CAMBAY ELECTRIC SUPPLY INDUSTRIAL CO. LTD.

THE COMMISSIONER OF INCOME TAX, GUJARAT-II

AHMEDABAD (AND VICE VERSA)

April 11, 1978

[Y. V. CHANDRACHUD, C.J. AND V. D. TULZAP\!RKAR, J.J

Income Tax Act, 1961 Sections 32(2), 33(2), 41(2), 72 and SOE(l)- Co1np111atton of tlic 1node in which and the fund fron1 which deduction of 8% under Section SOE(l) is to be 1nade, explained.

The assessee company carries on the business of generation and distribution of electricity at Cambay and as such is covered by the provisions of Section SOE(l) and is entitled to claim the deduction contemplated by the said provision.

During the accounting period which ended on March 31, 1967 i.e. assessment year 1967·68, the assessee Company earned an income of Rs. 46,319/- from its business.

The assessce company had sold some of its old machinery and buildings resulting in balancing charges contemplated by section 41(2) v.1hich worked out to Rs. 7,55,807/-.

There were unabsorbed depreciation of Rs. 1,42,955/- and unabsorbed development rebate of Rs. l,11,658/- aggregating to Rs. 2,54,613/- of the earlier years which \Vere required to be set off against the profits of that period. The Income Tax Officer, while com~ pleting the assessment treated the item of Rs. 7,55,807 /- as profits attributable to the business of generation and distribution of electricity and a1lo¥.'ed deduction at 8% thereon under Section 80E(l). The Income Tax Officer. thus computed the relief/deduction admissible to the assessee under section 80E(l) at 8% on the amount of Rs. 8,02,126/- ,(46,319+7,55,807). that is to say, on the income without adjusting or setting off the unabsorbed depreciation and development rebate carried forward from the earlier year. In exercise of his revisional powers under section 263 of the Act, the Additional Commissioner of E Income Tax called for examined the records and took the view that the manner of computing the deduction admissible to the assessee under Section SOE ( 1) was erroneous and prejudicial to the interests of the Revenue, in that the deduc tion of 8% on the item of profit of Rs. 7,55,807 arising under Section 41(2) had been wrongly allowed and that for the purpose of calculating the deduction of 8%, the items in respect of the unabsorbed depreciation and development rebate should not have been excluded and that, if proper calculations as suggested by him were made, the assessee was not entitled to any deduction. In F

the appeal, the Tribunal took the view that the item of Rs. 7,55.807 being profits arising from the sale of old machinery and buildings under S. 41(2) of the Act, could not be treated in isolation or divorced from the profit'! and gains of the business of generation and distribution of electricity done by the

assesseecompany and that the said item will have to be regarded as profits "attributable to'', though not "derived from" the business of generation and distribution of electricity and, as such, the said item was exigible to the deduction of 8 % under Section SOE( I) of the Act.

On the question whether the unabsorbed depreciation and development rebate would be deductible in computing the profits under Section 80E of the Act, fo11owing 93 ITR, 115, the Tribunal held that these items could not be deducted in computing the deduction admissible under Section SOE.

The Tribunal allowed the appeal and set aside the orders of the Additional Commissioner.

By its judgn1ent, dated 11th and 24th of December 1975 disposing of the Reference, the Gujarat High Court upheld the view .of the Tribunal regarding the item of Rs. 7,55,807/- and answered in favour of the assessee.

As to the items of unabsorbed depreciation and development rebate, the High Court held that they \Vere deductible befor€ arriving at the figure that would be exi.dble to the deduction of 8% under Section 80E(1) and. therefore. after deducting the aggregate amount of Rs. 2,54,613 from Rs. 8,02.126, the balance of Rs. 5,47,513 was exigible to the deduction of 8% under the said provision.

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CAMBAY ELECTRIC SUPPLY V. C.I.T. GUJARAT 661

Both the assessee and the Revenue preferred separate appeals againSt the said A judgment.

Dismissing both the appeals, the Court

HELD : 1. (a) On true constructioa of the prov1s1on itself, both the Tribunal and the High Court were right in taking the view that the item of Rs. 7,55,807 was required to be taken into account while computing the deduction of 8% contemplated by S. SOE(!) of the Act. [668 A] B

(b) Three important 5teps are requi1ed to be taken before the special deduction pe1miss1ble under section 80E(I) of Income Tax Act, 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 \vith all the provisions except Sec. SOE; secondly, ascertain \;,.hat part of the total incon1c so con1puted 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 gain.;; 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 i1npo1iant words in sub-s. 1 are those that appear in parenthesis, namely, "as computed in accordance \Vith the other provisions of this Act", and these \VOrds clearly contain a n1andate that the total income of the concerned assessee must be computed in accordance with the other provisions of the Act without reference to S. SOE and since in the instant case it is income from business the same as per s. 29 will have to be computed in accordance with Ss. 30 to 43A \Vhich would include s. 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 old machinery and buildings and worked out as per s. 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 s. 41(2) "'ill have to be taken into account before computing the deduction of 8% under the third step.

On proper construction of sub-s. (1) and having regard to the legislative mandate contained in the three steps that are required to be taken in the manner indicated above it is clear that the item of Rs. 7.55,807/- will have to be taken into account before computing the So/o deduction comtemplated by the said provision. [667 G-H, 668 A]

Comn1issioner of l11con1e Tax, Bon1bay City v. Bipinchandra Maganlal and Co. Ltd., (1961) 41 ITR 290 and Commissioner of Income Tax, Madras v.

Express N'ewspaper Ltd., (1964) 53 I.T.R. 250; discussed.

(c) It is true that by legal fiction created under S. 41(2) a balancing charge arising from sale of old machinery or building is treated as deemed income and the same is brought to tax; in other 'vords the le.cal fiction enables the Revenue to take back what it had given by way of depreciation allowance in the preced

ing years since what was given in the preceding years was in excess of that \Vhich ought to have been given. This shows that the fiction has been created for the purpose of computation of the assessable income of the assessee under the head 'buiness Income'. f669 A-B]

(d) Legal fictions are created only for a definite purpose and they should be limited to the purpose for \\1hich they are created and should not be extended beyond their legitimate field.

The fiction under s. 41(2) is created for the purpose of computation of assessable income of the assessee under the bead "business income" and under s. 80E(1 ). in order to compute and a11ow the permissible special deduction, computation of total income in accordance with the other provisions of the Act is required to be done and after allowing such deduction the net assessable income chargeable to tax is to be determined, in other words, the lec:al fiction under S. 41(2) and the grant of special deduction in case of specified industries are so closely connected with each other that

taking into account the balancing charge (i.e. deemed profits) before computing 8% deduction under S. SOE(l) would amount to extending the legal fiction within the limits of the purpose for which the said fiction had been created. [669 B-El

(e) Whenever the Legislature wanted to give a restricted meaning it has used the expression"derived from", as for instance in S. 80J.

Since the expression of wider import, namely, "attributable to" has been used, the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity. [669 G-ll]

2. (a) The High Court was right in deducting unabsorbed depreciation and development rebate aggregating to Rs. 2,54,613 from Rs. S,02,126 and bold!ng

the balance of Rs. 5,47,513/- being exigible to the S% deduction. [670 El

(b), !laving regard to the construction placed on sub-s. ( 1) of Section SOE as above it is obvious that, 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 S% contemplated by s. SOE(!) [670 D-El

( c) In sub-s. ( 1) of S. SOE 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.

The expression "total income" has been defined ins. 2(45) of the Act as meaning "the total amount of income referred to in Section 5, computed in the manner laid dolvn in this Act" and when this definition has been furnished by the Act itself the expression as appearing in S. SOE(l) must be in the absence of anything in the context suggesting to the contrary be construed in accordance w•ith such definition. Since the words in the parenthesis occurring in sub-s. ( 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 un::ibsorbed depreciation and unabsorbed development rebate while computing the total income on the basis that the total income spoken of by sub-s. ( 1) means commercial profits. [670 G-H, 671 A-Bl

3. S. 72(1) has a direct impact upon the computation under the head 'tirofits and gains' of business or profession.

In other words, the correct figure of total income, which is otherwise as taxable under other provisions of the Act, cannot be arrived at without working out the net result of computation under the head 'profits and gains' of business or profession. The question whether special benefit under s. SOE as well as the normal or usual benefit of carry forward of losses of previous years should both be available to an assessee without one impinging on the other must depend upon the intention of the Legislature and such intention has to be gathered from the language employed.

In this vie\v of the matter it is extremely doubtful, whether in spite of the legislative mandate contained in the three steps provided by sub-s. ( 1) of s. SOE,

carried forward losses would not be deductible before working out the 8 % deduction contemplated by s. SOE and, therefore, the contention that by parity of reasoning or on a priori reasoning unabsorbed develoment rebate and unabsorbed depreciation should be heW to be non-deductible before working out the 8% deduction under s. 80E(l) cannot be accepted. On proper comtruction of the provisions contained in sub-s. (1) of s. 80E item like unabsorbed depreciation and absorbed development rebate will have to be deducted in arriving at the figure which would be exigl"ble to deduction of S% under s SOE(!). [673 C-Fl

Indian Transformers Ltd. v. Commissioner of Income Tax, Ernakulam,

(1972) 86 I.T.R. 192, Comml99loner of Inca- Tax, Madras v. L, M.

Van Moppes Dia1nond Tools (India) Ltd., (1977) 107 I.T.R. 386, Comn1issioner of Income Tax, Madras v. Lucas T. V. S. Ltd. (No. 2); (1977) 110 I.T.R. 346 discussed and criticised. '

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Com1nissioner of Income Tax, Mysore v. Balasoor Tea and Rubber Co. Ltd., ,,.- 93 I.T.R. 115 held inapplicable.

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CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 785 and 783 of 1977.

AJilpeals by Special Leave from the Judgment and Order dated 11 /24-12-1975 of the Gujarat High Court in Income Tax Reference No. 115 of 1974.

S. T. Desa, i, P. H. Parekh and K. Vasudev, for the Appellant.

S. N. Kacker, Sol. Genl. J. Ramamurthi and (Miss) A. Subhashini, for the Respondent.

The Judgment of the Court was delivered by

TVLZAPURKAR. J.-These two appeals by special leave, one by the Commissioner of Income Tax, Gujarat and the other by the assessee, against the judgment of Gujarat High Court in Income Tax Reference No. 115 of 1974 raise two inte.resting questions regarding the mode in which and the fund from which deduction of 8 % contemplated by section SOE(!) of the Income Tax Act, 1961 (as it stood at the relevant time) should be computed.

The short facts giving rise to the questions may be stated : The assessee-Cambay Electricity Supply and Industrial Co.

Ltd.,- carries on the Business of generation and distribution of electricity at Cambay and, as such, is covered by the provisions of s. 80E(I) and is entitled to claim the deduction contemplated by the said provision.

The assessment in question relates to the assessment year 1967-68, the accounting year for which is the financial year ending March 31, 1967: During the accounting period which ended on March 31. 1967, the asses'see company earned an income of Rs. 46,319 /- from its said business.

It appears that during this period .it had sold some of its old machinery and buildings resulting in balancing charges contemplated by s. 41 (2) which the Income Tax Office.r worked out at Rs. 7,55,807 /-. It further appears that there wa's unabsorbed depreciation of Rs. 1,42,955 /- and unabsorbed development rebate of Rs. 1,11,658/- aggregating to Rs. 2,54,613/- of the earlier years which were required to be set off against the profits of that period.

The Income Tax Officer while completing the assessment, determined the deduction admissible to the assessee under s. SOE( 1) of the Act in the following manner : Income from business a computed Rs. 46,319 in the assessment order Add : Profit u/s. 41 (2) in respect of sale of machinery and buildings Rs. 7 55,807

Total Less : 8 %deduction u/s SOE (l) on Rs. 8.02,126

Less : Unabsorbed depreciation and development rebate : Depreciation : Rs. 1 42,955 Development Rebate : Rs. I l l ,658

Net Income chargeable to tax:

Rs. 8.02,126

Rs. 64.170

Rs. 7 37,956

Rs. 2,54,613

Rs. 4.8.3,343

664 SUPREME COURT Hf:l'ORTS

(J \178] 3 S.C.R.

It will appear clear. from the above computation that the Income Tax Officer treated the item of Rs. 7,55,807 /- as profits attributable to the business of generation and distribution of electricity and allowed deduct10n at 8 % thereon nnder s. 80E(l). It would also be clear that the Income Tax Officer computed the relief/deduction admissible to the assessee under s. 80E(l) at 8% on the amount of Rs. 8 02 126 that . . ' ' , JS to say,_ on the mcome before adjusting or setting off the unabsorbed depreciation and development rebate earned forward from the earlier year.

When the aforesaid assessment order came to his knowledge, the. Additional Commissioner of Income Tax called for and examined the record and proceedings in exercise of his powe.rs under s. 263 of the Act and after giving an opportunity to the assessee-company to show cause, took the view that the manner of computing the deduction admissible to the assessee under s. 80E(l) was erroneous and prejudicial to the intere'sts of the Revenue, in that the deduction of 8 % on the item of profit of Rs. 7,55,807 arising under s. 41 (2) had been wrongly allowed and that for the purpose of calculating the deduction of 8% the items in respect of the unabsorbed depreciation and development rebate should not have been excluded, and that if proper calculations as suggested by him were made, the assessee was not entitled to any deduction. He, therefore, set aside the ordeJC of the Income Tax Officer and directed that fresh assessment be made in accordance with Jaw.

Feeling aggrieved by the order passed by the Additional Commissioner of InrnmeTax the assessee preferred an appeal to the Income Tax Tribunal. In the appeal as rega<ds the item of Rs. 7,55,807 being profits arising from the sale of old machinery and buildings under s. 41 (2) of the Act, tbe Tribunal took the view that the said item of profits could not be treated in isolation or divorced from the profits and gains of the business of generation and distribution of electricity done by the asse5see-company and that the said item will have to be regarded as profits "attributable to". though not "derived from" the business of generation and distribution of electricity and, as such, the said item wa's exigible to the deduction of 8 % under s. SOE(!) of the Act.

On the question whether the unabsorbed depreciation and development rebate would be deductible in computing the prnfits under s. SOE of the, Act, the Tribunal following the decision of the Mysore High Court in the case of C.l.T. Mysore v. Balanoor Ta & Rub?er Co.(') held that these two items could not be deducted m computmg the dednction admissible under s. SOE of the Act.

The Tribunal accordingly allowed the appeal, set aside the order of the Additional Commissioner and restored that of the Income Tax Office.r.

At the instance of the Commissioner of Income Tax, the Tribunal referred the following two questions to the Gujarat High Court for its opinion :

"(1) Whether the Tribunal was correct in holding that the p.rofit's under section 41 (2) of the Income Tax Act 1961 arising from the sale of machinery and building, amounting to Rs. 7,55,807 /- should be taken into account while computing the deduction of 8 per cent under section SOE (1) of the Act?

(3) (1964) 53 T.T.R. 250.

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CAMBAY EI-ECTRJC SUPPLY v. C.I.T. GUJARAT (Tulzapurkar, J.) 665

(2) Whether unabsorbed depreciation and development rebate amounting to Rs. 2,54,613 is not deductible in computing profits under section 80E(l) of the Act ?"

The High Court by its judgment dated 11th and 24th December, 1975 disposed of !he Reference by answering the first question in favour of the assessee and the second question in favour of the Revenue. In other words the High Court upheld the view of the Tribunal on the first question while on the scond question it took the view that the unabsorbed depreciation and development rebate were deductible before arriving at the figure that would be exigible to the deduction of 8% under s. 80E(l) and therefore. after deducting the aggregate amount of Rs. 2,54,613 from Rs. 8,02,126 the balance of Rs. 5,47,513 was exigible to the deduction of 8 % under the said provision. Civil Appeal No. 783(NT) of 1977 has been preferred by the Revenue in so far as the answer to the first question has gone against it while Civil Appeal No. 785(NT) of 1977 has been preferred by the assessee inasmuch as the second question has been answered in favour of the Revenue.

As regards the question raised in C.A. No. 783(NT) of 1977, the learned Solicitor General appearing for the Revenue has contended that the item of Rs. 7,55,807 /- represents the balancing charges arising out of the sale of old machinery and buildings worked out under s. 41 (2) of the Act and the same cannot be treated as any profits or gains "attributable to" the business of generation and distribution of electricity carried on by the. as'sessee and as such the said item shonld not be taken into account while computing the deduction of 8% under s. 80E(l) of the Act. He emphasized that under that section a deduction of 8 %. is permissible from "such profits and gains" meaning "profits and gains attributable to the business of generation and distribution of electricity" carried on by an assessee. He contended that a balancing charge contemplated under s. 41 (2) is really in the nature of a return of capital and not a return of revenue and it is only by reason of the fiction created by s. 41 (2) that the same is deemed to be a revenue receipt and has been made chMgeable to jncome tax as income of the business but it is well seU!ed that a legal fiction is to be limited to the purpose for which it i's created and should not be -,_ extended beyond its legitimate field.

He urged that the very fact that a deeming provision has been made under s. 41 (2) shows that it is not a revenue receipt but a capital receipt in the hands of an assessee.

In suooort of his contention he placed reliance upon a decision of this

Court in Commissioner of Income-Tax. Bombay City v. llipinchnndra Ma!!anlal & Co. Ltd.,(') where the real nature of the balancing charge arisi'ng under the corresponding provision of the 1922 Act has been explained by this Court as being a capital return or a capital receipt.

He. therefore, contended that item of Rs. 7,55,807/- which is not really any profit or gain earned in the conduct of the business of generation and diRtribution of electricity cannot be taken i'nto account

-~, whHe computing the deduction of 8% under s. 80E(1) of the Act.

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(!) (1961) 41 I.T.R. 290. 8-3 l 5SCI/78

A On the other hand, Mr. S. T. Desai, appearing, for the assessee,

ontended that both the Tribunal as well as the High Court were right m coming to the conclusion that the said item of Rs. 7,55,807/- was, on proper construction of s. SOE(l), required to be taken into account before computing the permissible deduction of 8 % contemplated by that provision. He pointed out that s. SOE in the first place requires the computation of the total income of the assessee carryinron speci- B fied industry "in accordance with the other provisions of

0this Act"; secondly, such total income so computed should include "profits and gains attributable to the business of" the specified industry (here generation and distribution of electricity); and thirdly, it is from such profits attributable to the business of the specified industry that the deducticm of S % should be made.

He laid considerable emphasis on the aspect that the Legi'slature has used the expression "attributable to the business of" instead of "derived from the business of" and according to him the former being an expression of wider import would include C

an item like the balancing charge which may not be directly derived from the conduct of the business of the specified industry (here generation and distribution of electricity) . He also urged that in its subsequent decision in the case of Comtnissioner of Income-Tax, Madras v.

Express Newspapers Ltd.,(') this Court has explained that the balancing charge contemplated under s. 41 (2) in substance partakes the character of "e'scaped profits" of the busines carried on by an assessee and as such the item of Rs. 7,55, S07 /-could be treated as profits attributable to the business of generation and distribution of electricity by the assessee.

He also contended that even if the matter were to be looked at from the angle of the legal fiction created by s. 41 (2) of the Act, the said fiction could be extended so a's to take into acco?nt the said item of Rs. 7,55, S07 /- before computing the S% deducllon for such extension of the fiction would be within and for the purpose for which the same has been created.

In our view the answer to the question raised before us really turns upon the proper construction of the provision contained in s. SOE(l)

of the Act rather than on what is the real nature or character of a F balancing charge arising under s. 41 (2) of the Act and it would, therefore, be proper to set out the provisions of s. SOE as it stood at the relevant time :

"SOE. 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 article's 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.

(1) (1964) 53 I.T.R. 250.'

(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 1 OS and its total income as computed before applying the provisions of sub-section (1) does not exceed twenty-five thousand rupees."

,......,_ It was not disputed before us that the aforesaid provision contained m s. SOE( 1) has been enacted for the purpose of providing for certain special deduction to be made in computing the total income in the case of specified industries, over and above the other general deductions contemplated by the Act. 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 S % contemplated by that provision and the only question is how and in what manner the said deduction should be computed. On reading suh-s.

(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 pro- ..

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visions of the Act i.e. in accordance with all the provisions except s. SOE; secondly, ascertain what part of the total income so computed represents the profits and gain's 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 S % thereof from such profits and gains and then arrive at the net total income exigiblc to tax.

As regards the first step mentioned above, the important words in sub-s. ( 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 s. SOE and since in the instant case it is income from business the same as per s. 29 will have to be comnuted in accordance with ss. 30 to 43A which would includes. 41 (2)°. It is also clear that under the second step the profits aud gains attributable to the business of the specified industry (here generation and distribution of electricity) forms a component of the total income 'snoken of in the first step.

Reading these two steps together, therefore, it is obvious that in computing the total income o( the concerned assessee the balancing charge arising as a result of the sale of old machinery and buildings and worked out as per s. 41 (2), irresnective of its real character, will have to be taken into account ., / and included as income of the business. In other words, the balancing ~I charge as worked out nnder s. 41 (2) will have to be taken into account

A before computii:g the deduction of 8 % under the third step.

On proper constru_ctlon. of sub-s. ( 1) and having regard to the legislative mandate conta111ed m the three steps that are required to be taken in the manner md1cated above we are clearly of the view that the item of Rs. 7,55,807 /- will have to be taken into account before computincr the 8 % deduction contemplated by the said provision. "

B The learned Solic!tor General has argued to the contrry by laying

cons1drable emphasis on two aspects, first, the real nature of the balancmg charge under s. 41(2), which according to him is a return of capital and not a return of revenue and, secondly, under the second and thlfd steps the 8 % deduction is to be made from "profits and gains attributable to the business of" the specified industry (here generation and distribution of electricity). As regards the first aspect, on the c question of real nature or true character of a balancing charge two ~

apparently divergent views would appear to have been taken by this Court in two decisions.

In the case of Bipinchandra Maganlal & Co.

Ltd. (supra) the question that arose for determination was whether a balancing charge which was brought to tax on the basis of deemed income and was, therefore, included in the assessable income of an assessee under the second proviso to cl. (vii) of sub-s. (2) of s. 10 D of the 1922 Act (equivalent to s. 41(2) of the 1961 Act) could be taken into account while considering "smallness of profit" for purposes of deciding whether the case attracted the applicability of S. 23A of the Act and this Court took the view that the balancing charge was not real income but was made taxable income for the purpose of computation of the asses'sable income by legal fiction but on that account it did not become commercial profit and was not liable to be taken into E account in assessing whether in view of the smallness of profits a larger dividend would be unreasonable; in that context this Court observed that what in truth was a capital return was by a fiction regarded for ...

the purposes of the Act as income and was made chargeable to income . ,. tax but because of that its character was not altered and it was not converted into asses'see's business profits and that smallness of protlt in s. 23A had to be adjudged in the light of commercial principles F and not in the light of total receipts, actual or fictional. Jn the subsequent decision in the Express Newspapers cas~ (supra) this Court bas regarded a balancing charge as being the "escaped profits" of the business for which the assessee is made liable to tax.

At pag<" 254 of the report the Court explained the nature of the balancing Mlirge ,.--c~ by way of i!lustration thus : "assume that the original cost of a mach\- nery or plant is Rs. 100 and depreciation allowed is Rs. 25; the written • G down value is Rs. 75. If the machinery is sold for Rs. 100. it i\!

obvious that depreciation of Rs. 25 was wrongly allowed. If •t had not been allowed that amount would have swelled the profits to that extent.

When it is found that it was wrongly allowed that profit I• brought to charge. The second proviso, therefore, in substance, brings to charge an escaped profit or gain of the business carried on by the assessee;'. These apparently divergent views have given rise to tw" H rival contentions urged before us by counsel on other side. It is unnecessarv in this case to go into the question whether the divergenc~ is teol or merelv apparent, for. as we have said above, the answer to the

qu>' >stion raised before ns doe's not depend upon the real nature 01

true character of the balancing charge but upon proper construction of the su!J.-s. (I) which contains the legislative mandate with regard to the manner iu which three steps indicated therein are required to be taken for computing the deduction of 8 % contemplated by that provision.

Jt. is true that by a legal fiction created under s. 41 (2) a balancing charge arising from sale of old machinery or building is treated as deemed income and the same is brought to tax; in other words the legal fiction enables the Revenue to take back what it had given by way of depreciation allowance in the preceding years since what was given in the preceding years was in excess of that which ought to have been given. This shows that the fiction has been created for the purpose of computation of the assessable income of the assessee under the head "Business Income". It was rightly pointed ont by the learned Solicitor General that legal fictions are created only for a _..'- definite purpose _and they should be limited to the pnrpose for which they are created and should not be extended beyond their legitimate field .

But as indicated earlier the fiction under s. 41 (2) is created for the purpose of computation of assessable income of the assessee under the head 'Busines's Income' and under s. 80E(l) in order to compute and allow the permissible special deduction, computation of total income in accordance with the other provisions of the Act is required to be done and after allowing such deduction the net assessaole income chargeable to tax is to be determined; in other words, the legal fiction under s. 41 (2) and the grant of special deduction in case of specified industries are so closely connected with each other that taking ir.to account the balancing charge (i.e. deemed profits) before computing the 8 % deduction unde.r s. 80E(l) would amount to extending the legal fiction within the limits of the purpose for which the said fiction had been created . ...

As regards the aspect emerging from the expression "attributable to" occurring in the phrase "profits and gains attributable to the business of" the specified industry (here generation and distribution of electricity) on which the learned Solicitor General relied, it will be pertinent to observe that the Legislature has deliberately used the ex- _pression "attributable to" and not the expression "derived from"· It

caanot be disputed that the expression "attribntable to" is certainly wider in import than the expression "derived from".

Had the exgession "derived from" been used. it could have with some force been ..__ -contended th; tt a balancing charge arising from the sale of old machi- • nery and buildings cannot be regarded as profits and gains derived from the conduct of the business of generation and distribution of electricity.

In this connection it may be pointed out that whenever the Legislature wanted to give a restricted meaning iu the manner , sugoested by the learned Solicitor General it has used the expression

"'derlved from", as for instance in s. 80J.

In our view (since the expression of wider import, namely, "attributable to" has_ been used, ihe Legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electri- ""

oeity.

For the aforesaid reasons and particularly on true construction of the provision itself we are of the view that both the Tribunal and the

A High Court were right in taking the view that the item of Rs. 7,55,807 /- was required to be taken intq_ account while computing the deduction of 8 % contemplated by s. SOE( 1) of the Act. The Revenue's appeal, therefore, fails and is dismissed.

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 s. 80E(l) of the Act.

Here again the answer to the question must depend upon the construction of sub-s. ( 1) of s. SOE 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-s. (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 incomcof 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 s. SOE and since in this case it is income from busiuess the same will have to be computed in accordance with ss. 30 to 43A which would include s. 32(2) (which provides for carry forward of depreciation) ands. 33(2) (which provides for carry forward of development rabate for eight 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 oE 8 % contemplated by s. SOE(l). 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.

' f ~

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 "totol income" appearing in s. SOE ( 1) has been used in its commercial sense and since neither the unabsorbed depreciation nor the unabsorb- ___,' ed development rebate has anything to do with commercial pr?fits. 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-s. ( 1) of s. SOE 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 ins. 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 ins. 80E(l) must, in the absence of any-

" >

---- ...

thing in the context suggesting to the contrary, be construed in accordance with such definition.

Since the words in the parenthesis occm- A. ring in 'sub-s. ( 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 de'IClopmenl rebate while computing the total income on the basis that lhe total income spoken of by sub-s. (I) means commercial profits. ' . .

Counsel for the assessee next relied upon two decisions, one of the & Kerala High Court in the case of Indian Transformers Ltd. v. Commissioner of Income Tax, Ernakulam,(1) and \he other of the Madras High Court in the case of Commissioner of Income-Tax, Madras-I v.

L. M. Van Moppes Diamond Tools (India) Ltd.,(') in both of which

a vir:w has been taken that the deduction under s. SOE (1) has to be worked out before setting off the losses brought forward from the earlier years and the further argument based on this view is that if C carried forward losses are not to be deducted then carried forward depreciation and carried forward development rebate,-since all the thrco stand on the same footing-should not be deductible while working out the deduction under s. SOE of the Act and in that behalf reliance was placed on a later decision of the Madras High Court in Commissioner of Income Tax, Madras v. Lucas-T.-V. S. Ltd. (No.2).(3) It may be stated that the first two decisions did not deal with the ques- D tion of unabsorbed depreciation or nnabsorbed rebate. but merely dealt with the question of carried forward losses in the context of s. SOE(l), while the third decision dealt with all the three things, carried forward loss, carried forward depreciation and carried forward development rebate in the context of s. SOE(!) and it was held that the deduction under s.

SOE(!) will have to be worked out before setting off or adjusting each of the three E things.

In that case the Madras High Court held that as regards carried, forward loss the point was covered by its earlier decision in L. M. Van Moppes( 2), case (supra), that unabsorbed development rebate stood on the same footing as unabsorbed losses and as regards unabsorbed depreciation it took the view that since s. 72(2) itself postponed the adjustment of unabsorbed depreciation to a stage subsequent to the set off of business losses under s. 72 (2) F and set off of the losses in speculation business under s. 73(3), the unabsorbed depreciation cannot be adjusted or deducted because if for the purpose of s. SOE the previous years losses could not be set off it will be a fortiori that the unabsorbed depreciation could not be adjusted inasmuch as from the very sequence the adjustment of unabsorbed depreciation could come only after the adjustment of the unabsorbed losses of the previous years.

It will thus appear cler that G in the last mentioned case unabsorbed developmnt rebate was held to be non-deductible for the same reasons for which unabsorbed loss could not be deducted under the earlier decision and the unabsorbed depreciation was held to be non-deductible on the basis of a-_priori reasoning.

The question that arises for consideration, therefore, is whether the view taken in regard to non-deductibility of carried for- H

(1) (1972) 861.T.R. 19?.

(2) (1977) 107 J.T.R. 386.

(3) (!977) 1101.T.R. 346.

ward losses while computing the total income for the purpose of gra11ting the S % deduction under s. SOE in the first two decisions is correct.

It is true that in the instant case the question of deductibility or otherwise of carried forward losses of earlier years in the context of s. SOE has not directly arisen before us but since counsel for the assessee has raised a contention about non-deductibility of unabsorbed depreciation and unabsorbed development rebate on the basis of the view taken by Kerala High Court in Indian Transformer's case (supra) and Madras High Court in L. M. Van Moppes' case (supra) in regard to nondeductibility of unabsorbed losses of earlier years, we are constrained to express our opinion on the validity of the view taken in those two cases. In our opinion, the view taken in Indian Transformers' casil

(supra) and L. M. Van Moppes' case (supra) in regard to the nondeductibility of unabsorbed losses of the earlier years in the context of computing the deduction under s. SOE of the Act is open to grave doubts.

In the first place such a view runs counter to the Legislative mandate contained in the three steps required to be taken under sub-s. ( 1) of s. SOE as discussed earlier. Secondly, the main reasoning given by the Kerala High Court for taking such a view in the Indian Transformers' case (supra)-the Madras Hi)!h Court in L. M. Van Moppes' case (supra) has merely followed the Kerala decision-does not bear scrutiny.

After pointing out that Chapter IV of the 1961 Act deals with the computation of income falling under the various heads mentioned in s. 14 of the Act, that Chapter V1 in which s. 72 occurs deals with the aggregation of income and set off or carry forward of loss and that s. SOE deals with deduction to be made in computing total income, the Kerala High Court has proceeded to observe thus :

"Computation as such is used only in the heading in Chapter IV.

Section 66 also provides that in computing the total income of an assessee there shall be included all income on which no income-tax is payable under Chapter VII, etc.

What is provided in section 66 is also relating to computation.

Similarly, the same words are used in section 67.

But, there are no such words in section 72.

Section 72 speaks of the net result of the computation under the head 'Profits and gains of business or profession'.

We consider that the set-off permitted under section 72 is from an amount arrived at after applying the provisions of Chapter IV along with other sections of the Act such as sections 66 and 67, etc., dealing with computation of income and after permitting the deductions under section SOE."

The Court has further observed that in its opinion the deduction under s. SOE is a special benefit given to a company which satisfies the conditions under section SOE and the deduction permissible thereunder i6

on Iv from profits and gains attributable to the specified activities and this benefit should not be. diminished by the other benefits conferred by tbe Act, such as the right to have the previous losses set off, that the two serve different purposes and the benefit of both must be available to an assessee, without the one impinging on the other. It will thus appear that the Kerala High Court has regarded section 72 appearing in Chapter VI as a provision unconnected with the computation of the total income of an assessee and a provision which comes into opera- A

tion at a stage subsequent to the computation of the total income arising from business d9ne in accordance with ss. 30 to 43A occurring in Chapter IV of the Act and, therefore, the unabsorbed losses cannot be set off before calculating tbe deduction under s. SOE.

It is not possible to accept the view that s. 72 has no bearing on or is un- B connected with the computation of the total income of an assessce

unde.r the head 'Profits and gains of business or profession'. Actually s. 72(1) provides that wher' the net result of computation under the '

head 'Profits and gains of business or profession' is a loss and such Joss cannot be or is not wholly set off against the income under any

") .head of income in accordance with the provisions of s. 71, so much of

,..-~. !he 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 c ... and shall be set off against the profits and gains, if any, of any business or profession for that assessment year.

Therefore, s. 72 ( 1) has a direct impact upon the computation under tbe head 'Profits and gains of business or profession'.

In other words, the correct figure of total income. which is otherwise taxable under otber provisions of the Act, ,.,., cannot be arrived at without working out the net result of computatioll.

D m1der the head 'Profits and gains of business or profession'.

Further the question whether special benefit under s. SOE as well as the normal or usual benefit of carry forward of losses of previous years should both be available to an assessee, without one impinging on the other

~ must depend upon the intentiou of the Legislature aud such intention has to be gathered from the language employed. In this view of the matter it is extremely doubtful whether in spite of the Legislative man- E date contained in the three steps provided for by sub-s. (I) of s. SOE, ... the carried forward losses would not be deductible before working out -- the 8 % deduction contemplated by s. SOE and, therefore, the contention that by parity of reasoning or on a priori reasoning unabsorbed development Jebate and unabsorbed depreciation should be held to be non-deductible before working out the S % deduction under s. SOE(l) cannot be accepted. As observed earlier on proper construction of the F -

provision contained in sub-s. (1) of s. SOE items like unabsorbed

• depreciation and unabsorbed development rebate will have to be deducted in arriving at the figure which would be exigible to deduction of ·---

S% under s. 80E(l).

-I ..

Reference was also made by counsel for the assessee to the decision .. of the Mysore High Court in the case of Commissioner of Income Tax, G Mysore v. Balanoor Tea and Rubber Co. Ltd., (supra). In our view that decision has nothing whatever to do with the question posed before us.

Iu that case the question was whether the Joss incurred by an assessee in non-priority business could be set off against the profits and

gain; made by the asscssee in the priority business while computing the 8 % deduction under s. SOE and the High Court upheld the Tribunal's view that for the purpose of allowing a deduction under s. SOE the H •

words "such profits" occurring iu that section mean "the _profits and gains attributable to an activity as specified iu the 5th Schedule of the Act" and, therefore, the deduction was required to be worked out with-

A out reference to the loss incurred in non-priority business.

The decision was rendered on the language of s. 80E( 1) but it cannot avail the assessee on the point raised in the appeal.

In the result the assessee's appeal also fails and the same is dis- ~~. ~

B In the circumstances, there will be no order as to costs in both the apeals. ' [

S. R.

Appeals dismissed. .. "'--.

...