ivil Appeal Nos1685 and 1686NT of 1974 From the Judgment and Order dated 21st February 1974 of the Karnataka High Court in Tax Reference Nos 67 and 68 of 1972
MK Banerjee Additional Solicitor General Ms A Subhashini and BBAhuja for the Appellant G Sarangan and Mukul Mudgal for the Respondent
The Judgment of the Court was delivered by PATHAK J
These appeals are directed against the judgment of the Karnataka High Court disposing of two Income tax References
The question in each Reference which was answered by the High Court in favour of the assessee and against the Revenue is whether in computing the profits for the purpose of deduction under section 80E of the Income Tax Act 1961 the loss incurred by the assessee in the manufacture of alloy steels could not be set off against the profits of the manufacture of automobile ancillaries
The assessee is a public limited company engaged in the 169 manufacture of automobile spares
The products manufactured by it are covered by the list in the Fifth Schedule to the Income Tax Act
During the previous year relevant to the assessment year 1966 67 the assessee commenced another activity the manufacture of alloy steels which was also an industry included in the Fifth Schedule
The assessee sustained a loss in the alloy steel industry during the previous years relevant to the assessment years 1966 67 and 1967 68
It claimed a loss in the sum of Rs 1530688 for the assessment year 1966 67
For the assessment year 1966 67 the assessee disclosed profits from the industry of automobile ancillaries in the following detail 1
Manufacture of Springs at Mangalore Rs 754107 2
Manufacture of Springs at Nagpur Rs 961808 3
Manufacture of Hubs and Brake Drums Rs 41214 Rs 1757129 The assessee claimed relief under section 80E at 8 per cent of this amount in the sum of Rs140574
In the same manner the assessee claimed relief under section 80E in the sum of Rs152483 for the assessment year 1967 68
The Income Tax Officer declined to grant the relief claimed by the assessee in the two assessment years
He noticed that the assessee had not taken into account the losses incurred in the alloy steel industry and he held that the assessee would be entitled to deduction under section 80E on the profits from the manufacture of automobile parts only after setting off the loss in alloy steel manufacture
After making certain adjustments in the computation of the total income the Income Tax Officer gave relief under section 80E in the sum of Rs24896 for the assessment year 1966 67 and Rs120986 for the assessment year 1967 68 computing the deduction at 8 per cent on the amount of profits from the manufacture of automobile parts as reduced by the losses from the alloy steel manufacture
An appeal by the assessee was dismissed by the Appellate Assistant Commissioner of Income tax
But on second appeal the Income Tax Appellate Tribunal accepted the contention of the assessee that a deduction was permissible at 8 per cent on the entire profits of the automobile parts industry included in the total income without deducting therefrom the losses in the alloy steel manufacture
It directed the Income Tax Officer to recompute the relief under section 80E
At the instance of the Revenue the Appellate Tribunal referred 170 the case for each of the two assessment years 1966 67 and 1967 68 to the Karnataka High Court for its opinion on the following question of law Whether on the facts and in the circumstances of the case the Appellate Tribunal was right in holding that in computing the profits for the purpose of deduction under section 80E of the Income Tax Act 1961 the loss incurred in the manufacture of alloy steels should not be set off against the profits of the manufacture of automobile ancillaries The High Court answered the question in the affirmative
To appreciate the merits of the controversy in these appeals it would be as well to set forth at this point the relevant provisions of section 80E of the Income Tax Act as they stood at the time 80E Deduction in respect of profits and gains from specified industries in the case of certain companies 1 In the case of a company to which this section applies where the total income as computed in accordance with the other provisions of this Act includes any profits and gains attributable to the business of generation or distribution of electricity or any other form of power or of construction manufacture or production of any one or more of the articles and 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
 It is not disputed that the assessee is a company to which section 80E applies
The question is whether for the purpose of granting relief under s80E the loss suffered by the assessee in the manufacture of alloy steels can be set off against the profits arising from the manufacture of automobile ancillaries
It is apparent that section 80E provides for the grant of a rebate when computing the total income of a company carrying on the business of generating or distributing elect 171 ricity or other form of power or of constructing manufacturing or producing any one or more of the articles and things specified in the list in the Fifth Schedule
Popularly the list is known as the list of Priority Industries
A perusal of the entries in the list makes it clear that they are concerned with articles and things which are regarded of primary importance in the industrial and economic development of the country
Some of them form part of the industrial and economic base of the country while others enter into the industrial and economic infrastructure considered necessary or desirable for its development
A certain priority has been assigned to the construction manufacture or production of those articles and things
They find place in section 80E along with the business of generation or distribution of electricity or other form of power
Nobody can dispute that electrical energy or other form of energy is crucial to industrial and economic development
The nature of articles and things included in the list in the Fifth Schedule possesses the same character
Alloy steels are undoubtedly covered by Entry 1 Iron and steel metal ferro alloys and special steels while automobile ancillaries appear clearly by that description in Entry 20 of the list
Both represent separate priority industries
It is obvious from the object underlying the enactment of section 80E and the terms in which it provides relief that the intention of Parliament in enacting the provision was to encourage the setting up of industries concerned with the generation or distribution of electrical and other energy and the construction manufacture or production of articles or things specified in the list in the Fifth Schedule
The intention goes further
By making a provision for a rebate year after year on the industry making profits and gains during the year the intention also was to provide an incentive for promoting efficiency in the industry
It is clear that the benefit was directed to the setting up and also the efficient working of the priority industries
How is the benefit to be worked out First it must be a company to which section 80E applies that is to say a company which satisfies the requirements of sub section
2 of section 80E
Second the total income as computed in accordance with the Income tax Act 1961 without taking into regard the provisions of section 80E should include profits and gains attributable to the business or the industry mentioned in the section
Third from the profits and gains attributable to such business or industry a deduction has to be allowed of an amount equal to eight per cent of such profits and gains and effect must be given to this deduction when computing the total income of the company
172 The assessee in this case carries on two industries both of which find place in the list in the Fifth Schedule and can therefore be described as priority industries
It is urged by the learned Additional Soliciter General appearing for the Revenue that on a true application of section 80E the profit in the industry of automobile ancillaries must be reduced by the loss suffered in the manufacture of alloy steel and reference has been made to a number of cases to which we shall presently refer
After giving the matter careful consideration we do not find it possible to accept the contention
It seems to us that the object in enacting section 80E is properly served only by confining the application of the provisions of that section to the profits and gains of a single industry
The deduction of eight per cent is intended to be an index of recognition that a priority industry has been set up and is functioning efficiently
It was never intended that the merit earned by such industry should be lost or  diminished because of a loss suffered by some other industry
It makes no difference that the other industry is also a priority industry
The coexistence of two industries in common ownership was not intended by Parliament to result in the misfortune of one being visited on the other
The legislative intention was to give to the meritorious its full reward
To construe section 80E to mean that you must determine the net result of all the priority industries and then apply the benefit of the deduction to the figure so obtained will be in our opinion to undermine the object of the section
An example will illustrate this
An industry entitled to the benefit of section 80E could have its profits wholly wiped out on adjustment against a heavy loss suffered by another industry and thus be totally denied the relief which should have been its due by virtue of its profits
In our opinion each industry must be considered on its own working only when adjudging its title to the deduction under section 80E It cannot be allowed to suffer because it keeps company with some other industry in the hands of the assessee
To determine the benefit under section 80E on the basis of the net result of all the industries owned by the assessee would be moreover to shift the focus from the industry to the assessee
We hold that in the application of section 80E the profits and gains earned by an industry mentioned in that section cannot be reduced by the loss suffered by any other industry or industries owned by the assessee
We shall now turn to the cases cited before us
In the view which has found favour with us it is apparent that the Madras High Court erred in holding in Commissioner of Income tax Tamil Nadu III vs English Electric Company Ltd  that in granting relief under section 80E the adjustment of certain losses in other trading 173 transactions was permissible in determining the quantum of profits and gains attributable to the priority industry claiming relief under that provision
The High Court did not correctly appreciate the law laid down by this Court in Cambay Electric Supply Industrial Co Ltd vs Commissioner of Income tax Gujarat II
 That was a case where this Court held that for the purpose of granting relief under section 80E to an industry account must be taken when computing the profits and gains attributable to that industry of the balancing charge worked out under sub section
2 of section 41 as well as items of unabsorbed depreciation and any depreciation development rebate carried forward from earlier years
It appears from the facts of that case that the balancing charge as well as the unabsorbed depreciation and unabsorbed development rebate related to the particular industry itself
The only business carried on by the assessee there was generation and distribution of electricity at Cambay
The balancing charge arose because during the relevant accounting period the assessee had sold some of its machinery and buildings
The unabsorbed depreciation and development rebate also appear to relate to the same business
There is no indication that any of them related to a business or industry distinct from that whose profits and gains formed the subject of computation under section 80E Our attention has been invited by the Revenue to Distributors Baroda P Ltdv
Union of India and Others  That is a case in which the Constitution Bench of this Court was called upon to consider the scope of section 80M of the Income tax Act
We do not see how that case is in any way relevant to the case before us
The point before the Court appears to have been whether the income by way of dividends from a domestic company which fell to be included in the gross total income of the assessee should be the amount computed in accordance with the provisions of the Act or the full amount received from the paying company
We may refer at this point to Commissioner of Income tax West Bengal II vs Belliss and Morcon I Ltd a decision of the Calcutta High Court to which one of us Sabyasachi Mukharji J was a party
That decision supports the view taken by us in so far as it lays down that in applying section 80 I of the Income tax Act which replaced section 80E it is not permissible to compute the profits of the priority industry respecting which the relief is claimed by taking into account the depreciation loss from other industries
No doubt the depreciation loss arose in that case from non priority industries but in view of what we have said earlier that should make no difference whatever
We think it unnecessary to refer to other cases on the point
We think it sufficient to indicate that a distinction must be drawn between a case where the loss or un 174 absorbed depreciation pertain to the same industry whose profits and gains are the subject of relief under section 80E and a case where the loss or unabsorbed depreciation relate to industries other than the one whose profits and gains constitute the subject of relief
While concluding we may point out that the Mysore High Court seems in our opinion to be perfectly right in holding in Commissioner of Income tax Mysore vs Balanoor Tea and Rubber Co Ltd that the loss from the plastic business carried on by the assessee could not be deducted from the profits and gains attributable to the tea industry for the purpose of computing the quantum of the profits and gains attributable to the tea industry under section 80E
In the result we affirm the answer returned by the High Court to the question raised in the Income tax References
The appeals are dismissed with costs
APJ Appeals dismissed


Summary:
The assessee company is engaged in the manufacture of autombile spares
During the previous year relevant to the assessment year 1966 67 the assessee also commenced the manufacturing of alloy steels
Both the industries are included in the Fifth Schedule to the Income Tax Act 1961
The assessee sustained a loss in the alloys steel industry during the previous years relevant to the assessment years 1966 67 and 1967 68
It claimed a loss in the sum of Rs1530688 for the assessment year 1966 67
For the assessment year 1966 67 the assessee disclosed profits to the tune of Rs1757129 from the industry of automobile ancillaries
The assessee claimed relief under section 80E at 8 of this amount in the sum of Rs140574
Similarly the assessee claimed relief in the sum of Rs152483 for the assessment year 1967 68
The Income Tax Officer declined to grant the relief claimed and held that the assessee would be entitled to deduction under section 80E on the profits from the manufacture of automobile parts only after setting off the loss in alloy steel manufacture
The Appellate Assistant Commissioner dismissed the appeal of the assessee
But on second appeal the Tribunal accepted the contention of the assessee that a deduction was permissible at 8 on the entire profits of the automobile parts industry included in the total income without deducting therefrom the losses in the alloy steel manufacture and directed the Income tax Officer to recompute the relief under s80E
In the Reference on the question whether in computing the profits for the purpose of deduction under section 80E of the Income tax Act 1961 the loss incurred in the manufacture of alloy steels should not be set off against the profits of the manufacture of automobile ancillaries the High Court answered in favour of the assessee and against the revenue
167 In the Appeal to this Court on behalf of the Revenue it was contended that on a true application of section 80E the profit in the industry of automobile ancillaries must be reduced by the loss suffered in the manufacture of alloy steels
Dismissing the appeal  HELD 1
In the application of section 80E of the Income tax Act 1961 the profits and gains earned by an industry mentioned in that section cannot be reduced by the loss suffered by any other industry or industries owned by the assessee
172G 2
Each industry must be considered on its own working only when adjudging its title to the deduction under section 80E It cannot be allowed to suffer because it keeps company with some other industry in the hands of the assessee
To determine the benefit under section 80E on the basis of the net result of all the industries owned by the assessee would be to shift the focus from the industry to the assessee
172E F Commissioner of Income tax Tamil Nadu III vs English Electric Company Ltd 1981131 ITR 277 overruled
Cambay Electric Supply Industrial CoLtd
vs Commisioner of Income tax Gujrat II followed
Distributors Baroda P Ltd vs Union of India  Ors  inapplicable
Commissioner of Income tax West Bengal II vs Belliss and Morcon 1 Ltd  and Commissioner of Income tax Mysore vs Balanoor Tea and Rubber Co Ltd approved
The object underlying the enactment of section 80E was to encourage the setting up of industries concerned with the generation or distribution of electrical and other energy and the construction manufacture or production of articles or things specified in the list in the Fifth Schedule
By making a provision for a rebate year after year on the industry making profits and gains during the year the intention also was to provide an incentive for promoting efficiency in the industry
The benefit was directed to the setting up and also the efficient working of the priority industries
171E F 168 4
The object in enacting section 80E is properly served only by confining the application of the provisions of that section to the profits and gains of a single industry
The deduction of 8 is intended to be an index of recognition that a priority industry has been set up and is functioning efficiently
It was never intended that the merit earned by such industry should be lost or diminished because of a loss suffered by some other industry
It makes no difference that the other industry is also a priority industry
The co existence of two industries in common ownership was not intended by Parliament to result in the misfortune of one being visited on the other
The legislative intention was to give to the meritorious its full reward
To construe section 80E to mean that one must determine the net result of all the priority industries and then apply the benefit of the deduction to the figure so obtained will be to undermine the object of the section
172B E In the instant case both the industries carried on by the assessee find place in the list in the Fifth Schedule and represent separate priority industries
172A