Sen, J. - (1.) THE Tribunal has referred the following questions of law to this Court under s. 256(2) of the IT Act, 1961 ('the Act'):-- "1. Whether, on the facts and in the circumstances of the case, the Tribunal misdirected itself in law in holding that the assessee is entitled to relief under s. 80-I in respect of proportionate managing agency commission amounting to Rs.1,85,061 for the asst. yr. 1968-69? 2. Whether , on the facts and in the circumstances of the case, the Tribunal was right in law in holding that relief/deduction under s. 80-I should be allowed with reference to the profit and gains from priority industry without deducting proportionate managing agency commission therefrom? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that for the purpose of allowing deduction or relief under s. 80-I of the IT Act, 1961 commercial or accounting profits should be taken to be actual profits? 4. Whether, on the facts and in the circumstances of the case, the Tribunal having held that the accounting profits as worked out by the assessee should be the commercial profits for the purpose of s. 80-I of the said IT Act, 1961, the conclusion of the Tribunal that the assessee is entitled of additional deduction under s. 80-I of the said Act in respect of the proportionate managing agency commission that had been allowed as deduction in computing the business income if the assessee is unreasonable and/or perverse?"
(2.) THE assessment years involved are 1968-69 and 1969-70. THE accounting periods are year ended on 31st March, 1968 and 31st March, 1969, respectively. In the statement of the case the Tribunal has also mentioned three other questions in paragraph 4 as to have been directed to be referred in Matter No. 189 of 1978. But it appears in the order passed by this Court that the Rule was issued only in respect of the question which has been referred herein above and the Rule was made absolute with regard to that question in a proceeding under s. 256(2). It appears from the records of s. 256(2) proceedings, being Matter No.189 of 1978, that a Rule was issued in respect of all the four questions by the Revenue by order dt. 18th Sept., 1978. Ultimately when the case was taken up for final hearing the Rule was made absolute only on question No. 1 which has been set out hereinabove. Rule in respect of all other questions was discharged.
(3.) THE facts out of which the controversy arose have been stated by the Tribunal as under:-- "THE assessee claimed relief under s. 80-I of the IT Act, 1961 in respect of its unit, Sourastra Chemicals. THEre is no dispute that the aforesaid unit has been engaged in a priority industry and the assessee was entitled to relief under s. 80-I in respect thereof. THE assessee submitted to the ITO its computation of relief under s. 80-I and the amount of relief claimed was Rs. 2,10,489 and Rs. 7,90,028 for the asst. yrs. 1968-69 and 1969-70, respectively. For the asst. yr. 1968-69 the assessee-company started its computation with reference to the loss of Rs. 19,17,512 as per PandL a/c and no profit was computed at Rs. 26,31,123 and 8 per cent thereof was worked out to Rs. 2,10,489. THE profit as per PandL a/c for the asst. yr. 1969-70 was Rs. 75,75,429, net profit was computed at Rs. 98,75,356 and 8 per cent thereof was worked out to Rs. 7,50,023. THE assessee arrived at net profit for the asst. yrs. 1968-69 and 1969-70 for the purpose of s. 80-I after deducting proportionate managing agency commission of Rs. 1,85,061 and Rs. 5,89,130 respectively. Development rebates of Rs. 20,79,000 and Rs. 3,57,600 for the respective two assessment years were added to the profits disclosed as per PandL a/c or deducted from the loss as per PandL a/c. Similarly, in working out the profit for purpose of s. 80-I the assessee added the interest paid as head office or deducted from the loss as per PandL a/c of such interest paid to head office. Interest paid to head office was Rs. 25,12,850 and Rs. 21,83,355 for the asst. yrs. 1968-69 and 1969-70 respectively. THE ITO, on the other hand, computed the profit for the two assessment years at Rs. 9,79,120 and Rs. 86,580, respectively. Relief was worked out by applying 8 per cent of the aforesaid amount of net profit for each of the assessment years. He took net profit as per PandL a/c for the respective assessment years at Rs. 5,95,338 and Rs. 97,63,784. THE ITO followed the assessee in regard to the deduction of proportionate managing remuneration for the purpose of s. 80-I but unlike the assessee he deducted the development rebate for finding out the net profit in order to compute the relief under s. 80-I. THEre was slight difference in ITO's computation of development rebate allowable to the assessee. THEse figures for the respective assessment years were Rs. 20,79,082 and Rs. 8,57,613. In this regard it may be mentioned that the assessee credited development rebate reserve by debiting the PandL a/c with amount equivalent to development rebate. Being aggrieved, the assessee appealed before the AAC and contended before him that the deduction under s. 80-I should have been allowed with reference to the profit and gains from the priority industry without deducting development rebate and proportionate managing agency commission from the same. It was submitted that the deduction had to be worked out on the profit and gains of the priority industry and not on the assessable income. In regard to the development rebate it was the assessee's case that extra benefit or incentive to the assessee should not be treated as an expenditure necessary for working out the profits and similarly proportionate managing agency remuneration should not also have been deducted. THE AAC expressed inability to accede to the assessee's submission. According to him. THE profit and gains of a priority industry for the purpose of s. 80-I should be computed after taking into account the deductions specified in ss. 28 to 44 and as the ITO had actually done so, he refused to interfere with the matter. THE assessee felt aggrieved by the AAC's decision and preferred appeals before the Tribunal. Before the Tribunal the assessee objected to the decision taken by the AAC on the ground that development rebate was not normal business expenditure but a benefit extended to the assessee only on fulfilling pre-requisite conditions. According to the assessee, s. 80-I envisages relief as an encouragement to the companies engaged in priority industries under certain specified conditions. It was contended that the profit and gains attributable to a priority industry need not be computed after allowing all the deductions admissible in computing the business income under ss. 30 to 43 of the IT Act, 1961. THE assessee also contended before the Tribunal that though it had deducted proportionate managing agency remuneration in its computation for the asst. yrs. 1968-69 and 1969-70, the ITO should have applied the proper law following the decisions of the Supreme Court in CIT vs. C. Parakh and Co. (India) Ltd., (1956) 29 ITR 661 and CIT vs. Maharashtra Sugar Mills Ltd., 1973 CTR (SC) 489 : (1971) 82 ITR 452 (SC)." THE Tribunal held:-- "After going through the authorities cited before us and considering all the rival submissions on the basis of the facts and circumstances of the case, we are of the opinion that the assessee should be entitled to further relief under s. 80-I in respect of proportionate managing agency commission of Rs. 1,85,061 and Rs. 5,89,130 for the asst. yrs. 1968-69 and 1969-70 respectively. For attaining this relief, we are in complete agreement with the contention taken up by the learned counsel for the assessee who relied on the decisions of the Supreme Court in CIT vs. C. Parakh and Co. (India) Ltd., (supra) and CIT vs. Maharashtra Sugar Mills Ltd. (supra). It is now well-settled that the Income-tax authorities must not deduct proportionate managing agency commission while computing income of a bench. In other words, managing agency commission payable by a company to its managing agents related to the finally determined profits of the company. In the instant case before us the assessee-company paid managing agency commission to Birla Gwalior Ltd. THE assessee might have debited such proportionate managing agency commission in the accounts of its different units. But this would not in our opinion prevent the assessee from availing of the benefit which is otherwise due to it under the law. THErefore, we direct the ITO to revise his orders for the aforesaid two assessment years, i.e., 1968-69 and 1969-70 by allowing additional deduction under s. 80-I in respect of the proportionate managing agency commission to the assessee." Sec. 80 is one of the sections in Chapter VIA of the Act. The scheme of the Act is the total income of an assessee is first to be computed in accordance with the provisions of the Act after arriving at the gross total income. The deductions mentioned in the sections in Chapter VIA are to be allowed for the purpose of finding out the total income of an assessee. No deductions are to be made under any of these sections included in Chapter VIA at the time of computation of the total income. Sec. 80-I, cl. (i) provided as follows:-- "The 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 sent thereof, in computing the total income of the company." ;