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PETITIONER: C.I.T. (CENTRAL), MADRAS

       Vs.

RESPONDENT: CANARA WORKSHOPS (P) LTD., KODIALBALL, MANGALORE

DATE OF JUDGMENT15/07/1986

BENCH: PATHAK, R.S. BENCH: PATHAK, R.S. MUKHARJI, SABYASACHI (J)

CITATION:  1986 AIR 1727            1986 SCR  (3) 166  1986 SCC  (3) 538        JT 1986   302  1986 SCALE  (2)29

ACT:      Income Tax  Act, 1961-s.  80E-Profit and gains-Priority industries-deductions in respect of-how determined.

HEADNOTE:      The assessee-company  is engaged  in the manufacture of autombile spares.  During the  previous year relevant to the assessment year  1966-67, the  assessee also  commenced  the manufacturing of  alloy  steels.  Both  the  industries  are included in  the Fifth Schedule to the Income Tax Act, 1961. The assessee  sustained a  loss in the alloys steel industry during the  previous years  relevant to the assessment years 1966-67 and  1967-68. It   claimed  a loss  in  the  sum  of Rs.15,30,688  for  the  assessment  year  1966-67.  For  the assessment year  1966-67, the  assessee disclosed profits to the tune  of Rs.17,57,129  from the  industry of  automobile ancillaries. The  assessee claimed relief under s. 80E at 8% of this  amount in  the sum  of Rs.1,40,574.  Similarly  the assessee claimed  relief in  the sum  of Rs.1,52,483 for the assessment year  1967-68. The Income Tax Officer declined to grant the relief claimed and held that the assessee would be entitled to  deduction under  s. 80E on the profits from the manufacture of  automobile parts  only after setting off the loss in  alloy steel  manufacture. The  Appellate  Assistant Commissioner dismissed  the appeal  of the  assessee. But on second appeal,  the Tribunal  accepted the contention of the assessee that  a deduction  was permissible  at  8%  on  the entire profits  of the automobile parts industry included in the total  income without  deducting therefrom the losses in the alloy  steel manufacture  and  directed  the  Income-tax Officer to recompute the relief under s.80E.      In the  Reference, on the question whether in computing the profits for the purpose of deduction under s. 80E of the Income-tax Act,  1961, the  loss incurred in the manufacture of alloy steels should not be set off against the profits of the manufacture  of automobile  ancillaries, the  High Court answered in favour of the assessee and against the revenue. 167      In the  Appeal to  this Court, on behalf of the Revenue it was  contended that  on a  true application of s. 80E the profit in  the industry  of automobile  ancillaries must  be

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reduced by  the loss  suffered in  the manufacture  of alloy steels.      Dismissing the appeal, ^      HELD: 1. In the application of s. 80E of the Income-tax Act, 1961  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. [172G]      2. Each  industry must be considered on its own working only when adjudging its title to the deduction under s. 80E. It cannot be allowed to suffer because it keeps company with some other  industry  in  the  hands  of  the  assessee.  To determine the  benefit under  s. 80E on the basis of the net result of all the industries owned by the assessee would be, to shift the focus from the industry to the assessee. [172E- F]      Commissioner of  Income-tax, Tamil  Nadu-III v. English Electric Company Ltd., [1981]131 ITR 277 overruled.      Cambay   Electric    Supply   Industrial   Co.Ltd.   v. Commisioner of  Income-tax, Gujrat-II,  [1978]  113  ITR  84 followed.      Distributors (Baroda) P. Ltd. v. Union of India & Ors., [1985] 155 ITR 120 inapplicable.      Commissioner of  Income-tax, West  Bengal-II v. Belliss and Morcon (1) Ltd., [1982] 136 ITR 481; and Commissioner of Income-tax, Mysore  v. Balanoor  Tea and  Rubber  Co.  Ltd., [1974] 93 ITR 115 approved.      3. The object underlying the enactment of s. 80E was to encourage the  setting up  of industries  concerned with the generation or  distribution of  electrical and  other energy and the  construction, manufacture or production of articles or things  specified in  the list  in the Fifth Schedule. By making a  provision for  a rebate  year after  year  on  the industry making  profits and  gains  during  the  year,  the intention also  was to  provide an  incentive for  promoting efficiency in  the industry. The benefit was directed to the setting up  and also  the efficient  working of the priority industries. [171E-F] 168      4. The  object in  enacting s.  80E is  properly served only by  confining the application of the provisions of that section to  the profits  and gains of a single industry. The deduction of  8% is  intended to  be an index of recognition that a  priority industry has been set up and is functioning efficiently. It  was never intended that the merit earned by such industry should be lost or diminished because of a loss suffered by some other industry. It makes no difference that the other  industry is  also a  priority industry.  The  co- existence of  two industries  in common  ownership  was  not intended by  Parliament to  result in  the misfortune of one being visited on the other. The legislative intention was to give to  the meritorious its full reward. To construe s. 80E to mean  that one  must determine  the net result of all the priority industries  and  then  apply  the  benefit  of  the deduction to  the figure  so obtained  will be, to undermine the object of the section. [172B-E]      In the  instant case, both the industries carried on by the assessee  find place  in the  list in the Fifth Schedule and represent separate priority industries. [172A]

JUDGMENT:      CIVIL APPELLATE JURISDICTION: Civil Appeal Nos.1685 and

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1686(NT) of 1974      From the  Judgment and  Order dated 21st February, 1974 of the  Karnataka High Court in Tax Reference Nos. 67 and 68 of 1972.      M.K. Banerjee,  Additional  Solicitor  General,  Ms  A. Subhashini and B.B.Ahuja for the Appellant      G. Sarangan and Mukul Mudgal for the Respondent.      The Judgment of the Court was delivered by      PATHAK, J.  These  appeals  are  directed  against  the judgment of  the  Karnataka  High  Court  disposing  of  two Income-tax References. The question in each Reference, which was answered by the High Court in favour of the assessee and against the Revenue, is whether in computing the profits for the purpose of deduction under section 80E of the Income Tax Act,  1961,  the  loss  incurred  by  the  assessee  in  the manufacture of alloy steels could not be set off against the profits of the manufacture of automobile ancillaries.      The assessee is a public limited company engaged in the 169 manufacture of  automobile spares. The products manufactured by it  are covered  by the list in the Fifth Schedule to the Income Tax  Act. During  the previous  year relevant  to the assessment year  1966-67,  the  assessee  commenced  another activity, the manufacture of alloy steels, which was also an industry  included  in  the  Fifth  Schedule.  The  assessee sustained a  loss in  the alloy  steel industry  during  the previous years  relevant to the assessment years 1966-67 and 1967-68. It  claimed a  loss in the sum of Rs. 15,30,688 for the assessment  year 1966-67.  For the assessment year 1966- 67, the  assessee disclosed  profits from  the  industry  of automobile ancillaries in the following detail: 1. Manufacture of Springs at Mangalore       Rs. 7,54,107 2. Manufacture of Springs at Nagpur          Rs. 9,61,808 3. Manufacture of Hubs and Brake Drums       Rs.   41,214                                              ------------                                              Rs 17,57,129                                              ------------ The assessee  claimed relief under section 80E at 8 per cent of this  amount in  the sum  of  Rs.1,40,574.  In  the  same manner, the assessee claimed relief under section 80E in the sum of  Rs.1,52,483 for  the assessment  year  1967-68.  The Income Tax  Officer declined  to grant the relief claimed by the assessee  in the  two assessment  years. He noticed that the assessee  had not taken into account the losses incurred in the  alloy steel  industry, and he held that the assessee would be  entitled to  deduction under  section 80E  on  the profits from  the manufacture of automobile parts only after setting off  the loss  in  alloy  steel  manufacture.  After making certain  adjustments in  the computation of the total income, the Income Tax Officer gave relief under section 80E in the  sum of Rs.24,896 for the assessment year 1966-67 and Rs.1,20,986 for  the assessment  year 1967-68, computing the deduction at  8 per  cent on  the amount of profits from the manufacture of  automobile parts  as reduced  by the  losses from the  alloy steel manufacture. An appeal by the assessee was dismissed  by the  Appellate Assistant  Commissioner  of Income-tax. But  on second  appeal, the Income Tax Appellate Tribunal accepted  the contention  of the  assessee  that  a deduction was  permissible at  8  per  cent  on  the  entire profits of  the automobile  parts industry  included in  the total income  without deducting  therefrom the losses in the alloy steel  manufacture. It directed the Income Tax Officer to recompute the relief under section 80E.      At the  instance of the Revenue, the Appellate Tribunal referred

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170 the case  for each  of the  two assessment years 1966-67 and 1967-68 to  the Karnataka  High Court for its opinion on the following question of law:           "Whether on  the facts and in the circumstances of           the case,  the Appellate  Tribunal  was  right  in           holding that  in computing  the  profits  for  the           purpose of  deduction under  section  80E  of  the           Income Tax  Act, 1961  the loss  incurred  in  the           manufacture of  alloy steels should not be set off           against  the   profits  of   the  manufacture   of           automobile ancillaries?" The High Court answered the question in the affirmative.      To appreciate  the merits  of the  controversy in these appeals it  would be  as well to set forth at this point the relevant provisions  of section 80E of the Income Tax Act as they stood at the time:           80E. "Deduction in  respect of  profits and  gains                from 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                of the  articles and  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." It is  not disputed  that the assessee is a company to which section 80E applies. The question is whether for the purpose of granting  relief under  s.80E the  loss suffered  by  the assessee in  the manufacture  of alloy steels can be set off against  the   profits  arising   from  the  manufacture  of automobile ancillaries.  It is  apparent  that  section  80E provides for  the grant of a rebate when computing the total income of  a company  carrying on the business of generating or distributing elect 171 ricity  or   other  form   of  power   or  of  constructing, manufacturing or  producing any  one or more of the articles and things  specified in  the list  in the  Fifth  Schedule. Popularly, the  list  is  known  as  the  list  of  Priority Industries. A  perusal of  the entries  in the list makes it clear that they are concerned with articles and things which are regarded  of primary  importance in  the industrial  and economic development  of the country. Some of them form part of the  industrial and  economic base  of the  country while others enter into the industrial and economic infrastructure considered necessary  or desirable  for its  development.  A certain priority  has been  assigned  to  the  construction, manufacture or production of those articles and things. They find place  in  section  80E  along  with  the  business  of generation or  distribution of  electricity or other form of power. Nobody  can dispute  that electrical  energy or other form  of  energy  is  crucial  to  industrial  and  economic development. The  nature of  articles and things included in the list in the Fifth Schedule possesses the same character. Alloy steels  are undoubtedly covered by Entry (1) "Iron and steel  (metal),  ferro-alloys  and  special  steels",  while

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automobile ancillaries appear clearly by that description in Entry 20  of the  list.  Both  represent  separate  priority industries.      It is  obvious from the object underlying the enactment of s. 80E and the terms in which it provides relief that the intention of  Parliament in  enacting the  provision was  to encourage the  setting up  of industries  concerned with the generation or  distribution of  electrical and  other energy and the  construction, manufacture or production of articles or things  specified in  the list in the Fifth Schedule. The intention goes  further. By  making a provision for a rebate year after  year on  the industry  making profits  and gains during the  year, the  intention  also  was  to  provide  an incentive for  promoting efficiency  in the  industry. It is clear that  the benefit  was directed  to the setting up and also the  efficient working  of the priority industries. How is the benefit to be worked out? First, it must be a company to which  s. 80E  applies, that  is to  say a  company which satisfies the  requirements of sub-s. (2) of s. 80E. Second, the total income, as computed in accordance with the Income- tax Act 1961 without taking into regard the provisions of s. 80E, should  include profits  and gains  attributable to the business or  the industry  mentioned in  the section. Third, from the  profits and gains attributable to such business or industry a deduction has to be allowed of an amount equal to eight per  cent of such profits and gains and effect must be given to  this deduction  when computing the total income of the company. 172      The assessee  in this  case carries  on two industries, both of  which find  place in the list in the Fifth Schedule and can,  therefore, be described as priority industries. It is  urged  by  the  learned  Additional  Soliciter  General, appearing for  the Revenue, that on a true application of s. 80E the  profit in  the industry  of automobile  ancillaries must be  reduced by  the loss suffered in the manufacture of alloy steel,  and reference  has been  made to  a number  of cases to  which we  shall presently  refer. After giving the matter careful  consideration we  do not find it possible to accept the  contention. It  seems to  us that  the object in enacting s.  80E is  properly served  only by  confining the application of the provisions of that section to the profits and gains  of a  single industry. The deduction of eight per cent is  intended to  be an  index of  recognition,  that  a priority  industry  has  been  set  up  and  is  functioning efficiently. It  was never intended that the merit earned by such industry  should be  lost or’  diminished because  of a loss suffered by some other industry. It makes no difference that the  other industry  is also  a priority  industry. The coexistence of  two industries  in common  ownership was not intended by  Parliament to  result in  the misfortune of one being visited on the other. The legislative intention was to give to  the meritorious its full reward. To construe s. 80E to mean  that you  must determine  the net result of all the priority industries  and  then  apply  the  benefit  of  the deduction to the figure so obtained will be, in our opinion, to undermine  the object  of the  section. An  example  will illustrate this.  An industry  entitled to the benefit of s. 80E could  have its  profits wholly  wiped out on adjustment against a  heavy loss suffered by another industry, and thus be totally  denied the relief which should have been its due by virtue of its profits. In our opinion, each industry must be considered  on its  own working  only when  adjudging its title to the deduction under s. 80E. It cannot be allowed to suffer because  it keeps company with some other industry in

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the hands of the assessee. To determine the benefit under s. 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  s. 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.      We shall  now turn to the cases cited before us. In the view which  has found favour with us it is apparent that the Madras High  Court  erred  in  holding  in  Commissioner  of Income-tax, Tamil Nadu-III v. English Electric Company Ltd., [1981] 131 ITR 277, that in granting relief under s. 80E the adjustment of certain losses in other trading 173 transactions was  permissible in  determining the quantum of profits and  gains attributable  to  the  priority  industry claiming relief under that provision. The High Court did not correctly appreciate  the law  laid down  by this  Court  in Cambay Electric  Supply Industrial Co. Ltd., v. Commissioner of Income-tax,  Gujarat-II., [1978]  113 ITR  84. That was a case where this Court held that, for the purpose of granting relief under  s. 80E  to an  industry, account must be taken when computing  the profits  and gains  attributable to that industry of the balancing charge worked out under sub-s. (2) of s. 41 as well as items of unabsorbed depreciation and any depreciation development rebate carried forward from earlier years. It  appears from  the facts  of that  case  that  the balancing charge  as well as the unabsorbed depreciation and unabsorbed development  rebate  related  to  the  particular industry  itself.  The  only  business  carried  on  by  the assessee  there   was   generation   and   distribution   of electricity at  Cambay. The  balancing charge  arose because during the  relevant accounting period the assessee had sold some  of   its  machinery   and  buildings.  The  unabsorbed depreciation and development rebate also appear to relate to the same  business. There  is no indication that any of them related to  a business  or industry distinct from that whose profits and gains formed the subject of computation under s. 80E. Our  attention has  been  invited  by  the  Revenue  to Distributors (Baroda)  P. Ltd.v.  Union of India and Others, [1985] 155 ITR 120. That is a case in which the Constitution Bench of this Court was called upon to consider the scope of s. 80M of the Income-tax Act. We do not see how that case is in any  way relevant to the case before us. The point before the Court  appears to have been whether the income by way of dividends from a domestic company, which fell to be included in the  gross total  income of  the assessee,  should be the amount computed in accordance with the provisions of the Act or the  full amount received from the paying company. We may refer at  this point  to Commissioner  of  Income-tax,  West Bengal-II v.  Belliss and  Morcon (I.)  Ltd., [1982] 136 ITR 481 a decision of the Calcutta High Court to which one of us (Sabyasachi Mukharji J.) was a party. That decision supports the view  taken by  us in  so far  as it  lays down  that in applying s.  80 I  of the  Income-tax Act (which replaced s. 80E) it  is not  permissible to  compute the  profits of the priority industry,  respecting which  the relief is claimed, by taking  into account  the depreciation  loss  from  other industries. No  doubt the  depreciation loss  arose in  that case from  non-priority industries,  but in  view of what we have said  earlier that  should make no difference whatever. We think  it unnecessary  to refer  to other  cases  on  the point. We think it sufficient to indicate that a distinction must be drawn between a case where the loss or un-

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174 absorbed depreciation  pertain to  the same  industry  whose profits and gains are the subject of relief under s. 80E and a case  where the  loss or unabsorbed depreciation relate to industries other  than  the  one  whose  profits  and  gains constitute the subject of relief.      While concluding  we may point out that the Mysore High Court seems,  in our  opinion,  to  be  perfectly  right  in holding in  Commissioner of  Income-tax, Mysore  v. Balanoor Tea and  Rubber Co.  Ltd., [1974]  93 ITR  115 that the loss from the  plastic business  carried on by the assessee could not be  deducted from  the profits and gains attributable to the tea industry for the purpose of computing the quantum of the profits and gains attributable to the tea industry under s. 80E.      In the  result, we  affirm the  answer returned  by the High  Court   to  the  question  raised  in  the  Income-tax References. The appeals are dismissed with costs. A.P.J.                                    Appeals dismissed. 175