{"id":57125,"date":"1978-04-11T00:00:00","date_gmt":"1978-04-10T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/cambay-electric-supply-vs-the-commissioner-of-income-tax-on-11-april-1978"},"modified":"2017-06-16T10:06:42","modified_gmt":"2017-06-16T04:36:42","slug":"cambay-electric-supply-vs-the-commissioner-of-income-tax-on-11-april-1978","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/cambay-electric-supply-vs-the-commissioner-of-income-tax-on-11-april-1978","title":{"rendered":"Cambay Electric Supply … vs The Commissioner Of Income Tax, … on 11 April, 1978"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Cambay Electric Supply … vs The Commissioner Of Income Tax, … on 11 April, 1978<\/div>\n
Equivalent citations: 1978 AIR 1099, \t\t 1978 SCR (3) 660<\/div>\n
Author: V Tulzapurkar<\/div>\n
Bench: Tulzapurkar, V.D.<\/div>\n
           PETITIONER:\nCAMBAY ELECTRIC SUPPLY INDUSTRIAL CO.  LTD.\n\n\tVs.\n\nRESPONDENT:\nTHE COMMISSIONER OF INCOME TAX, GUJARAT-IIAHMEDABAD (AND VIC\n\nDATE OF JUDGMENT11\/04\/1978\n\nBENCH:\nTULZAPURKAR, V.D.\nBENCH:\nTULZAPURKAR, V.D.\nCHANDRACHUD, Y.V. ((CJ)\n\nCITATION:\n 1978 AIR 1099\t\t  1978 SCR  (3) 660\n 1978 SCC  (2) 644\n CITATOR INFO :\n R\t    1985 SC1585\t (18,19,22)\n E&R\t    1986 SC1727\t (7)\n\n\nACT:\nIncome\tTax Act, 1961 Sections 32(2), 33(2), 41(2),  72\t and\n80E(1)-Computation  of the mode in which and the  fund\tfrom\nwhich  deduction of 8% under Section 80E(1) is to  be  made,\nexplained.\n\n\n\nHEADNOTE:\nThe  assessee company carries on the business of  generation\nand  distribution  of electricity at Cambay and as  such  is\ncovered by the provisions of Section 80E(1) and is  entitled\nto  claim the deduction contemplated by the said  provision.\nDuring the accounting period which ended on March. 31,\t1967\ni.e. assessment year 1967-68, the assessee Company earned an\nincome\tof  Rs. 46,319\/- from its business.   The  assessee\ncompany\t had  sold some of its old machinery  and  buildings\nresulting in balancing charges contemplated by section 41(2)\nwhich  worked out to Rs. 7,55,807\/-.  There were  unabsorbed\ndepreciation  of Rs. 1,42,955\/- and  unabsorbed\t development\nrebate of Rs. 1,11,658\/aggregating to Rs. 2,54,613\/- of\t the\nearlier years which were required to be set off against\t the\nprofits of that period.\t The Income Tax Officer, while\tcom-\npleting the assessment treated the item of Rs. 7,55,807\/- as\nprofits\t attributable  to  the business\t of  generation\t and\ndistribution  of  electricity and allowed  deduction  at  8%\nthereon under Section 80E(1).  The Income Tax Officer,\tthus\ncomputed  the  relief\/deduction admissible to  the  assessee\nunder  section 80E(1) at 8% on the amount of Rs.  8,02,126\/-\n(46,319+7,55,807),  that  is to say, on the  income  without\nadjusting  or  setting off the unabsorbed  depreciation\t and\ndevelopment  rebate carried forward from the  earlier  year.\nIn  exercise of his revisional powers under section  263  of\nthe  Act, the Additional Commissioner of Income\t Tax  called\nfor  examined the records and took the view that the  manner\nof computing the deduction admissible to the assessee  under\nSection\t  80E(1)  was  erroneous  and  prejudicial  to\t the\ninterests of the Revenue, in that the deduction of 8% on the\nitem  of profit of Rs. 7,55,807 arising under Section  41(2)\nhad  been  wrongly  allowed  and that  for  the\t purpose  of\ncalculating the deduction of 8%, the items in respect of the\nunabsorbed  depreciation and development rebate\t should\t not\nhave  been  excluded  and that, if  proper  calculations  as\nsuggested by him were made, the assessee was not entitled to\nany  deduction.\t In the appeal, the Tribunal took  the\tview\nthat the item of Rs. 7,55,807 being profits arising from the\nsale  of old machinery and buildings under S. 41(2)  of\t the\nAct, could not be treated in isolation or divorced from\t the\nprofits\t and  gains  of\t the  business\tof  generation\t and\ndistribution of electricity done by the assessee-company and\nthat  the  said\t item will have to be  regarded\t as  profits\n,.attributable\tto\", though not \"derived from\" the  business\nof generation and distribution of electricity and, as  such,\nthe  said  item was exigible to the deduction  of  8%  under\nSection\t 80E(1)\t of the Act.  On the  question\twhether\t the\nunabsorbed  depreciation  and development  rebate  would  be\ndeductible in computing the profits under Section 80E of the\nAct,  following\t 93 ITR, 115, the Tribunal held\t that  these\nitems  could  not  be deducted in  computing  the  deduction\nadmissible  under  Section 80E.\t The  Tribunal\tallowed\t the\nappeal\t and  set  aside  the  orders  of   the\t  Additional\nCommissioner.\nBy  its\t judgment,  dated 11th and  24th  of  December\t1975\ndisposing  of the Reference, the Gujarat High  Court  upheld\nthe  view  of  the  Tribunal  regarding\t the  item  of\t Rs.\n7,55,807\/-  and answered in favour of the assessee.   As  to\nthe items of unabsorbed depreciation and development rebate,\nthe  High  Court  held\tthat  they  were  deductible  before\narriving  at  the  figure  that would  be  exigible  to\t the\ndeduction  of 8% under Section 80E(1) and, therefore,  after\ndeducting  the\taggregate amount of Rs.\t 2,54,613  from\t Rs.\n8,02.126,  the\tbalance of Rs. 547,513 was exigible  to\t the\ndeduction of 8% under the said provision.\n661\nBoth the assessee and the Revenue preferred separate appeals\nagainst the said judgment.\nDismissing both the appeals, the Court\nHELD : 1. (a) On true construction of the provision  itself,\nboth  the Tribunal and the High Court were right  in  taking\nthe  view that the item of Rs. 7,55,807 was required  to  be\ntaken  into  account  while computing the  deduction  of  8%\ncontemplated by S. 80E(1) of the Act. [668 A]\n(b)  Three  important steps are required to be taken  before\nthe  special deduction permissible under section  80E(1)  of\nIncome Tax Act, is allowed and the net total income exigible\nto  tax is determined.\tFirst, compute the total  income  of\nthe   concerned\t assessee  in  accordance  with\t the   other\nprovisions  of\tthe  Act i.e., in accordance  with  all\t the\nprovisions except Sec. 80E; secondly, ascertain what part of\nthe  total  income so computed represents  the\tprofits\t and\ngains attributable to the business of the specified industry\n(here  generation  and\tdistribution  of  electricity);\t and\nthirdly,  if  there be profits and  gains  so  attributable,\ndeduct\t8%  thereof  from such profits and  gains  and\tthen\narrive at the net total income exigible to tax.\t As  regards\nthe first step mentioned above, the important words in\tsub-\ns.   1\tare those that appear in  parenthesis,\tnamely,\t \"as\ncomputed  in  accordance with the other provisions  of\tthis\nAct\",  and  these words clearly contain a mandate  that\t the\ntotal  income of the concerned assessee must be computed  in\naccordance  with  the other provisions of  the\tAct  without\nreference  to  S. 80E and since in the instant\tcase  it  is\nincome\tfrom business the same as per s. 29 will have to  be\ncomputed  in  accordance  with Ss. 30  to  43A\twhich  would\ninclude\t s. 41 (2).  It is also clear that under the  second\nstep  the profits and gains attributable to the business  of\nthe specified industry (here generation and distribution  of\nelectricity) forms a component of the total income spoken of\nin  the\t first\tstep.  Reading\tthese  two  steps  together,\ntherefore, it is obvious that in computing the total  income\nof the concerned assessee the balancing charge arising as  a\nresult of the sale of old machinery and buildings and worked\nout  as\t per s. 41(2), irrespective of its  real  character,\nwill have to be taken into account and included as income of\nthe  business.\t In  other words, the  balancing  charge  as\nworked out under s. 41(2) will have to be taken into account\nbefore\tcomputing the deduction of 8% under the third  step.\nOn  proper construction of sub-s. (1) and having  regard  to\nthe  legislative mandate contained in the three\t steps\tthat\nare  required to be taken in the manner indicated above,  it\nis  clear  that the item of Rs. 7,55,807\/- will have  to  be\ntaken  into  account  before  computing\t the  8%   deduction\ncontemplated by the said provision. [667 G-H, 668 A]\nCommissioner  of  Income Tax, Bombay  City  v.\tBipinchandra\nMaganlal  and Co.  Ltd.,<\/a> (1961) 41 ITR 290 and\tCommissioner\nof  Income Tax, Madras V. Express Newspaper Ltd.,<\/a> (1964)  53\nI.T.R. 250; discussed.\n(c)  It is true that by legal fiction created under S. 41(2)\na  balancing  charge arising from sale of old  machinery  or\nbuilding is treated as deemed income and the same is brought\nto tax; in other words the legal fiction enables the Revenue\nto  take  back\twhat it had given  by  way  of\tdepreciation\nallowance in the preceding years since what was given in the\npreceding  years was in excess of that which ought  to\thave\nbeen  given.  This shows that the fiction has  been  created\nfor  the purpose of computation of the assessable income  of\nthe assessee under the head 'business Income'. [669A-B]\n(d)  Legal fictions are created only for a definite  purpose\nand they should be limited to the purpose for which they are\ncreated\t and should not be extended beyond their  legitimate\nfield.\t The  fiction  under s. 41(2) is  created'  for\t the\npurpose of computation of assessable income of the  assessee\nunder  the  head \"business income\" and under s.\t 80E(1),  in\norder\tto  compute  and  allow\t the   permissible   special\ndeduction,  computation of total income in  accordance\twith\nthe  other provisions of the Act is required to be done\t and\nafter  allowing\t such deduction the  net  assessable  income\nchargeable  to tax is to be determined, in other words,\t the\nlegal  fiction\tunder  S. 41(2) and  the  grant\t of  special\ndeduction  in  case of specified industries are\t so  closely\nconnected with each other that\n662\ntaking\tinto  account  the  balancing  charge  (i.e.  deemed\nprofits) before computing 8% deduction under S. 80E(1) would\namount to extending the legal fiction within the  limits  of\nthe  purpose  for which the said fiction had  been  created.\n[669 B-E]\n(e)  Whenever  the Legislature wanted to give  a  restricted\nmeaning\t it has used the expression \"derived from\",  as\t for\ninstance  in S. 80J.  Since the expression of wider  import,\nnamely,\t \"attributable\tto\" has been used,  the\t legislature\nintended  to  cover  receipts from sources  other  than\t the\nactual\t conduct   of  the  business   of   generation\t and\ndistribution of electricity. [669 G-H]\n2.   (a)  The High Court was right in  deducting  unabsorbed\ndepreciation  and  development\trebate\taggregating  to\t Rs.\n2,54,613  from Rs. 8,02,126 and holding the balance  of\t Rs.\n5,47,513\/- being exigible to the 8% deduction. [670 E]\n(b)  Having regard to the construction placed on sub-s.\t (1)\nof Section 80E as above it is obvious that, in computing the\ntotal  income of the concerned assessee items of  unabsorbed\ndepreciation and unabsorbed development rebate will have  to\nbe  deducted before arriving at the figure that will  become\nexigible  to the deduction of 8% contemplated by  s.  80E(1)\n[670D-E]\n(c)  In\t sub-s. (1) of S. 80E the expression \"total  income\"\nis followed by the words \"as computed in accordance with the\nother provisions of this Act\" in parenthesis and the mandate\nof  these  words  clearly negatives the\t argument  that\t the\nexpression  \"total  income\" has been used in  the  sense  of\ncommercial profits.  The expression \"total income\" has\tbeen\ndefined in s. 2(45) of the Act as meaning \"the total  amount\nof  income referred to in Section 5, computed in the  manner\nlaid  down  in this Act\" and when this definition  has\tbeen\nfurnished  by the Act itself the expression as appearing  in\nS. 80E(1) must be in the absence of anything in the  context\nsuggesting  to the contrary be construed in accordance\twith\nsuch  definition.   Since  the\twords  in  the\t parenthesis\noccurring  in  sub-s. (1) lay down the manner in  which\t the\ntotal  income  of the concerned assessee is to\tbe  computed\nthere would be no scope for excluding items like  unabsorbed\ndepreciation   and  unabsorbed\tdevelopment   rebate   while\ncomputing  the\ttotal  income on the basis  that  the  total\nincome\tspoken\tof by sub-s. (1) means\tcommercial  profits.\n[670 G-H, 671 A-B]\n3.   S. 72(1) has a direct impact upon the computation under\nthe head 'profits and gains' of business or profession.\t  In\nother  words, the correct figure of total income,  which  is\notherwise  as  taxable under other provisions  of  the\tAct,\ncannot\tbe arrived at without working out the net result  of\ncomputation  under the head 'profits and gains' of  business\nor  profession.\t The question whether special benefit  under\ns.  80E\t as  well as the normal or usual  benefit  of  carry\nforward of losses of previous years should both be available\nto  an\tassessee  without one impinging on  the\t other\tmust\ndepend\tupon  the  intention of\t the  Legislature  and\tsuch\nintention has to be gathered from the language employed.  In\nthis view of the matter it is extremely doubtful, whether in\nspite  of  the legislative mandate contained  in  the  three\nsteps  provided\t by sub-s. (1) of s.  80E,  carried  forward\nlosses\twould  not be deductible before working out  the  8%\ndeduction  contemplated\t by  s.\t 80E  and,  therefore,\t the\ncontention  that  by  parity of reasoning  or  on  a  priori\nreasoning  unabsorbed  development  rebate  and\t  unabsorbed\ndepreciation  should  be held to be  lion-deductible  before\nworking\t out  the  8% deduction under s.  80E(1)  cannot  be\naccepted.    On\t proper\t construction  of   the\t  provisions\ncontained  in  sub-s.  (1) of a. 80E  item  like  unabsorbed\ndepreciation and absorbed development rebate will have to be\ndeducted  in arriving at the figure which would be  exigible\nto deduction of 8% under 80E(1). [673C-F]\nIndian\tTransformers  Ltd. v. Commissioner  of\tIncome\tTax,\nErnakulam,  '1972)  86 I.T.R. 192.  Commissioner  of  Income\nTax, Madras v. L. M. Van Moppes Diamond Tools (India)  Ltd.,<\/a>\n(1977) 107 I.T.R. 386, Commissioner of income Tax, Madras v.\nLucas  T.  V.  S.  Ltd. (No.<\/a>  2);  (1977)  110\tI.T.R.\t346,\ndiscussed and criticised.\nCommissioner  of  Income  Tax, Mysore v.  Balasoor  Tea\t and\nRubber Co. Ltd.,<\/a> 93 I.T.R. 115 held inapplicable.\n663\n\n\n\nJUDGMENT:\n<\/pre>\n
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 785 and 783
\nof 1977.\n<\/p>\n
Appeals\t by Special Leave from the Judgment and Order  dated
\n11\/24-12-1975  of  the\tGujarat High  Court  in\t Income\t Tax
\nReference No. 115 of 1974.\n<\/p>\n
S.   T.\t Desai,\t P.  H.\t Parekh\t and  K.  Vasudev,  for\t the
\nAppellant.\n<\/p>\n
S.   N.\t Kacker,  Sol.\tGenl.  J. Ramamurthi and  (Miss)  A.
\nSubhashini for the Respondent.\n<\/p>\n
The Judgment of the Court was delivered by
\nTULZAPURKAR,  J.-These two appeals by special leave, one  by
\nthe Commissioner of Income Tax, Gujarat and the other by the
\nassessee,  against  the judgment of Gujarat  High  Court  in
\nIncome\tTax Reference No. 115 of 1974 raise two\t interesting
\nquestions  regarding  the mode in which and  the  fund\tfrom
\nwhich deduction of 8 % contemplated by section 80E(1) of the
\nIncome\tTax  Act, 1961 (as it stood at\tthe  relevant  time)
\nshould be computed.\n<\/p>\n
The short facts giving rise to the questions may be stated :
\nThe  assessee-Cambay Electricity Supply and  Industrial\t Co.
\nLtd.,carries on the Business of generation and\tdistribution
\nof  electricity\t at Cambay and, as such, is covered  by\t the
\nprovisions  of\tS.  80E(1)  and is  entitled  to  claim\t the
\ndeduction   contemplated   by  the  said   provision.\t The
\nassessment in question relates to the assessment year  1967-
\n68,  the  accounting year for which is\tthe  financial\tyear
\nending- March 31, 1967.\t During the accounting period  which
\nended  on  March 31, 1967, the assessee\t company  earned  an
\nincome\tof Rs. 46,319\/- from its said business.\t It  appears
\nthat  during  this  period  it had  sold  some\tof  its\t old
\nmachinery  and\tbuildings resulting  in\t balancing,  charges
\ncontemplated by s. 41(2) which the Income Tax Officer worked
\nout  at Rs. 7,55,807\/-.\t It further appears that  there\t was
\nunabsorbed  depreciation  of Rs. 1,42,955\/-  and  unabsorbed
\ndevelopment  rebate of Rs. 1,11,658\/- aggregating  to  Rs.
\n2,54,613\/-  of the earlier years which were required  to  be
\nset off against the profits of that period.  The Income\t Tax
\nOfficer\t while\tcompleting the\tassessment,  determined\t the
\ndeduction admissible to the assessee under s. 80E(1) of\t the
\nAct in the following manner :<\/p>\n
\nIncome from business a computed\t\t  Rs. 46,319\nin the assessment order\nAdd : Profit u\/s. 41 (2) in respect\nof sale of machinery and\nbuildings\t\t\t\tRs. 7.55,807\nTotal\t\t\t\t\tRs. 8. 02,126\nLess\t8 %deduction u\/s 80E (1) on\nRs. 8.02,126\t\t\t\tRs. 64.170\nLess\tUnabsorbed depreciation\t   Rs. 7 .37,956\nand development rebate :\nDepreciation :\t      Rs. 1 .42,955\n<\/pre>\n
Development Rebate: Rs. 1 . 11, 658   Rs. 2,54,613\n<\/p>\n
     –\t    –\n<\/p>\n
Net Income chargeable to tax:\t\tRs. 4,83,343
\n664<\/span>
\nIt  will  appear clear from the above computation  that\t the
\nIncome\tTax  Officer treated the item of Rs.  7,55,807\/-  as
\nprofits\t attributable  to  the business\t of  generation\t and
\ndistribution  of  electricity and allowed  deduction  at  8%
\nthereon\t under s. 80E(1).  It would also be clear  that\t the
\nIncome Tax Officer computed the relief \/deduction admissible
\nto  the assessee under s. 80E(1) at 8% on the amount of\t Rs.
\n8,02,126, that is to say, on the income before adjusting  or
\nsetting\t off  the unabsorbed  depreciation  and\t development
\nrebate\tcarried\t forward from the earlier  year.   When\t the
\naforesaid  assessment  order  came  to\this  knowledge,\t the
\nAdditional  Commissioner  of  Income  Tax  called  for\t and
\nexamined  the  record  and proceedings in  exercise  of\t his
\npowers\tunder  s.  263\tof  the\t Act  and  after  giving  an
\nopportunity to the assessee-company to show cause, took\t the
\nview  that the manner of computing the deduction  admissible
\nto  the assessee under s. 80E(1) was erroneous and  prejudi-
\ncial to the interests of the Revenue, in that the  deduction
\nof  8 % on the item of profit of Rs. 7,55,807 arising  under
\ns. 41 (2) had been wrongly allowed and that for the  purpose
\nof calculating the deduction of 8%  the items in respect  of
\nthe  unabsorbed depreciation and development  rebate  should
\nnot  have been excluded, and that if proper calculations  as
\nsuggested by him were made, the assessee was not entitled to
\nany  deduction.\t He, therefore, set aside the order  of\t the
\nIncome\tTax  Officer and directed that fresh  assessment  be
\nmade in accordance with law.  Feeling aggrieved by the order
\npassed\tby  the Additional Commissioner\t of  Income-Tax\t the
\nassessee preferred an appeal to the Income Tax Tribunal.  In
\nthe appeal as regards the item of Rs. 7,55,807 being profits
\narising\t from the sale of old machinery and buildings  under
\ns.  41 (2) of the Act, the Tribunal took the view  that\t the
\nsaid  item of profits could not be treated in  isolation  or
\ndivorced  from\tthe  profits and gains of  the\tbusiness  of
\ngeneration  and\t distribution  of electricity  done  by\t the
\nassessee-company  and  that the said item will\thave  to  be
\nregarded  as profits “attributable to”, though not  “derived
\nfrom”  the  business  of  generation  and  distribution\t  of
\nelectricity and, as such, the said item was exigible to\t the
\ndeduction of 8% under s. 80E(1) of the Act.  On the question
\nwhether\t the unabsorbed depreciation and development  rebate
\nwould be deductible in computing the profits under S. 80E of
\nthe, Act, the Tribunal following the decision of the  Mysore
\nHigh  Court in the case of C.I.T. Mysore v. Balanoor Teti  &
\nRubber\tCo.(1)\theld  that  these two  items  could  not  be
\ndeducted in- computing the deduction admissible under S. 80E
\nof  the Act.  The Tribunal accordingly allowed\tthe  appeal,
\nset  aside  the\t order of the  Additional  Commissioner\t and
\nrestored that of the income Tax Officer.\n<\/p>\n
At  the\t instance  of the Commissioner of  Income  Tax,\t the
\nTribunal referred the following two questions to the Gujarat
\nHigh Court for its  opinion :\n<\/p>\n
\t      ”\t (1)  Whether the Tribunal  was\t correct  in
\n\t      holding  that the Profits under section  41(2)
\n\t      of  the Income Tax Act 1961 arising from\tthe,
\n\t      sale  of machinery and building, amounting  to
\n\t      Rs.  7,55,807\/- should be taken  into  account
\n\t      while  computing the deduction of 8  per\tcent
\n\t      under section 80F(1) of the Act ?\n<\/p><\/blockquote>\n
(3)  (1964) 53 I.T.R.250.\n<\/p>\n
 665<\/span><\/p>\n
\t      (2)Whether   unabsorbed  depreciation   and
\n\t      development  rebate amounting to Rs.  2,54,613
\n\t      is  not deductible in computing profits  under
\n\t      section 80E(1) of the Act ?”\n<\/p>\n
The High Court by its judgment dated 11th and 24th December,
\n1975  disposed\tof  the-Reference  by  answering  the  first
\nquestion  in favour of the assessee and the second  question
\nin  favour. of the Revenue.  In other words the\t High  Court
\nupheld the view of the Tribunal on the first question  while
\non the second question it took the view that the  unabsorbed
\ndepreciation  and development rebate were deductible  before
\narriving  at  the  figure  that would  be  exigible  to\t the
\ndeduction  of  8%  under, s.  80E(1)  and  therefore.  after
\ndeducting  the\taggregate amount of Rs.\t 2,54,613  from\t Rs.
\n8,02,126  the  balance of Rs. 5,47,513 was exigible  to\t the
\ndeduction of 8% under the said provision.  Civil Appeal\t No.
\n783(NT) of 1977 has been preferred by the Revenue in so\t far
\nas  the\t answer to the first question has  gone\t against  it
\nwhile Civil Appeal No. 785(NT) of 1977 has been preferred by
\nthe  assessee  inasmuch\t as the\t second\t question  has\tbeen
\nanswered in favour of the Revenue.\n<\/p>\n
As regards the question raised in C.A. No. 783(NT) of  1977,
\nthe learned Solicitor General appearing for the Revenue\t has
\ncontended  that\t the item of Rs. 7,55,807\/_  represents\t the
\nbalancing  charges arising out of the sale of old  machinery
\nand buildings worked out under s. 41 (2) of the Act and the
\nsame   cannot\tbe  treated  as\t any.\tprofits\t  or   gains
\n“attributable  to”  the business of generation\tand  distri-
\nbution of electricity carried on by the assessee and as such
\nthe  said  item\t should not be\ttaken  into  account  while’
\ncomputing  the deduction of 8% under s. 80E(1) of  the\tAct.
\nHe emphasized that under that, section a deduction of 8%  is
\npermissible  from “such profits and gains” meaning  “profits
\nand  gains attributable ‘to the business of  generation\t and
\ndistribution of electricity” carried on by an assessee.\t  He
\ncontended  that a balancing charge contemplated under s.  41
\n(2) is really in the nature of a return of capital and not a
\nreturn\tof revenue and it is only by reason of\tthe  fiction
\ncreated by s. 41(2) that the same is deemed to be a  revenue
\nreceipt and has been made chargeable to income tax as income
\nof the business but it is well settled that a legal  fiction
\nis to be limited to the purpose for which it is created\t and
\nshould\tnot  be extended beyond its  legitimate\t field.\t  He
\nurged that the very fact that a deeming provision has’\tbeen
\nmade  under S. 41(2) shows that it is not a revenue  receipt
\nbut  a\tcapital\t receipt in the hands of  an  assessee.\t  In
\nsupport of his contention he placed reliance upon a decision
\nof this Court in Commissioner of Income-Tax, Bombay City  v.
\nRivinchandra Maganlal & Co. Ltd.-,<\/a>(1) where the real  nature
\nof  the\t balancing charge arising  under  the  corresponding
\nprovision  of the 1922 Act has been explained by this  Court
\nas  being  a  capital  return or  a  capital  receipt.\t He.
\ntherefore,  contended that item of Rs. 7,55.807\/-  which  is
\nnot  really any profit or gain earned in the conduct of\t the
\nbusiness  of  generation  and  distribution  of\t electricity
\ncannot be. taken into account while computing the  deduction
\nof 8% “under s. 80E(1) of the Act. in
\n(1) (1961) 41 I.T.R. 290.\n<\/p>\n
8315SCI\/78
\n666<\/span>
\nOn  the\t other hand, Mr. S. T. Desai,  appearing,  for\tthe,
\nassessee,  contended that both the Tribunal as well  as\t the
\nHigh  Court were right in coming to the conclusion that\t the
\nsaid  item of Rs. 7,55,807\/- was, on proper construction  of
\ns.  80E(1),  required  to  be  taken  into  account   before
\ncomputing  the permissible deduction of 8%  contemplated  by
\nthat  provision.   He pointed out that s. 80E in  the  first
\nplace  requires the computation of the total income  of\t the
\nassessee carrying on specified industry “in accordance\twith
\nthe  other  provisions of this Act”;  secondly,\t such  total
\nincome\tso  computed  should  include  “profits\t and   gains
\nattributable  to  the business of’  the\t specified  industry
\n(here  generation  and\tdistribution  of  electricity);\t and
\nthirdly,  it  is  from\tsuch  profits  attributable-to\t the
\nbusiness of the specified industry that the deduction of  8%
\nshould be made.\t He laid considerable emphasis on the aspect
\nthat  the Legislature has used the expression  “attributable
\nto  the business of’ instead of “derived  from\tthe-business
\nof”  and according to him the former being an expression  of
\n‘Wider\timport\twould  include an item\tlike  the  balancing
\ncharge which may not be directly derived from the conduct of
\nthe business of the specified industry (here generation\t and
\ndistribution  of  electricity).\t He also urged that  in\t its
\nsubsequent  decision in the case of Commissioner of  Income-
\nTax,  Madra  v. Express Newspapers Ltd.,<\/a>(1) this  Court\t has
\nexplained  that the balancing charge contemplated  under  s.
\n41(2).\tin  substance  partakes the  character\tof  “escaped
\nprofits”  of the business carried on by an assessee  and  as
\nsuch the item of Rs. 7,55,807\/- could be treated as  profits
\nattributable to the business of generation and\tdistribution
\nof electricity by the assessee.\t He also contended that even
\nif  the\t matter were to be looked at from the angle  of\t the
\nlegal fiction created by s. 41 (2) of the    Act,  the\tsaid
\nfiction\t could\tbe extended so as to take into\taccount\t the
\nsaid  item  of\tRs.  7,55,807\/-\t before\t computing  the\t  8%
\ndeduction for  such extension of the fiction would be within
\nand for the purpose for\t which the same has been created.
\nIn  our\t view the answer to the question  raised  before  us
\nreally\tturns upon the proper construction of the  provision
\ncontained in s. 80E(1) of the Act rather than on what is the
\nreal nature or character of a\t   balancing charge  arising
\nunder s. 41(2) of the Act and it would, therefore, be proper
\nto  set\t out  the provisions of s. 80E as it  stood  at\t the
\nrelevant time :\n<\/p>\n
\t      “80E.   Deduction\t in respect of\tprofits\t and
\n\t      gains from specified industries in the case of
\n\t      certain companies.-(1)
\n\t      In the case of a company to which this section
\n\t      applies,\twhere the total income (as  computed
\n\t      in  accordance with the\tother  provisions of
\n\t      this  Act)  includes  any\t profits  and  gains
\n\t      attributable to the business of generation  or
\n\t      distribution of electricity or any other\tform
\n\t      of  power or of construction,  manufacture  or
\n\t      production of any one or more of the  articles
\n\t      or  things specified in the list in the  Fifth
\n\t      Schedule, there ‘shall be allowed a  deduction
\n\t      from  such  profits and gains of\tan    amount
\n\t      equal to eight per cent, thereof, in computing
\n\t      the total income of the company.\n<\/p><\/blockquote>\n
(1)  (1964) 53 I.T.R. 250.\n<\/p>\n
 667<\/span><\/p>\n
\t      (2)   This section applies to-\n<\/p>\n
\t      (a)   an Indian company; or\n<\/p>\n
\t      (b)   any\t other\tcompany which has  made\t the
\n\t      prescribed  arrangements for  the\t declaration
\n\t      and payment of dividends (including  dividends
\n\t      on preference shares) within India.\n<\/p>\n
\t      but  does\t not  apply to\tany  Indian  company
\n\t      referred\tto  in clause (a), or to  any  other
\n\t      company  referred\t to in clause (b),  if\tsuch
\n\t      Indian or other company is a company  referred
\n\t      to  in  section 108 and its  total  income  as
\n\t      computed\tbefore\tapplying the  provisions  of
\n\t      sub-section  (1) does not\t exceed\t twenty-five
\n\t      thousand rupees.”\n<\/p>\n
It  was not disputed before us that the aforesaid  provision
\ncontained  in s. 80E(1) has been enacted for the purpose  of
\nproviding  for\tcertain,  special deduction to\tbe  made  in
\ncomputing  the,\t total\tincome\tin  the\t case  of  specified
\nindustries,  over  and above the  other\t general  deductions
\ncontemplated  by  the  Act.  It\t was  further  not  disputed
\nbefore. us that the assessee being an Indian company engaged
\nin   the   business  of\t generation  and   distribution\t  of
\nelectricity is a company to which the section applies and is
\nentitled  to claim the deduction of 8% contemplated by\tthat
\nprovision  and the only question is how and in\twhat  manner
\nthe  said deduction should be computed.\t On  reading  sub-s.
\n(1)  it\t will become clear that three  important  steps\t are
\nrequired   to  be  taken  before  the\t‘special   deduction
\npermissible  thereunder is allowed and the net total  income
\nexigible  to  tax is determined.  First, compute  the  total
\nincome\tof  the concerned assessee in  accordance  with\t the
\nother provisions of the Act i.e. in accordance with all\t the
\nprovisions  except s. 80E; secondly, ascertain what part  of
\nthe  total  income so computed represents  the\tprofits\t and
\ngains attributable to the business of the specified industry
\n(here  generation  and\tdistribution  of  electricity);\t and
\nthirdly,  if  there be profits and  gains  so  attributable,
\ndeduct\t8%  thereof  from such profits and  gains  and\tthen
\narrive at the net total income exigible to tax.\t As  regards
\nthe first step mentioned above, the important words in\tsub-
\ns.  (1)\t are those that appear in parenthesis,\tnamely,\t “as
\ncomputed  in  accordance with the other provisions  of\tthis
\nAct”  and  these words clearly contain a  mandate  that\t the
\ntotal  income of the concerned assessee must be computed  in
\naccordance  with  the other provisions of  the\tAct  without
\nreference  to  s. 80E and since in the instant\tcase  it  is
\nincome\tfrom business the same as per s. 29 will have to  be
\ncomputed  in  accordance  with ss. 30  to  43A\twhich  would
\ninclude\t S.  41(2). It is also clear that under\t the  second
\nstep  the profits and gains attributable to the business  of
\nthe specified industry (here generation and distribution  of
\nelectricity) forms a component of the total income spoken of
\nin  the\t first\tstep.  Reading\tthese  two  steps  together,
\ntherefore, it is obvious that in computing the total  income
\nof ‘the concerned assessee the balancing charge arising as a
\nresult of the sale of old machinery and buildings and worked
\nout  as per S. 41 (2), irrespective of its  real  character,
\nwill have to be taken into account and included as income of
\nthe  business.\t In  other words, the  balancing  charge  as
\nworked\tout  under  S. 41 (2) will have\t to  be\t taken\tinto
\naccount
\n668<\/span>
\nbefore\tcomputing the deduction of 8% under the third  step.
\nOn  proper construction of sub-s. (1) and having  regard  to
\nthe  legislative mandate contained-in the three\t steps\tthat
\nare  required to be taken in the manner indicated  above  we
\nare clearly of the view that the item of Rs. 7,55,807\/- will
\nhave  to  be  taken into account  before  computing  the  8%
\ndeduction contemplated by the said provision.
\nThe learned Solicitor General has argued to the contrary  by
\nlaying considerable emphasis on two aspects, first, the real
\nnature\tof  the\t balancing  charge  under  S.  41(2),  which
\naccording to him is a return of capital and not a return  of
\nrevenue and, secondly, under the second and third steps\t the
\n8%  deduction  is  to  be  made\t from  “profits\t and   gains
\nattributable  to  the business of”  the\t specified  industry
\n(here  generation  and\tdistribution  of  electricity).\t  As
\nregards the first aspect, on the question of real nature  or
\ntrue   character  of  a\t balancing  charge  two\t  apparently
\ndivergent  views  would appear to have been  taken  by\tthis
\nCourt  in  two\tdecisions.   In\t the  case  of\tBipinchandra
\nMaganlal  &  Co. Ltd. (supra) the question  that  arose\t for
\ndetermination  was  whether  a balancing  charge  which\t was
\nbrought\t to  tax  on the basis of  deemed  income  and\twas,
\ntherefore, included in the assessable income of an  assessee
\nunder the second proviso to cl. (vii) of sub-s. (2) of s. 10
\nof  the\t 1922 Act (equivalent to s. 41(2) of the  1961\tAct)
\ncould be taken into account while considering “smallness  of
\nprofit” for purposes of deciding whether the case  attracted
\nthe  applicability of S. 23A of the Act and this Court\ttook
\nthe  view that the balancing charge was not real income\t but
\nwas  made taxable income for the purpose of  computation  of
\nthe  assessable income by legal fiction but on that  account
\nit did not become commercial profit and was not liable to be
\ntaken  into  account  in assessing whether in  view  of\t the
\nsmallness   of\t profits   a  larger   dividend\t  would\t  be
\nunreasonable; in that context this Court observed that\twhat
\nin truth was a capital return was by a fiction regarded\t for
\nthe purposes of the Act as income and was made chargeable to
\nincome tax but because of that its character was not altered
\nand  it was not converted into assessee’s  business  profits
\nand that smallness of profit in S. 23A had to be adjudged in
\nthe  light of commercial principles and not in the light  of
\ntotal  receipts,  actual or fictional.\t In  the  subsequent
\ndecision  in the Express Newspapers case (supra) this  Court
\nhas  regarded  a  balancing charge  as\tbeing  the  “escaped
\nprofits”  of  the business for which the  assessee  is\tmade
\nliable\tto  tax.   At  page 254\t of  the  report  the  Court
\nexplained  the\tnature\tof the balancing charge\t by  way  of
\nillustration  thus  : “assume that the original\t cost  of  a
\nmachinery  or plant is Rs. 100 and depreciation\t allowed  is
\nRs. 25; the written down value is Rs. 75.  If the  machinery
\nis sold for Rs. 100. it is obvious that depreciation of\t Rs.
\n25  was\t wrongly allowed.  If it had not been  allowed\tthat
\namount would have swelled the profits to that extent.\tWhen
\nit  is\tfound  that it was wrongly allowed  that  profit  Is
\nbrought\t to  charge.   The  second  proviso,  therefore,  in
\nsubstance, brings to charge an escaped profit or gain of the
\nbusiness  carried  on by the  assessee”.   These  apparently
\ndivergent  views  have given rise to two  rival\t contentions
\nurged before us by counsel on other tide, It is\t unnecessary
\nin this case to go into the question whether the divergence,
\nis real or merely apparent, for. as we have said above.\t the
\nanswer to the question raised before us does not depend upon
\nthe real nature on
\n 669<\/span>
\ntrue  character\t of  the balancing charge  but\tupon  proper
\nconstruction   of   the\t sub-s.\t (1)  which   contains\t the
\nlegislative  mandate  with regard to  the  manner  in  which
\nthree  steps indicated therein are required to be taken\t for
\ncomputing  the\tdeduction of 8% contemplated  by  that\tpro-
\nvision.\t It is true that by a legal fiction created under s.
\n41  (2)\t a  balancing  charge  arising\tfrom,  sale  of\t old
\nmachinery  or building is treated as deemed income  and\t the
\nsame  is  brought to tax; in other words the  legal  fiction
\nenables the Revenue to take back what it had given by way of
\ndepreciation allowance in the preceding years since what was
\ngiven  in  the preceding years was in excess of\t that  which
\nought  to have been given.  This shows that the fiction\t has
\nbeen   created\tfor  the  purpose  of  computation  of\t the
\nassessable  income of the assessee under the head  “Business
\nIncome”.   It  was  rightly  pointed  out  by  the   learned
\nSolicitor General that legal fictions are created only for a
\ndefinite  purpose and they should be limited to the  purpose
\nfor which they are created and should not be extended beyond
\ntheir  legitimate  field.   But\t as  indicated\tearlier\t the
\nfiction\t under\ts.  41(2)  is created  for  the\t purpose  of
\ncomputation  of assessable income of the assessee under\t the
\nhead  ‘Business\t Income’  and under s. 80E(1)  in  order  to
\ncompute\t  and  allow  the  permissible\tspecial\t  deduction,
\ncomputation  of\t total income in accordance with  the  other
\nprovisions  of\tthe  Act is required to be  done  and  after
\nallowing such deduction the net assesaable income chargeable
\nto  tax\t is  to be determined; in  other  words,  the  legal
\nfiction under s. 41(2) and the grant of special deduction in
\ncase  of specified industries are so closely connected\twith
\neach  other  that taking into account the  balancing  charge
\n(i.e.  deemed  profits) before computing  the  8%  deduction
\nunder s. 80E(1) would amount to extending the legal  fiction
\nwithin the limits of the purpose for which the said  fiction
\n‘had been created.\n<\/p>\n
As   regards  the  aspect  emerging  from   the\t  expression
\n“attributable to” occurring in the phrase “profits and gains
\nattributable  to  the business of”  the\t specified  industry
\n(here  generation and distribution of electricity) on  which
\nthe  learned Solicitor General relied, it will be  pertinent
\nto  observe that the Legislature has deliberately  used\t the
\nexpression “attributable to” and not the expression “derived
\nfrom”.\t  It   cannot  be  disputed  that   the\t  expression
\n“attributable  to”  is certainly wider in import  than\tthe
\nexpression  “derived  from”.  Had  the\texpression  “derived
\nfrom” been used it could have with some force been contended
\nthat a balancing charge arising from the sale of old  machi-
\nnery  and buildings cannot be regarded as profits and  gains
\nderived\t from the conduct of the business of generation\t and
\ndistribution  of electricity.  In this connection it may  be
\npointed\t out that whenever the Legislature wanted to give  a
\nrestricted  meaning in the manner suggested by\tthe  learned
\nSolicitor  General  it\thas used  the  expression “derived
\nfrom”,\tas for instance in s. 80J.  In our view\t (since\t the
\nexpression  of wider import, namely, “attributable to?’\t has
\nbeen  used, the Legislature intended to cover receipts\tfrom
\nsources\t other\tthan the actual conduct of the\tbusiness  of
\ngeneration and distribution of electricity.
\nFor   the  aforesaid  reasons  and  particularly   on\ttrue
\nconstruction of the provision itself we are of the view that
\nboth the Tribunal and the
\n670<\/span>
\nHigh  Court were right in taking the view that the  item  of
\nRs.  7,55,807\/was  required to be taken into  account  while
\ncomputing the deduction of 8 % contemplated by s. 80E (1) of
\nthe  Act.   The Revenue’s appeal, therefore,  fails  and  is
\ndismissed.\n<\/p>\n
Turning\t to the appeal of the assessee, being  Civil  Appeal
\nNo.  785 (NT). of 1977, the question is\t whether  unabsorbed
\ndepreciation and development rebate are deductible or not in
\ncomputing.  profits under s. 80E(1) of the Act.\t Here  again
\nthe answer to the question must depend upon the construction
\nof  sub-s. (1) of s. 80E and the construction which we\thave
\nplaced\ton  the\t said  provision  while\t disposing  of\t the
\nRevenue’s  appeal  will furnish the correct  answer  to\t the
\nquestion   posed.    As\t  indicated   earlier\tsub-s.\t (1)
\ncontemplates  three  steps  being taken\t for  computing\t the
\nspecial deduction permissible thereunder and arriving at the
\nnet  income  exigible to tax and the first  two\t steps\tread
\ntogether contain the Legislative mandate as to how the total
\nincome\tof which the profits and gains attributable  to\t the
\nbusiness  of  the  specified industry forms  a\tpart-of\t the
\nconcerned  assessee is to be computed and according  to\t the
\nparenthetical clause, Which contains the key words, the same
\nis  to be computed in accordance with the provisions  a\t the
\nAct  except s. 80E and since in this case it is income\tfrom
\nbusiness  the  same will have to be computed  in  accordance
\nwith  ss.  30  to 43A which would include  s.  32(2)  (which
\nprovides  for carry forward of depreciation) and s. 3 3\t (2)
\n(which provides for carry forward of development rabate\t for
\neight years).  In other words, in computing the total income
\nof  the concerned assessee items of unabsorbed\tdepreciation
\nand  unabsorbed development rebate will have to be  deducted
\nbefore arriving at the figure that will become exigible\t to,
\nthe  deduction\tof 8% contemplated by s.  80E(1).   On\tthis
\nconstruction,  therefore  the High Court, in our  view,\t was
\nright  in deducting unabsorbed depreciation and\t development
\nrebate\taggregating  to Rs’ 2,54,613 from Rs.  8,02,126\t and
\nholding the balance of Rs. 5,47,513\/- being, exigible to the
\n8% deduction.\n<\/p>\n
The  assessee attempted to challenge the aforesaid  view  by
\nraising a couple of contentions.  In the first place  before
\nthe  High  Court  it  was  strenuously\turged,\tthough\t not
\nseriously  before  us, that the\t expression  “total  income”
\nappearing in S. 80E(1) has been used in its commercial sense
\nand  since  neither  the  unabsorbed  depreciation  nor\t the
\nunabsorbed  development\t rebate\t has  anything\tto  do\twith
\ncommercial  profits. attributable to the business, the\tsaid
\ntwo  items  would not be deductible before arriving  at\t the
\nfigure\tthat would be exigible to the 8% deduction.   It  is
\nnot  possible  to accept this contention for more  than\t one
\nreason.\t  First.  in  sub-s. (1) of s.\t80E  the  expression
\n“total\tincome”\t is followed by the words  “as\tcomputed  in
\naccordance  with  the  other  provisions  of  this  Act”  in
\nparenthesis and the mandate of these words clearly negatives
\nthe  argument  that the expression “total income”  has\tbeen
\nused  in  the sense of commercial  profits.   Secondly,\t the
\nexpression “total income”‘ has been defined in s. 2 (45)  of
\nthe  Act as meaning “the total amount of income referred  to
\nin section 5, computed in the manner laid down in this\tAct”
\nand  when  this\t definition has been furnished\tby  the\t Act
\nitself’\t the expression as appearing in S. 80E(1)  must,  in
\nthe absence of any-\n<\/p>\n
 671<\/span><\/p>\n
thing  in  the\tcontext\t suggesting  to\t the  contrary,\t  be
\nconstrued  in  accordance with such definition.\t  Since\t the
\nwords in the parenthesis occurring in sub-s. (1)Lay down the
\nmanner\tin which the total income of the concerned  assessee
\nis  to\tbe computed there would be no  scope  for  excluding
\nitems  like  unabsorbed depreciation  and  unabsorbed  deve-
\nlopment rebate while computing the total income on the basis
\nthat  the  total  income  spoken  of  by  sub-s.  (1)  means
\ncommercial profits.\n<\/p>\n
Counsel for the assessee next relied upon two decisions, one
\nof the Kerala High Court in the case of Indian\tTransformers
\nLtd.  v. Commissioner of Income Tax, Ernakulam,(1)  and\t the
\nother  of the Madras High Court in the case of\tCommissioner
\nof  Income-Tax, Madras-I v. L. M. Van Moppes  Diamond  Tools
\n(India) Ltd.,<\/a>(2) in both of which a view has been taken that
\nthe  deduction under s. 80E (1) has to be worked out  before
\nsetting\t off  the losses brought forward  from\tthe  earlier
\nyears and the further argument based on this view is that if
\ncarried\t forward losses are not to be deducted then  carried
\nforward\t  depreciation\tand  carried   forward\t development
\nrebate,-since all the three stand on the same footing-should
\nnot  be deductible while working out the deduction under  s.
\n80E  of the Act and in that behalf reliance was placed on  a
\nlater  decision of the Madras High Court in Commissioner  of
\nIncome Tax, Madras v. Lucas-T.-V. S. Ltd. (No.2).<\/a>(3), It may
\nbe stated that the first two decisions did not deal with the
\nquestion  of unabsorbed depreciation or\t unabsorbed  rebate,
\nbut merely dealt with the question of carried forward losses
\nin the context of s. 80E(1), while the third decision  dealt
\nwith  all  the three things, carried forward  loss,  carried
\nforward depreciation and carried forward development  rebate
\nin  the\t context  of  s. 80E(1) and it\twas  held  that\t the
\ndeduction under s. 80E(1) will have to be worked out  before
\nsetting off or adjusting each of the three things.  In\tthat
\ncase  the  Madras High Court held that\tas  regards  carried
\nforward\t loss the point was covered by its earlier  decision
\nin  L.\tM.  Van Moppes(2),  case  (supra),  that  unabsorbed
\ndevelopment  rebate stood on the same footing as  unabsorbed
\nlosses\tand as regards unabsorbed depreciation it  took\t the
\nview that since s. 72(2) itself postponed the adjustment  of
\nunabsorbed depreciation to a stage subsequent to the set off
\nof business losses under S. 72(2) and set off of the  losses
\nin  speculation\t business  under s.  73(3),  the  unabsorbed
\ndepreciation cannot be. adjusted or deducted because if\t for
\nthe purpose of S. 80E the previous years losses could not be
\nset   off  it  will  be\t a  fortiori  that  the\t  unabsorbed
\ndepreciation could not be adjusted inasmuch as from the very
\nsequence  the  adjustment of unabsorbed\t depreciation  could
\ncome  only after the adjustment of the unabsorbed losses  of
\nthe  previous years.  It will thus appear clear that in\t the
\nlast  mentioned case unabsorbed development rebate was\theld
\nto  be\tnon-deductible\tfor  the  same\treasons\t for   which
\nunabsorbed  loss  could not be deducted\t under\tthe  earlier
\ndecision and the unabsorbed depreciation was held to be non-
\ndeductible  on\tthe  basis  of\tde  priori  reasoning.\t The
\nquestion  that\tarises\tfor  consideration,  therefore,\t  is
\nwhether\t the  view taken in regard to  non-deductibility  of
\ncarried for-\n<\/p>\n
(1)  (1972) 86 I.T.R. 192.\n<\/p>\n
(2)  (1977) 107 I.T.R. 386.\n<\/p>\n
(3)  (1977) 110 I.T.R. 346.\n<\/p>\n
672<\/span><\/p>\n
ward losses while computing the total income for the purpose
\nof  granting the 8% deduction under s. 80E in the first\t two
\ndecisions  is correct.\tIt is true that in the instant\tcase
\nthe  question  of  deductibility  or  otherwise\t of  carried
\nforward losses of earlier years in the context of S. 80E has
\nnot  directly  arisen before us but since  counsel  for\t the
\nassessee has raised a contention about non-deductibility  of
\nunabsorbed depreciation and unabsorbed development rebate on
\nthe  basis of the view taken by Kerala High Court in  Indian
\nTransformer’s  case (supra) and Madras High Court in  L.  M.
\nVan  Moppes’ case (supra) in regard to\tnondeductibility  of
\nunabsorbed  losses of earlier years, we are  constrained  to
\nexpress\t our  opinion on the validity of the view  taken  in
\nthose  two cases.  In our opinion, the view taken in  Indian
\nTranssformers’\tcase  (supra)  and L. M.  Van  Moppes’\tcase
\n(supra)\t in  regard to the  nondeductibility  of  unabsorbed
\nlosses of the earlier years in the context of computing\t the
\ndeduction  under s. 80E of the Act is open to grave  doubts.
\nIn  the\t first\tplace  such  a\tview  runs  counter  to\t the
\nLegislative mandate contained in the three steps required to
\nbe taken under sub-s.  ‘(1) of s. 80E as discussed  earlier.
\nSecondly, the main reasoning given by the Kerala High  Court
\nfor  taking  such a view in the\t Indian\t Transformers’\tcase
\n(supra) the  Madras High Court in L. M. Van  Moppes’  case
\n(supra)\t has  merely followed the Kerala  decision-does\t not
\nbear  scrutiny.\t After pointing out that Chapter IV  of\t the
\n1961 Act deals with the computation of income falling  under
\nthe  various  heads  mentioned in s. 14\t of  the  Act,\tthat
\nChapter VI in which s. 72 occurs deals with the\t aggregation
\nof  income and set off or carry forward of loss and that  s.
\n80E  deals  with  deduction to be made\tin  computing  total
\nincome, the Kerala High Court has proceeded to observe thus
\n\t      “Computation  as\tsuch  is used  only  in\t the
\n\t      heading  in  Chapter  IV.\t  Section  66\tAlso
\n\t      provides that in computing the total income of
\n\t      an assessee there shall be included all income
\n\t      on  which\t no  income-tax\t is  payable   under
\n\t      Chapter VII, etc.\t What is provided in section
\n\t      66   is\talso   relating\t  to\tcomputation.\n<\/p>\n
\t      Similarly, the same words are used in  section\n<\/p>\n
\t      67.   But, there are no such words in  section\n<\/p>\n
\t      72.   Section 72 speaks of the net  result  of
\n\t      the  computation under the bead  ‘Profits\t and
\n\t      gains of business or profession’.\t We consider
\n\t      that the set-off permitted under section 72 is
\n\t      from  an amount arrived at after applying\t the
\n\t      provisions  of  Chapter IV  along\t with  other
\n\t      sections\tof the Act such as sections  66\t and
\n\t      67,  etc., dealing with computation of  income
\n\t      and  after  permitting  the  deductions  under
\n\t      section 80E.”\n<\/p>\n
The  Court  has\t further observed that in  its\topinion\t the
\ndeduction  under  S.80 E is a ‘special benefit\tgiven  to  a
\ncompany which satisfies the conditions under section 80E and
\nthe  deduction permissible thereunder is only  from  profits
\nand gains attributable to the specified activities and\tthis
\nbenefit\t should\t not be diminished by  ‘the  other  benefits
\nconferred by the Act, such as the right to have the previous
\nlosses\tset off, that the two serve different  purposes\t and
\nthe  benefit  of  both must be\tavailable  to  an  assessee,
\nwithout the one impinging on the other.\t It will thus appear
\nthat the Kerala High Court has regarded section 72 appear-,
\n 673<\/span>
\ning  in\t Chapter  VI as a  provision  unconnected  with\t the
\ncomputation  of\t the  total  income of\tan  assessee  and  a
\nprovision which comes into operation ‘at a stage  subsequent
\nto the computation of the total income arising from business
\ndone  in accordance with ss. 30 to 43A occurring in  Chapter
\nIV  of the Act and, therefore, the unabsorbed losses  cannot
\nbe  set off before calculating the deduction under  S.\t80E.
\nIt  is\tnot possible to accept the view that s.\t 72  has  no
\nbearing\t on  or is unconnected with the computation  of\t the
\ntotal  income  of an assessee under the\t head  ‘Profits\t and
\ngains  of  business  or\t profession’.\tActually  s.   72(1)
\nprovides that where the net result of computation under\t the
\nhead ‘Profits and gains of business or profession’ is a loss
\nand such loss cannot be or is not Wholly set off against the
\nincome\tunder  any head of income in,  accordance  with\t the
\nprovisions of S. 71, so much of the loss as has not been  so
\nset-off,  subject  to the other provisions of  the  Chapter,
\nshall  be carried forward to the following  assessment\tyear
\nand shall be set off against the profits and gains, if\tany,
\nof  any\t business or profession for  that  assessment  year.
\nTherefore, s. 72(1) has a direct impact upon the computation
\nunder\tthe   head  ‘Profits  and  gains  of   business\t  or
\nprofession’.   In other words, the correct figure  of  total
\nincome. which is otherwise taxable under other provisions of
\nthe  Act, cannot be arrived at without working out  the\t net
\nresult of computation under the head ‘Profits and gains\t of
\nbusiness  or  profession’.   Further  the  question  whether
\nspecial benefit under S. 80E as well as the normal or  usual
\nbenefit of carry forward of losses of previous years  should
\nboth  be available to an assessee, without one impinging  on
\nthe other must depend upon the intention of the\t Legislature
\nand  such  intention has to be gathered\t from  the  language
\nemployed.   In\tthis  view of the  matter  it  is  extremely
\ndoubtful  whether  in  spite  of  the  Legislative   mandate
\ncontained  in the three steps provided for by sub-s. (1)  of
\nS.  80E, the carried forward losses would not be  deductible
\nbefore\tworking out the 8% deduction contemplated by s.\t 80E
\nand,  therefore, the contention that by parity of  reasoning
\nor  on a priori reasoning unabsorbed development rebate\t and
\nunabsorbed depreciation should be held to be  non-deductible
\nbefore\tworking out the 8% deduction under S. 80E(1)  cannot
\nbe accepted.  As observed earlier on proper construction  of
\nthe  provision contained in sub-s. (1) of s. 80E items\tlike
\nunabsorbed  depreciation and unabsorbed\t development  rebate
\nwill  have  to be deducted in arriving at the  figure  which
\nwould be exigible to deduction of 8% under s. 80E(1).
\nReference  was also made by counsel for the assessee to\t the
\ndecision   of  the  Mysore  High  Court\t in  the   case\t  of
\nCommissioner  of  Income  Tax, Mysore v.  Balanoor  Tea\t and
\nRubber\tCo.  Ltd.,<\/a> (supra).  In our view that  decision\t has
\nnothing\t whatever to do with the question posed\t before\t us.
\nIn  that case the question was whether the loss incurred  by
\nan  assessee  in  non-priority business\t could\tbe  set\t off
\nagainst\t the profits and gains made by the assessee  in\t the
\npriority business while computing the 8 % deduction under s.
\n80E  and the High Court upheld the Tribunal’s view that\t for
\nthe  purpose of allowing a deduction under S. 80E the  words
\n“such  profits” occurring in that section mean “the  profits
\nand  gains attributable to an activity as specified  in\t the
\n5th  Schedule of the Act” and, therefore, the deduction\t was
\nrequired to be worked out with-\n<\/p>\n
674<\/span><\/p>\n
out reference to the loss incurred in non-priority business.
\nThe  decision was rendered on the language of s. 80E(1)\t but
\nit  cannot  avail the assessee on the point  raised  in\t the
\nappeal.\n<\/p>\n
In the result the assessee’s appeal also fails and the\tsame
\nis dismissed.\n<\/p>\n
In the circumstances, there will be no order as to costs  in
\nboth the appeals.\n<\/p>\n
S. R.\t\t\t\tAppeals dismissed.\n675<\/span>\n\n\n\n<\/pre>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Cambay Electric Supply … vs The Commissioner Of Income Tax, … on 11 April, 1978 Equivalent citations: 1978 AIR 1099, 1978 SCR (3) 660 Author: V Tulzapurkar Bench: Tulzapurkar, V.D. PETITIONER: CAMBAY ELECTRIC SUPPLY INDUSTRIAL CO. LTD. Vs. RESPONDENT: THE COMMISSIONER OF INCOME TAX, GUJARAT-IIAHMEDABAD (AND VIC DATE OF JUDGMENT11\/04\/1978 BENCH: […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-57125","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nCambay Electric Supply ... vs The Commissioner Of Income Tax, ... on 11 April, 1978 - Free Judgements of Supreme Court & High Court | Legal India<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalindia.com\/judgments\/cambay-electric-supply-vs-the-commissioner-of-income-tax-on-11-april-1978\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Cambay Electric Supply ... vs The Commissioner Of Income Tax, ... on 11 April, 1978 - 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