Commissioner of Income Tax vs Gannon Dunkerley and Co. Ltd.

Mrs. Sujata Manohar, J.—This reference is in respect of quantification of relief allowable u/s 80-I of the Income Tax Act, 1961, as in force at the relevant time in respect of a Burshane cylinder factory of the assessee. The relevant assessment year is 1971-72. In the books of account of the assessee-company, the profit and loss account of this unit showed a net profit of Rs. 2,60,536. This figure was arrived at after deducting depreciation of Rs. 2,09,251. The assessee contended that for the purpose of working out the relief u/s 80-I, which relief at the relevant time had to be granted at eight per cent. of the profits and gains derived from the priority industry, depreciation ought to have been added back to the net profit of this unit as shown in the books. This contention of the assessee has been upheld by the Tribunal in view of the decisions of the earlier Benches of the Tribunal in the assessee''s own case, although the Tribunal expressed some doubt as to whether the depreciation ought to be added back as contended by the assessee. Hence, the following question has been referred to us u/s 256(1) of the Income Tax Act, 1961:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the depreciation allowed should not be deducted in computing the profits and gains attributable to the cylinder factory for the purpose of granting relief u/s 80-I of the Income Tax Act, 1961?"

Section 80-I, as it stood at the relevant time, was as follows:

"Section 80-I(1). - In the case of a company to which this section applies, where the gross total income includes any profits and gains attributable to any priority industry, there shall be allowed, in accordance with and subject to the provisions of this section, a deduction from such profits and gains of an amount equal to eight per cent. thereof, in computing the total income of the company."

The section, therefore, deals with a case where the gross total income of a company includes any profits and gains attributable to a priority industry. Total income has been defined u/s 2(45) of the Income Tax Act, to mean "the total amount of income referred to u/s 5, computed in the manner laid down in this Act". Therefore, section 80-I deals with a case where the total income of a company, as computed under the Income Tax Act, includes profits and gains of a priority undertaking. The profits and gains of a priority undertaking, therefore, which form a part of this total income, must necessarily be profits and gains as computed under the provisions of the Income Tax Act. Therefore, depreciation is required to be deducted before arriving at such profits and gains.

In the case of Cambay Electric Supply Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, , the Supreme Court considered similar provisions of section 80E which were then in force. The Supreme Court was concerned with the question whether in calculating the profits and gains attributable to the business of generation or distribution of electricity, etc., carried forward unabsorbed depreciation and development rebate were required to be deducted. Section 80E(1) provided as follows:

"Section 80E(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."

The Supreme Court, inter alia, said that the definition of total income under the Income Tax Act clearly provides that total income has to be computed in the manner laid down in the Income Tax Act and, therefore, there would be no scope for excluding items like unabsorbed depreciation and unabsorbed development rebate while computing the total income. Therefore, for calculating the deduction allowed u/s 80E, unabsorbed depreciation and unabsorbed development rebate have to be deducted. The same reasoning would apply to the present case also. Although, u/s 80E, the words "as computed in accordance with the other provisions of this Act" expressly qualify the total income as set out in that section, the ratio of the Supreme Court is based not merely upon this explicit phrase describing total income u/s 80E, but had also rested upon the definition of "total income" u/s 2(45) of the Income Tax Act, 1961. Under the present section 80-I, while the express words above are not there, the phrase "total income" which is used there clearly indicates that this total income has to be computed in accordance with the other provisions of the Income Tax Act, 1961, in view of the definition of "total income" u/s 2(45) of the Income Tax Act. Therefore, while ascertaining the profits and gains attributable to a priority industry which forms a part of such total income necessary deductions required under the Income Tax Act have to be made including deduction for depreciation. In the present case, it is only the depreciation in the current year which is being deducted and we do not see any provisions in section 80-I under which such depreciation requires to be added back to the profits and gains attributable to the priority industry for the purpose of calculating the eight per cent. deduction under that section.

Mr. Dwarkadas, learned counsel for the respondent, has drawn our attention to a decision of the Orissa High Court in the case of Commissioner of Income Tax Vs. Tarun Udyog, . That case dealt with a deduction u/s 80HH of the Income Tax Act, 1961. The court said that for granting deduction as contemplated u/s 80HH what had to be taken into account was the profit of the industrial undertaking before deducting the investment allowance u/s 32A of the Income Tax Act, 1961. We do not see how this judgment has any application to the question before us. It is true that the Orissa High Court has referred to the ratio of Cambay Electric Supply Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, , but in our view, the discussion on Cambay Electric Supply Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, and whether it is attracted to the interpretation of section 80HH, will not have any bearing on the question before us, which, in our view, is directly covered by the ratio of the Cambay Electric Supply Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, , in so far as it deals with the definition of "total income" and whether depreciation is required to be deducted for the purpose of determining the profits and gains attributable to any industry as set out u/s 80E.

In the premises, the question which is referred to us is answered in the negative and in favour of the Revenue.