1. By this appeal the assessee, a company, challenges the order of the Commissioner (Appeals) dated 1-9-1984. It is opposed by the department.
2. Ground Nos. 1 to 7 relate to the first objection of the assessee that the order of the Commissioner (Appeals) regarding carry forward of the deficiency under Section 80J(3) of the Income-tax Act, 1961 ('the Act') is erroneous. In the assessment year 1976-77 the assessee's claim under Section 80J was dealt with by the ITO in the following manner : The assessee claimed relief under Section 80J of the Income-tax Act, 1961 for Unit No. 2 which has commenced production in this year. A separate balance sheet has also been filed in respect of Unit No. 2 which reveals the figure of sale at Rs. 18,429 and closing stock of initial product at Rs. 22,82,633. The assessee has also given separate balance sheet and separate set of accounts for this unit in support of the claim. But as the claim for Rs. 2,58,729 in the return and as per revised return dated 1-12-1975 at Rs. 3,22,893 is not in conformity with Rule 19A of the Income-tax Rules, 1962, the claim is restricted to Rs. 1,35,000 as per computation in terms of Rule 19A vide Schedule 'A' Rs. 1,35,000.
On an examination of the scheme of Chapter VIA of the Act in general and that of Section 80J in particular, the ommissioner (Appeals) before whom the appeal was preferred considered that the appellant's gross total income [as defined in Section 80B(5)] being nil or a negative figure, the ITO erred in law in all the four years before me. He thought it fit to rectify this error in law and to withdraw the benefit wrongly allowed by the ITO. He gave opportunity to the authorised representative for the assessee to make submissions on the matter.
After hearing the submissions of the authorised representative for the assessee-company, the Commissioner (Appeals) considered the matter by a lengthy and elaborate order and came to the following conclusion : In the case before me, the gross total income as defined under Section 80B(5) is nil or a negative figure. Consequently, the appellant would not have been eligible for any deduction under Section 80J(1), even if the new unit had produced profits large enough to fully absorb. The deduction under Section 80J(1), the deduction could not have exceed the gross total income, if the gross total income was positive but less than the profit of the unit. The new unit has produced a loss. This factor alone cannot place the appellant in any better position. It must, therefore, follow logically that the question of either computing the deficiency or carrying it forward does not arise. I, therefore, hold that the ITO - erred in allowing straight deduction in the assessment years 1976-77, 1978-79 and 1979-80; and - erred in computing the deficiency for the assessment year 1977-78 and in allowing it to be carried forward to the subsequent assessment years.
I accordingly annul the relevant portion of each of the four impugned assessment orders.
Being aggrieved the assessee-company preferred appeals against the said order. It may be mentioned that we are not concerned with the appeals relating to the assessment years 1977-78 to 1979-80.
3. As can be seen from the above the Commissioner (Appeals) assumed that the ITO had allowed straight deduction under Section 80J(1) for the assessment year under consideration, i.e., 1976-77. But from the order of the ITO it is clear that the ITO did not allow deduction under Section 80J(1) because the new Unit No. 2 suffered loss and also because the gross total income of the assessee was a negative figure.
The Commissioner (Appeals), however, made a specific finding that carrying forward the deficiency also did not arise. The assessee-company challenges before us this finding of the Commissioner (Appeals) that in the circumstances of the case, it was not permissible to carry forward the deficiency under Section 80J(3). As such, we are confining our discussions to the scope of Sub-section (3) of Section 80J. Our observations do not relate to the construction of Sub-section (1) of Section 80J. As such it is not necessary on our part to record our opinion whether deduction under Section 80J(1) is available if the assessee suffers loss from the new industrial undertaking or not. At paragraph 17 of the order, the Commissioner (Appeals) made the following observations : 17. Sub-section (3) introduces the idea of deficiency. Since under Sub-section (1), the deduction is allowed from the profits and gains of the new unit, the deficiency has been defined in terms of (a) the deduction and (b) the new units' profit/loss. Simply stated, the deficiency is : (a) the difference between the deduction referred to in Section 80J(1) and the profit of the new unit, in cases where the latter is less than the former ; or (b) the amount of the deduction itself, in cases where the new unit has incurred a loss.
And the deficiency will be carried forward and set off against the new unit's profits of the subsequent years. (The Sub-section also lays down certain riders in this regard, but it is unnecessary for the purpose on hand to notice them).
4. It seems to us that the Commissioner (Appeals) was not correct in summing up the provision of Section 80J(3) inasmuch as he stated the deficiency to be the amount of deduction in cases where the new unit has incurred loss. As we were of the opinion that Sub-section (3) does not contemplate carry forward of the deficiency in case the industrial undertaking suffers loss, we invited the authorised representatives for the parties to make submissions on this point whether carry forward of the deficiency is permissible under Sub-section (3) of Section 80J of the Act in case of loss also. It was argued by the departmental representative that the provision of Section 80A (2) of the Act debars the application of Section 80J(3). We are unable to accept this contention because under the provision thereof 'the aggregate amount of the deductions under this Chapter shall not, in any case, exceed the gross total income of the assessee'. Thus, it is clear that Section 80A(2) does not permit actual deduction exceeding the gross total income earned by the assessee. But it does not, in our opinion, prevant carry forward of any deduction even if it is expressly permissible under any other provision of the Act. In our opinion, Section 80J(3) is such a provision. A harmonious construction of Sections 80A(2) and 80J(3) will lead to the conclusion that Section 80A(2) bars actual deduction of relief exceeding the gross total income of the assessee but does not prevent carry forward of deficiency under Section 80J(3) if his requisite conditions for such carry forward are fulfilled.
5. The authorised representative for the assessee contended that the words used in Section 80J(3) do not show that carry forward of deficiency is not permissible in case of loss in the industrial undertaking. He further argued that the intention of the Legislature was to allow carry forward of deficiency also in case of loss as well as in the case of no profit or profit less than the 'relevant amount of capital employed during the previous year'. These contentions were opposed by the departmental representative.
6. We have given our anxious and careful consideration to the respective contentions put forth by the authorised representatives for the parties. We agree with the authorised representative for the assessee that when a provision is capable of two interpretations, the interpretation favourable to the assessee should be accepted. We also agree with him that when two interpretations of a provision of law are possible, the interpretation translating the intention of the Legislature should be preferred to that which negatives the intention of the Legislature. Keeping this as well as other principles of interpretation of statutes in view we propose to discuss the effect of Section 80J(3).
(3) Where the amount of the profits and gains derived from the industrial undertaking or ship or business of the hotel, as the case may be, included in the total income (as computed without applying the provisions of Section 64 and before making any deduction under Chapter VI-A or Section 280-O) in respect of the previous year relevant to an assessment year commencing on or after the 1st day of April, 1967, (not being an assessment year prior to the initial assessment year or subsequent to the fourth assessment year as reckoned from the end of the initial assessment year) falls short of the relevant amount of capital employed during the previous year, the amount of such shortfall, or, where there are no such profits and gains, an amount equal to the relevant amount of capital employed during the previous year (such amount, in either case, being hereafter, in this Section, referred to as deficiency) shall be carried forward and set off against the profits and gains referred to in Sub-section (1) as computed after allowing the deductions, if any, admissible under Section 80HH and the said Sub-section (1) in respect of the previous year relevant to the next following assessment year and, if there are no such profits and gains for that assessment year, or where the deficiency exceeds such profits and gains, the whole or balance of the deficiency, as the case may be, shall be set off against such profits and gains for the next following assessment year and if and so far as such deficiency cannot be wholly so set off, it shall be set off against such profits and gains assessable for the next following assessment year and so on : 8. Thus, it is clear that Section 80J(3) permits carry forward of the deficiency in the following cases : (a) where the profits and gains derived from the industrial undertaking (we are not concerned with the income from ship or business of the hotel) is a positive figure but falls short of 'the relevant amount of capital employed during the previous year' ; and 9. It does not mention anywhere about the contingency when loss occurs in the industrial undertaking. But admittedly three contingencies are possible, namely (a) where profits and gains fall short of the 'relevant amount of capital employed during the previous year', (b) where there are no such profits and gains, and (c) where loss occurs in the industrial undertaking. The Section makes provision for two contingencis only and not for the third contingency. As such the natural conclusion that has to be made is that the third contingency has been excluded by the Legislature. Moreover, if all these three contingencies including the loss occurring in the industrial undertaking were meant to be covered by this Sub-section the drafting would have been different and much simpler. No material could be produced before us to show that the intention of the Legislature was to allow carry forward of loss even in case of loss occurring in the industrial undertaking. We have examined the provision in the Finance (No.2) Bill, 1967 by which Section 80J was sought to be introduced by deleting Section 84 of the Act. Section 80J was enacted differently from the provision in the Bill. The Finance (No. 2) Bill, 1967 as well as the Notes on clauses also do not show that it was the intention of the Legislature to allow carry forward of the deficiency when the industrial undertaking suffered loss. So on a careful consideration of the provisions of the Act and the submissions of the authorised representatives for the parties we hold that carry forward of the deficiency is permissible under Section 80J(3) only (a) where profits and gains are derived from industrial undertaking and (b) where there are no such profits and gains. But carry forward of the deficiency is not permissible when there is loss in the industrial undertaking.
10. Admittedly, in the case under appeal, the assessee-company suffered loss in the industrial undertaking (as well as in its total 'business'). As such, in our opinion, it was not entitled to carry forward of the deficiency under Section 80J(3). We, therefore, decline to interfere with the order of the Commissioner (Appeals) though for defferent reasons.
11 to 13. [These paras are not reproduced here as they involve minor issues.]