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PETITIONER: CAMBAY ELECTRIC SUPPLY INDUSTRIAL CO.  LTD.

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME TAX, GUJARAT-IIAHMEDABAD (AND VIC

DATE OF JUDGMENT11/04/1978

BENCH: TULZAPURKAR, V.D. BENCH: TULZAPURKAR, V.D. CHANDRACHUD, Y.V. ((CJ)

CITATION:  1978 AIR 1099            1978 SCR  (3) 660  1978 SCC  (2) 644  CITATOR INFO :  R          1985 SC1585  (18,19,22)  E&R        1986 SC1727  (7)

ACT: Income  Tax Act, 1961 Sections 32(2), 33(2), 41(2),  72  and 80E(1)-Computation  of the mode in which and the  fund  from which  deduction of 8% under Section 80E(1) is to  be  made, explained.

HEADNOTE: The  assessee company carries on the business of  generation and  distribution  of electricity at Cambay and as  such  is covered by the provisions of Section 80E(1) and is  entitled to  claim the deduction contemplated by the said  provision. During the accounting period which ended on March. 31,  1967 i.e. assessment year 1967-68, the assessee Company earned an income  of  Rs. 46,319/- from its business.   The  assessee company  had  sold some of its old machinery  and  buildings resulting in balancing charges contemplated by section 41(2) which  worked out to Rs. 7,55,807/-.  There were  unabsorbed depreciation  of Rs. 1,42,955/- and  unabsorbed  development rebate of Rs. 1,11,658/aggregating to Rs. 2,54,613/- of  the earlier years which were required to be set off against  the profits of that period.  The Income Tax Officer, while  com- pleting the assessment treated the item of Rs. 7,55,807/- as profits  attributable  to  the business  of  generation  and distribution  of  electricity and allowed  deduction  at  8% thereon under Section 80E(1).  The Income Tax Officer,  thus computed  the  relief/deduction admissible to  the  assessee under  section 80E(1) at 8% on the amount of Rs.  8,02,126/- (46,319+7,55,807),  that  is to say, on the  income  without adjusting  or  setting off the unabsorbed  depreciation  and development  rebate carried forward from the  earlier  year. In  exercise of his revisional powers under section  263  of the  Act, the Additional Commissioner of Income  Tax  called for  examined the records and took the view that the  manner of computing the deduction admissible to the assessee  under Section   80E(1)  was  erroneous  and  prejudicial  to   the interests of the Revenue, in that the deduction of 8% on the item  of profit of Rs. 7,55,807 arising under Section  41(2) had  been  wrongly  allowed  and that  for  the  purpose  of calculating the deduction of 8%, the items in respect of the

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unabsorbed  depreciation and development rebate  should  not have  been  excluded  and that, if  proper  calculations  as suggested by him were made, the assessee was not entitled to any  deduction.  In the appeal, the Tribunal took  the  view that the item of Rs. 7,55,807 being profits arising from the sale  of old machinery and buildings under S. 41(2)  of  the Act, could not be treated in isolation or divorced from  the profits  and  gains  of  the  business  of  generation   and distribution of electricity done by the assessee-company and that  the  said  item will have to be  regarded  as  profits ,.attributable  to", though not "derived from" the  business of generation and distribution of electricity and, as  such, the  said  item was exigible to the deduction  of  8%  under Section  80E(1)  of the Act.  On the  question  whether  the unabsorbed  depreciation  and development  rebate  would  be deductible in computing the profits under Section 80E of the Act,  following  93 ITR, 115, the Tribunal held  that  these items  could  not  be deducted in  computing  the  deduction admissible  under  Section 80E.  The  Tribunal  allowed  the appeal   and  set  aside  the  orders  of   the   Additional Commissioner. By  its  judgment,  dated 11th and  24th  of  December  1975 disposing  of the Reference, the Gujarat High  Court  upheld the  view  of  the  Tribunal  regarding  the  item  of   Rs. 7,55,807/-  and answered in favour of the assessee.   As  to the items of unabsorbed depreciation and development rebate, the  High  Court  held  that  they  were  deductible  before arriving  at  the  figure  that would  be  exigible  to  the deduction  of 8% under Section 80E(1) and, therefore,  after deducting  the  aggregate amount of Rs.  2,54,613  from  Rs. 8,02.126,  the  balance of Rs. 547,513 was exigible  to  the deduction of 8% under the said provision. 661 Both the assessee and the Revenue preferred separate appeals against the said judgment. Dismissing both the appeals, the Court HELD : 1. (a) On true construction of the provision  itself, both  the Tribunal and the High Court were right  in  taking the  view that the item of Rs. 7,55,807 was required  to  be taken  into  account  while computing the  deduction  of  8% contemplated by S. 80E(1) of the Act. [668 A] (b)  Three  important steps are required to be taken  before the  special deduction permissible under section  80E(1)  of Income Tax Act, 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 Sec. 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.  As  regards the first step mentioned above, the important words in  sub- s.   1  are those that appear in  parenthesis,  namely,  "as computed  in  accordance with the other provisions  of  this Act",  and  these words clearly contain a mandate  that  the total  income of the concerned assessee must be computed  in accordance  with  the other provisions of  the  Act  without reference  to  S. 80E and since in the instant  case  it  is income  from business the same as per s. 29 will have to  be computed  in  accordance  with Ss. 30  to  43A  which  would include  s. 41 (2).  It is also clear that under the  second step  the profits and gains attributable to the business  of

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the specified industry (here generation and distribution  of electricity) forms a component of the total income spoken of in  the  first  step.  Reading  these  two  steps  together, therefore, it is obvious that in computing the total  income of the concerned assessee the balancing charge arising as  a result of the sale of old machinery and buildings and worked out  as  per s. 41(2), irrespective of its  real  character, will have to be taken into account and included as income of the  business.   In  other words, the  balancing  charge  as worked out under s. 41(2) will have to be taken into account before  computing the deduction of 8% under the third  step. On  proper construction of sub-s. (1) and having  regard  to the  legislative mandate contained in the three  steps  that are  required to be taken in the manner indicated above,  it is  clear  that the item of Rs. 7,55,807/- will have  to  be taken  into  account  before  computing  the  8%   deduction contemplated by the said provision. [667 G-H, 668 A] Commissioner  of  Income Tax, Bombay  City  v.  Bipinchandra Maganlal  and Co.  Ltd., (1961) 41 ITR 290 and  Commissioner of  Income Tax, Madras V. Express Newspaper Ltd., (1964)  53 I.T.R. 250; discussed. (c)  It is true that by legal fiction created under S. 41(2) a  balancing  charge arising from sale of old  machinery  or building is treated as deemed income and the same is brought to tax; in other words the legal fiction enables the Revenue to  take  back  what it had given  by  way  of  depreciation allowance in the preceding years since what was given in the preceding  years was in excess of that which ought  to  have been  given.  This shows that the fiction has  been  created for  the purpose of computation of the assessable income  of the assessee under the head ’business Income’. [669A-B] (d)  Legal fictions are created only for a definite  purpose and they should be limited to the purpose for which they are created  and should not be extended beyond their  legitimate field.   The  fiction  under s. 41(2) is  created’  for  the purpose of computation of assessable income of the  assessee under  the  head "business income" and under s.  80E(1),  in order   to  compute  and  allow  the   permissible   special deduction,  computation of total income in  accordance  with the  other provisions of the Act is required to be done  and after  allowing  such deduction the  net  assessable  income chargeable  to tax is to be determined, in other words,  the legal  fiction  under  S. 41(2) and  the  grant  of  special deduction  in  case of specified industries are  so  closely connected with each other that 662 taking  into  account  the  balancing  charge  (i.e.  deemed profits) before computing 8% deduction under S. 80E(1) would amount to extending the legal fiction within the  limits  of the  purpose  for which the said fiction had  been  created. [669 B-E] (e)  Whenever  the Legislature wanted to give  a  restricted meaning  it has used the expression "derived from",  as  for instance  in S. 80J.  Since the expression of wider  import, namely,  "attributable  to" has been used,  the  legislature intended  to  cover  receipts from sources  other  than  the actual   conduct   of  the  business   of   generation   and distribution of electricity. [669 G-H] 2.   (a)  The High Court 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% deduction. [670 E] (b)  Having regard to the construction placed on sub-s.  (1) of Section 80E as above it is obvious that, in computing the total  income of the concerned assessee items of  unabsorbed

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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  s.  80E(1) [670D-E] (c)  In  sub-s. (1) of S. 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 been used in  the  sense  of commercial profits.  The expression "total income" has  been defined in s. 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 S. 80E(1) must be in the absence of anything in the  context suggesting  to the contrary be construed in accordance  with such  definition.   Since  the  words  in  the   parenthesis occurring  in  sub-s. (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-s. (1) means  commercial  profits. [670 G-H, 671 A-B] 3.   S. 72(1) has a direct impact upon the computation under the head ’profits and gains’ of business or profession.   In other  words, the correct figure of total income,  which  is otherwise  as  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 question whether special benefit  under s.  80E  as  well as the normal or usual  benefit  of  carry forward of losses of previous years should both be available to  an  assessee  without one impinging on  the  other  must depend  upon  the  intention of  the  Legislature  and  such intention has to be gathered from the language employed.  In this view of the matter it is extremely doubtful, whether in spite  of  the legislative mandate contained  in  the  three steps  provided  by sub-s. (1) of s.  80E,  carried  forward losses  would  not be deductible before working out  the  8% deduction  contemplated  by  s.  80E  and,  therefore,   the contention  that  by  parity of reasoning  or  on  a  priori reasoning  unabsorbed  development  rebate  and   unabsorbed depreciation  should  be held to be  lion-deductible  before working  out  the  8% deduction under s.  80E(1)  cannot  be accepted.    On  proper  construction  of   the   provisions contained  in  sub-s.  (1) of a. 80E  item  like  unabsorbed depreciation and absorbed development rebate will have to be deducted  in arriving at the figure which would be  exigible to deduction of 8% under 80E(1). [673C-F] Indian  Transformers  Ltd. v. Commissioner  of  Income  Tax, Ernakulam,  ’1972)  86 I.T.R. 192.  Commissioner  of  Income Tax, Madras v. L. M. Van Moppes Diamond Tools (India)  Ltd., (1977) 107 I.T.R. 386, Commissioner of income Tax, Madras v. Lucas  T.  V.  S.  Ltd. (No.  2);  (1977)  110  I.T.R.  346, discussed and criticised. Commissioner  of  Income  Tax, Mysore v.  Balasoor  Tea  and Rubber Co. Ltd., 93 I.T.R. 115 held inapplicable. 663

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 785 and 783 of 1977.

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Appeals  by Special Leave from the Judgment and Order  dated 11/24-12-1975  of  the  Gujarat High  Court  in  Income  Tax Reference No. 115 of 1974. S.   T.  Desai,  P.  H.  Parekh  and  K.  Vasudev,  for  the Appellant. S.   N.  Kacker,  Sol.  Genl.  J. Ramamurthi and  (Miss)  A. Subhashini for the Respondent. The Judgment of the Court was delivered by TULZAPURKAR,  J.-These two appeals by special leave, one  by the Commissioner of Income Tax, Gujarat and the other by the assessee,  against  the judgment of Gujarat  High  Court  in Income  Tax Reference No. 115 of 1974 raise two  interesting questions  regarding  the mode in which and  the  fund  from which deduction of 8 % contemplated by section 80E(1) of the Income  Tax  Act, 1961 (as it stood at  the  relevant  time) should be computed. The short facts giving rise to the questions may be stated : The  assessee-Cambay Electricity Supply and  Industrial  Co. Ltd.,carries on the Business of generation and  distribution of  electricity  at Cambay and, as such, is covered  by  the provisions  of  S.  80E(1)  and is  entitled  to  claim  the deduction   contemplated   by  the  said   provision.    The assessment in question relates to the assessment year  1967- 68,  the  accounting year for which is  the  financial  year ending- March 31, 1967.  During the accounting period  which ended  on  March 31, 1967, the assessee  company  earned  an income  of Rs. 46,319/- from its said business.  It  appears that  during  this  period  it had  sold  some  of  its  old machinery  and  buildings resulting  in  balancing,  charges contemplated by s. 41(2) which the Income Tax Officer worked out  at Rs. 7,55,807/-.  It further appears that  there  was unabsorbed  depreciation  of Rs. 1,42,955/-  and  unabsorbed development  rebate of Rs. 1,11,658/- aggregating  to  Rs. 2,54,613/-  of the earlier years which were required  to  be set off against the profits of that period.  The Income  Tax Officer  while  completing the  assessment,  determined  the deduction admissible to the assessee under s. 80E(1) of  the Act in the following manner : Income from business a computed           Rs. 46,319 in the assessment order Add : Profit u/s. 41 (2) in respect of sale of machinery and buildings                               Rs. 7.55,807 Total                                   Rs. 8. 02,126 Less    8 %deduction u/s 80E (1) on Rs. 8.02,126                            Rs. 64.170 Less    Unabsorbed depreciation    Rs. 7 .37,956 and development rebate : Depreciation :        Rs. 1 .42,955 Development Rebate: Rs. 1 . 11, 658   Rs. 2,54,613      -      - Net Income chargeable to tax:           Rs. 4,83,343 664 It  will  appear clear from the above computation  that  the Income  Tax  Officer treated the item of Rs.  7,55,807/-  as profits  attributable  to  the business  of  generation  and distribution  of  electricity and allowed  deduction  at  8% thereon  under s. 80E(1).  It would also be clear  that  the Income Tax Officer computed the relief /deduction admissible to  the assessee under s. 80E(1) at 8% on the amount of  Rs. 8,02,126, that is to say, on the income before adjusting  or setting  off  the unabsorbed  depreciation  and  development rebate  carried  forward from the earlier  year.   When  the aforesaid  assessment  order  came  to  his  knowledge,  the Additional  Commissioner  of  Income  Tax  called  for   and

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examined  the  record  and proceedings in  exercise  of  his powers  under  s.  263  of  the  Act  and  after  giving  an opportunity to the assessee-company to show cause, took  the view  that the manner of computing the deduction  admissible to  the assessee under s. 80E(1) was erroneous and  prejudi- cial to the interests of the Revenue, in that the  deduction of  8 % on the item of profit of Rs. 7,55,807 arising  under s. 41 (2) had been wrongly allowed and that for the  purpose of calculating the deduction of 8%  the items in respect  of the  unabsorbed depreciation and development  rebate  should not  have been excluded, and that if proper calculations  as suggested by him were made, the assessee was not entitled to any  deduction.  He, therefore, set aside the order  of  the Income  Tax  Officer and directed that fresh  assessment  be made in accordance with law.  Feeling aggrieved by the order passed  by  the Additional Commissioner  of  Income-Tax  the assessee preferred an appeal to the Income Tax Tribunal.  In the appeal as regards the item of Rs. 7,55,807 being profits arising  from the sale of old machinery and buildings  under s.  41 (2) of the Act, the Tribunal took the view  that  the said  item of profits could not be treated in  isolation  or divorced  from  the  profits and gains of  the  business  of generation  and  distribution  of electricity  done  by  the assessee-company  and  that the said item will  have  to  be regarded  as profits "attributable to", though not  "derived from"  the  business  of  generation  and  distribution   of electricity and, as such, the said item was exigible to  the deduction of 8% under s. 80E(1) of the Act.  On the question whether  the unabsorbed depreciation and development  rebate would be deductible in computing the profits under S. 80E of the, Act, the Tribunal following the decision of the  Mysore High  Court in the case of C.I.T. Mysore v. Balanoor Teti  & Rubber  Co.(1)  held  that  these two  items  could  not  be deducted in- computing the deduction admissible under S. 80E of  the Act.  The Tribunal accordingly allowed  the  appeal, set  aside  the  order of the  Additional  Commissioner  and restored that of the income Tax Officer. At  the  instance  of the Commissioner of  Income  Tax,  the Tribunal referred the following two questions to the Gujarat High Court for its  opinion :               "  (1)  Whether the Tribunal  was  correct  in               holding  that the Profits under section  41(2)               of  the Income Tax Act 1961 arising from  the,               sale  of machinery and building, amounting  to               Rs.  7,55,807/- should be taken  into  account               while  computing the deduction of 8  per  cent               under section 80F(1) of the Act ? (3)  (1964) 53 I.T.R.250.  665               (2)Whether   unabsorbed  depreciation   and               development  rebate amounting to Rs.  2,54,613               is  not deductible in computing profits  under               section 80E(1) of the Act ?" The High Court by its judgment dated 11th and 24th December, 1975  disposed  of  the-Reference  by  answering  the  first question  in favour of the assessee and the second  question in  favour. of the Revenue.  In other words the  High  Court upheld the view of the Tribunal on the first question  while on the second question it took the view that the  unabsorbed depreciation  and development rebate were deductible  before arriving  at  the  figure  that would  be  exigible  to  the deduction  of  8%  under, s.  80E(1)  and  therefore.  after deducting  the  aggregate amount of Rs.  2,54,613  from  Rs. 8,02,126  the  balance of Rs. 5,47,513 was exigible  to  the deduction of 8% under the said provision.  Civil Appeal  No.

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783(NT) of 1977 has been preferred by the Revenue in so  far as  the  answer to the first question has  gone  against  it while Civil Appeal No. 785(NT) of 1977 has been preferred by the  assessee  inasmuch  as the  second  question  has  been answered in favour of the Revenue. As regards the question raised in C.A. No. 783(NT) of  1977, the learned Solicitor General appearing for the Revenue  has contended  that  the item of Rs. 7,55,807/_  represents  the balancing  charges arising out of the sale of old  machinery and buildings worked out under s. 41 (2) of the Act and the same   cannot   be  treated  as  any.   profits   or   gains "attributable  to"  the business of generation  and  distri- bution of electricity carried on by the assessee and as such the  said  item  should not be  taken  into  account  while’ computing  the deduction of 8% under s. 80E(1) of  the  Act. He emphasized that under that, section a deduction of 8%  is permissible  from "such profits and gains" meaning  "profits and  gains attributable ’to the business of  generation  and distribution of electricity" carried on by an assessee.   He contended  that a balancing charge contemplated under s.  41 (2) is really in the nature of a return of capital and not a return  of revenue and it is only by reason of  the  fiction created by s. 41(2) that the same is deemed to be a  revenue receipt and has been made chargeable to income tax as income of the business but it is well settled that a legal  fiction is to be limited to the purpose for which it is created  and should  not  be extended beyond its  legitimate  field.   He urged that the very fact that a deeming provision has’  been made  under S. 41(2) shows that it is not a revenue  receipt but  a  capital  receipt in the hands of  an  assessee.   In support of his contention he placed reliance upon a decision of this Court in Commissioner of Income-Tax, Bombay City  v. Rivinchandra Maganlal & Co. Ltd.-,(1) where the real  nature of  the  balancing charge arising  under  the  corresponding provision  of the 1922 Act has been explained by this  Court as  being  a  capital  return or  a  capital  receipt.   He. therefore,  contended that item of Rs. 7,55.807/-  which  is not  really any profit or gain earned in the conduct of  the business  of  generation  and  distribution  of  electricity cannot be. taken into account while computing the  deduction of 8% "under s. 80E(1) of the Act. in (1) (1961) 41 I.T.R. 290. 8315SCI/78 666 On  the  other hand, Mr. S. T. Desai,  appearing,  for  the, assessee,  contended that both the Tribunal as well  as  the High  Court were right in coming to the conclusion that  the said  item of Rs. 7,55,807/- was, on proper construction  of s.  80E(1),  required  to  be  taken  into  account   before computing  the permissible deduction of 8%  contemplated  by that  provision.   He pointed out that s. 80E in  the  first place  requires the computation of the total income  of  the assessee carrying on specified industry "in accordance  with the  other  provisions of this Act";  secondly,  such  total income  so  computed  should  include  "profits  and   gains attributable  to  the business of’  the  specified  industry (here  generation  and  distribution  of  electricity);  and thirdly,  it  is  from  such  profits  attributable-to   the business of the specified industry that the deduction of  8% should be made.  He laid considerable emphasis on the aspect that  the Legislature has used the expression  "attributable to  the business of’ instead of "derived  from  the-business of"  and according to him the former being an expression  of ’Wider  import  would  include an item  like  the  balancing charge which may not be directly derived from the conduct of

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the business of the specified industry (here generation  and distribution  of  electricity).  He also urged that  in  its subsequent  decision in the case of Commissioner of  Income- Tax,  Madra  v. Express Newspapers Ltd.,(1) this  Court  has explained  that the balancing charge contemplated  under  s. 41(2).  in  substance  partakes the  character  of  "escaped profits"  of the business carried on by an assessee  and  as such the item of Rs. 7,55,807/- could be treated as  profits attributable to the business of generation and  distribution of electricity by the assessee.  He also contended that even if  the  matter were to be looked at from the angle  of  the legal fiction created by s. 41 (2) of the    Act,  the  said fiction  could  be extended so as to take into  account  the said  item  of  Rs.  7,55,807/-  before  computing  the   8% deduction for  such extension of the fiction would be within and for the purpose for  which the same has been created. In  our  view the answer to the question  raised  before  us really  turns upon the proper construction of the  provision contained in s. 80E(1) of the Act rather than on what is the real nature or character of a      balancing charge  arising under s. 41(2) of the Act and it would, therefore, be proper to  set  out  the provisions of s. 80E as it  stood  at  the relevant 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               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. (1)  (1964) 53 I.T.R. 250.  667               (2)   This section applies to-               (a)   an Indian company; or               (b)   any  other  company which has  made  the               prescribed  arrangements for  the  declaration               and payment of dividends (including  dividends               on preference shares) within India.               but  does  not  apply to  any  Indian  company               referred  to  in clause (a), or to  any  other               company  referred  to in clause (b),  if  such               Indian or other company is a company  referred               to  in  section 108 and its  total  income  as               computed  before  applying the  provisions  of               sub-section  (1) does not  exceed  twenty-five               thousand rupees." It  was not disputed before us that the aforesaid  provision contained  in s. 80E(1) has been enacted for the purpose  of providing  for  certain,  special deduction to  be  made  in computing  the,  total  income  in  the  case  of  specified industries,  over  and above the  other  general  deductions contemplated  by  the  Act.  It  was  further  not  disputed before. us that the assessee being an Indian company engaged in   the   business  of  generation  and   distribution   of electricity is a company to which the section applies and is entitled  to claim the deduction of 8% contemplated by  that

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provision  and the only question is how and in  what  manner the  said deduction should be computed.  On  reading  sub-s. (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 s. 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.  As  regards the first step mentioned above, the important words in  sub- s.  (1)  are those that appear in parenthesis,  namely,  "as computed  in  accordance with the other provisions  of  this Act"  and  these words clearly contain a  mandate  that  the total  income of the concerned assessee must be computed  in accordance  with  the other provisions of  the  Act  without reference  to  s. 80E and since in the instant  case  it  is income  from business the same as per s. 29 will have to  be computed  in  accordance  with ss. 30  to  43A  which  would include  S.  41(2). It is also clear that under  the  second step  the profits and gains attributable to the business  of the specified industry (here generation and distribution  of electricity) forms a component of the total income spoken of in  the  first  step.  Reading  these  two  steps  together, therefore, it is obvious that in computing the total  income of ’the concerned assessee the balancing charge arising as a result of the sale of old machinery and buildings and worked out  as per S. 41 (2), irrespective of its  real  character, will have to be taken into account and included as income of the  business.   In  other words, the  balancing  charge  as worked  out  under  S. 41 (2) will have  to  be  taken  into account 668 before  computing the deduction of 8% under the third  step. On  proper construction of sub-s. (1) and having  regard  to the  legislative mandate contained-in the three  steps  that are  required to be taken in the manner indicated  above  we are clearly of the view that the item of Rs. 7,55,807/- will have  to  be  taken into account  before  computing  the  8% deduction contemplated by the said provision. The learned Solicitor General has argued to the contrary  by laying considerable emphasis on two aspects, first, the real nature  of  the  balancing  charge  under  S.  41(2),  which according to him is a return of capital and not a return  of revenue and, secondly, under the second and third steps  the 8%  deduction  is  to  be  made  from  "profits  and   gains attributable  to  the business of"  the  specified  industry (here  generation  and  distribution  of  electricity).   As regards the first aspect, on the question of real nature  or true   character  of  a  balancing  charge  two   apparently divergent  views  would appear to have been  taken  by  this Court  in  two  decisions.   In  the  case  of  Bipinchandra Maganlal  &  Co. Ltd. (supra) the question  that  arose  for determination  was  whether  a balancing  charge  which  was brought  to  tax  on the basis of  deemed  income  and  was, therefore, included in the assessable income of an  assessee under the second proviso to cl. (vii) of sub-s. (2) of s. 10 of  the  1922 Act (equivalent to s. 41(2) of the  1961  Act) could be taken into account while considering "smallness  of profit" for purposes of deciding whether the case  attracted

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the  applicability of S. 23A of the Act and this Court  took the  view that the balancing charge was not real income  but was  made taxable income for the purpose of  computation  of the  assessable income by legal fiction but on that  account it did not become commercial profit and was not liable to be taken  into  account  in assessing whether in  view  of  the smallness   of   profits   a  larger   dividend   would   be unreasonable; in that context this Court observed that  what in truth was a capital return was by a fiction regarded  for the purposes of the Act as income and was made chargeable to income tax but because of that its character was not altered and  it was not converted into assessee’s  business  profits and that smallness of profit in S. 23A had to be adjudged in the  light of commercial principles and not in the light  of total  receipts,  actual or fictional.   In  the  subsequent decision  in the Express Newspapers case (supra) this  Court has  regarded  a  balancing charge  as  being  the  "escaped profits"  of  the business for which the  assessee  is  made liable  to  tax.   At  page 254  of  the  report  the  Court explained  the  nature  of the balancing charge  by  way  of illustration  thus  : "assume that the original  cost  of  a machinery  or plant is Rs. 100 and depreciation  allowed  is Rs. 25; the written down value is Rs. 75.  If the  machinery is sold for Rs. 100. it is obvious that depreciation of  Rs. 25  was  wrongly allowed.  If it had not been  allowed  that amount would have swelled the profits to that extent.   When it  is  found  that it was wrongly allowed  that  profit  Is brought  to  charge.   The  second  proviso,  therefore,  in substance, brings to charge an escaped profit or gain of the business  carried  on by the  assessee".   These  apparently divergent  views  have given rise to two  rival  contentions urged before us by counsel on other tide, It is  unnecessary in this case to go into the question whether the divergence, is real or merely apparent, for. as we have said above.  the answer to the question raised before us does not depend upon the real nature on  669 true  character  of  the balancing charge  but  upon  proper construction   of   the  sub-s.  (1)  which   contains   the legislative  mandate  with regard to  the  manner  in  which three  steps indicated therein are required to be taken  for computing  the  deduction of 8% contemplated  by  that  pro- vision.  It is true that by a legal fiction created under s. 41  (2)  a  balancing  charge  arising  from,  sale  of  old machinery  or building is treated as deemed income  and  the same  is  brought to tax; in other words the  legal  fiction enables the Revenue to take back what it had given by way of depreciation allowance in the preceding years since what was given  in  the preceding years was in excess of  that  which ought  to have been given.  This shows that the fiction  has been   created  for  the  purpose  of  computation  of   the assessable  income of the assessee under the head  "Business Income".   It  was  rightly  pointed  out  by  the   learned Solicitor General that legal fictions are created only for a definite  purpose and they should be limited to the  purpose for which they are created and should not be extended beyond their  legitimate  field.   But  as  indicated  earlier  the fiction  under  s.  41(2)  is created  for  the  purpose  of computation  of assessable income of the assessee under  the head  ’Business  Income’  and under s. 80E(1)  in  order  to compute   and  allow  the  permissible  special   deduction, computation  of  total income in accordance with  the  other provisions  of  the  Act is required to be  done  and  after allowing such deduction the net assesaable income chargeable to  tax  is  to be determined; in  other  words,  the  legal

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fiction under s. 41(2) and the grant of special deduction in case  of specified industries are so closely connected  with each  other  that taking into account the  balancing  charge (i.e.  deemed  profits) before computing  the  8%  deduction under s. 80E(1) would amount to extending the legal  fiction within the limits of the purpose for which the said  fiction ’had been created. As   regards  the  aspect  emerging  from   the   expression "attributable to" occurring in the phrase "profits and gains attributable  to  the business of"  the  specified  industry (here  generation and distribution of electricity) on  which the  learned Solicitor General relied, it will be  pertinent to  observe that the Legislature has deliberately  used  the expression "attributable to" and not the expression "derived from".    It   cannot  be  disputed  that   the   expression "attributable  to"  is certainly wider in import  than  the expression  "derived  from".  Had  the  expression  "derived from" been used it could have with some force been contended that a balancing charge arising from the sale of old  machi- nery  and buildings cannot be regarded as profits and  gains derived  from the conduct of the business of generation  and distribution  of electricity.  In this connection it may  be pointed  out that whenever the Legislature wanted to give  a restricted  meaning in the manner suggested by  the  learned Solicitor  General  it  has used  the  expression "derived from",  as for instance in s. 80J.  In our view  (since  the expression  of wider import, namely, "attributable to?’  has been  used, the Legislature intended to cover receipts  from sources  other  than the actual conduct of the  business  of generation and distribution of electricity. For   the  aforesaid  reasons  and  particularly   on   true construction of the provision itself we are of the view that both the Tribunal and the 670 High  Court were right in taking the view that the  item  of Rs.  7,55,807/was  required to be taken into  account  while computing the deduction of 8 % contemplated by s. 80E (1) of the  Act.   The Revenue’s appeal, therefore,  fails  and  is dismissed. 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-s. (1) of s. 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   sub-s.   (1) contemplates  three  steps  being taken  for  computing  the special deduction permissible thereunder 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  a  the Act  except s. 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  s.  32(2)  (which provides  for carry forward of depreciation) and s. 3 3  (2) (which provides for carry forward of development rabate  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

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before arriving at the figure that will become exigible  to, the  deduction  of 8% contemplated by s.  80E(1).   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% deduction. The  assessee attempted to challenge the aforesaid  view  by raising a couple of contentions.  In the first place  before the  High  Court  it  was  strenuously  urged,  though   not seriously  before  us, that the  expression  "total  income" appearing in S. 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 8% deduction.   It  is not  possible  to accept this contention for more  than  one reason.   First.  in  sub-s. (1) of s.  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  been used  in  the sense of commercial  profits.   Secondly,  the expression "total income"’ has been defined in s. 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 S. 80E(1)  must,  in the absence of any-  671 thing  in  the  context  suggesting  to  the  contrary,   be construed  in  accordance with such definition.   Since  the words in the parenthesis occurring in sub-s. (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  deve- lopment rebate while computing the total income on the basis that  the  total  income  spoken  of  by  sub-s.  (1)  means commercial profits. Counsel for the assessee next relied upon two decisions, one of the Kerala High Court in the case of Indian  Transformers Ltd.  v. Commissioner of Income Tax, Ernakulam,(1)  and  the other  of the Madras High Court in the case of  Commissioner of  Income-Tax, Madras-I v. L. M. Van Moppes  Diamond  Tools (India) Ltd.,(2) in both of which a view has been taken that the  deduction under s. 80E (1) has to be worked out  before setting  off  the losses brought forward  from  the  earlier years and the further argument based on this view is that if carried  forward losses are not to be deducted then  carried forward   depreciation  and  carried   forward   development rebate,-since all the three stand on the same footing-should not  be deductible while working out the deduction under  s. 80E  of the Act and in that behalf reliance was placed on  a later  decision of the Madras High Court in Commissioner  of Income Tax, Madras v. Lucas-T.-V. S. Ltd. (No.2).(3), It may be stated that the first two decisions did not deal with the question  of unabsorbed depreciation or  unabsorbed  rebate, but merely dealt with the question of carried forward losses in the context of s. 80E(1), while the third decision  dealt with  all  the three things, carried forward  loss,  carried forward depreciation and carried forward development  rebate in  the  context  of  s. 80E(1) and it  was  held  that  the deduction under s. 80E(1) will have to be worked out  before setting off or adjusting each of the three things.  In  that

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case  the  Madras High Court held that  as  regards  carried forward  loss the point was covered by its earlier  decision in  L.  M.  Van Moppes(2),  case  (supra),  that  unabsorbed development  rebate stood on the same footing as  unabsorbed losses  and as regards unabsorbed depreciation it  took  the view that since s. 72(2) itself postponed the adjustment  of unabsorbed depreciation to a stage subsequent to the set off of business losses under S. 72(2) and set off of the  losses in  speculation  business  under s.  73(3),  the  unabsorbed depreciation cannot be. adjusted or deducted because if  for the purpose of S. 80E the previous years losses could not be set   off  it  will  be  a  fortiori  that  the   unabsorbed depreciation could not be adjusted inasmuch as from the very sequence  the  adjustment of unabsorbed  depreciation  could come  only after the adjustment of the unabsorbed losses  of the  previous years.  It will thus appear clear that in  the last  mentioned case unabsorbed development rebate was  held to  be  non-deductible  for  the  same  reasons  for   which unabsorbed  loss  could not be deducted  under  the  earlier decision and the unabsorbed depreciation was held to be non- deductible  on  the  basis  of  de  priori  reasoning.   The question  that  arises  for  consideration,  therefore,   is whether  the  view taken in regard to  non-deductibility  of carried for- (1)  (1972) 86 I.T.R. 192. (2)  (1977) 107 I.T.R. 386. (3)  (1977) 110 I.T.R. 346. 672 ward losses while computing the total income for the purpose of  granting the 8% deduction under s. 80E in the first  two decisions  is correct.  It is true that in the instant  case the  question  of  deductibility  or  otherwise  of  carried forward losses of earlier years in the context of S. 80E has not  directly  arisen before us but since  counsel  for  the assessee has raised a contention about non-deductibility  of unabsorbed depreciation and unabsorbed development rebate on the  basis of the view taken by Kerala High Court in  Indian Transformer’s  case (supra) and Madras High Court in  L.  M. Van  Moppes’ case (supra) in regard to  nondeductibility  of unabsorbed  losses of earlier years, we are  constrained  to express  our  opinion on the validity of the view  taken  in those  two cases.  In our opinion, the view taken in  Indian Transsformers’  case  (supra)  and L. M.  Van  Moppes’  case (supra)  in  regard to the  nondeductibility  of  unabsorbed losses of the earlier years in the context of computing  the deduction  under s. 80E of the Act is open to grave  doubts. In  the  first  place  such  a  view  runs  counter  to  the Legislative mandate contained in the three steps required to be taken under sub-s.  ’(1) of s. 80E as discussed  earlier. Secondly, the main reasoning given by the Kerala High  Court for  taking  such a view in the  Indian  Transformers’  case (supra) the  Madras High Court in L. M. Van  Moppes’  case (supra)  has  merely followed the Kerala  decision-does  not bear  scrutiny.  After pointing out that Chapter IV  of  the 1961 Act deals with the computation of income falling  under the  various  heads  mentioned in s. 14  of  the  Act,  that Chapter VI in which s. 72 occurs deals with the  aggregation of  income and set off or carry forward of loss and that  s. 80E  deals  with  deduction to be made  in  computing  total income, the Kerala High Court has proceeded to observe thus               "Computation  as  such  is used  only  in  the               heading  in  Chapter  IV.   Section  66   Also               provides that in computing the total income of               an assessee there shall be included all income               on  which  no  income-tax  is  payable   under

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             Chapter VII, etc.  What is provided in section               66   is   also   relating   to    computation.               Similarly, the same words are used in  section               67.   But, there are no such words in  section               72.   Section 72 speaks of the net  result  of               the  computation under the bead  ’Profits  and               gains of business or profession’.  We consider               that the set-off permitted under section 72 is               from  an amount arrived at after applying  the               provisions  of  Chapter IV  along  with  other               sections  of the Act such as sections  66  and               67,  etc., dealing with computation of  income               and  after  permitting  the  deductions  under               section 80E." The  Court  has  further observed that in  its  opinion  the deduction  under  S.80 E is a ’special benefit  given  to  a company which satisfies the conditions under section 80E and the  deduction permissible thereunder is only  from  profits and gains attributable to the specified activities and  this benefit  should  not be diminished by  ’the  other  benefits conferred by the Act, such as the right to have the previous losses  set off, that the two serve different  purposes  and the  benefit  of  both must be  available  to  an  assessee, without the one impinging on the other.  It will thus appear that the Kerala High Court has regarded section 72 appear-,  673 ing  in  Chapter  VI as a  provision  unconnected  with  the computation  of  the  total  income of  an  assessee  and  a provision which comes into operation ’at a stage  subsequent to the computation of the total income arising from business done  in accordance with ss. 30 to 43A occurring in  Chapter IV  of the Act and, therefore, the unabsorbed losses  cannot be  set off before calculating the deduction under  S.  80E. It  is  not possible to accept the view that s.  72  has  no bearing  on  or is unconnected with the computation  of  the total  income  of an assessee under the  head  ’Profits  and gains  of  business  or  profession’.   Actually  s.   72(1) provides that where the net result of computation under  the head ’Profits and gains of business or profession’ is a loss and such loss cannot be or is not Wholly set off against the income  under  any head of income in,  accordance  with  the provisions of S. 71, so much of the loss as has not been  so set-off,  subject  to the other provisions of  the  Chapter, shall  be carried forward to the following  assessment  year and shall be set off against the profits and gains, if  any, of  any  business or profession for  that  assessment  year. Therefore, s. 72(1) has a direct impact upon the computation under   the   head  ’Profits  and  gains  of   business   or profession’.   In other words, 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’.   Further  the  question  whether special benefit under S. 80E as well as the normal or  usual benefit of carry forward of losses of previous years  should both  be available to an assessee, without one impinging  on the other must depend upon the intention of the  Legislature and  such  intention has to be gathered  from  the  language employed.   In  this  view of the  matter  it  is  extremely doubtful  whether  in  spite  of  the  Legislative   mandate contained  in the three steps provided for by sub-s. (1)  of S.  80E, the carried forward losses would not be  deductible before  working out the 8% deduction contemplated by s.  80E and,  therefore, the contention that by parity of  reasoning or  on a priori reasoning unabsorbed development rebate  and

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unabsorbed depreciation should be held to be  non-deductible before  working out the 8% deduction under S. 80E(1)  cannot be accepted.  As observed earlier on proper construction  of the  provision contained in sub-s. (1) of s. 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 8% under s. 80E(1). Reference  was also made by counsel for the assessee to  the decision   of  the  Mysore  High  Court  in  the   case   of Commissioner  of  Income  Tax, Mysore v.  Balanoor  Tea  and Rubber  Co.  Ltd., (supra).  In our view that  decision  has nothing  whatever to do with the question posed  before  us. In  that case the question was whether the loss incurred  by an  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 s. 80E  and the High Court upheld the Tribunal’s view that  for the  purpose of allowing a deduction under S. 80E the  words "such  profits" occurring in that section mean "the  profits and  gains attributable to an activity as specified  in  the 5th  Schedule of the Act" and, therefore, the deduction  was required to be worked out with- 674 out reference to the loss incurred in non-priority business. The  decision was rendered on the language of s. 80E(1)  but it  cannot  avail the assessee on the point  raised  in  the appeal. In the result the assessee’s appeal also fails and the  same is dismissed. In the circumstances, there will be no order as to costs  in both the appeals. S. R.                           Appeals dismissed. 675