Gedore Tools (India)(P.) Ltd. vs Commissioner of Income Tax

B.N. Kirpal, J.—The Tribunal has referred to this Court the following question of law for its opinion: Whether, on the facts and in the circumstances of the case, the Tribunal was correct in excluding for the purposes of relief u/s 80-I of the income tax Act, 1961, the sums of Rs. 2,19,617 and Rs. 12,549 representing the development rebate and relief u/s 35B that has been allowed to the assessee in the assessment?

Briefly stated the facts, as found by the Tribunal, are that the assessee is engaged in the manufacture and sale of hand tools. It declared a net profit in respect to the assessment year 1969-70 of Rs. 39,92,472 and claimed relief u/s 80-I of the income tax Act, 1961 (''the Act''). The ITO made certain adjustments while arriving at a figure on which deduction u/s 80-I was admissible. An appeal was filed by the assessee where two contentions were raised. The contention with reference to relief claimed u/s 80-I was not dealt with by the AAC with the result that when further appeal was filed by the assessee to the Tribunal, the Tribunal sent back the matter to the AAC for a decision on this point.

After the matter came back to the AAC he passed two orders u/s 154 of the Act. He came to the conclusion that relief u/s 80-I was to be worked out on the assessed income and not on the book profits of the business.

The assessee filed further appeal to the Tribunal. The question which was posed before the Tribunal was whether the relief was to be allowed u/s 80-I on the assessed income of Rs. 43,17,546 or on that income as enhanced by the claim of the assessee relating to development rebate amounting to Rs. 2,19,617 and weighted expenditure on exports u/s 35B amounting to Rs. 12,549. Following its decision for the earlier year the Tribunal came to the conclusion that the decision of the AAC was correct. Thereafter the aforesaid question of law has been referred to this Court.

Before us it has been contended by the learned counsel for the assessee that the relief should really have been allowed on a figure of Rs. 45,49,712 and not on the assessed income of Rs. 43,17,546. According to the learned counsel, the gross total income and the profits and gains of the industry in question would be the assessable income of Rs. 43,17,546 as enhanced by the amount of development rebate plus weighted expenditure which had been allowed as deduction. In other words, before allowing the deduction of development rebate amounting to Rs. 2,19,617 and the weighted expenditure of Rs. 12,549, the relief u/s 80-I should have been granted on the income of Rs. 45,49,712.

In order to appreciate the contention it is necessary to refer to the provisions of section 80-I as it stood at the relevant time. The said provision was as follows:

80-I Deduction in respect of profits and gains from priority industries in the case of certain companies. -- (1) In the case of a company to which the 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.

(2) This section applies to a domestic company, save in a case where such company is a company which is referred to in section 108 and has a gross total income of fifty thousand rupees or less.

(3) Where a company to which this section applies is entitled also to the deduction u/s 80H, the deduction under sub section (1) of this section shall be allowed with reference to the amount of the profits and gains attributable to the priority industry or industries as reduced by the deduction u/s 80H in relation to such profits and gains.

The learned counsel for the assessee has strongly relied upon the decision of the Calcutta High Court in the case of Commissioner of Income Tax Vs. Orient Paper Mills Ltd., . In that case it was held that relief on income from priority industry should be given before setting off unabsorbed development rebate of the priority industry itself. The Court while arriving at this conclusion referred to and relied upon the decision of the Supreme Court in the case of Cloth Traders (P) Ltd. Vs. Additional Commissioner of Income Tax , Gujarat-I, . It also referred to another decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, but observed that there were certain aspects of the question which were not urged before the Supreme Court in Cambay Electric Supply Industrial Co.''s case (supra).

There can be no doubt that the decision of the Calcutta High Court in Orient Paper Mills'' case (supra) supports the assessee. We, however, find that the decision in Cloth Traders (P.) Ltd. ''s case (supra) on which Calcutta High Court had placed reliance, was overruled by the Supreme Court itself in the case of Distributors (Baroda) Pvt. Ltd. Vs. Union of India (UOI) and Others, . Furthermore, the decision of the Supreme Court in the case of Cambay Electric Supply Industries Co. ''s case (supra) is undistinguishable. In that case the Supreme Court was dealing with the interpretation of section 80E which was analogous to the provisions of section 80-I in this case. Referring to the question of unabsorbed depreciation and development rebate being deducted while computing profits the Supreme Court observed as follows:

''Turning to the appeal of the assessee, being Civil Appeal No. 785 (NT) of 1977, the question is whether unabsorbed depreciation and development rebate are deductible or not in computing profits under s. 80E(1) of the Act. Here again the answer to the question must depend upon the construction of sub-section (1) of section 80E and the construction which we have placed on the said provision while disposing of the Revenue''s appeal will furnish the correct answer to the question posed. As indicated earlier, subsection (1) contemplates three steps being taken for computing the special deduction permissible there under and arriving at the net income exigible to tax and the first two steps read together contain the legislative mandate as to how the total income of which the profits and gains attributable to the business of the specified industry forms a part of the concerned assessee is to be computed and according to the parenthetical clause, which contains the key words, the same is to be computed in accordance with the provisions of the Act except section 80E and since in this case it is income from business the same will have to be computed in accordance with ss. 30 to 43A which would include section 32(2) (which provides for carry forward of depreciation) and section 33(2)(which provides for carry forward of development rebate for eight years). In other words, in computing the total income of the concerned assessee, items of unabsorbed depreciation and unabsorbed development rebate will have to be deducted before arriving at the figure that will become exigible to the deduction of 8 per cent contemplated by section 80E(l). On this construction, therefore, the High Court, in our view, was right in deducting unabsorbed depreciation and development rebate aggregating to Rs. 2,54,613 from Rs. 8,02,126 and holding the balance of Rs. 5,47,513 being exigible to the 8 per cent deduction. (p. 94)

In our opinion merely because certain aspects may not have been urged before the Supreme Court, cannot be a reason for not applying the ratio of the said decision. The observations of the Supreme Court in Cambay Electric Supply Industrial Co.''s case (supra) are very clear and categorical. The Supreme Court has held that while computing the profits and gains for the purpose of section 80E of the Act, which is analogous to section 80-I with which we are concerned, the rebate is to be allowed on the profits and gains which are assessable and computed under the provisions of the Indian income tax Act, 1922 in relation to business income of the priority industry. Inasmuch as development rebate and weighted expenditure have to be deducted while arriving at a figure of assessable income, therefore, it is on this amount that the rebate u/s 80-I would be allowed. We are fortified in this conclusion by the decision of the Madras High Court in the case of Commissioner of Income Tax Vs. Marshall Sons and Co. Mfg. Ltd., . In that case also, following the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. (supra) it was held by the Madras High Court that in computing the total income of the assessee for purposes of calculating the special deduction u/s 80-I the unabsorbed depreciation and carried forward losses have to be deducted.

For the aforesaid reasons the question of law referred to this Court is answered in the affirmative and in favour of the revenue. The respondents will also be entitled to costs.