Ltd. : 107ITR386(Mad) .
11. In the meantime, the Gujarat High Court was seized of the same problem in CIT v. Cambay Electric Supply Industrial Co. Ltd. : 104ITR744(Guj) . In the case before the Gujarat High Court, the assessee earned Rs. 46,319 from its running business. There was a sum of Rs. 7,55,807 which was assessable to tax under Section 41(2). This sum was the difference between the cost of certain depreciable assets, which were sold, and their written down value. There were also unabsorbed depreciation and unabsorbed development rebate totalling Rs. 2,54,613. The ITO added to the business income of Rs. 46,319 the profits assessable under Section 41(2) amounting to Rs. 7,55,807 and from the total he deducted the sum of Rs. 2,54,613 representing unabsorbed depreciation and absorbed development rebate. The result was that he applied the 8 per cent. mentioned in Section 80E on a sum of Rs. 4,83,343. The Additional Commissioner took action under Section 263 as in his view the profit of Rs. 7,55,807 assessable under Section 41(2) was not liable to be added to the business income and the 8 per cent. had to be applied only on the sum of Rs. 46,319. After adjusting the unabsorbed depreciation business loss, there would be no income from the priority industry, and he, therefore, considered that the ITO could not have allowed any relief under Section 80E. The Gujarat High Court, when the matter came up before it on reference, held that the profit of Rs. 7,55,807 added by the ITO under Section 41(2) should be taken into account for the purpose of working out the 8 per cent. It was also held that the unabsorbed depreciation and unabsorbed development rebate relating to the priority industry had also to be deducted in computing the income on which 8 per cent. was to be applied. In the course of the judgment, at p. 767, the learned judges pointed out three important steps in making the computation under Section 80E and these are :
' (i) Find out, without reference to the provisions of Section 80E, what is the total income of the concerned assessee if the same is computed in accordance with the other provisions of the Act.
(ii) Having done that, find out whether any of the components of the total income thus arrived at represents profits and gains of business attributable to the industry specified in Section 80E.
(iii) If there is any component of the type referred to in (ii), deduct 8% thereof from such profits and gains, and then compute the total income which becomes exigible to tax.
This is the plain and simple scheme of Section 80E which does not admit of any complications. This scheme is definitely suggestive of the fact that working out of the total income contemplated by the first part of the section is a condition precedent to the working out of 8% deduction contemplated by its second part. '
12. This decision was taken on appeal to the Supreme Court and the Supreme Court decision is Cawbay Electric Supply Industrial Co. Ltd. v. CIT : 113ITR84(SC) . The Supreme Court affirmed the judgment of the Gujarat High Court. Their Lordships held that the profit assessable under Section 41(2) was liable to be included as the income attributable to the priority industry. It was also held that, in computing the profits for the purpose of the special deduction provided under Section 80E, items of unabsorbed depreciation and unabsorbed development rebate carried forward from earlier years will have to be deducted before arriving at the figure from which the 8 per cent. contemplated by Section 80E is to be deducted. At p. 91, their Lordships enunciated the process of computation as follows :
' 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 the specified industry (here generation and distribution of electricity); and, thirdly, if there be profits and gains so attributable, deduct 8% thereof from such profits and gains and then arrive at the net total income exigible to tax. As regards the first step mentioned above, the important words in Sub-section (1) are those that appear in parenthesis, namely, 'as computed in accordance with the other provisions of this Act' and these words clearly contain a mandate that the total income of the concerned assessee must be computed in accordance with the other provisions of the Act without reference to Section 80E and since in the instant case it is income from business the same as per Section 29 will have to be computed in accordance with Sections 30 to 43A which would include Section 41(2). It is clear that under the second step the profits and gains attributable to the business of the specified industry forms a component of the total income spoken of in the first step. Reading these two steps together, therefore, it is obvious that in computing the total income of the concerned assessee the balancing charge arising as a result of the sale of old machinery and buildings and worked out as per Section 41(2), irrespective of its real character, will have to be taken into account and included as income of the business. In other words, the balancing charge as worked out under Section 41(2)will have to be taken into account before computing the deduction of 8% under the third step. '
13. This passage occurred in the portion of the judgment relating to the question whether the sum of Rs. 7,55,707 must be taken into account in arriving at the profit attributable to priority industry.
14. The question whether the unabsorbed depreciation and unabsorbed development rebate had to be adjusted as against the total amount so arrived at was then considered. After referring to the three steps being taken for computing the special deduction permissible under Section 80E and arriving at the net income exigible to tax, the court pointed out at p. 94 as follows (of 113 ITR):
' 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 figure that will become exigible to the deduction of 8% contemplated by Section 80E(1). On this construction, therefore, the High Court, in our view, was right in deducting unabsorbed depreciation and development rebate aggregating to Rs. 2,54,613 from Rs. 8,02,126 and holding the balance of Rs. 5,47,513 being exigible to 8% deduction. '
15. The decision of the Kerala High Court in Indian Transformers Ltd. v. CIT : 86ITR192(Ker) and of this court in CIT v. L. M. Van Moppes Diamond Tools (India] Ltd. : 107ITR386(Mad) and CIT v. Lucas-T.V.S. Ltd. (No. 2) : 110ITR346(Mad) , were then referred to and doubts were entertained about them.
16. Though the question of 'carried forward losses' being eligible for adjustment in the computation of the business income did not arise for consideration in that case, the Supreme Court expressed its opinion on the said point in the following words 113 ITR98 :
'In other words, the correct figure of total income, which is otherwise taxable under other provisions of the Act, cannot be arrived at without working out the net result of computation under the head ' Profits and gains of business or profession'. Further, the question whether special benefit under Section 80E as well as the normal or usual benefit of carry forward of losses of previous years should both be available to an assessee, without one impinging on the other must depend upon the intention of the legislature and such intention has to he gathered from the language employed. In this view of the matter, it is extremely doubtful whether in spite of the legislative mandate contained in the three steps provided for by Sub-section (1) of Section 80E, the carried forward losses would not be deductible before working out the 8% deduction contemplated by Section 80E and, therefore, the contention that by parity of reasoning or on a priori reasoning unabsorbed development rebate and unabsorbeddepreciation should be held to be non-deductible before working out the 8% deduction under Section 80E(1) cannot be accepted. As observed earlier, on a proper construction of the provision contained in Sub-section (1) of Section 80E, items like unabsorbed depreciation and unabsorbed development rebate will have to be deducted in arriving at the figure which would be exigible to deduction of 8% under Section 80E(1). '
17. Towards, the end of the judgment, the decision of the Mysore High Court in CIT v. Balanoor Tea and Rubber Co. Ltd. : 93ITR115(KAR) , was noticed and the following remarks were made about the said decision ;
' In our view that decision has nothing whatever to do with the question posed before us. In that case, the question was whether the loss incurred by an assessee in non-priority business could be set off against the profits and gains made by the assessee in the priority business while computing the 8% deduction under Section 80E and the High Court upheld the Tribunal's view that, for the purpose of allowing a deduction under Section 80E, the words ' such profits ' occurring in that section mean ' the profits and gains attributable to an activity as specified in the 5th Schedule of the Act.' and, therefore, the deduction was required to be worked out without reference to the loss incurred in non-priority business. The decision was rendered on the language of Section 80E(l) but it cannot avail the assessee on the point raised in the appeal. '
18. The learned counsel for the assessee, in the present case, contended that while the decision of the Madras and Kerala High Courts were doubted, no doubt was cast upon the decision of the Mysore High Court and the said decision was only distinguished. In the submission of the learned counsel, the case before us is similar to the decision of the Mysore High Court. The argument was that the decision of the Kerala High Court and this court had not to consider the problem of adjustment of the loss from a non-priority industry and that as the only decision relating to that point was that of the Mysore High Court in CIT v. Balanoor Tea and Rubber Co. Ltd. : 93ITR115(KAR) , which was only distinguished, the Supreme Court had in a way approved the said decision and that we must apply that decision to the facts before us.
19. The learned counsel for the Commissioner submitted that if the whole of the judgment of the Supreme Court is taken into account, it would be clear that the computation as contended for by the assessee herein runs counter to the Supreme Court decision. Their Lordships have required the computation being made with reference to the entire income in accordance with the other provisions of the Act except Section 80E. In his submission it would, therefore, be clear that the Supreme Court did not envisage the losses in non-priority industry being kept out separately.
20. The matter cannot be said to be free from difficulty. The Supreme Court doubted the correctness of the decisions of this court in CIT v. L. M. Van Moppes Diamond Tools (India] Ltd. : 107ITR386(Mad) and CIT v. Lucas-T.V.S. Ltd. (No. 2) : 110ITR346(Mad) and also of the Kerala High Court in Indian Transformers Ltd. v, CIT : 86ITR192(Ker) . All those decisions were concerned with the brought forward losses, unabsorbed depreciation or unabsorbed development rebate relating to the same business. The Mysore decision was concerned with the adjustment of loss from an activity which did not enjoy the benefit of Section 80E. The Supreme Court in the closing passage of Cambay Electric Supply Industrial Co. Ltd. v. CIT : 113ITR84(SC) , already extracted, has only distinguished the Mysore decision. It was also observed that the said decision was rendered ' on the language of Section 80E(1)'. As there was no expression of doubt about the correctness of this decision, as was done with reference to the Madras and Kerala decisions, the point strenuously urged by Mr. M. U. Reddy was that we must apply the Mysore decision. We consider that to do so would run in the teeth of the construction placed by the Supreme Court on Section 80E. The first of the three steps referred to at p. 91 of : 113ITR84(SC) --the passage has already been extracted--clearly shows that the computation of the total income has to be in accordance with the other provisions of the Act, i.e., in accordance with all the provisions, except Section 80E. This computation would take in adjustment of losses from other than priority industry also. Thus, there is no escape from adjustment of these losses. The assessee would be eligible for deduction of a percentage, of the profits and gains attributable to the priority industry, which remain after adjustment of the losses of the non-priority activity. Therefore, in our opinion, the contention of the assessee cannot be accepted and we, accordingly, answer the question referred to us in the negative and in favour of the revenue. There will be no order as to costs.