Skip to content


Commissioner of Income-tax Vs. Orient Paper Mills Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 424 of 1977
Judge
Reported in(1981)23CTR(Cal)180,[1983]139ITR763(Cal)
ActsIncome Tax Act, 1961 - Sections 40 and 80I; ;Finance Act, 1972
AppellantCommissioner of Income-tax
RespondentOrient Paper Mills Ltd.
Appellant AdvocateA.N. Bhattacharji, Adv.
Respondent AdvocateR.N. Bajoria, ;Samir Chakraborty and ;A.K. Dey, Advs.
Cases ReferredCloth Traders (P.) Ltd. v. Addl.
Excerpt:
- sabyasachi mukharji, j.1. this reference under section 256(1) of the i.t. act, 1961, relates to the assessment year 1971-72. it appears that the ito did not allow relief under section 80-i of the i.t. act, 1961, as the assessee had not claimed the same in the return as required under the i.t. rules. in this connection it may not be inappropriate to refer to the relevant portion of the order of the ito which reads as follows:'(5) development rebate for earlier year as detailed below:up to 68-69 a. y.rs. 23,79,623 69-70 'rs.6,94,995 70-71 'rs. 15,82,829rs. 46,57,447 '2. thereafter, the ito has observed as follows :' under section 80-i on rs. 4,60,42,731 @ 8%, i.e., after adjustment of income under section 41(2), rent, sundry receipt, technical know-how and rebate allowed under section 80g......
Judgment:

Sabyasachi Mukharji, J.

1. This reference under Section 256(1) of the I.T. Act, 1961, relates to the assessment year 1971-72. It appears that the ITO did not allow relief under Section 80-I of the I.T. Act, 1961, as the assessee had not claimed the same in the return as required under the I.T. Rules. In this connection it may not be inappropriate to refer to the relevant portion of the order of the ITO which reads as follows:

'(5) Development rebate for earlier year as detailed below:

Up to 68-69 A. Y.Rs. 23,79,623 69-70 'Rs.6,94,995 70-71 'Rs. 15,82,829Rs. 46,57,447 '

2. Thereafter, the ITO has observed as follows :

' Under Section 80-I on Rs. 4,60,42,731 @ 8%, i.e., after adjustment of income under Section 41(2), rent, sundry receipt, technical know-how and rebate allowed under Section 80G.

Rs. 36,83,418Rs. 2,47,82.407Total income:Rs. 2,31,02,004Round off to :Rs. 2,31,02,000'

3. There was an appeal before the AAC. The AAC, relying upon the decision in the case of Indian Transformers Ltd. : [1972]86ITR192(Ker) and Gurjargravures Pvt. Ltd. : [1972]84ITR723(Orissa) , directed the ITO to allow relief to the assessee under Section 80-I on the gross total income before setting off of the carried forward losses and development rebate. Being aggrieved by the order on this aspect, the Revenue went up in appeal before the Tribunal. The Tribunal had observed that similar issue arose in the assessment year 1970-71, in which it had held that the assessee was entitled to the relief under Section 80E on the profits of priority industry before setting off of the unabsorbed development rebate. In this connection, it should be proper to refer to the order of the Appellate Tribunal which, inter alia, observed as follows:

'In ground No. 6 the Department has objected to the allowance of relief under Section 80-I on the gross total income before setting off of the unabsorbed development rebate. Similar issue arose in the assessment year 1970-71. In that year, we have held that the assessee is entitled to the relief under Section 80-I on profits of the priority industry before setting off of the unabsorbed development rebate. The parties have raised the same contentions in this year. We follow our decision for the assessment year 1970-71 on this point. We may point out that in this year the gross total income is such that relief under Section 80-I can be allowed to the full extent and Section 80A(2) does not come in the way. We, therefore, affirm the order of the AAC.'

4. There was another question involved in the assessment for this year. The ITO went into the details of the perquisites allowed by the assessee to its employees. He determined that the value of the perquisites to the extent of Rs. 16,678 exceeded 1/5th of their salary. It was argued that the cash allowance paid to the employees did not amount to perquisites and the same could not be considered in making a disallowance under Section 40(a)(v) of the I.T. Act, 1961. The ITO disallowed Rs. 16,678 which included the cash allowance of Rs. 8,623.

5. In appeal, the AAC following the decision of the Tribunal in the case of Blue Star Engineering Co., accepted the assessee's contention and deleted the disallowance of Rs. 8,623. The Tribunal upheld the order of the AAC.

6. On these two aspects, the following questions under Section 256(1) of the I.T. Act, 1961, have been referred to this court:

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee is entitled to relief under Section 80-I of the Income-tax Act, 1961, on the profits of the priority industry, before setting off the unabsorbed development rebate of the said priority industry itself ?

2; Whether, on the facts and in the circumstances of the case, the Tribunal misdirected itself in law in holding that the sum of Rs. 8,623, being cash allowance paid to the employees by the assessee-company, did not amount to perquisites and as such the same could not be considered in making disallowance under Section 40(a)(v) of the Income-tax Act 1961 ?'

7. Before we deal with the first question, the second question has been the subject-matter of several judicial decisions and is now concluded by the said decisions. We may say that in view of the decision in the case of CIT v. Kanan Devan Hills Produce Co. Ltd. : [1979]119ITR431(Cal) , the Tribunal did not misdirect itself, in law, in holding that the sum of Rs. 8,623 being cash allowance paid to the employees of the assessee did not amount to perquisites. The Tribunal was, therefore, justified in deleting the disallowance of this sum made by the Revenue authorities. The question is, therefore, answered in the negative and in favour of the assessee.

8. It is now necessary for us to examine the first question. This question, we must first make it clear, deals with the question whether the profits of priority industry could be set off against the unabsorbed development rebate of priority industry itself. What would be the position in the case of a claim for setting off depreciation, and carried forward losses in respect of non-priority industry was the subject-matter of a decision before us in the case of CIT v. Belliss & Morcon (I.) Ltd. (I.R. Reference No. 225 of 1976) judgment in which was delivered by us on February 18, 1981 : [1982]136ITR481(Cal) . But here, in the instant case, we are concerned with the question of setting-off of the profits of the priority industry against the unabsorbed development rebate of priority industry itself for the purpose of eligibility under Section 80-I of the I.T. Act, 1961. In this connection, it would be necessary to refer to the actual provision of Section 80-I as it stood at the relevant time. Section 80-I was on the following terms :

'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 8 per cent. thereof, in computing the total income of the company.

(2) This section applies to a domestic company, save in a case where such company is a company which is referred to in Section 108 and has a gross total income of fifty thousand rupees or less.

(3) Where a company to which this section applies is entitled also to the deduction under Section 80H, the deduction under Sub-section (1) of this section shall be allowed with reference to the amount of the profits and gains attributable to the priority industry or industries as reduced by the deduction under Section 80H in relation to such profits and gains.'

9. It may incidentally be mentioned that prior to Section 80-I, the subject-matter covered by Section 80-I was dealt with by Section 80E, which was inserted by the Finance Act of 1966 with effect from April 1, 1966. That section was deleted and Section 80-I was introduced with effect from April 1, 1968. It may also be mentioned that this Section 80-I has subsequently been deleted. It would also be material for the present purpose to refer to Chap. VI which deals with deductions under several sections, viz., Sections 80J, 80M, etc. Section 80H deals with deduction in the case of new industrial undertakings employing displaced persons, etc. Section 80M deals with deduction in respect of certain intercorporate dividends which was considered by the Supreme Court in a decision which we shall have to consider in detail. Section 80-O deals with deduction in respect of royalties, etc. Section 80B contains the definitions and Sub-clause (5) defines gross total income as follows:

'(5) '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 280-0... '.

10. In Section 80-I, we have to concentrate our attention on certain factors. The section had the heading which indicated that it dealt with the question of deduction in respect of profits and gains from priority industries in the case of certain companies. It is indisputable that the present company of the assessee with which we are concerned comes within the ambit of the provisions of this section. It next appears that in the case of such a company in order to be eligible for the deduction the 'gross total income' must include 'any profits and gains' 'attributable to priority industries' and if it does then the section enjoins that 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 8 per cent. thereof in computing the total income of the company. For our present purpose, it is not relevant to refer to Sub-section (2) or (3) of Section 80-I. We may, however, mention that Sub-section (3) of Section 80-I was designed to avoid double benefit in respect of certain contingencies for priority industries. Therefore, the expressions 'gross total income', 'profits and gains', 'attributable to priority industries' as also the expressions 'deductions' and 'total income', must, in our opinion, be construed in the light of the purpose of the scheme of the section. The scheme of the section seems to be to encourage development of certain priority industries and for that purpose to allow certain development rebate or deductions in respect of such profits and gains attributable to such priority industries. The purpose of this section can be better understood in the light of the observations of the Supreme Court in the case of P.K. Badiani v. CIT : [1976]105ITR642(SC) . There the question was whether the development rebate reserve created by a company by duly charging the amount to the profit and loss account could be allowed although the rebate was allowable as a deduction under the Act constituted 'accumulated profit' of a company within the meaning of Section 2(6A)(e) of the Indian I.T. Act, 1922. It was held by the Supreme Court consisting of three learned judges that for the purpose of assessing to tax the amounts advanced by a private company to the appellant, who was a major shareholder and also its managing director, as dividend under Section 2(6A)(e) of the Indian I.T. Act, 1922, the development rebate reserve created out of its profits constituted a part of the accumulated profits of the company. The expression 'accumulated profit' occurring in Clause (e) of Section 2(6A) or for the matter of that in any other clause meant profits in the commercial sense and not assessable or taxable profits liable to tax as income under the Indian I.T. Act, 1922. It was held that the term 'profits' occurring in Section 2(6A)(e) meant profits in the commercial sense, that is to say, profits made by the company in the usual and true sense of the term. The allowance of initial depreciation or development rebate unlike normal depreciation was in no sense a deductible item of cost or an expenditure in the process of settlement of commercial profits ; although it did not form part of the assessable profits undoubtedly it did form part of the commercial profits. Mere transferring of an amount from the profit and loss account to the development reserve account did not amount to a capitalisation of the profits. There, explaining the purpose of that section, the Supreme Court at p. 646 of the report observed that the expression 'accumulated profit' occurring in Clause (e) of Section 2(6A) or as a matter of fact in any other clause, undoubtedly meant profits in the commercial sense and not assessable or taxable profits liable to tax as income under the 1922 Act. It was a well-known concept in the taxation law that the term 'profits' in the various sections of the income-tax Acts had not got the same meaning. In the context, sometimes it meant the assessable profits and sometimes it meant commercial profits. The gravamen of the argument on behalf of the assessee, in that case had been that the development rebate deductible from the assessable profits of the company was also a type of outgoing expenditure or out of pocket cost which was deductible while ascertaining the profits of the company in the commercial sense. It was submitted that it was in the nature of a depreciation allowance and was identical with the initial depreciation. It should, therefore, be deducted from the commercial profit of the company. The Supreme Court noted that depreciation allowance had been allowed to be deducted from the assessable profits of the assessee under Section 10(2)(vi) of the 1922 Act, corresponding to Section 32 of the 1961 Act. It would appear from the report of the Taxation Enquiry Commission, 1953-54, Vol. II, as to what was the nature of depreciation allowance. The normal depreciation provided in Clause (vi) and the additional depreciation mentioned in Clause (via) of Section 10(2) of the 1922 Act was permitted to be deducted from the written down value. By and large the cost of replacement was allowed as deduction in lieu of depreciation in respect of certain assets. But by the amendments made by the I.T. (Amend.) Act, 1946, the Finance Act, 1955 and the Finance Act, 1956, certain initial depreciation was allowed in respect of buildings, or newly erected machinery and plant installed. The Supreme Court thereafter made a significant observation that it was by way of an incentive for the new structure or the new installation of the plant and machinery. The amount of initial depreciation was not deductible in determining the written down value, although under prov. (c) it was to be taken into account in the aggregate of allowances so as not to permit these to exceed the minimum limit of allowance provided therein. The development rebate was provided in Clause (vib) with effect from April 1, 1955. Although the initial depreciation, the Supreme Court noted, and development rebate were not identical, and they differed in some material particulars, they were similar in nature as they were by way of 'incentive for installation of new machinery or plant'. Therefore, the purpose of allowing this deduction in respect of profits and gains attributable to priority industry was meant to be as a kind of an incentive for the growth of what was considered as priority industries by the Legislature. Keeping in the background this purpose, we have to analyse the language used in this section. As we have noted, the section uses the expression 'gross total income'. This 'gross total income' has first to be computed. The gross total income must be computed in accordance with the provisions of the Act and would normally be in compliance with Section 80B, Sub-section (5), that is to say, the total income computed in accordance with the provisions of the Act before making any deductions under this Chapter, viz., VIA or under Section 280-O with which we are not concerned. 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 I.T. 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. This question, however, has been the subject-matter of several decisions. But, before we examine them, it would be instructive in this connection to refer to Section 15C of the 1922 Act. Section 15C provided for exemption from tax of newly established industrial undertakings and stipulated that, save as otherwise therein provided, the tax would not be payable by an assessee on so much of the profits and gains derived from an industrial undertaking or hotel, to which the section applied, as did not exceed 6 per cent. per annum on the capital employed in the undertaking or hotel computed in accordance with such rules, as might be made in that behalf by the CBR but, however, the section stipulates the conditions to which the section would be applicable, and Sub-section (3) of that Section 15C specifically provided as follows :

'The profits or gains of an industrial undertaking or a hotel to which this section applies shall be computed in accordance with the provisions of Section 10,' (meaning thereby Section 10 of the Indian Income-tax Act, 1922).

11. We are not concerned with the other sub-sections of Section 15C of the Indian I.T. Act, 1922. Here, the Legislature had taken pains to make it clear that though the expressions profits and gains of an industrial undertaking 'to which the section applied did not use the words 'computation of such profits' must be made in accordance with Section 10, but this section dealt with the computation of the profits and gains of business and specifically provided for certain deductions and disallowances eligible for computation. Similarly, Section 84 which replaced Section 15C of the Indian I.T. Act. 1922, was also subsequently deleted and which dealt with the income of the new industrial establishment, viz., Section 84 of the 1961 Act, which subsequently provided, save as otherwise provided therein, the income-tax shall not be payable by an assessee on so much of the profits and gains derived from an industrial undertaking or business or hotel or any establishment to which the section applied as would not exceed the 6 per cent. of the capital employed in such an undertaking or business or establishment. Sub-section (5) of Section 84, as it stood at the relevant time, specifically provided that 'the profits and gains derived from an industrial undertaking or business of a hotel or from a ship to which the section applies, shall be computed in accordance with the provisions contained in Chapter IV-D'. Therefore, the Legislature wanted that the profits and gains of a particular type of industry to which the Legislature desired to give the special treatment should be computed in accordance with the provisions of the Indian I.T. Act, 1922, and not in accordance with the notions of commercial profits. The Legislature has expressly provided so in the language used in the said provision. It is in this light, we may examine some of the decisions of the Supreme Court. In the case of CIT v. S. S. Sivan Pillai : [1970]77ITR354(SC) , the question was whether the exemption under Section 15C(1) of the Indian I.T. Act, 1922, from payment of income-tax of a part of the profits of new industrial undertaking was not related to the business profit or was related to the taxable profit. The Supreme Court was of the view that the language of Sub-section (3) was clear that the profits of industrial undertakings had to be determined under Section 10 of the Act. Even if the undertaking had earned profits out of its commercial activity, if it had no taxable profits, it could not claim exemption from payment of tax under Section 15C( 1) and, therefore, if the undertaking could not claim the benefit under Sub-section (1), the shareholders would not get the benefit under Sub-section (4), for there was no dividend paid which was attributable to that part of the profits and gains on which tax was not payable by the undertaking under Sub-section (1). Under the scheme of Section 15C, the profits or gains of an industrial undertaking must be determined under and in the manner provided by Section 10 of the Indian I.T. Act, 1922. For that purpose, all the allowances under Sub-section (2) must be taken into account and the resultant amount formed a component of the taxable profit. If by prov. (b) to Section 10(2)(vi) the unabsorbed depreciation of the previous year was deemed depreciation for the subsequent year, there was no room for making any distinction between the unabsorbed depreciation for the previous year and the depreciation for the current year. The right to appropriate, profits towards the unabsorbed depreciation of the previous year did not arise under Section 24(1) of the Indian I.T. Act, 1922. It arose by virtue of Section 10(2)(iv), prov. (b). In computing the profits of an industrial undertaking in any year under Section 15C(3), the unabsorbed depreciation for a year could not be ignored. It was held that the shareholders in the company, an industrial undertaking, to which Section 15C applied were not entitled to exemption under Section 15C(4) in relation to dividend received from the company since, owing to the unabsorbed depreciation of earlier years admissible under Section 10(2)(vi) and (via), the company had no taxable profit in the relevant year. There, the Supreme Court observed at p. 757 of the report that the language of the sub-section was clear. The profits of an industrial undertaking had to be determined under Section 10 of the Act. The question was again considered by a Bench of the Supreme Court consisting of three learned judges in the case of Rajapalayam Mills Ltd. v. CIT : [1978]115ITR777(SC) . There, the Supreme Court explaining the purpose of Sub-section (3) of Section 15C at pp. 788-789 of the report observed as follows :

'Now, Sub-section (3) of Section 15C provides that the profits or gains of a new industrial undertaking shall be computed under Section 10 and, therefore, according to Clause (vi) read under proviso (b), no part of the depreciation allowance and according to Clause (vib). Explanation I, no part of the development rebate in respect of the new industrial undertaking for the past assessment years, can be allowed as a deduction in computing the profits and gains, unless it has remained unabsorbed by reason of inadequacy of the total income chargeable to tax in the past assessment years--and, as pointed out above, by total income we mean not only pro-fits or gains derived from the new industrial undertaking but the totality of profits or gains computed under various heads--and is carried forward to the assessment year in question. There is nothing in Sub-section (3) of Section 15C or in any other provision of the Act which requires that in computing the profits or gains of a new industrial undertaking under Section 10, depreciation allowance or development rebate in respect of the new industrial undertaking for the past assessment years should be taken into account, even if it has been set off fully against the profits or gains of any other business carried on by the assessee or against income under any other head and there is no unabsorbed depreciation allowance or development rebate to be carried forward. It is indeed difficult to see how effect can be given to depreciation allowance and development rebate twice over, once in the past assessment years and again in the assessment year in question. To give effect to depreciation allowance or development rebate for the past assessment years, even though it has been set off and absorbed completely against the total income of the assessee for those assessment years, would be to allow a deduction not warranted by any provision of the Act and indeed it would be going contrary to the express provision of proviso (b) to Clause (vi) and Explanation I to Clause (vib). Sub-section (3) of Section 15C clearly does not have any such effect. What it does is no more than provide as to how ' the profits or gains derived from new industrial undertaking ' referred to in Sub-section (1) of Section 15C shall be computed. If Sub-section (3) of Section 15C had not been enacted it might have been a matter of some controversy as to what is meant by the expression 'the profits or gains derived from new industrial undertaking'. Does it mean commercial profits or gains or profits or gains chargeable to tax or does it have any other connotation It was to set this controversy at rest that Sub-section (3) of Section 15C enacted that the profits or gains of the new industrial undertaking shall be computed in accordance with the provisions of Section 10. It may be noted that Sub-section (3) of Section 15C does not enact any legal fiction providing that the profits or gains of the new industrial undertaking shall be computed as if the new industrial undertaking were the only business of the assessee from the date of its establishment or the past years, depreciation or development rebate had not been set off against other income of the assessee. The new industrial undertaking is not retrospectively quarantined or isolated from the other income producing activities of the assessee for determining its profits or gains for the purpose of applicability of Sub-section (1) of Section 15C. What Sub-section (3) of Section 15C does is merely to lay down the same rule of computation for the profits or gains of a new industrial undertaking as in respect of any other business and, therefore, neither depreciation allowance nor development rebate in respect of the new industrial undertaking for the past assessment years can be allowed as a deduction in computing the profits or gains for the assessment year in question, except where and to the extent to which, it has not been set off against the total income of the assessee for those assessment years and has remained unabsorbed. This is the plain and undoubted effect of the language used in Sub-section (3) of Section 15C. Indeed, the language is so clear and unambiguous that it is impossible to place any other construction upon it. But, apart from the language of the section, it may be noted that if the construction contended for on behalf of the Revenue and upheld by the High Court as well as the Tribunal were accepted, it would lead to the highly anomalous result that, though for the purpose of computing the total income chargeable to tax, the depreciation allowance and development rebate which have been set off against the other income of the assessee for the past assessment years would not be liable to be taken into account, they would have to be deducted in computing the profits or gains of the business for the purposes of applicability of Sub-section (1) of Section 15C. Thus, there would be two different modes of determining the profits or gains of the business, one for computing the total income chargeable to tax and the other for applying the provisions of Sub-section (1) of Section 15C. We cannot imagine that such a consequence could ever have been intended by the Legislature.'

12. With this background in view it would be necessary to consider the decision of the Supreme Court in the case of Cloth Traders (P.) Ltd. v. Addl. CIT : [1979]118ITR243(SC) . We will, however, have to consider after we consider this and the ratio of the said decision, another decision of the Supreme Court which is anterior to this decision, in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT : [1978]113ITR84(SC) , upon which reliance was placed heavily on behalf of the Revenue and which requires detailed consideration for the purpose of answering the question before us. For the present purpose, however, it is necessary to refer to the decision of the Supreme Court in the case of Cloth Traders (P.) Ltd. v. Addl. CIT : [1979]118ITR243(SC) . There, the Supreme Court was concerned directly with the deduction permissible under Section 80M of the I.T. Act, 1961. The Supreme Court noted that Section 99(1)(iv) of the I.T. Act, 1961, granted exemption from super-tax in respect of 'any dividend from an Indian company' and these words could not mean anything else but the full amount of dividend, according to the Supreme Court, derived from an Indian company. The Supreme Court was further of the view that this did not mean dividend from an Indian company minus any expenses incurred in earning it or less any deduction allowable under the Act. The words 'the following amounts which are included in the total income' in the opening part of Section 99(1), according to the Supreme Court, did not have any limitative effect. The Supreme Court observed that those were descriptive of the items of income included in the total income and were not indicative of the quantum of the amounts included under different items in the computation of the total income. The Supreme Court was of the view that the exemption from super-tax granted under Clause (iv) of Sub-section (1) of Section 99 would be applicable only if the particular item of income, namely, 'dividend from an Indian company' was included in the total income. What was exempted was 'dividend from an Indian company' which could only mean the full amount of dividend received from the Indian company. The rebate on income-tax under Section 85A which was to be calculated by applying the average rate of tax to the 'income by way of dividend from an Indian company' could only mean the full amount of dividend received from an Indian company. The words 'income so included' referred not, according to the Supreme Court, to the quantum of the income included, but referred only to the category of income included, that is to say, income by way of dividend from an Indian company. The Supreme Court was of the view that the deductions permissible under Section 80M was to be calculated with reference to the full amount of dividend received from a domestic company and not with reference to the dividend so computed in accordance with the provisions of the Act, i.e., after making the deduction provided under the Act. The words 'where the gross total income of an assessee... includes any income by way of dividends from a domestic company 'in Section 80M merely prescribed a condition for the applicability of the section, that is to say, that the gross total income must include this category of income described by the words 'income by way of dividend from a domestic company'. If the gross total income included this particular category of income, whatever might be the quantum of such income included, the condition, according to the Supreme Court, would be satisfied and the assessee would be eligible for deduction of the whole or 60 per cent. of such income, as the case might be. The words 'such income' could not have any reference to the quantum of income included but could only refer to the category of income included, that is to say, income by way of dividend from a domestic company. The Supreme Court, further noted that the possibility that the income by way of dividend might exceed the quantum of such income inclusive of the gross total income was taken care of by Section 80A(2) which provided that the aggregate amount of the deduction should not exceed in any case the gross total income. This decision of the Supreme Court was rendered in an appeal from the decision of the Gujarat High Court in the case of Addl. CIT v. Cloth Traders (P.) Ltd. : [1974]97ITR140(Guj) , where the Gujarat High Court took a view different from the view expressed, by this court in the case of CIT v. Darbhanga Marketing Co. Ltd. : [1971]80ITR72(Cal) as well as those in the decisions of the Bombay High Court and the Madras High Court. The Supreme Court approved the decision of this court at p. 250 of : [1979]118ITR243(SC) (Cloth Traders (P.) Ltd. v. Addl. CIT) and observed at pp. 257 to 259 as follows:

'We must now turn to consider Section 80M for the purpose of arriving at its true interpretation. There is a close similarity between Section 85A and Section 80M so far as the opening part of the two sections is concerned, but when we come to the latter part, we find that there is a difference, inasmuch as Section 85A provides for calculation of rebate of income-tax on 'income so included' while Section 80M provides for deduction of the whole or part of ' such income by way of dividends'. Even if there be any doubt or ambiguity, in regard to the meaning of the words 'income so included' in Section 85A, though we do not think that there is any scope for such doubt or ambiguity, the language employed by the Legislature in Section 80M is much clearer and leaves no doubt that the deduction, whether whole or 60 per cent. is to be calculated with reference to the entire amount of income by way of dividends received from a domestic company. Section 80M occurs in Chap. VI-A which is headed 'Deduction to be made in computing total income'. Section 80M, Sub-section (1) provides that in computing the total income of an assessee, the deductions specified in Sections 80C to 80VV shall be made from his gross total income and gross total income, according to the definition in Section 80B, Clause (5), means the total income computed in accordance with the provisions of the Act before making any deduction under Chap. VI-A or under Section 280D. What Section 80A, Sub-section (1), requires is that, first, the total income of the assessee must be computed in accordance with the provisions of the Act without taking into account the deductions required to be made under Chap. VI-A or under Section 280D and then from the gross total income thus computed, the deductions specified in Sections 80C to 80VV must be made in order to arrive at the total income. But Sub-section (2) of Section 80A provides that the aggregate amount of the deductions required to be made under Chap. VI-A shall not exceed the gross total income of the assessee so that the total income arrived at after making the deductions specified in Sections 80C to 80VV from the gross total income can never be a minus or negative figure. This provision imposing a ceiling on the deductions which may be made under Sections 80C to 80VV clearly postulates that in a given case the aggregate amount of these deductions may exceed the gross total income. It is in the context of this background that we have to determine the true interpretation of Section 80M, which, as the marginal note indicates, provides for deduction in respect of certain intercorporate dividends. Section 80M, Sub-section (1), opens with the words ' where the gross total income of an assessee... includes any income by way of dividends from a domestic company' and proceeds to say that in such a case there shall be allowed in computing the total income of the assessee a deduction 'from such income by way of dividends' of an amount equal to the whole of such income or 60 per cent. of such income, as the case may be, depending on the nature of the domestic company from which the income by way of dividends is received. Now, the words 'such income by way of dividends' must be referable to the income by way of dividends mentioned earlier and that would be income by way of dividends from a domestic company which is included in the gross total income. The whole of such income, that is, income by way of dividends from a domestic company or 60 per cent. of such income, as the case may be, would be deductible from the gross total income for arriving at the total income of the assessee. The words 'where the gross total income of an assessee...includes any income by way of dividends from a domestic company ' are intended only to provide that a particular category of income, namely, income by way of dividends from a domestic company, should form a component part of the gross total income. These words merely prescribe a condition for the applicability of the section, namely, that the gross total income must include the category of income described by the words 'income by way of dividends from a domestic company'. If the gross total income includes this particular category of income, whatever be the quantum of such income included, the condition would be satisfied and the assessee would be eligible for deduction of the whole or 60 per cent. of 'such income'. Now, if the words ' where the gross total income of an assessee... includes any income by way of dividends from a domestic company' in the opening part of the section refer only to the inclusion of the category of the income denoted by the words 'income by way of dividends from a domestic company' and not to the quantum of the income so included, the words 'such income' cannot have reference to the quintum of the income included, but they must be held referable only to the category of the income included, that is, income by way of dividends from a domestic company. The words 'such income' as a matter of plain grammar must be substituted by the words 'income by way of dividends from a domestic company' in order to arrive at a proper construction of the section and if that is done, it would be obvious that the deduction is to be in respect of the whole or 60 per cent. of the 'income by way of dividends from a domestic company', which can only mean the full amount of dividends received from a domestic company. The deduction permissible under the section is, therefore, to be calculated with reference to the full amount of dividends received from a domestic company and not with reference to the dividend income as computed in accordance with the provisions of the Act, that is, after making deductions provided under the Act. This was the view taken by the Madras High Court in Madras Auto Service v. ITO : [1975]101ITR589(Mad) and it meets with our approval. It is true that the Gujarat High Court has taken a contrary view in Addl. CIT v. Cloth Traders P. Ltd. [1974] 97 ITR 130 which is the subject-matter of Civil Appeals Nos. 117 and 118 of 1975, but we think it proceeds on an erroneous interpretation of the language of Section 80M, Sub-section (1). It wrongly construes the words 'such income' to be referable to the quantum of income includible in the gross total income, overlooking the fact that the opening words in the section, namely, 'where the gross total income of an assessee... includes any income by way of dividends from a domestic company' refer only to the inclusion of the category of income by way of dividends from a domestic company and they are not indicative of the quantum of the income included in the gross total income. It is true that on this view the deduction in respect of the income by way of dividends from a company falling within Clause (a) of Sub-section (1) of Section 80M may exceed the quantum of such income included in the gross total income, but that possibility is indeed contemplated and taken care of by Section 80A, Sub-section (2), which provides that the aggregate amount of the deductions shall not in any case exceed the gross total income of the assessee.'

13. The Supreme Court thereafter noted that these were the consistent views of the Madras, Bombay and the Calcutta High Courts but the Gujarat High Court had taken a different view. At p. 260 of the report, the Supreme Court noted as follows :

' We may also in this connection refer to Section 80K read with Rule 20, Section 80MM, Section 80N and Section 80-O which occur in the same group of sections as Section 80M. These sections use the same legislative formula as Section 80M and open with the identical words 'where the gross total income of an assessee...... includes any income....' It appears on a plain reading of the these sections that the deduction admissible is in respect of the whole of the income received by the assessee and not in respect of the income computed after making the deductions provided under the Act. Vide Madras Auto Service's case : [1975]101ITR589(Mad) and Addl. CIT v. Isthmian India Maritime P. Ltd. : [1978]113ITR570(Mad) . We derive considerable support for our view from the analogy of these sections.'

14. The Supreme Court accordingly reversed the decision of the Gujarat High Court in the case of Addl. CIT v. Cloth Traders P. Ltd. : [1974]97ITR140(Guj) . Following this decision of the Supreme Court there have been some amendments in the I.T. Act, 1961, and it will be instructive to refer to the same for the purpose of understanding how the Legislature interpreted the Supreme Court decision. The I.T. Act, 1961, was amended by the Finance (No. 2) Act of 1980, by incorporating Section 80AA which reads as follows:

'80AA. Computation of deduction under Section 80M.--Where any deduction is required to be allowed under Section 80M in respect of any income by way of dividends from a domestic company which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, the deduction under that section shall be computed with reference to the income by way of such dividends as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) and not with reference to the gross amount of such dividends.'

15. Section 80AB was also inserted by the Finance (No. 2) Act of 1980 and which reads as follows :

'80AB. Deductions to be made with reference to the income included in the gross total income.--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.'

16. In order to appreciate the reason for this incorporation it may be instructive to refer to the Finance (No. 2) Bill of 1980 as introduced originally, which was substituted by insertion of new Section 80AA. Clause 12 read as follows (See [1980] 123 ITR 32):

'12. Insertion of new Section 80AA.--In the Income-tax Act, after Section 80A, the following section shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 1968, namely :--

80AA. Deductions to be made with reference to the income included in the gross total income.--Where any deduction is required to be made or allowed under any section 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 deductions under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deductions 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.'

17. In the memorandum explaining the reasons for the provisions of the Finance (No. 2) Bill, 1980, in Clauses 78, 79, 80 and 81 it was explained as follows [1980] 123 ITR 166:

'78. Under the existing provisions, in computing the total income of the taxpayer, the deductions specified in this behalf are allowed from the 'gross total income'. For this purpose, 'gross total income' means the total income computed in accordance with the provisions of the Income-tax Act before making any deduction under Chapter VI-A. The income by way of dividends computed in accordance with the provisions of the Income-tax Act, i.e., after allowing the necessary expenditure specified in the preceding paragraphs, forms part of the 'gross total income' of the taxpayer. It has accordingly all along been considered that any deduction in respect of inter-corporate dividends has necessarily to be calculated with reference to the amount of dividend which forms part of the 'gross total income'. In other words, it has always been the intention to grant the deduction at the specified percentage on the net amount of such dividends and not the gross amount thereof.

79. However, recently, the Supreme Court has held that the deduction admissible for the inter-corporate dividends has to be calculated with reference to the gross amount of dividends received by a domestic company from an Indian company and not with reference to the dividend income as computed in accordance with the provisions of the Income-tax Act, i.e., after making the deductions provided under the Act; The Supreme Court, further held that if the gross total income of the taxpayer includes any particular category of income, whatever be the quantum of such income included, the taxpayer would be eligible for the deduction of the whole, or, as the case may be, the specified percentage of such income.

80. The effect of the Supreme Court's decision may be explained by taking a hypothetical example. Suppose, a domestic company receives dividends amounting to Rs. 2 lakhs from another domestic company and has paid Rs. 1 lakh as interest on moneys borrowed for the purpose of investment in the relevant shares, its dividend income would be computed at Rs. 1 lakh (Rs. 2 lakhs minus Rs. 1 lakh). The deduction in respect of inter-corporate dividends should, therefore, be allowed with reference to the net dividends received by the company and included in its taxable income, namely, Rs. I lakh, but according to the Supreme Court ruling, the deduction will be admissible on the gross amount of Rs. 2 lakhs received by the company.

81. Although the issue before the Supreme Court in this case was in respect of the concessional tax treatment of inter-corporate dividends, the Supreme Court has specifically referred to the provisions of some of the other sections which occur in the same group of sections as the one dealing with the inter-corporate dividends. The Supreme Court has, in respect of these other sections, observed that on a plain reading of these sections, it appears that the deduction admissible is in respect of the gross amount of the income received by the taxpayer and not in respect of the net income computed after making the deduction provided under the Act.'

18. Finally, of course, the Finance (No. 2) Act of 1980, amending inserting Section 80AA and Section 80AB was passed in the manner, we have indicated before. The reason for such changes are best explained in the words of the Finance Minister as appearing in his speech while moving the Finance (No. 2) Bill of 1980, for the consideration of the Lok Sabha. There, in course of his speech, the Finance Minister observed, inter alia, as follows :

'The Bill also seeks to insert a new Section 80AA, in the Income-tax Act to clarify that the deductions admissible under various provisions of Part G of Chapter VIA will be available with reference to the net income from the specified sources after allowing for expenditure incurred for earning such income and not with reference to the gross amount of the income from the qualifying sources. This provision is being made in order to get over the difficulty caused by a recent decision of the Supreme Court. It has been represented that the retrospective operation of this provision will cause hardship in several cases. I have carefully examined the matter. I am satisfied that the intention of Parliament has always been to allow the deductions only with reference to the net amount of income and the retrospective operation of the new Section 80AA would be fully justified. However, the retrospective operation of the provision may cause hardship in case of persons who have developed scientific skills and technology and helped in making our technology popular in other countries as well as in India. Some of the other provisions in Chapter VIA have no significant revenue implications. Having regard to these consideration, I propose to give retrospective effect to this provision only in relation to inter-corporate dividends eligible for deduction under Section 80M. So far as other sources of income mentioned in Part C of Chapter VIA are concerned, the relevant provision in the Bill will apply only prospectively, that is, with effect from April 1, 1981.'

19. Therefore, it appears that the Legislature understood the effect of the decision in the case of Cloth Traders (Pt.) Ltd. v. CIT [1919] 118 ITR 243, that profits and gains attributable to the types of industries to which the relief was contemplated in Chap. VI of the Act was to be understood in the commercial sense and was not to be computed in the light of the computation of total income in accordance with the other provisions of the I.T. Act. The Legislature, therefore, wanted that the legislative intent should be given effect to, which according to the Legislature, was not expressed in the language as explained by the Supreme Court in the last mentioned decision, by giving retrospective effect to Section 80M as indicated in Section 80AA and making the provisions of Section 80AB applicable after the adoption of the Finance (No. 2) Act of 1980, that is to say, prospectively. Section 80AB stated that the deduction in respect of certain income 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 the 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. Therefore, we have the legislative understanding of the decision of the Supreme Court in the last mentioned case, and the consequential changes made in the Act relating to the provisions with which we are concerned and the question with which we are concerned being relevant to the year before the amendment came into effect must be understood in that light. There, we have mentioned before, the Supreme Court had dealt not only with Section 80M but also with the other sections appearing in that chapter and it was the view of the Supreme Court that deductions and rebate in respect of the amounts included in that chapter should be made on gross profit or income or profit as understood in the commercial sense and not computed in accordance with the provisions of the I.T. Act, 1961. Keeping these factors in the background, it is now necessary to analyse the ratio of the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT : [1978]113ITR84(SC) , Before, however, we do so, it would be material to consider the decision of the Gujarat High Court of which this matter went to the Supreme Court. That decision is reported in the case of CIT v. Cambay Electric Supply Industrial Co. Ltd. : [1976]104ITR744(Guj) . There, one of the controversies was whether the balancing charge in respect of machinery used in priority industry under Section 41(2) of the I.T. Act, 1961, could be said to be an income attributable to such industry. The Gujarat High Court, in this connection, examined the difference between the expressions 'attributable to' and 'derived from' and was of the opinion that such balancing charge from the priority industry could be treated as an income attributable to priority industry. The next question was whether in computing the relief under Section 80E(1) of the I.T. Act, 1961, deduction in respect of such balancing charge and other unabsorbed depreciation had to be made before giving relief under Section 80E. There, the assessee-company was carrying on business of generation and distribution of electricity and was, therefore, covered by the provisions of Section 80E of the I.T. Act, 1961, as it stood prior to the amendment in 1968. According to this section, the assessee was entitled to claim deduction at the rate of 8 per cent. on the amount of profits and gains attributable to its business of the generation and distribution of electricity. During the assessment year 1967-68, the accounting year for which was the financial year 1966-67, the assessee earned an income of Rs. 46,319 from its business and had sold some of its old machinery and building in respect of which sale the ITO worked out the balancing charge contemplated by Section 41(2) at Rs. 7,55,807. In accordance with Section 41(2), this amount was added to the previously mentioned business income of Rs. 46,319 thus making a total of Rs. 8,02,126. The deduction of 8 per cent. which was contemplated by Section 80E(1) computed by the ITO on this amount and since this deduction worked out to Rs. 64,170 for the purpose of computing the net income chargeable to tax he arrived at the figure of Rs. 7,37,956. The unabsorbrd depreciation of Rs. 1,42,955 and the unabsorbed development rebate of Rs. 1,11,658 totalling Rs. 2,54,613 was set-off against the above amount of Rs. 7,37,956 and this gave a result of net income chargeable to tax at Rs. 4,83,343. The Addl. Commissioner, however, took action under Section 263 of the Act as he was of the view that the order passed by the ITO was erroneous. It was contended for the Revenue that the addition of Rs. 7,55,807 on account of the balancing charge under Section 41(2) was treated merely because of the fiction created by Section 41(2) and it did not really amount to either profit or gains from business and that while computing the deduction at 8 per cent. under Section 80E this amount should not be taken into consideration. Analysing the scheme of the section and the effect of Section 41(2), the Division Bench of the Gujarat High Court held that the incidence of the depreciation of capital fell on the Revenue and, therefore, the profit which was the result of the balancing charge of Section 41(2) could be said to be the income attributable to such priority industry and as such should be deducted. It was further held, that Section 80E(1) contemplated the working out of the total income of the assessee 'as computed in accordance with other provisions of the Act'. It was contended for the Revenue that when working out the total income as computed in accordance with the other provisions of the Act one must deduct the depreciation allowance and development rebate as contemplated by Sections 32 and 33 of the Act. The court held that the use of the words 'other provisions' clearly ruled out the application of those provisions of Section 80E(1) which related to 8 per cent. deduction when the total income contemplated by the first part was computed. This signified that the computation of total income referred to in the first part was to be made before the deduction of 8 per cent. was worked out and the computation was to be worked out with reference to the other provisions of the Act except the provisions of Section 80E. In this connection, it may be material to refer to the contentions urged on behalf of Revenue, in this case, in the words of the Division Bench which are as follows : [1976]104ITR744(Guj) :

'On this point, the contention of the Revenue is that if a reference is made to the scheme of Section 80E(1) it is found that it first contemplates the working out of the total income of the assessee 'as computed in accordance with other provisions of the Act'. It was contended by Shri Kaji, on behalf of the Revenue, that the expression 'total income' as defined by Clause (45) of Section 2 means 'income computed in the manner laid down in the Act' and that this expression should be understood in the same sense while interpreting the provisions of Section 80E(1). Sri Kaji also drew our attention to the provisions contained in sections 28 and 29 of the Act. Section 28 enumerates the income which shall be chargeable to income-tax under the head ' profits and gains of business or profession' while Section 29 says that income referred to in Section 28 shall be computed in accordance with the provisions contained in sections 30 to 43A. Drawing our attention to these sections, Shri Kaji contended that Sections 32 and 33 under which the depreciation allowance and the development rebate are granted are two of the sections referred to in Section 29, and, therefore, when you are working out the total income 'as computed in accordance with the other provisions of the Act' you must first work out the figures of the total income after deducting the depreciation allowance and the development rebate as contemplated by sections 32 and 33. As against this, the contention of Shri Shah, appearing for the assessee, was that the expression 'total income' appearing in Section 80E(1) is used in its commercial sense, and neither the carried forward depreciation nor the development rebate has anything to do with commercial profits and gains attributable to the business. It was also contended on behalf of the asses-see that the first part of Section 80E(1) which contemplates computation of income in accordance with the other provisions of the Act refers only to an event, the event being the occasion of computing income under the Act. According to the assessee, therefore, computation of income according to the other provisions of the Act need not be construed as a condition precedent for computing the 8% deduction under Section 80E(1)?'

20. It may be mentioned that, in this matter, that the Division Bench had passed an order holding in favour of the assessee, but later on, in another reference that came up for hearing, and, after hearing it, it was held against the assessee. Therefore, this matter was put down for a fresh hearing and the order was passed. The question that was pressed before the Division Bench was whether the expression 'total income' was used in the commercial sense as contemplated by the assessee or in the statutory sense as contended by the Revenue. It was held that it must have been done in the statutory sense in accordance with the provisions of the Act. At p. 768 of the report, the court observed as follows:

'It is important to note that profits and gains from which 8% deduction is required to be made under Section 80E are those profits and gains which are included in the computation of total income. Therefore, the real question is what is included in the computation of total income. Is it the gross amount of profits and gains or the net amount of profits and gains (arrived at after deducting depreciation allowance and development rebate) which is included in the computation of 'total income' The correct answer to this question can be obtained only if we find out what becomes a constituent part of the 'total income' which is computed in accordance with the provisions of the Act. Can it be said that when you are computing the 'total income' in accordance with the provisions of the Act, you can take the gross amount of profits and gains as one of its components In our opinion, a clear and unequivocal answer to this question is in the negative, because, if you do so, you are taking the 'total income' which is not in accordance with the provisions of the Act. This particular aspect has been exhaustively examined by this court in the above referred case of Addl. Commissioner of Income-tax v. Cloth Traders (P.) Ltd. : [1974]97ITR140(Guj) . The question which was involved in that case was whether, while computing deduction of tax on inter-corporate dividend under Section 85A of the Act of 1961, income from dividend should be taken at its gross figure or at its net figure which is arrived at after deducting the expenditure incurred by the concerned assessee to earn that dividend. The court answered this question by stating that it is the net figure which is arrived at after deducting expenditure incurred to earn the dividend, which should be taken into consideration for the purpose of determining deduction of tax on intercorporate dividends under Section 85A of the Act. The provisions of Section 85A with reference to which the said decision was given provide that where the total income of an assessee being a company includes any income by way of dividends received by it from an Indian company, the assessee shall be entitled to the deduction from income-tax which is chargeable on its total income for any assessment year of so much of the amount of income calculated at the average rate pf income tax on income so included as exceeds the amount of 25% thereof. Thus, this section puts emphasis on the amount included in the total income for the purpose of calculating the deduction contemplated by it. The court, therefore, construed the effect of the expression 'on income so included' in the following words :

'The second part of the section says that the deduction shall be from the income-tax with which the company is chargeable on its 'total income'. But still the question is how much deduction should be given. The second part provides an answer to this question by saying that the deduction should be on that amount of tax, calculated at the average rate on the dividend income included in the 'total income', which exceeds 25% of the income so included. The point to be noted is that the second part contemplates deduction of tax 'on income so included'. The words, 'so included' have reference to the inclusion in the 'total income' contemplated by the above-referred second condition of the first part of the section. In other words, only that tax can be deducted which could be assessed on the dividend income which is included in the 'total income' of the assessee-company. To put it differently, the said dividend income is that income which has become one of the component parts of the 'total income'. If that be so, gross dividend income can form the base of the deduction contemplated by Section 85A only if it has become a component of 'total income' and not otherwise. The discussion which follows shows that it is the net dividend income and not the gross one which can become a component of 'total income' ' These observations apply fully to the facts of the present case, because even Section 80E, with which we are concerned in this reference, contemplates the deduction of 8% from such profits and gains which are included in the total income computed under the first part of the section. In other words, 8% deduction is to be calculated on that component which has gone to make up the 'total income' contemplated by the first part of the section. Therefore, the contention of the assessee that 8% deduction should be on the gross profits and gains of business irrespective of what happens when 'total income' is computed, is wholly unacceptable.'

21. Now, out of this decision, the matter went up to the Supreme Court and the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT : [1978]113ITR84(SC) . It may be mentioned that the Bench consisted of two learned judges. There, the Supreme Court held that in computing the total income of the assessee carrying on the business of the industry specified in Section 80E of the I.T. Act, 1961, as it stood prior to its amendment, by the Finance (No. 2) Act of 1974 for the purpose of special deduction permissible thereunder, the balancing charge arising as a result of the sale of old machinery and buildings and worked out in accordance with Section 41(2) irrespective of its real character had to be taken into account and included as income of the business. In other words, the balancing charge would have to be taken into account for computing the deduction at 8 per cent. under Section 80E. The legal fiction under Section 41(2) and the grant of special deduction under Section 80E in the case of the specified industries were so closely connected with each other that taking into account the balancing charge, the deemed profit before computing the 8% deduction under Section 80E(1) would amount to extending the legal fiction within the limits of the purpose for which the fiction had been created. The Legislature had deliberately used the expression 'attributable to' having a wider import than the expression 'derived from' thereby intending to cover receipts from sources other than the actual conduct of the business of the specified industry. Similarly, in computing the profits of the assessee for the purpose of the special deduction provided under Section 80E, items of unabsorbed depreciation and unabsorbed development rebate carried forward, from earlier years would have to be deducted before arriving at the figure from which the 8 per cent. contemplated by Section 80E was to be deducted. The important words in Section 80E were those that appear in the parenthesis, viz., 'as computed in accordance with the other provisions of the Act' and since it was income from business, the same, in view of Section 29 had to be computed in accordance with Sections 30 to 43A which would include Section 41(2) providing for the balancing charge, Section 32(2) providing for carry forward of depreciation and Section 33(2) providing for carry forward of development rebate. Section 72(1) had a direct impact upon the computation under the head 'Profits and gains of business or profession'. In that view of the matter, the Supreme Court affirmed the decision of the Gujarat High Court, referred to hereinbefore. We may, at the outset, point out that neither the decision of the Supreme Court in the case of CIT v. Sivan Pillai : [1970]77ITR354(SC) where, though not an identical question, a similar problem under Section 15C(1) was involved, (was cited), nor, the decision of the Supreme Court in the case of Rajapalayam Mitts Ltd. v. CIT : [1978]115ITR777(SC) (could have been cited) before the Supreme Court in the case of Cambay Electric Supply : [1978]113ITR84(SC) . The Supreme Court observed at pp. 90-91 of the report as follows :

'It was further not disputed before us that the assessee being an Indian company engaged in the business of generation and distribution of electricity is a company, to which the section applies and is entitled to claim the deduction of 8% contemplated by that provision and the only question is how and in what manner the said deduction should be computed. 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 also clear that under the second step the profits and gains attributable to the business of the specified industry (here generation and distribution of electricity) 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 the 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. On proper construction of Sub-section (1) and having regard to the legislative mandate contained in the three steps that are required to be taken in the manner indicated above we are clearly of the view that the item of Rs. 7,55,807 will have to be taken into account before computing the 8% deduction contemplated by the said provision.'

22. Dealing with the contention of the assessee in the appeal, the Supreme Court, observed at pp. 94-95 of the report as follows ;

'Turning to the appeal of the assessee, being Civil Appeal No. 785(NT) of 1977, the question is whether unabsorbed depreciation and development rebate are deductible or not in computing profits under Section 80E(1) of the Act. Here again the answer to the question must depend upon the construction of Sub-section (1) of Section 80E and the construction which we have placed on the said provision while disposing of the Revenue's appeal will furnish the correct answer to the question posed. As indicated earlier, Sub-section (1), contemplates three steps being taken for computing the special deduction permissible thereunder and arriving at the net income exigible to tax and the first two steps read together contain the legislative mandate as to how the total income--of which the profits and gains attributable to the business of the specified industry forms a part--of the concerned assessee is to be computed and according to the parenthetical clause, which contains the key words, the same is to be computed in accordance with the provisions of the Act, except Section 80E and since in this case, it is income from business the same will have to be computed in accordance with sections 30 to 43A which would include Section 33(2) (which provides for carry forward of depreciation) and Section 33(2) (which provides for carry forward of development rebate for 8 years). 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 the 8% deduction.

The assessee attempted to challenge the aforesaid view by raising a couple of contentions. In the first place, before the High Court, it was strenuously urged, though not seriously before us, that the expression 'total income' appearing in Section 80E(1) has been used in its commercial sense and since neither the unabsorbed depreciation nor the unabsorbed development rebate had anything to do with commercial profits attributable to the business, the said two items would not be deductible before arriving at the figure that would be exigible to the 8% deduction. It is not possible to accept this contention for more than one reason. First, in Sub-section (1) of Section 80E, the expression 'total income' is followed by the words ' as computed in accordance with the other provisions of this Act' in parenthesis and the mandate of these words clearly negatives the argument that the expression 'total income' has been used in the sense of commercial profits. Secondly, the expression 'total income' has been defined in Section 2(45) of the Act as meaning 'the total amount of income referred to in Section 5, computed in the manner laid down in this Act' and when this definition has been furnished by the Act itself the expression as appearing in Section 80E(1) must, in the absence of anything in the context suggesting to the contrary, be construed in accordance with such definition. Since the words in the parenthesis occurring in Sub-section (1) lay down the manner in which the total income of the concerned assessee is to be computed there would be no scope for excluding items like unabsorbed depreciation and unabsorbed development rebate, while computing the total income on the basis that the total income spoken of by Sub-section (1) means commercial profits.'

23. It may be pointed out with respect that though at p. 91 of the report the Supreme Court had made it clear that three steps were required to be taken before the special deduction permissible under Section 80E was to be allowed, first was the computation of the total income of the concerned assessee in accordance with the other provisions of the Act, it may be pointed out that this position, with respect, is indisputable. The second step is to ascertain what part of the total income so computed represents the profits and gains attributable to the business of the specified industry. This is also a legitimate step and the third step is that if there were profits and gains so attributable, deduct 8 per cent. thereof from such profits and gains. It seems that it was not seriously argued before the Supreme Court that the expression 'profits and gains' should be understood in the commercial sense and not in the sense of computation of the total income. The statute provides in accordance with the other provisions of the I.T. Act specifically for that. That was not the contention urged before the Supreme Court as appearing from the arguments advanced before the Supreme Court as noted therein. In that respect, it may be said that there is no warrant in the statute for treating the expression 'gross total income' or 'total income computed' in accordance with the provisions of the Act as synonymous with the profits and gains attributable to the specified industry. The Legislature has advisedly used the expression 'profits and gains' without making any provision that such profits and gains had to be computed as total income in accordance with the other provisions of the Act as it had done under Section 15C(3) of the Indian I.T. Act, 1922, or s. 84(5) of the I.T. Act, 1961. In such a situation it may be pointed out, with respect, that it would be unwarranted to make those two expressions synonymous. In this background, it appears to us that the question of gross total income being not synonymous with the profits and gains attributable to the specified industry was not argued and not pressed before the Supreme Court. It was not also urged that the profits and gains that was attributable as contemplated by Section 80E was not the taxable profit but commercial profit. It further appears that it was also not argued that it was the gross amount and not the net amount which was eligible for exemption in respect of priority industry. It is important in this connection to remember that the Legislature has used the expression 'profits and gains' and not the total income of the priority industry or 'gross total income' of the priority industry advisedly. It is in this background that the Supreme Court's later decision in the case of Cloth Traders (P.) Ltd. v. Addl. CIT : [1979]118ITR243(SC) , understood the meaning of this expression. We have now the declared pronouncement of the Supreme Court at p. 260 of the said report that whenever the sections in that chapter, namely. Chap. VIA used the expression 'where the gross total income of an assessee.........includes any income........', these sections meant that the deduction admissible was in respect of the whole of the income received by the assessee and not in respect of the income computed after making the deductions provided under the Act. That is, how the Legislature also in enacting the Finance (No. 2) Act, 1980, understood the effect of the decision of the Supreme Court. That is how they have tried to alter the law by the provisions of Sections 80AA and 80AB by the Finance (No. 2) Act, 1980, as we have set out hereinbefore. Therefore, in our opinion, on the ratio of the decision of the Supreme Court in the case of Cloth Traders (P.) Ltd. v. Addl. CIT : [1979]118ITR243(SC) , as to the relevant assessment year with which we are concerned the assessee was entitled to a deduction of 8 per cent. as contemplated by Section 80E(1) without a deduction of the unabsorbed depreciation and development rebate in the priority industry.

24. In this connection, it appears to us that in so far as the effect of the expression as mentioned by the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT there is some apparent conflict with the subsequent 'decision' (sic) of the Supreme Court in the case of Cloth Traders (P.) Ltd. v. Addl. CIT. In such a case, as the decision of Cloth Traders (P.) Ltd. was a decision of a larger Bench and in the later decision though the previous decision was not considered, we are bound to follow the ratio of the decision of the larger Bench. In this connection reference may be made to the observations of the Supreme Court in the case of Mattulal v. Radhe Lal, : [1975]1SCR127 , as well as the decision of the Supreme Court in the case of State of U.P. v. Ram Chandra Trivedi, : (1977)ILLJ200SC . In the last mentioned case, the Supreme Court noted with approval the observations from the unreported decision of the Supreme Court in Civil Appeal No. 212 of 1975--(since reported Union of India v. K.S. Subramanian, : (1977)ILLJ5SC ), where the Supreme Court observed as follows:

'We do not think that the difficulty before the High Court could be resolved by it by following what it considered to be the view of a Division Bench of this court in two cases and by merely quoting the views expressed by larger Benches of this court and then observing that these were insufficient for deciding the point before the High Court. It is true that, in each of the cases cited before the High Court, observations of this court occur in a context different from that of the case before us. But, we do not think that the High Court acted correctly in skirting the views expressed by larger Benches of this court in the manner in which it had done this. The proper course for a High Court, in such a case, is to try to find out and follow the opinions expressed by larger Benches of this court in preference to those expressed by smaller Benches of the court. That is the practice followed by this court itself. The practice has now crystallized into a rule of law declared by this court. If, however, the High Court was of opinion that the views expressed by larger Benches of this court were not applicable to the facts of the instant case it should have said so giving reasons supporting.'

25. These observations were relied on by an unreported Bench decision of this court in Matter No. 668 of 1975--Cementation Patel (Durgapur) v. CCT judgment delivered on 16th and 17th April, 1979 (since reported in [1981] 47 STC 385).

26. We must, however, observe that Mr. Bajoria, learned advocate for the assessee, in his unfailing fairness, drew our attention to certain observations by the Division Bench of this court in Appeal No. 93 of 1974 in the case of Jiyajeerao Cotton Mills Ltd. v. ITO, judgment delivered on August 16, 1979 : [1981]130ITR710(Cal) . There, however, the main question was whether Section 154 of the I.T. Act, 1961, was attracted and as such the order impugned was rectifiable. In this connection, it appears that the decisions of the Supreme Court, namely, the decision in Cloth Traders (P.) Ltd. v. Addl. CIT : [1979]118ITR243(SC) as well as the decision in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 3 ITR 84 were cited and there the Division Bench observed:

'We are unable to accept the contention of Mr. Bajoria that the subsequent decision of the Supreme Court in Cloth Traders (P.) Ltd. has greatly shaken or impliedly overruled its earlier decision in Cambay Electric Supply.'

27. This observation in the decision of this court, in our opinion, is obiter because the court held that two views were possible, and under Section 154 of the Act, therefore, the ITO had no jurisdiction to pass the impugned order. Secondly, it appears that before the Division Bench the legislative interpretation of the Bench decision of the Supreme Court in Cloth Traders (P.) Ltd. was not there. In that view of the matter, in our opinion, the said observation of the Division Bench cannot in any way affect the decision of the issue before us which is directly in issue.

28. Learned advocate for the Revenue mainly stressed on the structure and language used of the section. He is quite right in emphasising that primarily the language used must be resorted to in resolving the controversy at issue. But in this case as we have indicated the language used a dichotomy, namely, the expression 'total income' or 'gross total income' on the one hand, and 'profits and gains' attributable to priority industry on the other. Therefore, it must be presumed that the Legislature intended to convey two different ideas by two different kinds of expressions and it is also significant that while using the expression 'profits and gains' the Legislature has not chosen to use the expression 'profits and gains' computed in accordance with the other provisions of the Act as it had done under Section 15C(3) of the Indian I.T. Act, 1922, or under Section 84(5) of the I.T. Act, 1961. Learned advocate for the Revenue drew our attention to two decisions of the Madras High Court, namely, the decision in the case of CIT v. English Electric Company Ltd. : [1981]131ITR277(Mad) and the other in the case of CIT v. Standard Motor Products of India Ltd. : [1981]131ITR300(Mad) . Both are the decisions of the Division Bench where Mr. Justice Sethuraman had delived judgments and relied mainly on the decision of Cambay Electric Supply Industrial Co. Ltd. : [1978]113ITR84(SC) referred to hereinbefore. We have expressed our views on the effect of the said decision of the Supreme Court and, therefore, we are unable to accept, with great respect, the view taken on this aspect by the Division Bench of the Madras High Court. It is also true that Cambay Electric Supply Industrial Co. Ltd. : [1978]113ITR84(SC) dealt precisely with Section 80E while Cloth Traders (P.) Ltd. : [1979]118ITR243(SC) dealt with not directly but made a reference about the effect of the other sections in the same group, and the Legislature rioted the same as the ratio of the decision of the Supreme Court.

29. In the view we have taken, it is also not necessary, in our opinion, to deal with the numerous other decisions which had considered this aspect. We may incidentally refer to the decision of the Mysore High Court in the case of CIT v. Balanoor Tea and Rubber Co. Ltd. : [1974]93ITR115(KAR) as well as the decision in the case of Indian Transformers Ltd. v. CIT : [1972]86ITR192(Ker) and the decision of the Gujarat High Court in the case of CIT v. Amul Transmission Line Hardware Pvt. Ltd. : [1976]104ITR771(Guj) and the decision of the Madras High Court in the case of CIT v. L.M. Van Moppes Diamond Tools (India) Ltd. : [1977]107ITR386(Mad) .

30. In the aforesaid view of the matter and for the reasons mentionedhereinbefore we, therefore, answer the question No. 1 in the affirmativeand in favour of the assessee and the question No. 2 in the negative and infavour of the assessee.

31. In the facts and circumstances of the case, parties will pay and beartheir respective costs.

32. On the oral application of the counsel for the Revenue, for an appeal to the Supreme Court, we are of the opinion that it is a fit case for appeal to the Supreme Court on question No. 1 as this question involves the interpretation of two different decisions of the Supreme Court. We, accordingly, grant a certificate for appeal to the Supreme Court. Let a certificate under Section 261 of the I.T. Act, 1961, be issued separately forthwith.

Sudhindra Mohan Guha, J.

33. I agree.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //