P.N.BHAGWATI - (1.) THESE two appeals by special leave raise a short but (Contd. on Col. 2) interesting question of law relating to the interpretation of S. 15-C of the Indian Income Tax Act, 1922 and S. 84 of the Income-Tax Act, 1961. THESE two sections are in material respects in identical terms and the interpretation we place on Section 15-C is bound to apply equally to S. 84. We will, therefore, first deal with Civil Appeal 1989 of 1972 which involves the interpretation of S. 15-C and then turn to Civil Appeal 2418 of 1977 which deals with S. 84.
(2.) THE assessee in Civil Appeal 1989 of 1972 is a public limited company carrying on business in manufacture and sale of yarn. During the financial year ending 31/03/1959, being the accounting year relevant to the assessment year 1959-60, the assessee set up a new industrial undertaking which admittedly satisfied the requirement of S. 15-C (2) of the Indian Income-tax Act, 1922. THE profit, depreciation and development rebate in respect of this new unit for the assessment years 1959-60 and 1960-61 were as follows: JUDGEMENT_322_4_1978Html1.htm In the assessment year 1959-60 the total profit of the assessee in respect of its old and new units came to Rs. 2,42,432, including Rs. 33,118 in respect of the new unit and the total depreciation amounted to Rs. 2,66,651, including Rs. 1,44,361 in respect of the new unit and after setting off the amount of depreciating against the total profit, a sum of Rs. 24,183 remained as unabsorbed depreciation which was carried forward to the next year. THE entire development rebate, which included Rs. 5,07,336 in respect of the new unit, also remained unabsorbed owing to the smallness of the profit and that too had to be carried forward. THE total profit of the assessee in respect of its old and new units for the assessment year 1960-61 was Rs. 14,13,604 inclusive of Rs. 3,64,672 in respect of the new unit and this was large enough to absorb the carried forward depreciation and development rebate as also the current year's depreciation and development rebate in respect of both the units In fact, after setting off of such depreciation and development rebate, a sum of Rs. 3,25,176 remained as the taxable income of the assessee and it was assessed to tax in its hands. THE result was that no part of the depreciation or development rebate for the assessment years 1959-60 and 1960-61 remained unabsorbed to be carried forward to the next assessment year 1961-62. The position in the assessment year 1961-62 was that the assessee earned a net business income of Rs. 12,69,403 which included a sum of Rs. 1,08,822 representing the income from the new unit. The assessee in its assessment to tax for this assessment year claimed exemption of the income from the new unit to the extent of 6 Per Cent of the average capital employed in it under S. 15-C. This section in so far as material read as follows:- (1) Save as otherwise hereinafter provided, the tax shall not be payable by an assessee on so much of the profits or gains derived from any industrial undertaking (or hotel) to which this section applies as do not exceed six per cent per annum on the capital employed in the undertaking (or hotel) computed in accordance with such rules as may be made in this behalf by the Central Board of Revenue. (2)xxx (3) 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 S. 10. (4) The tax shall not be payable by a shareholder in respect of so much of any dividend paid or deemed to be paid to him by an industrial undertaking (or a hotel) as is attributable to that part of the profits or gains on which the tax is not payable under this section. (Explanation - The amount of dividend in respect of which the tax is not payable under the sub section shall be computed in accordance with such rules as may be made in this behalf by the Central Board of Revenue). (5)xxx (6) The provisions of this section (shall, in relation to an industrial undertaking, apply) to the assessment for the financial year next following the previous year in which the assessee begins to manufacture or produce articles and for the four assessments immediately succeeding. The Income-tax Officer took the view that the benefit of S. 15-C, sub-sec. (1) could be claimed by the assessee only if there was any profit derived from the new unit and since this profit was, by reason of sub-sec. (3) of S. 15-C, required to be computed in accordance with the provisions of S. 10, it was necessary to work out the trading result of the new unit without reference to any other activity carried on by the assessee and if that was done, the result would clearly show that there was a loss in the working of the new unit in the assessment year 1961-62. The computation made by the Income-tax Officer was as under. The total depreciation and development rebate in respect of the new unit for the assessment years 1959-60 and 1960-61 was Rs. 10,88,493, while the profit for these two assessment years came to only Rs. 3,97,790 so that, taking into account only the trading result of the new unit as if that was the only source of income of the assessee during the assessment years 1959-60 and 1960-61, a sum of Rs. 6,90,703 representing the excess of depreciation and development rebate over profit remained unabsorbed to be carried forward to the next assessment year 1961-62. If this carried forward depreciation and development rebate amounting to Rs. 6,90,703 were allowed against the profit of Rs. 1,36,822 derived from the new unit in the assessment year 1961-62, there would be a resultant loss and hence the benefit of the exemption under S. 15-C sub sec. (1) was held not available to the assessee and the claim of the assessee for exemption was rejected. The assessee carried the matter in appeal and before the Appellate Assistant Commissioner, the assessee succeeded in making good its claim for exemption under S. 15-C, sub-sec. (1). The Appellate Assistant Commissioner pointed out in a brief but precise order. "The loss of Rs. 6,90,703 being depreciation in excess of the income made by the new mill was set off against the income of the old mill in both the years and the net result for the assessment year 1960-61 was a positive figure which was assessed to tax. There is no question of once again carrying forward the depreciation of the new mill to the assessment year 1961-62 and allowing it against the income of the new mill. It is only when there is a loss of the earlier year due to depreciation attributable to the new industrial undertaking which could not be set off against the profits of the earlier years, it has to be carried forward and set off against the income of the current year in working out the income liable to tax under S. 10." The Appellate Assistant Commissioner accordingly allowed the claim for exemption and directed the Income-tax Officer to modify the assessment in conformity with his decision.
(3.) THE Revenue being aggrieved by the decision of the Appellate Assistant Commissioner preferred an appeal before the Income-tax Appellate Tribunal. THE appeal was successful and the Tribunal set aside the order of the Appellate Assistant Commissioner and restored that of the Income-tax Officer. THE Tribunal took the view that the trading result of the new unit must be considered as if it stood by itself, ignoring every other income producing activity of the assessee and if that was done, it was clear that there was an unabsorbed depreciation and development rebate of Rs. 6,90,703 in respect of the new unit which was required to be carried forward and treated as part of the allowance for the assessment year 1961-62 and that would wholly wipe out the profits of Rs. 1,36,822 leaving a resultant loss in the new unit for the assessment year 1961-62. THE Tribunal in this view held that the benefit of the exemption under S. 15-C sub-sec. (1) was not available and the Income-tax Officer was justified in refusing to grant such exemption. This led to the filing of an application for reference by the assessee and on the application, the Tribunal stated a case and referred the following question of law for the opinion of the High Court: "Whether on the facts and in the circumstances of the case the assessee company was entitled to the relief under S. 15-C (2)," The High Court agreed with the view taken by the Tribunal an proceeding on the assumption that for the purpose of determining the applicability of Section 15-C, sub-sec. (1), the new unit was required to be treated in isolation, as if no other income producing activity was carried on by the assessee, the High Court observed that there was unabsorbed depreciation and development rebate of Rs. 6,90,703 in respect of the new unit which was required to be carried forward and set off against the profit of Rs. 1,36,822 derived from the new unit in the assessment year 1961-62 and since that left the new unit in a resultant position of loss, the assessee was not entitled to claim the benefit of the exemption under S. 15-C, sub-sec. (1). The High Court accordingly answered the question referred by the Tribunal in favour of the Revenue and against the assessee. The assessee thereupon preferred the present Civil Appeal No. 1989 of 1972 after obtaining certificate of fitness from the High Court. ;