Suhas Chandra Sen, J.
1. The Tribunal has referred the following two questions of law to this court under Section 256(1) of the Income-tax Act, 1961 :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee was entitled to deduction under Section 80HH of the Income-tax Act, 1961, for its new freight container unit without setting off past losses of the said unit
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in not upholding the order of the Commissioner of Income-tax (Appeals) to the effect that relief under Section 80HH of the Income-tax Act, 1961, should be determined with reference to the working of the new unit only without reference to the profits of other units not eligible for deduction under this section ?'
2. The assessment year involved is 1983-84 for which the relevant accounting year is the financial year 1982-83.
3. The facts as narrated by the Tribunal in the statement of the case are as under :
The brief facts are that the assessee in this case is a Government of India enterprise. It filed a return declaring a total income of Rs. 74,99,630 and the assessment was completed on a total income of Rs. 1,10,61,470. While completing the assessment, the Assessing Officer worked out the allowable deduction under Section 80HH at a sum of Rs. 2,86,562 as against the assessee's claim of Rs. 11,15,008. The reduction in the allowable deduction under Section 80HH arose due to variation in the allocation of common expenses for deduction while working out the profit of the unit. The assessee filed an appeal against the said computation. In the meanwhile, the Assessing Officer by his order dated March 10, 1988, rectified the order and held that the assessee was not entitled to any deduction under Section 80HH as there was no surplus in the said freight container unit, Cochin, after adjusting the past losses and, therefore, no relief under Section 80HH of the Income-tax Act can be given to the assessee. The assessee thereupon filed another appeal against this order of rectification under Section 154 to the Commissioner of Income-tax (Appeals). The learned Commissioner of Income-tax (Appeals) considered both the issues in this order. It was claimed before the learned Commissioner of Income-tax (Appeals) that the Assessing Officer was not justified in withdrawing relief of Rs. 2,86,562 already allowed by resorting to Section 154 of the Act. According to the assessee, the Assessing Officer did not correctly appreciate the decisions of the Supreme Court in the case of CIT v. Patiala Flour Mills Co. P. Ltd. : [1978]115ITR640(SC) and in the case of Rajapalayam Mills Ltd. v. CIT : [1978]115ITR777(SC) as the said decisions were rendered in the context of the provisions of Section 80-I of the Act. Since there is a fundamental difference in the provisions, it was wrong on the part of the Assessing Officer to have recomputed the profit from the new container unit in Cochin by notionally carrying forward the losses of earlier years and adjusting them against the current year's profit. The losses of the new unit have already been absorbed by the profits attributable to other business and the assessee has already been assessed on a positive income after adjusting the past losses. In such a case, there is no question of adjusting all over again the past losses already adjusted against the profit of the current year while computing the deduction under Section 80HH. The learned Commissioner of Income-tax (Appeals), however, did not accept the contentions. Relying on the decision in the case of CIT v. Kerala Solvent Extraction Ltd. [1987] 165 ITR 174 and in the case of CIT v. Canara Workshops P. Ltd. : [1986]161ITR320(SC) , the learned Commissioner of Income-tax (Appeals) held that such industry must be considered on its working in adjudging its entitlement to the deduction on the relief and, therefore, the assessee cannot get the benefit of deduction under Section 80HH of the Act as there was no profit after adjustment of the losses for those earlier years.
4. The assessee preferred an appeal to the Tribunal. The Tribunal, after a review of the facts and also the relevant provisions of law, came to the conclusion that the assessee's contention was correct and should be allowed.
5. It may be mentioned at the very outset that it is very difficult to appreciate the stand taken by the Revenue. There is no dispute that an industrial undertaking has been set up in a backward area by the assessee which fulfils the requirement of Section 80HH. This industrial undertaking had incurred losses in the earlier years, which had been set off entirely against the profits made by other units of the company in those years, In the relevant year of account, the industrial undertaking has made profits. The assessee is claiming relief given under Section 80HH in respect of this profit made in the current year. Under Section 80HH, the assessee is entitled to get a deduction of an amount equal to 20 per cent. of the profits made. It should be noted that the entire amount of the profit made by the industrial undertaking has been included in the gross total income without any set off. In computing the total income of the assessee, 20 per cent. of such profit made by the industrial undertaking and which was included in the gross total income will have to be deducted. This appears to be a simple proposition.
6. Mr. Mitra, appearing for the Revenue, however, has contended that the past losses suffered by this industrial undertaking which had already been set off in the earlier years of the assessments against the profit made by the company should once again be set off against the profit made by Section 80HH before granting any relief under the section. There is nothing in the wording of Section 80HH which supports this extreme contention. Our attention was invited to certain decisions under Sections 80-I and 80E to support the extreme contention made on behalf of the Revenue.
7. The relevant statutory provisions are as under :
'80A. Deductions to be made in computing total income.--(1) In computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of this Chapter, the deductions specified in Sections 80C to 80W.'
'80B. (5) 'gross total income' means the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter or under Section 280-O.'
8. Section 80E, as it stood in the assessment years 1966-67 to 1967-68.
'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.'
'80HH. Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas,--(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent. thereof.
(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely : --
(i) it has begun or begins to manufacture or produce articles after the 31st day of December, 1970, in any backward area ;
(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence in any backward area :
Provided that this condition shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in Section 33B, in the circumstances and within the period specified in that section ;
(iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose in any backward area ;
(iv) it employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power. . . .
(3) This section applies to the business of any hotel, where all the following conditions are fulfilled, namely :--
(i) the business of the hotel has started or starts functioning after the 31st day of December, 1970, in any backward area ;
(ii) the business of the hotel is not formed by the splitting up, or the reconstruction, of a business already in existence ;
(iii) the hotel is for the time being approved for the purposes of this Sub-section by the Central Government.
(4) The deduction specified in Sub-section (1) shall be allowed in computing the total income in respect of each of the ten assessment years beginning with the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or the business of the hotel starts functioning. . . .
(5) Where the assessee is a person other than a company or a co-operative society, the deduction under Sub-section (1) shall not be admissible unless the accounts of the industrial undertaking or the business of the hotel for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant as defined in the Explanation below Sub-section (2) of Section 288 and the assessee furnishes, along with his return of income, the report of such audit in the prescribed form duly signed and verified by such accountant.
(6) Where any goods held for the purposes of the business of the industrial undertaking or the hotel are transferred to any other business carried on by the assessee, or where any goods held for the purposes of any other business carried on by the assessee are transferred to the business of the industrial undertaking or the hotel and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the business of the industrial undertaking or the hotel does not correspond to the market value of such goods as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of the industrial undertaking or the business of the hotel shall be computed as if the transfer, in either case, had been made at the market value of such goods as on that date :
Provided that where, in the opinion of the Income-tax Officer, the computation of the profits and gains of the industrial undertaking or the business of the hotel in the manner hereinbefore specified presents exceptional difficulties, the Income-tax Officer may compute such profits and gains on such reasonable basis as he may deem fit.
Explanation.--In this Sub-section, 'market value' in relation to any goods means the price that such goods would ordinarily fetch on sale in the open market. ...
(9) In a case where the assessee is entitled also to the deduction under Section 80-I or Section 80J in relation to the profits and gains of an industrial undertaking or the business of a hotel to which this section applies, effect shall first be given to the provisions of this section.
(9A) Where a deduction in relation to the profits and gains of a small-scale industrial undertaking to which Section 80HHA applies is claimed and allowed under that section for any assessment year, deduction in relation to such profits and gains shall not be allowed under this section for the same or any other assessment year.'
'80-I. Deduction in respect of profits and gains from industrial undertakings after a certain date, etc.--(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, (or the business of repairs to ocean-going vessels or other powered craft), to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent. thereof....
(2) This section applies to any industrial undertaking which fulfils all the following conditions, . . .
(3) This section applies to any ship, where all the following conditions are fulfilled, namely :--....
(4) This section applies to the business of any hotel, where all the following conditions are fulfilled, namely :--....
(5) The deduction specified in Sub-section (1) shall be allowed in computing the total income in respect of the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things, or to operate its cold storage plant or plants or the ship is first brought into use or the business of the hotel starts functioning (or the company commences work by way of repairs to ocean-going vessels or other powered craft) (such assessment year being hereafter in this section referred to as the initial assessment year) and each of the seven assessment years immediately succeeding the initial assessment year. ...
(6) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an industrial undertaking or a ship or the business of a hotel (or the business of repairs to ocean-going vessels or other powered craft) to which the provisions of Sub-section (1) apply shall, for the purposes of determining the quantum of deduction under Sub-section (1) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such industrial undertaking or ship or the business of the hotel (or the business of repairs to ocean-going vessels or other powered craft) were the only source of income of the assessee during the previous years relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.'
9. Section 80-I was introduced with effect from April 1, 1981, and replaced Section 80J which ceased to apply from April 1, 1981. The material portion of Section 80J was as under :
'80J. Deduction in respect of profits and gains from newly established industrial undertakings or ships or hotel business in certain cases.--(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains (reduced by the deduction, if any, admissible to the assessee under Section 80HH or Section 80HHA) of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent. per annum on the capital employed in the industrial undertaking or ship or business of the hotel, as the case may be, computed in the manner specified in subsection (1A) in respect of the previous year relevant to the assessment year (the amount calculated as aforesaid being hereafter, in this section, referred to as the relevant amount of capital employed during the previous year).'
10. A reading of all these sections makes it clear that the relief under Section 80-I had to be calculated as if the profits and gains of the industrial undertaking 'were the only source of income of the assessee during the previous years'. This legal fiction is not to be found in Section 80HH. Therefore, for calculating relief under Section 80HH, it has to be seen whether the gross total income of the assessee includes any profits and gains derived from the industrial undertaking in question. If that be the case, then the assessee has to be given relief calculated on the basis 'such profits and gains of an amount equal to twenty per cent. thereof'.
11. The contention made on behalf of the Revenue that past losses, which had already been set off against the income of the earlier assessment years, must also be set off once again against the profits of the current accounting year is without any substance. There is nothing in the section to justify this contention.
12. The Supreme Court in the case of CIT v. Canara Workshops P. Ltd. : [1986]161ITR320(SC) held that the profits and gains earned by a priority industry could not be reduced by the loss suffered by another industry owned by the assessee. That was a case under Section 80E. The assessee manufactured automobile spares and also alloy steel. The assessee sustained a loss in the alloy steel industry in the assessment years 1966-67 and 1967-68. For the assessment years 1966-67 and 1967-68, the assessee made profit from the automobile spares industry. The assessee claimed relief on the entire amount of the profit made from the automobile spares industry under Section 80E for both the assessment years.
13. It was contended on behalf of the Revenue that in granting the relief, the losses suffered in the alloy steel industry must be set off against the profit made in the automobile spares industry. The Supreme Court held that the loss suffered in the alloy steel manufacture could not be set off against the profits of the automobile spares industry. The method of calculation of the relief to be granted was pointed out by the Supreme Court in the following manner (at page 324) :
'It is clear that the benefit was directed to the setting up and also the efficient working of the priority industries. How is the benefit to be worked out First, it must be a company to which Section 80E applies, that is to say, a company which satisfies the requirements of Sub-section (2) of Section 80E. Second, the total income as computed in accordance with the Income-tax Act, 1961, without taking into regard the provisions of Section 80E, should include profits and gains attributable to the business or the industry mentioned in the section. Third, from the profits and gains attributable to such business or industry, a deduction has to be allowed of an amount equal to eight per cent. of such profits and gains and effect must be given to this deduction when computing the total income of the company.'
14. In the instant case, if the principle laid down by the Supreme Court for calculation of the relief is followed, it will be seen that the entire profit from the priority industry was to be included in the gross total income. Therefore, the relief had to be calculated on the basis of the entire amount of profit of the priority industry, which was included in the gross total income without any set off.
15. Moreover, the most important feature of this case is that past years' losses have already been set off against the profit made in the earlier years in the earlier assessment proceedings.
16. In the case of CIT v. Patiala Flour Mills Co. P. Ltd. : [1978]115ITR640(SC) , it was categorically laid down by the Supreme Court that the losses of depreciation and development in the earlier years, which had not been carried forward to the current year could not be set off against the profit of the priority industry made in the current year of assessment.
17. A similar view was again expressed by the Supreme Court in a case under Section 15C of the Indian Income-tax Act, 1922, Rajapalayam Mills Ltd. v. CIT : [1978]115ITR777(SC) , where it was held that the depreciation allowance of the preceding years could be taken into account in the current year only if, and to the extent to which, it is not absorbed by the total income of the assessee computed under different heads and chargeable to tax for those assessment years. The principle of calculation of profit of a priority industry was laid down by a Bench of five-judge of the Supreme Court in the case of Distributors (Baroda) P. Ltd. v. Union of India : [1985]155ITR120(SC) . In that case, the judgment in Cloth Traders (P.) Ltd. v. Addl. CIT : [1979]118ITR243(SC) was overruled and the decision given in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT : [1978]113ITR84(SC) was affirmed.
18. In Cambay Electric Supply Industrial Co.'s case : [1978]113ITR84(SC) , the question was whether unabsorbed depreciation and unabsorbed development rebate were liable to be deducted before the calculation of the profit on the basis of such deduction under Section 80E could be given. The Supreme Court did not accept the contention that unabsorbed depreciation and unabsorbed development rebate were not liable to be deducted from the profits and gains attributable to the priority industry for calculating the relief under Section 80E.
19. This argument of the assessee was rejected by the court and the court held that the profits and gains exigible to deduction of eight per cent. were profits and gains computed in accordance with the provisions of the Act and forming part of the total income and, hence, unabsorbed depreciation and unabsorbed development rebate were liable to be excluded from the profits and gains attributable to the specified business in arriving at the figure exigible to eight per cent. deduction. Tulzapurkar J., speaking on behalf of the court, analysed the provisions of Sub-section (1) of Section 80E in the following words (at page 91) :
'On reading Sub-section (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 Section 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 eight per cent. thereof from such profits and gains and then arrive at the net total income exigible to tax.'
20. In the instant case, there is no dispute that the entirety of the income of the priority industry has been included in the gross total income. Therefore, there is no reason why the entire amount should not form the basis for calculation of relief under Section 80HH.
21. In view of the clear principles laid down by the Supreme Court in the aforesaid cases, it is not necessary to refer to some judgments of the various High Courts cited on behalf of the Revenue. Both the questions are answered in the affirmative and in favour of the assessee.
22. There will be no order as to costs. KRISHNA CHANDRA AGARWAL C.J.--I agree.
Income-tax Reference No. 131 of 1993 dated May 12, 1994 :
Suhas Chandra Sen, J.
23. The Tribunal has referred the following two questions of law to this court under Section 256(1) of the Income-tax Act, 1961 :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee was entitled to deduction under Section 80HH of the Income-tax Act, 1961, for its new container unit at Mathura without setting off past losses of the said unit ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in not upholding the order of the Commissioner of Income-tax (Appeals) to the effect that relief under Section 80HH of the Income-tax Act, 1961, should be determined considering the working of the new unit only without reference to the profits of other units not eligible for deduction under this section ?'
24. The assessee is a resident Indian company and the assessment year involved is 1985-86 for which the previous year ended on March 31, 1985.
25. In view of the judgment and the order passed today by this court in Income-tax Reference No. 53 of 1993 (CIT v. Balmer Lawrie and Co. Ltd. reported in : [1995]215ITR249(Cal) ) both the questions referred to this court are answered in the affirmative and in favour of the assessee.
26. There will be no order as to costs.
K.C. Agakwal, C.J.
27. I agree.