Calcutta High Court
Gouri Prasad Goenka And Ors. vs Commissioner Of Income-Tax on 21 March, 1989
Equivalent citations: [1991]190ITR81(CAL)
Author: Suhas Chandra Sen
Bench: Suhas Chandra Sen
JUDGMENT Suhas Chandra Sen, J.
1. The Tribunal has referred the following question of law to this court, under Section 256(1) of the Income-tax An. 1961 :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the deduction under Section 80T of the Income-tax Act, 1961, should have been computed by reference to the amount of capital gains as reduced by loss under the head "Capital gains" brought forward from earlier years and not by reference to the amount of capital gains arising during the relevant previous year without any such deduction ?"
2. The year of assessment is 1972-73 for which the relevant accounting period was the year ending on October 17, 1971 (Dewali 2028 S. Y.). It appears from the statement of case that the assessee is a Hindu undivided family. For this assessment year, the assessee had, amongst, other incomes, income from capital gains on sale of property at 30, Tara Chand Dutta Street, Calcutta, amounting to Rs. 1,89,000. The Income-tax Officer set off against this income from capital gains of Rs. 1,89,000 the earlier year's loss under the head "Income from capital gains" brought forward amounting to Rs. 1,14,500 and on the balance amount of Rs. 74,500, the Income-tax Officer allowed deduction under Section 80T of Rs. 5,000 on the first Rs. 5,000 and 35% of the balance.
3. The assessee went up in appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner, while not accepting some of the claims in the appeal before him, accepted the assessee's claim that the deduction under Section 80T should be worked out on the capital gains for this year without first setting off the losses under the head "Capital gains" brought forward from the earlier years.
4. The Revenue appealed to the Tribunal against the order of the Appellate Assistant Commissioner. The Tribunal held that the deduction under Section 80T should have been worked out after setting off the loss brought forward from the earlier years and on that portion of the amount of the long-term capital gains which were included in the gross total income. The order of the Appellate Assistant Commissioner was reversed and the order passed by the Income-tax Officer was restored.
5. Mr. Bajoria, on behalf of the assessee, M/s. Gouri Prasad Goenka, has contended that the computation of capital gain must be made without making any deduction on account of unabsorbed loss on long-term capital gains of the earlier years. His contention is that although the Supreme Court in the case of Distributors (Baroda) P. Ltd. v. Union of India , has overruled its decision in the case of Cloth Traders (P.) Ltd. v. Addl. CIT and has affirmed its earlier judgment in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT , a new avenue of thought has been opened up by the judgment in the case of CIT v. Canara Workshops P. Ltd. . Following the ratio laid down in that judgment, it must be held that in computing capital gains arising out of sale or transfer of long-term capital assets, the loss incurred by the assessee in the earlier years could not be set off against profits arising out of sale of capital assets in the relevant year of account. It was argued that the profit has arisen because of sale of an asset and this transaction was quite independent of the transactions and the asset in which the loss was incurred. If this ratio laid down in the case of CIT v. Canara Workshops P. Ltd. , is followed, then the assessee is entitled to succeed in this case.
6. I am unable to uphold this contention. The earlier controversy as to how the relief in the group of sections in Chapter VI-A would be made was resolved by the judgment of the Supreme Court in the case of Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120. Chapter VI-A comprises Sections 80A to 80VV. Section 80A provides that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of this Chapter, the deductions specified in Sections 80C to 80VV. In other words, the gross total income will have to be calculated first and, thereafter, the deductions contained in Sections 80C to 80VV will have to be allowed. The definition of "gross total income" in Sub-section (5) of Section 80B is that "the gross total income means the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter or under Section 280-O". Although this definition came by way of an amendment with retrospective effect, the Supreme Court has held in the aforesaid case of Distributors (Baroda) P. Ltd. [1985] 155 ITR 120, that the Explanation was clarificatory. It did not change the law in any way. The controversy before the Supreme Court in the case of Distributors (Baroda) P. Ltd. [1985] 155 ITR 120 was as to the manner of calculating relief under Section 80M in respect of intercorporate dividend. The language of Section 80M(1) is as follows :
"Where the gross total income of an assessee, being a domestic company, includes any income by way of dividends from a domestic company, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such income by way of dividends of an amount equal to ..."
7. The argument on behalf of the assessee in that case was that "such income by way of dividends" appearing in Section 80M must be the gross amount of dividends received by the assessee. The contention of the Revenue was that it was the figure which had been arrived at after making all the deductions and the allowances that qualified for deduction under Section 80M. The contention was that it was after the assessment was actually made and the gross total income of the assessee had been arrived at that the question of granting further relief under Section 80M arose. This contention was upheld by the Supreme Court in the aforesaid case of Distributors (Baroda) P. Ltd. . In fact, this view was taken earlier by the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. [1978] 113 ITR 84, where the Supreme Court had to consider the question whether unabsorbed development rebate and depreciation carried forward from earlier years of a priority industry engaged in generation and distribution of electricity had to be adjusted and set off from the profits of that industry before the relief under Section 80E was calculated.
8. In the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT , the asses see-company carried on business of generation and distribution of electricity at Cambay. The relevant portion of Section 80E(1) at the material time was as under (at p. 90 of 113 ITR) :
"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 and distribution of electricity . . . there shall be allowed a deduction from such profits and gains of an amount equal to 8% thereof in computing the total income of the company."
9. Tulzapurkar J. observed (at p. 91 of 113 ITR) :
"On reading Sub-section (1) it will become clear that three important steps are required to be taken before the special deduction permissible thereunder is allowed and the net total income exigible to tax is determined. First, compute the total income of the concerned assessee in accordance with the other provisions of the Act, i.e., in accordance with all the provisions except Section 80E ; secondly, ascertain what part of the total income so computed represents the profits and gains attributable to the business of the specified industry (here generation and distribution of electricity) ; and, thirdly, if there be profits and gains so attributable, deduct 8% thereof from such profits and gains and then arrive at the net total income exigible to tax."
10. The controversy before the Supreme Court in that case was two fold. Firstly, the question was whether the balancing charge of Rs. 7,55,807 arising out of sale of some old machineries and buildings should be taken into account while computing the deduction of 8% under Section 80E. The second question was whether unabsorbed depreciation and development rebate amounting to Rs. 2,54,613 carried over from the earlier years of assessment were deductible in computing the profits under Section 80E. It was observed by Tulzapurkar J. that (at p. 91) : ". . . it is obvious that in computing the total income of the concerned assessee, the balancing charge arising as a result of sale of old machinery and buildings and worked out as per Section 41(2), irrespective of its real character, will have to be taken into account and included as income of the business."
11. On the question whether unabsorbed depreciation and development rebate were deductible or not in computing the profits under Section 80E(1) of the Act, it was pointed out that the first two steps indicated earlier in the judgment contained (at p. 94) ". . . 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 Sections 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% contemplated by Section 80E(1)."
12. It was emphasised in that judgment that the expression "total income" was followed by the words "as computed in accordance with the other provisions of the Act". Therefore, the expression "total income" had not been used in the commercial sense.
13. It was further emphasised that the expression "total income" had 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". Therefore, there was 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) meant commercial profits.
14. In the case of Cloth Traders P. Ltd. v. Addi CIT , the question that came up before the Supreme Court was the interpretation of Section 80M which dealt with deductions in respect of certain intercorporate dividends. The material part of Sub-section (1) of Section 80M was "where the gross total income of an assessee, being a domestic company, includes any income by way of dividends received by it from a domestic company, there shall ... be allowed, in computing the total income of the assessee, a deduction from such income by way of dividends of an amount equal to". The question in that case was whether on a true interpretation of Section 85A and Section 80M of the Income-tax Act, 1961, rebate on income-tax was admissible on the actual amount of dividend received by an assessee, being a company, from an Indian company, or it was confined only to the dividend income as computed in accordance with the provisions of the Act, that is, after making the deductions specified in Section 57 including deduction of the interest paid on borrowings for making the investments. It was held in that case that the expression "such income by way of dividends" in Section 80M was referable to the income by way of dividends which was included in the gross total income. These words merely prescribe a condition for the applicability of the section, namely, the gross total income must include the category of income described by the words "income by way of dividends from a domestic company". If the gross total income included this particular category of income, whatever was the quantum of such income included, the condition would be satisfied and the assessee would be eligible for deduction of the whole or 60% of "such income" as the case may be. The words "such income" would only mean the full amount of dividends received from a domestic company. "The deduction permissible under Section 80M was, therefore, to be calculated with reference to the full amount of dividends received from a domestic company and not with reference to its income as computed in accordance with the provisions of the Act, that is, after making deductions provided under the Act."
15. It was also observed in that judgment that Section 80K read with Rule 20, Section 80MM, Section 80N and Section 80-O used the same legislative formula as Section 80M and opened with the identical words "where the gross total income of an assessee . . . includes an income, . . .". The deduction admissible in those sections was in respect of the whole of the income received by the assessee and not in respect of the income computed after making the deductions provided under the Act.
16. As there were divergent views expressed by the two aforesaid judgments of the Supreme Court about how relief was to be granted in the group of sections under Chapter VI-A of the Income-tax Act, a Bench comprising five judges of the Supreme Court examined the question once again in the case of Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120. In that case, the scope of Section 80M once again came to be considered by the Supreme Court. The Supreme Court explained the scheme of Chapter VI-A which comprised Sections 80A to 80VV (at p. 132):
"Section 80A(1), provides that in computing the total income of an assessee there shall be allowed from his gross total income, in accordance with and subject to the provisions of Chapter VI-A, the deductions specified in Sections 80C to 80VV and Sub-section (2) of that section imposes a ceiling on such deductions by enacting that the aggregate amount of such deductions shall not, in any case, exceed the gross total income of the assessee. The expression 'gross total income' is defined in Clause (v) of Section 80B to mean the total income computed in accordance with the provisions of the Act before making any deductions under Chapter VI-A or under Section 280-0. Section 80M is the new section which corresponds to the repealed Section 85A and it provides for deduction in respect of certain categories of intercorporate dividends. It is the interpretation of this Section which constitutes the subject-matter of controversy between the parties ..."
17. It was held by Bhagwati J. (as his Lordship then was) (at p. 135) :
"Now, it was urged on behalf of the assessee that the words 'where the gross total income of an assessee . . . includes any income by way of dividends from a domestic company' in the opening part of Sub-section (1) of Section 80M refer only to the inclusion of the category of income and not to the quantum of such income and, therefore, the words 'such income by way of dividends' following upon the specification of this condition, cannot have reference to the quantum of the income included but must be held referable only to the category of income included, that is, income by way of dividends from a domestic company. This was the same argument which found favour with the court in Cloth Traders' case , but on fuller consideration, we do not think it is well founded. We may assume with the court in Cloth Traders' case [1979] 118 ITR 243, that the words 'where the gross total income of an assessee . . . includes any income by way of dividends from a domestic company' are intended only to provide that a particular category of income, namely, income by way of dividends from a domestic company should form a component part of gross total income, irrespective of what is the quantum of the income so included but it is difficult to see how the factor of quantum can altogether be excluded when we talk of any category of income included in the gross total income. What is included in the gross total income in such a case is a particular quantum of income belonging to the specified category. Therefore, the words 'such income by way of dividends' must be referable not only to the category of income included in the gross total income but also to the quantum of the income so included. It is obvious, as a matter of plain grammar, that the words 'such income by way of dividends' must have reference to the income by way of dividends mentioned earlier and that would be income by way of dividends from a domestic company which is included in the gross total income. Consequently, in order to determine what is 'such income by way of dividends', we have to ask the question : what is the income by way of dividends from a domestic company included in the gross total income and that would obviously be the income by way of dividends computed in accordance with the provisions of the Act. It is difficult to appreciate how, when we are interpreting the words 'such income by way of dividends', we can make a dichotomy between the category of income by way of dividends included in the gross total income and the quantum of the income by way of dividends so included."
18. It was also held (at p. 137) :
"There is also one other strong indication in the language of Sub-section (1) of Section 80M which clearly compels us to take the view that the deduction envisaged by that provision is required to be made with reference to the income by way of dividends computed in accordance with the provisions of the Act and not with reference to the full amount of dividend received by the assessee. This indication was also unfortunately lost sight of by the court in Cloth Traders' case , presumably because it was not brought to the attention of the court. The court observed in Cloth Traders' case , that the whole of the income by way of dividends from a domestic company or 60% of such income, as the case may be, would be deductible from the gross total income for arriving at the total income of the assessee. We are afraid this observation appears to have been made tinder some misapprehension, because what Sub-section (1) of Section 80M requires is that the deduction of the whole or a specified percentage must be made from 'such income by Way of dividends' and not from the gross total income. Sub-section (1) of Section 80M provides that in computing the total income of the assessee, there shall be allowed a deduction from 'such income by way of dividends' of an amount equal to the whole or a specified percentage of such income. Now when in computing the total income of the assessee, a deduction has to be made from 'such income by way of dividends', it is elementary that 'such income by way of dividends' from which deduction has to be made must be part of gross total income. It is difficult to see how the language of this part of Sub-section (1) of Section 80M can possibly fit in if 'such income by way of dividends' were interpreted to mean the full amount of dividend received by the assessee. The full amount of dividend received by the assessee would not be included in the gross total income ; what would be included would only be the amount of dividend as computed in accordance with the provisions of the Act. If that be so, it is difficult to appreciate how for the purpose of computing the total income from the gross total income, any deduction should be required to be made from the full amount of dividend. The deduction required to be made for computing the total income from the gross total income can only be from the amount of dividend computed in accordance with the provisions of the Act which would be forming part of the gross total income."
19. It was further observed in the case of Distributors (Baroda) P. Ltd. :
"We find ourselves wholly in agreement with the view taken by this court in Cambay Electric Supply Industries Co.'s Case [1978] 113 ITR 84 and we must, therefore, dissent from the interpretation placed on Sub-section (1) of Section 80M by the decision in Cloth Traders' case . "
20. It was also held in that case that the provisions of Section 80AA were declaratory of the law as it always was since April 1, 1968, and it was unnecessary to consider the question of constitutional validity of the retrospective operation of Section 80AA.
21. The material part of the language of Section 80T is as under :
"80T. Where the gross total income of an assessee not being a company includes any income chargeable under the head 'Capital gains' relating to capital assets other than short-term capital assets (such income being, hereinafter, referred to as long-term capital gains), there shall be allowed, in computing the total income of the assessee, a deduction from such income of an amount equal to,--
(a) in a case where the gross total income does not exceed ten thousand rupees or where the long-term capital gains do not exceed five thousand rupees, the whole of such long-term capital gains ;
(b) in any other case, five thousand rupees as increased by a sum equal to--
(i) twenty-five per cent of the amount by which the long-term capital gains relating to capital assets, being buildings or lands, or any rights in buildings or lands, exceed five thousand rupees ;
(ii) forty per cent of the amount by which the long-term capital gains relating to any other capital assets exceed five thousand rupees."
22. In the instant case, there is no dispute about the facts. The Income-tax Officer had computed "long-term capital gains" of the assessee at the figure of Rs. 1,89,000 and deducted from this, the loss of capital gains of the earlier years amounting to Rs. 1,14,500. It is on the balance amount of capital gains of Rs. 74,500 that the deduction allowable under Section 80T was computed. If the three steps laid down by Tulzapurkar J. are to be taken, then the computation of gross total income in accordance with the provisions of the Income-tax Act has to be made first. The second step will be to find out what part of the gross total income, so computed, represented any income chargeable under the head "Capital gains". The third step will be to deduct the prescribed percentage of the amount of five thousand rupees plus a further sum equal to 25% of the amount by which the long-term capital gains exceed five thousand rupees.
23. Therefore, the basis on which relief under Section 80T will have to be computed is the amount of long-term capital gains computed in accordance with the provisions of the Income-tax Act. In order to arrive at that income, adjustments and set off as provided under the various provisions of the Act will have to be made first. It is the resultant figure after all adjustments and set off which is included in the gross total income. If any portion of the total amount of income under the head "Capital gains" is not brought within the computation of gross total income because of deduction or adjustments of losses of earlier years then the deductions will be calculated only on that portion of income which has been included in the gross total income.
24. Mr. Bajoria has, however, contended that a new line of thinking has been opened on this aspect of the matter by the judgment of the Supreme Court in the case of CIT v. Canara Workshops P. Ltd. [1986] 161 ITR 320, 324. In that case, in construing Section 80E, the Supreme Court held :
"In our opinion, each industry must be considered on its own working only when adjudging its title to the deduction under Section 80E. It cannot be allowed to suffer because it keeps company with some other industry in the hands of the assessee".
25. The Supreme Court also held (at p. 325) :
"To determine the benefit under Section 80E on the basis of the net result of all the industries owned by the assessee would be, moreover, to shift the focus from the industry to the assessee. We hold that in the application of Section 80E, the profits and gains earned by an industry mentioned in that section cannot be reduced by the loss suffered by any other industry or industries owned by the assessee."
26. The argument, on behalf of the assessee, is that the judgment of the Supreme Court in the case of CIT v. Canara Workshops P. Ltd. [1986] 161 ITR 320 has, in effect, considerably whittled down or modified the principles laid down in the cases of Cambay Electric Supply Industrial Co. Ltd. and Distributors (Baroda) P. Ltd. . It has been argued that it is not necessary to find out whether the income on the basis of which relief under Section 80E will have to be granted has been included in the total income. The decision given in Cambay Electric Supply Industrial Co. Ltd.'s case laying down the aforesaid three steps for granting relief under Section 80E, if followed logically, would have shown that the income arising out of the business of priority industry was arrived at after allowing all deductions and set off under the Income-tax Act. The assessee claimed relief on the basis of income of the priority industry without any deduction on the ground of carry over of losses sustained in some other industry. In computation under the head "business", this income of the priority industry would be included in the gross total income of the assessee. The Supreme Court, however, held that this should not be the method of computation of relief of a priority industry. It has been argued that logically this principle should also be extended to the case of the petitioner who has made capital gains by selling certain assets and had suffered capital losses in some other capital assets in the earlier years of account.
27. I am unable to uphold this contention. The principles laid down in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT were categorically affirmed by a Bench of five judges of the Supreme Court in the case of Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120. Therefore, it cannot be presumed that a judgment delivered by a Bench of five judges has been overruled or modified by a Bench of two judges.
28. Moreover, a distinction has been made about the case of a priority industry which is included in the list of such industries in the Fifth Schedule.
29. It is to be noted that even in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT , where it was held that the relief under Section 80E(1) was to be calculated on the basis of income "as computed in accordance with the other provisions of the Act, meant that income from business had to be computed not only in accordance with Sections 30 to 43A which would include the balancing charge but also after providing for carry forward of depreciation and development rebate". It was further emphasised that Section 72(1) (carry forward and set off of business losses) had a direct impact upon the computation under the head "Profits and gains of business or profession". But even in that case, Tulzapurkar J. specifically distinguished the judgment of the Mysore High Court in the case CIT v. Balanoor Tea and Rubber Co. Ltd. [1974] 93 ITR 115. That case dealt with the question whether the loss incurred by the assessee in non-priority business could be set off against the profits and gains made by the assessee in the priority business while computing the 8% deduction under Section 80E. The Mysore High Court had held that profits and gains were required to be worked out* without reference to the loss incurred in non-priority business for the purpose of computation of deductions under Section 80E(1). It was observed by Tulzapurkar J. that this principle "cannot avail the assessee on the point raised in the appeal".
30. Therefore, having regard to the special provisions relating to priority industries it cannot be said that there is any conflict between in the judgments in the cases of Cambay Electric Supply Industrial Co. Ltd. v. CIT and CIT v. Canara Workshops P. Ltd. . In the instant case, the assessee is not engaged in a business which comes within the category of priority industries set out in the Fifth Schedule. Therefore, the assessee cannot derive any support from the principles laid down in the case of Canara Workshops P. Ltd. . Computation of income under the Income-tax Act will have to be done, in the instant case, under the head "Capital gains" and all the deductions and allowances will have to be allowed. All adjustments of losses will have to be made in accordance with the provisions of the Income-tax Act for the purpose of arriving at the gross total income as defined in Section 80B. It is only that part of the income which has been included in the gross total income which will be the basis for computation of the relief claimed by the assessee under Section 80T.
31. Therefore, the question is answered in the affirmative and against the assessee.
32. There will be no order as to costs.
33. Advocate for the assessee prayed for a certificate of fitness for appeal to the Supreme Court. Such prayer is refused.
Bhagabati Prasad Banerjee, J.
34. I agree.