Gujarat High Court
Commissioner Of Income-Tax vs Milling Trading Co. Pvt. Ltd. on 15 December, 1993
Equivalent citations: [1995]211ITR690(GUJ)
Author: M.B. Shah
Bench: J.M. Panchal, M.B. Shah
JUDGMENT M.B. Shah, J.
1. The assessee, the Milling Trading Company Private Limited, has income from business and from other sources which included inter-corporate dividend. It maintained two sets of accounts, one for the milling trading and the other for the new industrial undertaking "Kanisha Steels". For the assessment year 1976-77, the Income-tax Officer worked out the total income of the assessee-company at Rs. 13,71,849 which included dividend income of Rs. 1,70,964. He gave relief under section 80M for Rs. 1,02,578 against the aforesaid income. In the business of Kanisha Steels, there was a loss of Rs. 10,92,222. However, since there were unabsorbed depreciation and unadjusted development rebate of earlier years which were more than profits worked out at Rs. 1,79,000, adjustments were given to the extent permissible. The assessee was also having carried forward losses of Rs. 6,65,000.
2. After examining the income-tax records for the assessment year 1976-77, the Commissioner of Income-tax issued a show-cause notice dated December 20, 1978, under section 263 of the Act wherein it is, inter alia; stated that the Income-tax Officer has erred in computing the total income for the assessment year 1976-77 and has wrongly given the deduction of Rs. 1,02,578 under section 80M of the Act because the gross total income, as computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A, was "nil" in the ease of the assessee. Therefore, there was no question of giving any deduction under section 80M of the Act. It was also stated that the loss of Rs. 6,84,909 on account of the goods alleged to have been destroyed by fire has also been allowed without proper scrutiny and enquiry. He, therefore, proposed that the order passed by the Income-tax Officer requires to be set aside. In pursuance of the show-cause notice dated December 20, 1978, the assessee replied by letter dated January 9, 1979. After considering the objections raised by the parties and after referring to the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84, the Commissioner of Income-tax set aside the order passed by the Income-tax Officer and directed the Income-tax Officer to withdraw the deduction allowed under section 80M in respect of inter-corporate dividends of Rs. 1,02,578 and pass a fresh order after giving a reasonable opportunity of hearing to the assessee. With regard to deduction towards loss of Rs. 6,84,909 on account of goods destroyed by fire, the matter was not pursued further.
3. Against the order dated January 9, 1979, passed by the Commissioner of Income-tax, the assessee preferred an appeal before the Income-tax Appellate Tribunal, Ahmedabad. The Tribunal allowed the appeal, by its order dated September 23, 1980, by observing that the Commissioner of Income-tax has set side the order of the Income-tax Officer by holding that the Income-tax Officer ought to have adjusted the profits against carried forward losses of the earlier years, but the Income-tax Officer did not adjust any such losses in his original order and has adjusted unabsorbed depreciation and development rebate of earlier years. The Tribunal, therefore, held that as the Commissioner of Income-tax has not processed the case at all regarding such adjustments, the Department cannot modify the case to urge that not only losses but also unabsorbed depreciation and development rebate required to be taken into consideration. The Tribunal further observed that, before the Revenue could be permitted to review or revise the finalised assessment against the interest of an assessee, there should be a clear case against the assessee which should be brought to his notice and he should have an opportunity to meet the ease. Only on this short ground, the Tribunal allowed the appeal of the assessee and negatived the other contentions raised by the assessee with regard to the provisions of section 70 that the assessee was having an option not to set off the losses of Kanisha Steels against the income from different sources and that the assessee was entitled to carry forward the losses of Kanisha Steels and set it off against the profits in the subsequent years.
4. Being aggrieved and dissatisfied by the aforesaid order of the Tribunal, the Revenue as well as the assessee filed reference applications. At the instance of the Revenue and the assessee, the Tribunal has referred the following questions for our opinion under section 256(1) of the Act :
At the instance of the Revenue :
1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that as the Income-tax Officer had not adjusted any carried forward loss in his assessment order but what was adjusted was unabsorbed depreciation and unabsorbed development rebate of earlier years, the order of the Commissioner of Income-tax under section 263 cannot survive ?. . . . .
5. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the order of the Commissioner of Income-tax under section 263 cannot survive ?"
5. At the instance of the assessee :
"2. If answer to question No. 1 (above) is in the negative, whether, on the facts and in the circumstances of the case, the assessee had an option not to set off loss of Kanisha Steels against the income from a different source taxable under the head 'Business income'?
3. If the answer to question No. 2 is in the affirmative, whether, on the facts and in the circumstances of the case, the assessee is entitled to carry forward loss of Kanisha Steels and set it off against the profits in subsequent years ?
4. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in observing that the question of option referred to in question No. 2 would not affect the total income at all ?"
6. Re : Questions Nos. 1 and 5 :
For deciding questions Nos. 1 and 5, it would be necessary to refer to the show-cause notice issued by the Commissioner of Income-tax under section 263 of the Income-tax Act. It is specifically stated in it that the Income-tax Officer has erred in computing the total income for the year in so far as deduction of Rs. 1,02,578, which has wrongly been given under section 80M of the Act, is concerned. It is also pointed out that section 80M contemplates deduction of income by way of dividends from a domestic company subject to the provisions of section 80A(2) that the aggregate amount of deduction under Chapter VI-A should not in any case exceed the gross total income; in the case of the assessee the gross total income as computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A is "nil" and hence the question of giving any deduction under section 80M does not arise. It seems that the Tribunal has not considered this aspect at all and arrived at the conclusion that the Department ought to have brought it to the notice of the assessee and ought to have given an opportunity of hearing to him before adjusting unabsorbed depreciation and development rebate for earlier years. In his order, the Commissioner of Income-tax has referred to the judgment of the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 and observed that the contentions raised by the assessee with regard to deduction of Rs. 1,02,578 under section 80M were not tenable in view of the aforesaid judgment. It is pointed out that in the case of the assessee the carried forward loss of earlier years was Rs. 8,44,754 and the Income-tax Officer ought to have adjusted the profits against the carried forward loss of earlier years and if there was any surplus then only the Income-tax Officer should have allowed the benefit of deduction admissible under section 80M. This would not mean that the Commissioner of Income-tax has set aside the order only on the ground that the profits required to be adjusted against the carried forward losses of the earlier years. The Commissioner of Income-tax has merely indicated that, as per the principles laid down by the Supreme Court, before grant of benefit under section 80M, there should be a surplus. The Commissioner has finally directed the Income-tax Officer to withdraw the deduction allowed under section 80M in respect of inter-corporate dividends of Rs. 1,02,578 and pass a fresh order after giving reasonable opportunity of hearing to the assessee. This part of the order would mean that the Income-tax Officer should withdraw the deduction allowed under section 80M and pass an (sic) cannot be said that the Commissioner has directed that the profits of the assessee-company should first be adjusted against the carried forward loss of the earlier years. In the order of the Commissioner of Income-tax, there is no such direction. In this view of the matter, the Tribunal manifestly erred in not properly considering the show-cause notice issued and the final order passed by the Commissioner of Income-tax under section 263 of the Act.
7. In our view, the order passed by the Commissioner of Income-tax is fully consistent with the ratio laid down by this court in the case of CIT v. Cambay Electric Supply Industrial Co. Ltd. [1976] 104 ITR 744, which was approved by the Supreme Court.
8. We would first refer to the decision of this court in the case of Cambay Electric Supply Industrial Co. Ltd. [1976] 104 ITR 744. In that case, the court was required to consider the question regarding the mode in which and the fund from which the deduction of 8 per cent. contemplated by section 80E(1) of the Income-tax Act (as it stood at the relevant time) for the assessment year 1967-68 should be calculated. After considering the various contentions raised by the parties, the court considered as to what meaning should be given to the expression "total income" which was used in section 80E. The court observed that the expression "total income" is to be construed in view of the parenthetical words "as computed in accordance with the other provisions of this Act" which follow it. The court further observed that the construction which renders these words purposeless and redundant is never permissible. The court held that the expression "total income" should be construed only in the statutory sense. The court thereafter referred to the definition of the expression "total income" given in clause (45) of section 2 and held that this clause specifically refers to the computation "in the manner laid down in the Act" and observed (at page 765) :
"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 income."
9. Thereafter, the court referred to sections 28 and 29 and held as under (at page 766) :
"The above reference to different relevant sections of the Act reveals two important aspects of the matter, namely, (1) the 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 contained in sections 32 and 33."
10. Thereafter, the court considered the question as to at what stage the benefit under section 80E(1) can be given. The relevant observations are as under (at page 766) :
"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 per cent. 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 per cent. of (A plus B), which was wholly excluded previously, is again excluded for the purpose of working out the provisions of section 80E(1). In other words, 8 per cent. of (A plus B) is exempted for depreciation and development rebate as well as for section 80E(1). This reduces the assessee's contention to an absurdity 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 eight per cent. thereof from such profits and gains, and then compute the total income which becomes exigible to tax.
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 the total income contemplated by the first part of the section is a condition precedent to the working out of eight per cent. deduction contemplated by its second part."
11. The aforesaid decision of this court has been approved by the Supreme Court by its judgment in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84. The Supreme Court has negatived the contention of the assessee that the expression "total income" appearing in section 80E(1) has been used in its commercial sense and since neither the unabsorbed depreciation nor the unabsorbed development rebate has anything to do with commercial profits attributable to the business, the said two items would not be deductible before arriving at the figure that would be exigible to the eight per cent. deduction, and observed as under (at page 95 of 113 ITR) :
"It is not possible to accept this contention for more than one reason. First, in sub-section (1) of section 80E, the expression 'total income' is followed by the words 'as computed in accordance with the other provisions of this Act' in parenthesis and the mandate of these words clearly negatives the argument that the expression 'total income' has be used in the sense of commercial profits. Secondly, the expression 'total income' has been defined in section 2(45) of the Act as meaning 'the total amount of income referred to in section 5, computed in the manner laid down in this Act' and when this definition has been furnished by the Act itself the expression as appearing in section 80E(1) must, in the absence of anything in the context suggesting to the contrary, be construed in accordance with such definition. Since the words in parenthesis occurring in sub-section (1) lay down the manner in which the total income of the concerned assessee is to be computed there would be no scope for excluding items like unabsorbed depreciation and unabsorbed development rebate while computing the total income on the basis that the total income spoken of by sub-section (1) means commercial profits."
12. Thereafter, the Supreme Court has considered the decisions of other courts on the point which are cited before it and observed that section 72(1) has a direct impact upon the computation under the head "Profits and gains of business or profession". The court held that the correct figure of total income, which is otherwise taxable under other provisions of the Act, cannot be arrived at without working out the net result of computation under the head "Profits and gains of business or profession" : The court finally held (at page 98) :
"As observed earlier, on a proper construction of the provision contained in sub-section (1) of section 80E, items like unabsorbed depreciation and unabsorbed development rebate will have to be deducted in arriving at the figure which would be exigible to deduction of eight per cent. under section 80E(1)."
13. Hence, questions Nos. 1 and 5 are answered in the negative, i.e., in favour of the Revenue and against the assessee.
14. Re : Questions Nos. 2, 3 and 4 :
For appreciating the contentions with regard to the aforesaid questions, it is required to be kept in mind that income-tax is charged on the total income of the previous year of the assessable entity. Under section 5, "total income" includes all income from whatever sources it is derived as provided therein. Section 14 provides for different heads of income for the purpose of charging of income-tax and computation of total income. The total income from different sources is to be computed in the manner laid down in the Act. Therefore, it is difficult to accept the contention of the assessee that the assessee had an option not to set off the loss of Kanisha Steels against the income from different sources taxable under the head "Business income". In the computation of the total income of the assessee under the head "Profits and gains of business", the total income has to be arrived at after considering the profit and loss from different heads of income. "Total income" cannot be computed without adjusting the profit and loss from different heads. In our view, the reliance placed by the assessee on sections 71 and 72 for contending that it is entitled to carry forward loss of Kanisha Steels without adjusting it with the profits from Milling Trading Company Private Ltd. is totally mis-conceived. Section 71(1), inter alia, provides that where in respect of any assessment year the net result of the computation under any head of income, other than "Capital gains" is a loss and the assessee has no income under the head "Capital gains", he is entitled to have the amount of such loss set off against his income, if any, assessable for that assessment year under any other head. Therefore, the Tribunal rightly arrived at the conclusion that irrespective of adjustments under sections 70, 71 and 72(1) income from all sources accruing to the assessee in the year had necessarily to go into the calculation of total income. The Tribunal further rightly observed that section 72 provided for carried forward loss only when such loss cannot be set off against income under any other head and the present case of the assessee is not covered by such provision. For calculating the total income of the assessee, profits and losses from different sources of income are required to be taken into consideration. Under the Act, there is no provision which gives an option to the assessee to show the profit as income from one source and carry forward the loss from other source of income to the next year.
15. In the result, question No. 2 is answered in the negative, i.e., in favour of the Revenue and against the assessee by holding that the assessee had no option not to set off the loss of Kanisha Steels against the income from different sources taxable under the head "Business income". As question No. 2 is answered in the negative, question No. 3 would not survive and, therefore, is not required to be answered. Further, even on merits, the assessee is not entitled to carry forward losses of Kanisha Steels and set it off against the profits in the subsequent years. For the same reasons, question No. 4 is answered in the affirmative, i.e., in favour of the Revenue and against the assessee. The reference stands disposed of accordingly with no order as to costs.