JUDGMENT [ENTITY], J.
1. The question involved in this reference is whether at the time of giving effect to the provisions contained in [SECTION] of the [ACT] (which is hereinafter referred to as "the Act"), deduction of 8% should be made before setting off carried forward losses, carried forward depreciation and carried forward development rebate or after setting off all these items.
2. Short facts of the case giving rise to this reference are as under The respondent-assessee is a private limited company carrying on a priority industry as defined by [SECTION] of the Act. For the assessment year 1968-69, the total income of the company was assessed at Rs. 1,59,252 (this being the figure of total income as subsequently rectified, the original figure being Rs. 1,57,348). The company carried forward losses from the previous year amounting to Rs. 44,516. It also carried forward development rebate of Rs. 37,416 and depreciation allowance of Rs. 19,560. The total of carried forward loss, development rebate and depreciation allowance comes to Rs. 1,01,492. Now for the purpose of working out 8% deduction contemplated by [SECTION] of the Act, the Income-tax Officer first deducted the above referred total carried forward amount of Rs. 1,01,492 from the total income of the assessee and then deducted 8% deduction contemplated by [SECTION] The stand of the assessee-company is that 8% deduction contemplated by this section should have been made on the total income of Rs. 1,59,252 before deducting the carried forward amount of Rs. 1,01,492. This contention of the assessee was rejected by the Income-tax Officer as well as by the Appellate Assistant Commissioner in appeal with the result that the assessee approached the Appellate Tribunal in the second appeal. The Tribunal relied upon the decision given by the Kerala High Court in [PRECEDENT] and held that the Income-tax Officer was wrong in calculating 8% deduction after setting off the carried forward amount of Rs. 1,01,492.
3. It should be mentioned here that the above-referred contention of the assessee was rejected by the Income-tax Officer not in the original proceedings of assessment but in the subsequent proceedings of rectification undertaken by him under [SECTION] of the Act.
4. Being aggrieved by the above-referred order of the Tribunal, the revenue has preferred this reference in which the Tribunal has referred to us the following question :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the relief under [SECTION] of the Act should be allowed to the assessee-company at 8% of Rs. 1,57,319 without first setting off unabsorbed losses, depreciation and development rebate carried forward from the earlier years ?"
5. As already stated above, the figure of Rs. 1,57,319 now stands rectified and, therefore, that figure should be taken as Rs. 1,59,252.
6. The question which is referred to us by the Tribunal for our opinion arises out of the construction of [SECTION] of the new [SECTION], which has replaced [SECTION] of the old [SECTION] by [ACT], with effect from April 1, 1968. Since we have already decided the question as regards the deduction of carried forward depreciation and carried forward development rebate in [PRECEDENT] which was decided with reference to the old [SECTION], it would be necessary to quote new [SECTION] as well as old [SECTION] in order to understand whether there is any substantial difference between these two corresponding sections.
7. New [SECTION], which contains [SECTION], is with regard to the decisions made in computing the total income. As already noted above, this new [SECTION] has replaced the old [SECTION] which contained corresponding section as regards deduction to be made in computing total income. This substitution came into force by virtue of [ACT], with effect from April 1, 1968. Substituted [SECTION] is in the following terms :
"(1) In the case of a company to which this section applies, where the gross total income includes any profits and gains attributable to any priority industry, there shall be allowed, in accordance with and subject to the provisions of this section, a deduction from such profits and gains of an amount equal to eight per cent. thereof, in computing the total income of the company.
(2) This section applies to a domestic company, save in a case where such company is a company which is referred to in [SECTION] 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], 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] in relation to such profits and gains."
8. We are concerned in this reference with sub-section (1) of this section. Perusal of this sub-section shows that it refers to "gross total income" and to "a priority industry". Both these expressions are statutorily defined by [SECTION], clauses (5) and (7), as under :
"(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] and without applying the provisions of [SECTION]."
9. [SECTION], to which reference is made by the above-referred definition, is with regard to the deduction on account of annuity deposits while [SECTION], to which reference is made, is with regard to clubbing of certain incomes. So far as this reference is concerned, we are not concerned either with [SECTION] [SECTION].
10. Definition of "priority industry" as given in [SECTION] is as under :
"(7) 'priority industry' means the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule or the business of any hotel where such business is carried on by an Indian company and the hotel is for the time being approved in this behalf by the Central Government."
11. Since it is an admitted fact that the respondent-assessee comes within this definition of "priority industry", the above referred definition has no other relevance except showing that it is practically on the same lines, on which specified industries were mentioned in the old [SECTION] It is thus clear by reference to [SECTION] that final effect to the provisions of this section can be given only after making reference to the definition of "gross total income" given in [SECTION]
12. Old [SECTION], which we have construed in [PRECEDENT], was in the following terms :
"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 or things specified in the list in the Fifth Schedule, there shall be allowed a deduction from such profits and gains of an amount equal to eight per cent. thereof, in computing the total income of the company.
(2) This section applies to -
(a) an Indian company; or (b) any other company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, but does not apply to any Indian company referred to in clause (a), or to any other company referred to in clause (b), if such Indian or other company is a company referred to in [SECTION] and its total income as computed before applying the provisions of sub-section (1) does not exceed twenty-five thousand rupees."
13. If this old [SECTION] is put in juxtaposition, with new [SECTION] read with [SECTION] of the new [SECTION], it will be found that substantially the provisions of both are the same. Similarly, in both sections the interpretation, with which we are concerned in this reference, is as regards the expression "total income", which is referred to in the first part of [SECTION], because in both the sections the total income is required to be computed "in accordance with the other provisions of the Act."
14. Now, so far as the question whether the carried forward development rebate and depreciation allowance should be first set off against the income received by an assessee before deducting 8% under [SECTION] or [SECTION] is concerned, the same has been exhaustively dealt with by us in [PRECEDENT] ([PRECEDENT], which was reheard by this Bench, and during the course of the rehearsing of which, Shri [ENTITY], who appears for the assessee in this reference, was allowed to intervene and argue. Since we find that the interpretation which we have given to [SECTION] on this point must hold good even with regard to the provisions contained in [SECTION], we hold that the carried forward development rebate of Rs. 37,416 and depreciation allowance of Rs. 19,560 should be first deducted from the income which the assessee has received from the priority industry during the accounting period before working out the deduction of 8% under [SECTION]
15. With regard to the carried forward development rebate, however, we shall add a few more words in view of the definition of "gross total income" given in [SECTION], and the amendment which is made in [SECTION], which relates to development rebate, by the same [ACT] with effect from April 1, 1968. The definition shows that the expression "gross total income" not only means the total income "as computed in accordance with the provisions of the Act", but also the one which is worked out "before making any deduction under [SECTION]". The statutory definition of the expression "gross total income" thus makes it abundantly clear that deductions, which are required to be worked out under other provisions of the Act, should be worked out before 8% deduction contemplated by [SECTION] is made. Therefore, this definition clearly provides that 8% deduction contemplated by [SECTION] should be made after working out the figure of total income which is taxable under the other provisions of the Act. This aspect of the matter was implicit in the provisions of the old [SECTION] It is made quite explicit by the statutory definition of "gross total income" given in [SECTION]
16. The amendment made by [ACT] in [SECTION] suggests the same thing with regard to development rebate. [SECTION] contemplates the method to be adopted for carrying forward the development rebate if the total income for the current year is not sufficient to absorb the whole of the amount of development rebate which is required to be absorbed. The amendment made in this sub-section (2) by the [ACT] makes it clear that when the total income of an assessee is worked out to see whether it is sufficient to absorb the development rebate, wholly or partially, the said total income should be computed without making "any deduction under [SECTION]". This result is brought about by inserting the words "or any deduction under [SECTION] or [SECTION]" in sub-section (2) and its Explanation. This amendment in [SECTION] is consistent with the statutory definition of "gross total income" given in [SECTION], which emphasises that deduction of 8% which is required to be given under [SECTION], is to be given only after setting off the carried forward development rebate. It should be noted that no such amendment was required to be made with regard to the carried forward depreciation in view of the fact that according to [SECTION] carried forward depreciation is deemed to be a part of the depreciation for the current year. By virtue of this deeming fiction even the carried forward depreciation operates as a charge against profits and gains of the accounting period along with current depreciation, and hence "total income" for the accounting period cannot be computed correctly without deducting even carried forward and current depreciation.
17. We have thus noticed that [ACT] which substituted new [SECTION] in place of the old one, and which also amended [SECTION], has made it clear, beyond any doubt, that deduction of 8% contemplated by [SECTION] should be made only after setting off carried forward development rebate. We are of the opinion that this was the legal position even under the provisions of old [SECTION] We have discussed this legal position in our judgment in [PRECEDENT] We find that the reasoning which has guided us in reaching that judgment is available to us with greater force in this reference in view of the above discussed amendments brought about by the [ACT].
18. This brings us to the question as regards the deduction of carried forward loss of Rs. 44,516. Now, so far as the carried forward loss is concerned, Shri [ENTITY]'s contention on behalf of the assessee was that whatever be the position as regards the deduction on account of carried forward development rebate and carried forward depreciation, the deduction on account of carried forward loss contemplated by [SECTION] stands on an altogether different ground, because this deduction of carried forward loss does not enter in the concept of computation of total income under the Act. For this proposition, Shri [ENTITY] has put heavy reliance on the above referred decision given by the Kerala High Court in [PRECEDENT]. Before referring to this decision we would deal with the matter on the true construction which can be placed on the provisions of [SECTION]
19. As already held by us in [PRECEDENT], the provisions of [SECTION] can be worked out only after computing the total income "in accordance with the provisions of the Act" and before making any deduction under [SECTION] It is, therefore, necessary to see whether while working out the figure of total income in accordance with the provisions of the Act, it is necessary to give effect to the provisions contained in [SECTION] of the Act or not.
20. Now, if a reference is made of [SECTION], it will be found that it provides that where the net result of computation under the head "profits and gains of business or profession" is a loss and such loss cannot be or is not wholly set off against the income under any head of income in accordance with the provisions of [SECTION], so much of the loss as has not been so set off, subject to the other provisions of the Chapter, shall be carried forward to the following assessment year and shall be set off against the profits and gains, if any, of any business or profession carried on by the assessee and assessable for that assessment year. Thus, [SECTION] has a direct impact upon the computation under the head of "profits and gains of business or profession". It is thus obvious that the correct figure of total income, which is otherwise taxable under other provisions of the Act, cannot be obtained without working out the net result of computation under the head "profits and gains of business". As we have already pointed out in our judgment in [PRECEDENT] ([PRECEDENT]), the computation of total income in accordance with the provisions of the Act is a condition precedent to allowing the deduction of 8% in case of a "priority industry." Under these circumstances, even so far as carried forward loss is concerned, it stands on the same footing as the carried forward development rebate and carried forward depreciation allowance. In principle, therefore, it is not possible to make any distinction as between carried forward depreciation allowance so far as [SECTION] is concerned.
21. Now, coming to the Kerala case of Indian Transformers, that decision was given with reference to old [SECTION] The facts of that case were that for the assessment year 1967-68, the Income-tax Officer determined the total income assessable to tax at Rs. 2,13,769. The assessee in that case had carried forward loss of earlier years amounting to Rs. 87,437. The Income-tax Officer during the course of the assessment set off this loss against the profits and gains arising out of the business of the assessee under [SECTION] of the Act. After doing this, he deducted 8% of the balance of Rs. 1,26,332 under [SECTION] The contention of the assessee was that 8% deduction contemplated by [SECTION] should be deducted on the original figure of Rs. 2,13,769 before deducting the carried forward loss. This contention of the assessee was rejected by the Income-tax Officer but the assessee succeeded in appeal before the Appellate Assistant Commissioner but, in further appeal, the Tribunal reversed the decision of the Appellate Assistant Commissioner and held that 8% can be deducted only on the net balance of income after setting off the loss and that the figure for the purpose of [SECTION] was Rs. 1,26,332. The matter was taken in reference to the High Court. The High Court observed that [SECTION] was the special provision and permitted deduction from profits and gains attributable to specific activities like the business of generation or distribution of electricity. The High Court further observed that set off under [SECTION] was applicable in relation to profits and gains arising from any business or profession. The High Court, therefore, thought that the deduction under [SECTION] was a special benefit given to the company, which satisfied the conditions under [SECTION], and since this deduction was only from profits and gains attibutable to the specific activities which are referred to in the section, ti must refer to the results of that particular activity. According to the High Court, therefore, that benefit should not be diminished by any other benefits conferred by the Act. The High Court further observed that the deduction contemplated by [SECTION] referred to the total income of a particular year, namely, the previous year, and, therefore, it was the business income of that previous year which should form the sole basis for this deduction.
22. With great respect to the learned judges of the Kerala High Court who have decided this case, we find ourselves unable to follow the reasoning adopted by them. In our opinion, this reasoning runs counter to the express legislative mandate of [SECTION] that the deduction of 8% should be given only on that component of profits and gains from business of the specified industry which is obtained after computing total income "in accordance with the other provisions of the Act." In [PRECEDENT], we have discussed this aspect of the matter at great length and we have observed how this method of calculation of 8% of deduction would result in a double benefit to the assessee. While disposing of this Reference No. 115/74, we have observed as under on this point :
"The purpose for which [SECTION] is enacted is to provide for certain deduction to be made in computing total income in the case of specified industries. This deduction is over and above other general deductions contemplated by the Act. Depreciation allowance and development rebate-whether current or carried forward-go to reduce the figure of total income and hence the assessee concerned has to pay less tax to the extent to which the said figure stands reduced. The special deduction contemplated by [SECTION] was not intended to result in a double benefit on the same amount. If the contention of the assessee is accepted, it would obviously result in a double benefit as will be clear form the following illustration : Suppose an assessee's total income from the business of a specified industry, without deducting depreciation and development rebate, is 'X'; but after deducting these two items it becomes 'X-(A plus B)'. Here (A plus B) represents that part of the total income which is not taken into account for calculating tax. If now 8% deduction is to be calculated on 'X' and not on 'X-(A plus B)', as desired by the assessee in this case, what happens is that the same income which is excluded for calculating tax is taken into account for further tax reduction. This obviously results in double exclusion of a part of the same amount because 8% of (A plus B), which was wholly excluded previously, is again excluded for the purpose of working out the provisions of [SECTION] In other words, 8% of (A plus B) is exempted for depreciation and development rebate as well as for [SECTION]. This reduces the assessee's contention to an absurdity which is not contemplated by the legislature. The legislature has, therefore, provided three important steps in [SECTION]. These steps are :
(i) Find out, without reference to the provisions of [SECTION], what is the total income of the assessee if the same is computed in accordance with the other provisions of the Act.
(ii) Having done that, find out whether any of the components of the total income thus arrived at represents profits and gains of business attributable to the industry specified in [SECTION]
(iii) If there is any component of the type referred to in clause (ii), deduct 8% thereof, from such profits and gains, and then compute the total income which becomes exigible to tax.
This is the plain and simple scheme of [SECTION] which does not admit of any complications. This scheme is definitely suggestive of the fact that working out of the total income contemplated by the first part of the section is a condition precedent to the working out of 8% deduction contemplated by its second part."
23. Whatever is stated above with regard to the carried forward depreciation and development rebate applies with equal force to carried forward loss. Under these circumstances we are unable to take the view which the Kerala High Court has taken in the above-referred case.
24. The result, therefore, is that, in our opinion, the Tribunal was not justified in law in holding that relief under [SECTION] of the Act should be allowed to the assessee-company at 8% without first setting off unabsorbed losses, depreciation and development rebate carried forward from earlier years. Our answer to the question, which is referred to us is, therefore, in the negative, i.e., in favour of the revenue and against the assessee. This reference is accordingly disposed of. The respondent-assessee shall bear the costs of the revenue in this reference.