Commissioner of Income-tax, Gujarat Ii Vs. Cambay Electric Supply Industrial Co. Ltd. - Court Judgment

T.U. Mehta, J.

1. This reference raises some interesting, though some what complicated, questions regarding the mode in which and the fund from which deduction of 8% contemplated by section 80E(1) of the Income-tax Act, 1961 (as it stood at the relevant time), should be calculated.

2. Short facts of the case are that the respondent-assessee is an electric supply company working at Compay. The assessment in question relates to the assessment year 1967-68, accounting year for which is the financial year 1966-67. During the course of the assessment of the assessee's income, the question arose as regards the deduction of 8% contemplated by section 80E of the Act. Section 80E, prior to its amendment in the year 1968, stood as under :

'80E. Deduction in respect of profits and gains form 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 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.'

3. Corresponding section after the amendment is found at section 80-I. Since we are concerned with section 80E, as it stood at the relevant time, it is not necessary to refer to the new provisions of section 80-I.

4. It is an admitted fact that the assessee-company is running the business of generation and distribution of electricity and is, therefore, covered by the provisions of the above referred section 80E, it is entitled to claim deduction at the rate of 8% on the amount of profits and gains attributable to its business of generation and distribution of electricity.

5. During the accounting period in question the assessee earned the income of Rs. 46,319 from its running business. During the accounting period the assessee had sold some of its old machineries and buildings and, therefore, the Income-tax Officer worked out the balancing charge contemplated by section 41(2) in respect of this sale at Rs. 7,55,807. In accordance with the provisions of section 41(2) of the Act, this amount was added to the previously mentioned business income amounting to Rs. 46,319, thus making the total of Rs. 8,02,126. Deduction of 8% which is contemplated by section 80E(1) was computed by the Income-tax Officer on this amount and since this deduction worked out to Rs. 64,170 for the purpose of computing the net income chargeable to tax, he found the figure of Rs. 7,37,956.

6. There was unabsorbed depreciation and development rebate which were also required to be adjusted against this profit. The unabsorbed depreciation was of Rs. 1,42,955 and the unabsorbed development rebate was of Rs. 1,11,658. Thus, the total of this unabsorbed depreciation and development rebate came to Rs. 4,83,343.

7. The Additional Commissioner of Income-tax having come to know about this assessment took action contemplated by section 263 of the Act and called for and examined the record and proceedings, after giving to the assessee an opportunity to show cause why the assessment carried out by the Income-tax Officer should not be interfered with. The Additional Commissioner of Income-tax found that the amount of profit of Rs. 7,55,807, which was added for the purpose of balancing charge under section 41(2) of the Act, did not represent profit or gain attributable to the business of generation or distribution of electricity within the meaning of section 80E(1) and should, therefore, have not been added to the business income of Rs. 46,319 for the purpose of giving 8% deduction contemplated by the said section. He also found that for the purpose of calculating deduction of 8% under section 80E, set-off for the unabsorbed depreciation and development rebate should also not have been given by the Income-tax Officer. On this calculation, the Additional Commissioner of Income-tax came to the conclusion that the assessee was not entitled to any deduction. The Additional Commissioner of Income-tax carried out the assessment in the manner stated as under :

8. Since under section 41(2) of the Act, the excess over written down value up to the amount of the original cost of machinery and plant, which was sold during the accounting period, was required to be added to the business income earned by the assessee during the accounting period, the Additional Commissioner of Income-tax computed the total income of the assessee at Rs. 8,02,126. From this amount, he first set off the unabsorbed depreciation and development rebate of Rs. 2,54,613. This gave the net result of Rs. 5,47,593. Now, for the purpose of calculating the deduction of 8% under section 80E, the Additional Commissioner of Income-tax found that the amount of Rs. 7,55,807, which was added under section 41(2) for the purpose of balancing charge, should be deducted from the above stated ner amount of Rs. 5,47,593 and if that was so done, the net result was minus Rs. 2,78,210. Since this was a minus figure, the Additional Commissioner of Income-tax came to the conclusion that no deduction under section 80E was admissible to the assessee.

9. Being aggrieved by this decision, the assessee approached the Appellate Tribunal. The Appellate Tribunal came to the conclusion that the Income-tax Officer was justified in working out the deduction of 8% under section 80E after adding the amount of Rs. 7,55,807 for the purpose of balancing charge under section 41(2) because that amount represented the amount of profit which had escaped assessment on account of depreciation during the previous years. The Tribunal further held that since this profit was relatable to the business of generation or distribution of electricity, deduction at the rate of 8% under section 80E was permissible. So far as the unabsorbed depreciation and development rebate were concerned, the Tribunal held on the authority of the decision given by the Mysore High Court in Commissioner of Income-tax v. Balanoor Tea & Rubber Co., Ltd. that for the purpose of calculating the deduction of 8% under section 80E neither depreciation nor development rebate should be deducted from the figure of income which is otherwise arrived at. Thus, in effect, the Tribunal disagreed with the view taken by the Additional Commissioner of Income-tax and restored the order of the Income-tax Officer.

10. Being aggreived by the decision of the Tribunal, the revenue has preferred this reference, in which the Tribunal has referred the following two questions for our opinion :

'(1) Whether the Tribunal was correct in holding that the profits under section 41(2) of the Income-tax Act, 1961, arising from the sale of machinery and bulidings, amounting to Rs. 7,55,807 should be taken into account while computing the deduction at 8% under section 80E(1) of the Act

(2) Whether unabsorbed depreciation and development rebate amounting to Rs. 2,14,613 is not deductible in computing profits under section 80E(1) of the Act ?'

11. We shall first take up for our consideration the question whether the profit of Rs. 7,55,807 added to the profits and gains of business under section 41(2) on account of sale of old machinery and building should be taken into account while working out the deduction under section 80E or not.

12. On this question the contention raised by Shri Kaji on behalf of the revenue was that since the addition of Rs. 7,55,807 is on account of the balancing charge made under section 41(2) of the Act, the nature of this addition does not amount either to profits or gains from business. According to him, in its real nature, this amount is the return of the depreciated capital and if it is treated as profit under section 41(2) of the Act, it is merely because of the fiction created by section 41(2) of the Act. According to Shri Kaji, such a fiction should not be carried further than what is absolutely necessary for carrying out its purpose. According to him, therefore, while computing the deduction at 8% under section 80E, this amount should not be taken into consideration. In support of the above proposition Shri Kaji has put strong reliance upon the decision given by the Supreme Court in Commissioner of Income-tax v. Bipinchandra Maganlal & Co., Ltd. and the subsequent decision given by a Bench of this court in Commissioner of Income-tax v. Bai Vina, wherein the nature of such balancing charge contemplated by section 41(2) of the Act is exhaustively dealt with and it is observed that the fiction created by section 41(2) should not be carried further beyond its purpose.

13. The above two decisions lay down that when balancing charges are worked out under section 41(2) of the Act, the same is done on the basis of the fiction introduced by that section to treat the receipt, which is of capital nature as of revenue nature. It is further held therein that the fact that these balancing charges are added as income in the accounting peroid in which the machinery and other assets are sold, does not alter the real character of the receipt, which is of a capital nature.

14. As against this, Shri Shah, who appeared on behalf of the assessee, has put strong reliance upon the decision given by the Supreme Court in Commissioner of Income-tax v. Express Newspapers Ltd., wherein Subba Rao J., speaking for the court, has observed that when balancing charges are worked out under section 41(2) of the Act, they are worked on the basis that the profit, which had escaped assessment in the previous years on account of depreciation, was wrongly allowed to escape assessment and, therefore, the working up of the balancing charge in substance brings to charge an escaped profit or gain of the business carried on by the assessee. Shri Shah, therefore, contended that whatever be the nature either of the depreciation allowance or the balancing charge, the fact remains that it is the escaped profit of the previous years relating to the business carried on by the assessee, which is brought to tax and, therefore, the amount calculated for the purpose of these charges should be taken into account for the purpose of working out the deduction of 8% under section 80E of the Act.

15. Since the above stated controversy mainly related to what the Supreme Court has decided in the above referred two cases, it would first be necessary to consider these decisions and the ratio established by them and to find out whether these ratios are in any manner conflicting with each other We shall, therefore, presently see in what context these two decisions of the Supreme Court and the third decision of this court in Commissioner of Income-tax v. Bai Vina were given.

16. In Commissioner of Income-tax v. Bipinchandra Maganlal & Co., Ltd. the question which was involved was with reference to the working out of the provisions of section 23A(1) of the Act of 1922. The company in that case had distributed its profits without taking into account the difference between the written down value of the asset which was sold and the price realised by the sale thereof and the question arose whether such distribution was justified by smallness of profits earned by the company excluding the said difference. If the above stated difference between the written down value and the sale price was added then the profit which was distributable could not be considered small. On behalf of the revenue it was contended in that case before the Supreme Court that the expression 'smallness of profit' means no more than smallness of the assessable income, and in that event, in the computation of profits, the amount realised by sale of the machinery in the year of account in excess of its written down value was liable to be included in considering whether the condition relating to 'smallness of profits' was fulfilled. Discussing the merits of this submission of the revenue, the Supreme Court considered the legal provisions contained in the second proviso to clause (vii) of section 10(2) of the Act of 1922 which is similar to section 41(2) of the Act of 1961. According to that provision of the Act of 1922, where the amount for which any building, machinery or plant is sold exceeds the written down value, so much of the exceed as does not exceed the difference between the original cost and the written down value should be deemed to be profit of the previous year in which the sale took place. The Supreme Court observed as under while considering the contention raised by the revenue :

'In computing the profits and gains of the company under section 10 of the Act, for the purpose of assessing the taxable income, the difference and the price at which it was sold (the price not being in excess of the original cost) was to be deemed to be profit in the year of account, and being such profit, it was liable to be included in the assessable income in the year of assessment. But this is the result of a fiction introduced by the Act. What in truth is a capital return is by a fiction regarded for the purposes of the Act as income. Because this difference between the price realised and the written down value is made chargeable to income-tax, its character is not altered, and it is not converted into the assessee's business profits. It does not reach the assessee as his profits; it reaches him as part of capital invested by him, the fiction created by section 10(2)(vii) second proviso, notwithstanding. The reason for introducing this fiction appears to be this. Where in the previous years, by the depreciation allowance, the taxable income is reduced for those years and ultimately the asset fetches on sale and amount exceeding the written down value, i.e., the original cost less depreciation allowance the revenue is justified in taking back what it had allowed in recoupment against wear and tear, because in fact the depreciation did not result. But the reason of the rule does not alter the real character of the receipt. Again, it is the accumulated depreciation over a number of years which is regarded as income of the year in which the asset is sold. The difference between the written down value of an asset and the price realized by sale thereof though not profit earned in the conduct of the business of the assessee it notionally regarded as profit in the year in which the asset is sold, for the purpose of taking back what had been allowed in the earlier years.'

17. Relying upon these observations, Shri Kaji contended that the addition of the amount of Rs. 7,55,807 under section 41(2) of the Act is nothing but the return of capital and therefore, it should not be considered either as profits or as gains of the business of the assessee.

18. The above decision given by the Supreme Court has been considered by this court, as started above, in Commissioner of Income-tax v. Bai Vina. It is, therefore, necessary to refer to that decision in order to know how the above ratio of the Supreme Court has been applied by this court. In this case, the question which arose for consideration was relating to the construction of section 2(6A)(c) of the Act of 1922. This section of the Act of 1922 describes what should be included in the term 'dividend' includes 'any distribution made to the shareholders of a company on its liquidation to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not'. Now, the facts of that case, as reported, show that the assessee at all material times held 18 shares in a limited company called the Gujarat Spinning & Weaving Co., Ltd. This company went into liquidation and the liquidator of the company decided to make distribution of Rs. 3,500 per share amongst the shareholders. Pursuant to this decision, the assessee received from the liquidator a sum of Rs. 63,000 by way of distribution in respect of 18 shares. The sum of Rs. 3,500 per share distributed amongst the shareholders was composed of the following items :

Rs. 1,000 repayment of capital.Rs. 1,570 repayment of capital gains.Rs. 930 distribution out of accumulated profits.Rs. 3,500

19. The dispute in that matter was confined only to the distribution of Rs. 1,570 per share which was the distribution out of the capital gains. It was further found that though the distribution of this amount of Rs. 4,570 per share was shown to have been made out of the capital gains, it was in fact a distribution of 'deemed profits' arising to the company on the sale of its capital assets under the second proviso to section 10(2)(vii) of the Act of 1922. The revenue sought to tax the distribution as dividend under section 2(6A)(c) on the basis that it represented distribution out of the accumulated profits of the company. Ultimately, the question which was referred to the High Court by the Tribunal was whether this sum of Rs. 1,570 being a payment out of deemed profits under section 10(2)(vii) included in the amount of Rs. 3,500 distributed by the liquidator of the company and received by the assessee as a shareholder, was 'dividend' within the meaning of section 2(6A)(c) of the Indian Income-tax Act, 1922 While considering this question, the court construed the true character of the receipt of Rs. 1,570 which was described as 'deemed profit' under section 10(2)(vii) and found that it was not real commercial profits earned by the company, which was in liquidation but was clearly regarded as profit and, therefore, could not be treated as 'dividend'. For taking this view the court has observed as under :

'The excess of the sale price over the written down value is to be deemed to be the profit of the assessee to the extent of the total depreciation allowance granted in the past and it is to be deemed to be such profit in the year of account in which the capital asset is sold. It would be seen that a deeming provision is enacted in this proviso and the object clearly is to convert that which is not profit into profit. When a capital asset is sold what is received by the assessee is capital return and not profit. Of course when we say this we are referring only to so much of the sale price as does not exceed the cost of the capital asset. The excess of the sale price over the cost would certainly be capital gain but return of capital and no part of it even in excess of the written down value can be said to partake of the character of profit. The receipt of excess over written down value on sale of capital asset would, therefore, be inthe nature of capital return and not profit. But the legal fiction in the second proviso to section 10(2)(vii) converts it into profit for the purpose of assessment of the taxable income of the assessee. The deeming provision in the second proviso to section 10(2)(vii) is thus used to include the impossible, that is, that which is capital return and not profit in the category of profit.'

20. Thereafter, this court has referred to the various decisions including the decision of the Supreme Court in Bipinchandra's case and the observations which are already quoted by us above. Ultimately, this court took the view that the receipt of excess over written down value on sale of capital asset cannot be held to be profit independently and apart from the legal fiction enacted in the second proviso to section 10(2)(vii). Shri Kaji's contention is that this decision interprets the decision given by the Supreme Court in Bipinchandra's case, and, therefore, this ratio should prevail even so far as the case under our consideration is concerned.

21. Now, before taking up the further discussion of the matter, let us see what the Supreme Court has decided in its subsequent decision in Commissioner of Income-tax v. Express Newspapers Ltd. There the facts were that there was one Free Press Co., which was carrying on the business of publishing certain newspapers. The said company transferred the right to print and publish those newspapers to the Express Newspapers Ltd., and let out its machinery and assets to the latter. Thereafter, Free Press Co., went into liquidation and the liquidator was directed to carry on the business of that company. The liquidator confirmed the transfer of the machinery and assets to the Express Newspapers Ltd. That sale yielded a profit to the Free Press Co., of Rs. 6,08,666 comprising of Rs. 2,14,090, being the difference between the original cost and written down value of the machinery, and Rs. 3,94,576, being the amount in excess over the original cost. As the original Free Press Co., was dissolved and was eventually struck off the register of companies, the Express Newspapers Ltd., was assessed as the successor of the Free Press Co., under the proviso to section 26(2) fo the Act of 1922, inter alia, on the above referred two amounts of Rs. 2,14,090 and Rs. 3,94,576. The Supreme Court held that the profits or gains which were not earned when the business was being carried on by the assessee during the accounting year fell outside the provisions of section 10(1) and that in order that the excess over the written down value up to the original cost to the assessee realised on the sale of machinery used in his business might be brought to tax as profit of the business under second proviso to section 10(2)(vii) of the Act, it was necessary that the machinery should have been sold when the business was being carried on. The Supreme Court further held that as the machinery was sold in this case after the business of the Free Press Co., was closed and during the winding-up proceedings, the second proviso to section 10(2)(vii) did not apply. Therefore, the sum of Rs. 2,14,090 which was excess over the written down value up to the amount of cost, could not be brought to tax. Now, while giving this decision, the Supreme Court construed the second proviso to section 10(2)(vii) of the Act and observed as under :

'We are concerned with the second proviso to section 10(2)(vii) of the Act. The substantive cluase grants a balancing allowance in respect of building, machinery or plant which has been sold or discarded or demolished or destroyed. The allowance represents the excess of the written down value over the sale price. Under the proviso, if the sale price exceeds the written down value, but does not exceed the original cost price, the difference between the original cost and the written down value shall be deemed to be profits of the year previous to that in which the sale takes place; that is to say, the difference between the price fetched at the sale and the written down value is deemed to be the escaped profits for which the assessee is made liable to tax. As the sale price is higher than the written down value, the difference represents the excess depreciation mistakenly granted to the assessee. To illustratd : assume that the original cost of a machinery or plant is Rs. 100 and depreciation allowed is Rs. 25; the written down value is Rs. 75. If the machinery is sold for Rs. 100 it is obvious that depreciation of Rs. 25 was wrongly allowed. If it had not been allowed that amount would have swelled the profits to the extent. When it is found that it was wrongly allowed that profit is brought to charge. The second proviso, therefore, in substance, brings to charge an escaped profit or gain of the business carried on by the assessee.'

22. Shri Shah, appearing for the assessee, puts emphasis on the underlined protin of the above observations and contend that in this case the Suypreme Court has categorically expressed an opinion that what is added to the income under section 41(2) of the Act is nothing but escaped profit or gain of business and if this profit which can be attributable to the business of generation or distribution of electricity, there is no reason why it should not be taken into account for the purpose of calculating deduction of 8% under section 80E of the Act.

23. It is obvious from the above excerpts of the two decisions of the Supreme Court and one decision of this court, that the real controversy is what is the nature of the amount which is sought to be taxed under section 41(2) of the Act-whether it is of capital nature or of revenue nature. On other words, whether it is merely the return of capital or whether it is the profit or gain from the business. The learned advocates of the parties contended that there is an apparent conflict between the above referred two decisions of the Supreme Court on this question. But on a close consideration of the real nature of depreciation allowance, contemplated by section 32 of the Act we are of the opinion that truly speaking there is no conflict between these two decisions. We find that while the decision given by the Supreme Court in Bipinchandra Maganlal & Co. emphasise the original and real character of the charges in question, the decision given by the Supreme Court in Express Newspapers Pvt., Ltd., emphasises the incidence or the resultant effect of that charge. This will be clear if we examine the intrinsic character of the depreciation allowance as well as the balancing charges contemplated by the Act.

24. The plant or the machinery which is used for running the business is bound to suffer from wear and tear on account of its user. It, therefore, necessarily depreciates in value by its use in business. Really speaking, such depreciation is reduction in its capital value. In ordinary course, reduction of capital value of a fixed asset would be treated as having a capital nature and would be taken on the capital account. But when there is reduction in capital value on account of depreciation resulting from the use of that fixed asset for running a business, the said reduction must be treated on the revenue account, and hence, on strict principles of accountancy, depreciation is always treated as the first charge on profits and gains of business. Thus, though the depreciation is of capital its incidence falls on the revenue and that, for a very good reason.

25. Now let us see, what happens when, what is known as balancing charge, is made under section 41(2) of the Act. The relevant portion of section 41(2) of the Act is as under :

'Where any building, machinery, plant or furniture which is owned by the assessee and which was or has been used for the purposes of business or profession is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceed the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to income-tax as income of the business or profession of the previous year in which the moneys payable for the building, machinery, plant or furniture became due.'

26. There is a proviso and Explanation attached to this sub-section but, for the purpose of this reference, we are not concerned with them. The sub-section shows that the excess in question is made 'chargeable to income-tax'. The scheme of this sub-section is such that the balancing charge is made on the amount which is exactly the same as the depreciation which is assessed in the previous years. For instance, if an asset is purchased for Rs. 1,000 and the total depreciation claimed for the previous years on this asset is Rs. 600, the book value of this asset is written down at Rs. 400. Here the depreciation is valued at Rs. 600 and hence it reduces the profits of business to that extent in the previous years. Now, if in the accounting period this asset is sold away at the original price of Rs. 1,000, what happens is that though it was supposed that its value was reduced to Rs. 400, it has, in fact, fetched its original cost price of Rs. 1,000. Thus, its written down value in the books is not found to be the real one, and the charge of depreciation against profits and gains of previous years is also found to have been wrongly made. Section 41(2) steps in under such circumstances and says that the amount of Rs. 600 which was deducted from the profits and gains of business and which, therefor, escaped tax, should not (sic) be brought to tax in the accounting period by adding it to the business income.

27. It is thus clear that when the above referred amount of Rs. 600 was deducted from the profits, it was deducted on the footing that it was revenue loss, though, in fact, it was loss of capital. In the same manner when it is again added under section 41(2) to the business income, it is added on the same footing that it is profit or gain in revenue, though, in fact, it was nothing but the return of loss in capital which occurred in the previous years. When it was deducted as depreciation, its incidence or resultant effect fell on the revenue with the result that profits from business suffered to the extent of the depreciated value. In the same manner, when the same amount was added back, for working balance charge, its incidence fell on the revenue, because profits from business swelled to the extent of that charge. Thus, at both the ends the sufferer and the gainer is the revenue account as the profits and gains of business even though the loss or the gain was really referable to an asset which was of capital nature.

28. If the matter is viewed from this aspect, it will be clear that the original character of depreciation allowance and balancing charge remains the same and the same doctrine, pursuant to which one is deducted from the revenue works when the other is added to the revenue. This does not alter the real character either of the depreciation allowance or of the balancing charge. It is the incidence or the resultant effect of both which makes the difference. Speaking of the case of an industry, which is covered by section 80E and which is, therefore, entitled to earn deduction of 8%, it is obvious that when the depreciation amount was deducted from its profits and gains in the previous years, it had lost the deduction of 8% to the extent of that amount. It, therefore, stands to reason that if the same amount is added back in the accounting period for working out the balancing charge, it should gain the advantage which it had lost in the previous years.

29. Thus, we see no contradiction between the two Supreme Court decisions on which reliance is placed by the contending parties. We find that while the decision in the case of Bipinchandra Maganlal & Co. emphasises the intrinsic character of the balancing charge and say that it is not a 'commercial profit' the strictly so-called decision given in Express Newspapers Co.'s case emphasises the incidence or the resultant effect of such a charge on revenue account. Even the ratio of the decision given by this court in Commissioner of Income-tax v. Bai Vina is not disturbed by treating the balancing charge as profit for the accounting period, because, by doing so, we are not doing anything more than implementing the purpose for which the legal fiction of treating the balancing charge as revenue gain is created. As stated above, even the deduction of depreciation charge from the revenue receipt was also governed by the similar fiction, namely, that the charge which were of capital nature, were treated as of revenue nature. Therefore, the addition of the same depreciation charge to the reveune amounts to nothing but the working out of the impugned fiction to its logical conclusion.

30. We have already stated the facts relating to the decision of the Supreme Court in the case of Bipinchandra Maganlal & Co. and the decision of this court in Commissioner of Income-tax v. Bai Vina. In both the cases, the attempt was to carry the fiction contemplated by section 10(2)(vii) beyond its own field and the courts held that that was not permissible. But, here, we are carrying the fiction to its logical conclusion by keeping it within its own purpose and field. In our opinion, therefore, the decision in both these cases can be reconciled with our decision because we are not treating the excess over written down value in this case as anything but the return of capital but since this return of capital had previously also its resultant effect on the revenue account, the said effect is merely carried to its logical conclusion.

31. In this connection, we may profitably refer to the decision given by the Supreme Court in Donald Miranda v. Commissioner of Income-tax, wherein it is observed that when any portion of the tax collected on excess profits is refunded under the provisions of the Indian Finance Act, 1942, or the Excess Profits Tax Ordinance, 1943, it necessarily has the same quality which it had under the provisions of those Acts. It was further observed with reference to the facts of that case that when the tax was deposited with the Central Government it was a portion of the profits of the business of the assessee and when it was returned to the assessee it must be restored to its character of being a part of the profits of a business, and that it cannot be said that its nature changes merely because it is refunded as a consequence of some provisions in the Finance Act or the Excess Profits Tax Ordinance. Its nature remains the same. This very principle can effectively apply to the facts of the case under our consideration, because the profit which was charged with depreciation in the previous years is the same profit which is now sought to be added to the income of the assessee.

32. In this connection, Shri Kaji drew our attention also to two other cases of the Supreme Court; one was the case of Commissioner of Income-tax v. National Syndicate and the other was the case of Commissioner of Income-tax v. Ajax Products Ltd. In our opinion, neither of these cases is helpful in deciding the point in controversy in this reference, because the only thing which the relevant observation in these cases show is that section 10(2)(vii), proviso 2 of the Act of 1922, which is equivalent to section 41(2) of the Act of 1961, merely creates a fiction while treating the return of capital as of revenue character. As already stated above, the fiction holds good in cases such as the one with which we are dealing and, should, therefore, be worked out to its logical conclusion.

33. In view of the above discussion, we agree with the Tribunal that, so far as the profit of Rs. 7,55,807 added under section 41(2) is concerned, it should be taken into account for the purpose of working out 8% deduction under section 80E of the Act. Our answer to the first question is in the affirmative, i.e., in favour of the assessee and against the revenue. This is, of course, subject to our answer, which we provide to question No. 2, which we now presently propose to deal with.

34. So far as the second question is concerned, it refers to two items, namely, unabsorbed depreciation and unabsorbed development rebate. Now, so far as the depreciation amount of Rs. 1,42,955 is concerned, the contention raised by Shri Shah on behalf of the assessee is that unabsorbed depreciation cannot be deducted from the current year's income for the purpose of working out 8% deduction under section 80E(1). As against this, the contention of the revenue is that this unabsorbed depreciation is deemed to be the depreciation of the current year under section 32(2) of the Act, and, therefore, before working out what is the exact figure of the profits and gains of the business for the current year, it must be deducted. So far as the unabsorbed depreciation of Rs. 1,42,955 is concerned, we find that, apart from the legal aspect of the matter, on consideration of the peculiar facts of this case, the unabsorbed or carried forward amount of depreciation must be deducted according to law before 8% deduction under section 80E is worked out. We propose to discuss this aspect of the matter first.

35. We have already held above that the profit of Rs. 7,55,807 which is worked out under section 41(2) of the Act should be taken into consideration and added to the business income of the assessee for the purpose of working out 8% deduction. Obviously, this profit fo Rs. 7,55,807 is worked out as a result of particular written down value in the books with regard to the machinery and the building in question. Now, this written down value is written down irrespective of the question whether depreciation of a particular year is fully or partially absorbed. In this connection we may point out to the provisions contained in section 43(6). Explanation 3, which says that any allowance in respect of any depreciation carried forward under sub-section (2) of section 32 shall be deemed to be depreciation 'actually allowed'. The impact of this Explanation 3 is that written down value of a particular asset in the books of the assessee will go on decreasing year by year irrespective of the question whether the depreciation for that year is actally absorbed or not. Under these circumstances, it must follow that the amount of Rs. 7,55,807, which is added under section 41(2) as profit, is on the basis that the written down value of the asset in question was at a particular figure after calculating the depreciation with respect to all the previous years in question according to law. Therefore, the unabsorbed depreciation of Rs. 1,42,955 is already accounted for in working out the profit of Rs. 7,55 807, It has, therefor, to be deducted, because, without this deduction, the above referred figure of Rs. 7,55,807 would not have been available to the assessee for addition to its profits. Therefore, the peculiar circumstances of this case show that whatever be the legal position as regards the deduction or otherwise of the unabsorbed depreciation, so far as the facts of this case are concerned, the unabsorbed depreciation of Rs. 1,42,955 must be deducted from the total figure of Rs. 8,02,126 before the deduction of 8% is worked out under section 80E of the Act. In view of this, we are of the opinion that the Tribunal was not justified in not deducting this amount of depreciation before working out 8% deduction under section 80E.

36. This brings us to the consideration of the legal question whether on a true construction of section 80E(1) of the Act, carried forward depreciation allowance and carried forward development rebate should be taken into consideration before 8% deduction contemplated by section 80E is allowed.

37. On this point, the contention of the revenue is that if a reference is made to the scheme of section 80E(1) it is found that it first contemplates the working out of the total income of the assessee 'as computed in accordance with other provisions of the Act'. It was contended by Shri Kaji, on behalf of the revenue, that the expression 'total income' as defined by clause (45) of section 2 means 'income computed in the manner laid down in the Act' and that this expression should be understood in the same sense while interpreting the provisions of section 80E(1). Shri Kaji also drew our attention to the provisions contained in sections 28 and 29 of the Act. Section 28 enumerates the income which shall be chargeable to income-tax under the head 'profits and gains of business or profession' while section 29 says that income referred to in section 28 shall be computed in accordance with the provisions contained in section 30 to 43A. Drawing our attention to these section, Shri Kaji contended that sections 32 and 33 under which the depreciation allowance and the development rebate are granted are two of the sections referred to in section 29, and, therefore, when you are working out the total income 'as computed in accordance with the other provisions of the Act', you must first work out the figures of the total income after deducting the depreciation allowance and the development rebate as contemplated by sections 32 and 33. As against this, the contention of Shri Shah appearing for the assessee was that the expression 'total income' appearing in section 80E(1) is used in its commercial sense, and neither the carried forward depreciation nor the development rebate has anything to do with commercial profits and gains attributable to the business. It was also contended on behalf of the assessee that the first part of section 80E(1) which contemplates computation of income in accordance with the other provisions of the Act refers only to an event, the event being the occasion of computing income under the Act. According to the assessee, therefore, computation of income according to the other provisions of the Act need not be construed as a condition precedent for computing the 8% deduction under section 80E(1)

38. Before considering the legal merits of the contentions advanced on behalf of both the sides, it should be mentioned that on the previous date of the hearing of this reference, i.e., on December 11, 1975, we had already dictated judgment wherein we had taken the view that the first part of the provisions of section 80E, in so far as it refers to 'total income' as computed in accordance with the provisions of the Act 'does not operate as a condition precedent, and, therefore, before deducting the allowance of 8% contemplated by section 80E, it is not legally necessary to deduct the carried forward development rebate. This view was, therefore, in favour of the assessee and against the revenue. However, before this judgment was signed Income-tax Reference No. 106/74 (Commissioner of Income-tax v. Amul Transmission Line Hardware Pvt., Ltd., came up for hearing, and during the course of that hearing, the same question, viz., whether the carried forward development rebate should be first deducted before working out the deduction of 8% in favour of a priority industry, inter alis, arose for our consideration. The provision of law involved there was the new section 80E, the consideration of which is involved in this reference. After hearing the learned advocates of the parties, we found that the view taken by us on the question of construction of section 80E during the course of the dictation of our judgment in this reference on December 11, 1975, was required to be reconsidered. Since the judgment was not signed, we fixed this matter for rehearing and it is after rehearing Shri Shah as well as Shri K. C. Patel who was allowed to intervene, on behalf of the assessee in I.T.R. No. 106/74 representing the assessee, and Shri Kaji, representing the revenue, that we are now setting out our view about the correct interpretation of section 80E of the Act as under :

Section 80E finds its place in old Chapter VI-A which provided for 'deductions to be made in computing total income'. This Chapter is now replaced by a new Chapter bearing the same number and similar provisions, by Finance(No. 2) Act of 1967, with effect form April 1, 1968. Provisions corresponding to section 80E of the old Chapter VI-A are found in section 80-I and section 80B(5) of the new Chapter VI-A. The difference between the two provisions is not of any substance as it consists only in the arrangement of legal provisions. While section 80E is a composite and a self-contained provision regarding the deduction of 8%, section 80-I refers merely to the said deduction of 8% in the case of a priority industry, and its first part refers to 'gross total income' instead of 'total income'. The expression 'gross total income' and 'priority industry' are then defined in section 80E. Thus, the total effect of section 80-I of the new Chapter VI-A can be known only after reading the definitions given in section 80B. It should be noted that the expression 'gross total income' is defined in clause(5) of section 80B as 'total income computed in accordance with the provision of this Act, before making any deduction under this Chapter'. These words are practically the same as used in the paranthesis of the first part of section 80E(1), viz., 'as computed in accordance with the other provisions of this Act'. Since in this case we are concerned only with the provisions of section 88E of the Chapter VI-A we shall concentrate our attention only to these provisions.

39. Analysis of section 80E(1) shows that if contains two features in its two parts. The first part consists of the words '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'. The main feature of this part is the computation on the total income of the concerned assessee and the finding out of the fact whether that computation includes any profits and gains which can be attributed to the business of the specified industry. The second part consists of the words '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'. The main feature of this second part is the deduction of 8% from profits and gains which are attributable to the business of the specified industry, and which are included in the computation of 'total income' referred to in the first part. Reading both the parts together, it becomes evident that the deduction of 8% contemplated by the section is to be worked out not on the 'total income' but on that portion of profits and gains which is attributable to the specified industry. Important fact, which should, however, be noted is that it is not every profit and gain attributable to the specified industry, which become the basis of the deduction of 8% because the use of the word 'such' with reference to the expression 'profits and gains' appearing in the second part makes it quite clear that 'profits and gains' are those which are referred to in the earlier part, i.e., the first part. The first part obviously refers to those profits and gains which are included in the 'total income' as computed in accordance with the provisions other than section 80E. This analysis thus brings to the forefront the concept of the meaning of the expression 'total income' which is used in the first part of the section.

40. The question then is, whether this expression is used in its commercial sense as contended by the assessee, or in its statutory sense, as contended by the revenue. We do not encounter with any difficulty in finding the sense in which this expression is used in view of the paranthetical words 'as computed in accordance with the other provisions of this Act' which follow it. If we construe the expression 'total income' in its commercial sense, then these paranthetical words become redundant and without any effect. A construction which ignores the words used by the legislature and which renders these words purposeless and redundant, is never permissible. A contention, such as this, was advanced on behalf of the assessee in Addl. Commissioner of Income-tax v. Cloth Traders (P.) Ltd. decided by this Bench with reference to the mode of computation of deduction in respect of intercorporate dividend contemplated by section 85A (now section 80N) of the Act, but the same was rejected holding that unless the context shows otherwise, the expression 'total income' should be construed only in the statutory sense.

41. Moreover, the parenthetical words also show that the computation of 'total income' is to be made in accordance with 'the other provisions' of the Act. The use of the words 'the other provisions' clearly rules out the application of those provisions of section 80E(1) which relate to 8% deduction, when total income, contemplated by the first part, is computed. This signifies two things, viz., (1) computation of 'total income' referred to in the first part is to be made before deduction of 8% is worked out, and (2) the said computation is to be worked out with reference to all other provisions of the Act, except the provisions of section 80E.

42. At this stage, it is now necessary to see which are 'the other' provisions of the Act, in accordance with which the total income of an assessee can be computed. We have already referred to the statutory definition to the expression 'total income' as given in clause (45) of section 2. This clause specifically refers to the computation 'in the manner laid down in the Act'. Therefore, let us examine the manner of computation to income which is laid down in the Act. Section 4 of the Act shows that the statutory importance of 'total income' is for the purpose of charging income-tax because the charge is to be levied on the total income of the previous year. Section 5 refers to the scope of this total income and section 14 refers to the different heads of income which should be taken into account before computing the total incoem. One of these heads is profits and gains of business or profession. The scheme of the Act is to prescribe through different sections how income under different heads should be computed, and how deductions with regard to each of these heads should be made. Section 28 deals with the head of 'profits and gains' of business and prescribes which income shall be chargeable to income-tax under this head. Section 29 is very important for the purpose of deciding the disputed question. It in terms, lays down as under :

Income referred to in section 28 shall be computed in accordance with the provisions contained in section 30 to 43A.'

43. This section makes it clear that when income under the head of 'profits and gains' of business is required to be computed, the computation must be made in accordance with the provisions contained in section 30 to 43A, which include sections 32 and 33.

44. Now, section 32 is with regard to the depreciation allowance and section 33 is with regard to development rebate. Therefore, at the time of working out the computation of the income under the head 'profits and gains of business', all the implications of section 32 and section 33, which are with regard to the depreciation allowance and development rebate, must be worked out. This means that a correct figure of 'total income' as computed in accordance with the provisions of the Act cannot be had without working out depreciation allowance and development rebate (current as well as carried forward) in terms of all the provisions of section 32 and 33.

45. The above reference to different relevant sections of the Act reveals two important aspects of the matter, namely, (1) total income of an assessee cannot be computed in accordance with the provisions of the Act without computing his income under different heads prescribed by section 14, and (2) computation of income under the head of 'profits and gains of business' cannot be made without reference to the provisions cantained in sections 32 and section 33.

46. The purpose for which section 80E is enacted is to provide for certain deduction to be made in computing total income in the case of specified industries. This deduction is over and above other general deductions contemplated by the Act. Depreciation allowance and development rebate-whether current or carried forward-go to reduce the figure of total income and hence the assessee concerned has to pay less tax to the extent to which the said figure stands reduced. The special deduction contemplated by section 80E(1) was not intended to result in a double benefit on the same amount. If the contention of the assessee is accepted it would obviously result in a double benefit as will be clear from the following illustration : Suppose an assessee's total income from the business of a specified industry, without deducting depreciation and development rebate, is 'X'. But after deducting these two items it becomes 'X-(A plus B)'. Here (A plus B) represents that part of the total income which is not taken into account for calculating tax. If now 8% deduction is to be calculated on 'X' and not on 'X-(A plus B)', as desired by the assessee in this case, what happens is that the same income which is excluded for calculating tax is taken into account for further tax reduction. This obviously results in double exclusion of a part of the same amount because 8% of (A plus B), which was wholl excluded previously, is again excluded for the purpose of working out the provisions of section 80E(1). In other words, 8% of (A plus B) is exempted for depreciation and development rebate as well as which is not contemplated by the legislature. The legislature has, therefore, provided three important steps in section 80E(1). These steps are :

(i) Find out, without reference to the provisions of section 80E, what is the total income of the concerned assessee if the same is computed in accordance with the other provisions of the Act.

(ii) Having done that, find out whether any of the components of the total income thus arrived at represents profits and gains of business attributable to the industry specified in section 80E.

(iii) If there is any component of the type referred to in (ii), deduct 8% thereof from such profits and gains, and then compute the total income which becomes exigible to tax.

47. This is the plain and simple scheme of section 80E which does not admit of any complications. This scheme is definitely suggestive of the fact that working out of the total income contemplated by the first part of the section is a condition precedent to the working out of 8% deduction contemplated by its second part.

48. It was contended on behalf of the assessee that even if it is found that the total income of the assessee is to be computed for the purpose of the first part of section 80E in the manner stated above, the deduction of 8% should be made from the profits and gains attributable to the business of generation or distribution of electricity without making any deduction on account of depreciation allowance or development rebate under section 32 and section 33 of the Act. It was contended that when the latter part of the section contemplates the deduction of 8% from profits and gains, it refers to those profits and gains which were gross i.e., which were not reduced either by depreciation allowance or by development rebate. We find that on a plain reading of section 80E, no such construction is possible.

49. It is important to note that profits and gains from which 8% deduction is required to be made under section 80E are those profits and gains which are included in the computation of total income. Therefore, the real question is what is included in the computation of total income. Is it the gross amount of profits and gains or the net amount of profits and gains (arrived at after deducting depreciation allowance and development rebate) which is included in the computation of 'total income' The correct answer to this question can be obtained only if we find out what becomes a constituent part of the 'total income' which is computed in accordance with the provisions of the Act. Can it be said that when you are computing the 'total income' in accordance with the provisions of the Act, you can take the gross amount of profits and gains as one of its components In our opinion, a clear and unequivocal answer to this question is in the negative, because, if you do so, you are taking the 'total income' which is not in accordance with the provisions of the Act. This particular aspect has been exhaustively examined by this court in the above-referred case of Addl. Commissioner of Income-tax v. Cloth Traders (P.) Ltd. The question which was involved in that case was whether, while computing deduction of tax on inter-corporate dividend under section 85A of the Act of 1961, income from dividend should be taken at its gross figure, or at its net figure which is arrived at after deducting the expenditure incurred by the concerned assessee to earn the dividend. The court answered this question by stating that it is the net figure which is arrived at after deducting expenditure incurred to earn the dividend, which should be taken into consideration for the purpose of determining deduction of tax on inter-corporate dividends under section 85A of the Act. The provisions of section 85A with reference to which the said decision was given provide that where the total income of an assessee being a company includes any income by way of dividends received by it from an Indian company, the assessee shall be entitled to the deduction from income-tax which is chargeable on its total income for any assessment year of so much of the amount of income calculated at the average rate of income-tax so included as exceeds the amount of 25% thereof. Thus, this section puts emphasis on the amount included in the total income for the purpose of calculating the deduction contemplated by it. The court, therefore, construed the effect of the expression 'on income so included' in the following words :

'The second part of the section says that the deduction shall be from the income-tax with which the company is chargeable on its 'total income'. But still the question is how much deduction should be given. The second part provides an answer to this question by saying that the deduction should be on that amount of tax, calculated at the average rate on the dividend income included in the 'total income', which exceeds 25% of the income so included. The point to be boted is that the second part contemplates deduction of tax 'on income so included'. The words 'so included' have reference to the inclusion in the 'total income' contemplated by the above-referred second condition of the first part of the section. In other words, only that tax can be deducted which could be assessed on the dividend income which is included in the 'total income' of the assessee-company. To put it differently, the said dividend income is that income which has become one of the component parts of the 'total income'. If that be so, gross dividend income can form the base of deduction contemplated by section 85A only if it has become a component of 'total income' and not otherwise. The discussion which follows shows that it is the net dividend income and not the gross one which can become a component of 'total income'.'

50. These observations apply fully to the facts of the present case, because even section 80E, with which we are concerned in this reference, contemplates the deduction of 8% from such profits and gains which are included in the total income computed under the first part of the section. In other words, 8% deduction is to be calculated on that component which has gone to make up the 'total income' contemplated by the first part of the section. Therefore, the contention of the assessee that 8% deduction should be on gross profits and gains of business irrespective of what happens when 'total income' is computed, is wholly unacceptable.

51. On the question of depreciation allowance and development rebate, the assessee has put reliance upon the decision given by the Mysore High Court in Commissioner of Income-tax v. Balanoor Tea & Rubber Co., Ltd., and another decision of the Kerala High Court in Indian Transformers Ltd. v. Commissioner of Income-tax. By reference to these decisions, we find that neither of them exactly covers the point which we are called upon to decide in this reference. In the Mysore case, the income which the assessee received from his priority business was of Rs. 1,18,214. The assessee in that case had also incurred los in non-priority business, namely, plastic business, and this loss amounted to Rs. 48,105. The assessee wanted the deduction of 8% under section 80E on the income earned from priority business and thereafter wanted to deduct the loss in the non-priority business from the resultant figure, while the Income-tax Officer first deducted the loss in the non-priority business from the income earned from the priority business, and then sought to deduct 8% under seciton 80E. Therefore, the real question which was involved in that Mysore cas was whether loss incurred by the assessee in non-priority business could be set off against the profits and gains made by it in the priority business. The Mysore High Court decided the matter in favour of the assessee by holding that the quantum of deduction should be 8% of the profits and gains 'attributable' to the business of a priority industry. In the case before us, there is no question of adjustment of profits and gains from non-priority business against the profits or gains from priority business. In the Kerala case, the question was whether carried forward 'loss' from the earlier years could be deducted from the income earned by the assessee before deduction at the rate of 8% was calculated under section 80E. In this reference, there is no question of deduction or otherwise of any carried forward 'loss'. In our opinion, the question whether the loss incurred in non-priority business, or the carried forward loss can be set off against the income derived from the priority business before calculating 8% deduction under section 80E, would stand on different principles, the debate on which is not necessary in this reference. We have arrived at our conclusions quite independently of what is stated in the above two decisions of the Mysore and Kerala High Courts. In that view of the matter, it is not necessary to deal with these two decisions in this reference.

52. The result of the above discussion is that the addition of Rs. 7,55,807 as profit under section 41(2) should be made to the business profits of the year amounting to Rs. 46,319. This gives the total of Rs. 8,02,126; from this total, the carried forward depreciation of Rs. 1,42,955 and development rebate of Rs. 1,11,658 should be deducted before calculating 8% deduction under section 80E(1). Making these two deductions, we get the net figure of Rs. 5,47,513. As there is no income which is attributable to non-specified industry, the whole of the amount of Rs. 5,47,513 is income attributable to specified industry. 8% of this amount should, therefore, be deducted from it for computing the total taxable income.

53. In view of the above, our answer to question No. 2 is that the unabsorbed depreciation and the unabsorbed development rebate relating to specified industry have to be first deducted in computing deduction of 8% under section 80E of the Act.

54. This reference is accordingly disposed of without any order as to costs.