TULZAPURKAR - (1.) 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 interesting questions regarding the mode in which and the fund from which deduction of 8% contemplated by S. 80-E (1) of the Income-tax Act, 1961 (as it stood at the relevant time) should be computed.
(2.) 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. 80-E (1) 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 31/03/1967. During the accounting period which ended on 31/03/1967, the assessee company earned an income of s. 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 Officer worked out at Rs. 7,55, 807.00. It further appears that there was unabsorbed depreciation of Rs. 1,42,955.00 and unabsorbed development rebate of Rs. 1,11,658.00 aggregating to Rupees 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. 80E (1) of the Act in the following manner : JUDGEMENT_644_2_1978Html1.htm 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 deduction at 8% thereon under S. 80E (1). It would also be clear that the Income-tax Officer computed the relief/deduction admissible to the assessee under S. 80E (1) at 8% on the amount of Rs. 8,02,126, that is to say, on the income before adjusting or setting off the unabsorbed depreciation and development rebate carried 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 powers 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. 80-E (1) was erroneous and prejudical to the interests 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 order of the Income-tax Officer and directed that fresh assessment be made in accordance with law. Feeling aggrieved by the order passed by the Additional Commissioner of Income-tax, the assessee preferred an appeal to the Income Tax Tribunal. In the appeal as regards 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, the 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 assessee 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 was exigible to the deduction of 8% under S. 80-E (1) of the Act. On the question whether the unabsorbed depreciation and development rebate would be deductible in computing the profits under S. 80-E of the Act, the Tribunal following the decision of the Mysore High Court in the case of C.I.T. Mysore v. Balanoor Tea and Rubber Co., 93 ITR 115 : (1973 Tax LR 319) (Mys) held that these two items could not be deducted in computing the deduction admissible under S. 80-E of the Act. THE Tribunal accordingly allowed the appeal, set aside the order of the Additional Commissioner and restored that of the Income-tax Officer. 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 profits under Section 41 (2) of the Income Tax Act 1961 arising from the sale of machinery and building, amounting to Rs. 7,55,807.00 should be taken into account while computing the deduction of 8 per cent under section 80E (1) of the Act? (2) Whether unabsorbed depreciation and development rebate amounting to Rs. 2,54,613 is not deductible in computing profits under section 80E (1) of the Act?" The High Court by its judgment dated 11th and 24/12/1975 disposed of the 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 second 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. (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. 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. 7,55,807.00 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 assessee and as such the said item should not be taken into account while computing the deduction of 8% under S. 80E (1) 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 chargeable to income-tax as income of the business but it is well settled that a legal fiction is to be limited to the purpose for which it is created and should not be extended beyond it 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 support of his contention he placed reliance upon a decision of this Court in Commr. of Income-tax, Bombay City v. Bipinchandra Maganlal and Co. Ltd., 41 ITR 290 : (AIR 1961 SC 1040), where the real nature of the balancing charge arising 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. 7,55,807.00 which is not really any profit or gain earned in the conduct of the business of generation and distribution of electricity cannot be taken into account while computing the deduction of 8% under S. 80E (1) of the Act.
(3.) ON the other hand, Mr. S. T. Desai, appearing for the assessee, contended that both the Tribunal as well as the High Court were right in coming to the conclusion that the said item of Rs. 7,55,807.00 was, on proper construction of S. 80E (1), required to be taken into account before computing the permissible deduction of 8% contemplated by that provision. He pointed out that S. 80E in the first place requires the computation of the total income of the assessee carrying on specified industry "in accordance with the other provisions of this 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 deduction of 8% should be made. He laid considerable emphasis on the aspect that the Legislature 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 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 Commr. of Incometax, Madras v. Express Newspapers Ltd., 53 ITR 250 : (AIR 1965 SC 33), this Court has explained that the balancing charge contemplated under S. 41 (2) in substance partakes the character of "escaped profits" of the business carried on by an assessee and as such the item of Rs. 7,55,807.00 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 as to take into account the said item of Rs. 7,55,807 before computing the 8% deduction 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. 80E (1) of the Act rather than on what is the real nature or character of a balancing charge arising under S. 41(2) of the Act and it would, therefore, be proper to set out the provisions of S. 80E as it stood at the relevant 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 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 108 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 in S. 80E (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 8% contemplated by that provision and the only question is how and in what manner the said deduction should be computed. On reading sub-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 provisions of the Act i.e. in accordance with all the provisions except S. 80E, secondly, ascertain what part of the total income so computed represents the profits and gains attributable to the business of the specified industry (here generation and distribution of electricity); and thirdly, if there be profits and gains so attributable, deduct 8% thereof from such profits and gains and then arrive at the net total income exigible to tax. As regards the first step mentioned above, the important words in sub-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. 80E 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 Sections 30 to 43-A which 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) will 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 we are clearly of the view that the item of Rs. 7,55,807.00 will have to be taken into account before computing the 8% deduction contemplated by the said provisions. ;