http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 9  

PETITIONER: COMMISSIONER OF INCOME TAX, PATIALA

       Vs.

RESPONDENT: PATIALA FLOUR MILLS CO. PVT. LTD., PATIALA

DATE OF JUDGMENT: 06/10/1968

BENCH: BHAGWATI, P.N. BENCH: BHAGWATI, P.N. TULZAPURKAR, V.D. PATHAK, R.S.

CITATION:  1979 AIR  216            1979 SCR  (2)1128  1979 SCC  (2) 621

ACT:      Income Tax Act, 1961, Section 80 J-Interpretation of.

HEADNOTE:      The Respondent-assessee  claimed in  its assessment  to tax for  the assessment  year 1970-71  that the  amounts  of deficiency under  Sec. 801  for the  current as well as past assessment years  were liable  to be  adjusted  against  the profit of  Rs. 1,51,011/-  earned by  its cold storage plant which was  a new industrial undertaking to which sub-section (4) of  Sec. 80J of the Income Tax Act applied. The assessee did not  make any  profit in  the business  of cold  storage plant during  the assessment years 1967-68, and  1968-69 and 1969-70, but  there was  profit in  the other businesses and the losses, depreciation allowance and development rebate in respect of  the cold storage plant were adjusted against the profit from  the other  businesses in  computing  the  total income  of   the  assessee   chargeable  to  tax  for  those assessment years.  The Income  Tax officer and in appeal the Appellate Assistant  Commissioner rejected  the claim of the assessee for  adjustment. But in further appeal the Tribunal held that since the losses as well as depreciation allowance and development  rebate  in  respect  of  the  cold  storage business for the past assessment years were already adjusted against the  profit from  other businesses,  no part of such losses,  depreciation   allowance  or   development   rebate remained unabsorbed  so as to be carried forward and set off against the profit for the assessment year 1970-71 and hence the profit  of Rs. 1,51,011/- from the cold storage business was not  liable to  be reduced  by any  such set off and the assessee was  entitled to claim that from out of such profit there should  be deducted, first, the amount of Rs. 83,891/- representing the  relevant amount of capital employed during the previous year and then the amounts of deficiency for the past assessment years. The High Court on a reference, at the instance of  the Revenue  answered the question in favour of the assessee.      Dismissing the appeal by special leave the Court, ^      HELD: (1) The proper construction of sub-section (1) of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 9  

Sec. 80J  must, be  taken to be that the profits or gains of the  new   industrial  undertaking   must  be   computed  in accordance with the provisions of the Act in the same manner as they  would be in determining the total income chargeable to tax  and it  must follow  a fortiori  that if the losses, depreciation allowance  and development rebate in respect of the new industrial undertaking for the past assessment years have been  fully set  off against the profit of the assessee from other  business or  for the matter of that, against the income of  the assessee  under any  other head  by reason of sections 70  and 71 read with sub-section (2) of Sec. 32 and sub-section (2)  of Sec.  32A,  no  part.  Of  such  losses, depreciation allowance or development rebate would be liable to be  adjusted over again in computing the profits or gains of the new industrial undertaking for applying the provision contained in  sub-section (1)  of Sec. 80J. The same mode of computation must  Prevail also  in  applying  the  provision contained in 1129 sub-section  (3)  of  Sec.  80J,  because  that  sub-section provides for  setting  off  the  carried-forward  amount  of deficiency of the past assessment years against "the profits and gains  referred to  in sub-section  1" or  Sec. 80J,  as computed after  allowing inter alia the deduction admissible under sub-section  and, therefore,  if, for  the purpose  of sub-section (  I )  of Sec. 80J, the profits or gains of the new  industrial   undertaking  are   to   be   computed   in accordance.. with  the provision  of the  Act and no part of the losses, depreciation allowance or development rebate for the past  assessment years  which has  been  fully  set  off against the profit from other businesses or income under any other head  is liable to be adjusted over again in computing the profits  or gains  of the awe industrial undertaking, no such adjustment would equally be permissible in applying the provision contained in sub-section of Section 80J.[1136 D-H, 1137-A]      (2) It is clear from the language of sub-section (1) of Section 80J  that the  profits or  gains of a new industrial undertaking from  which deduction  of the relevant amount of capital employed  during   a particular  assessment year  is allowable under.  that provision,  are the  profits or gains includible in the computation of the total income chargeable to tax.  Therefore, whatever- be the profits or gains of the new industrial  undertaking  computed  for  the  purpose  of arriving at  the total  income chargeable to tax, would have to be  taken to  be the  profits or.  gains for applying the provision contained in sub-section (I) of Section 80J. [1135 D-E]      (3) There  are no  two  modes  of  computation  of  the profits  or   gains  of   the  new   industrial  undertaking contemplated  by   sub-section(1)  of   Sec.  80J,  one  for determining the total income chargeable to tax and the other for applying  the provision  contained in  that sub-section. The language  of sub-section  of Section  80J is  clear  and explicit and  leaves no  doubt that  the profits or gains of the new  industrial undertaking  for the purpose of allowing the deduction  provided in  that  sub-section,  have  to  be computed in  the same  manner in  which  they  would  be  in determining  the  total  income  chargeable  to  tax  and  a deduction has then to be made from such profits or gains, of the  relevant   amount  of.   capital  employed  during  the assessment year  in question.  It cannot  be held    by  any process of  construction, even  by turning  and twisting the language of  sub-section (  I )  of Sec.  80J that  for  the purpose of  allowing the  deduction contemplated  under that

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 9  

section  the   profits  or   gains  of  the  new  industrial undertaking must be computed in a manner different from that in which  they would  be computed  in determining  the total income chargeable    to tax. Sub-section (1 ) of Section 80J does not  create a  legal fiction  that for  the purpose  of applying the  provision contained  in that  sub-section, the profits or- gains of the new industrial undertaking shall be computed as  if the new industrial undertaking were the only business  of  the  asseesee  right  from  the  date  of  its establishment  or  the  losses,  depreciation  allowance  or development  rebate   in  respect   of  the  new  industrial undertaking for  the past  assessment years were not set off against  the   profit  from   other   businesses.   If   the construction of  sub-section (1)  of Sec.  80J contended for and on behalf of the Revenue were accepted, it would lead to the absurd result that there would be two species of profits or  gains   of  the  new  industrial  undertaking,  one  for inclusion in  the total  income chargeable  to tax  and  the other for  determining   the availability  of the  deduction under sub-section  ( I  ) of  Section  80J.  That  would  be plainly contrary  to the express language of sub-section (I) of Section 80J. [1135 E-H,1136 A-D] 1130

JUDGMENT:      CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2395 of 1977.      Appeal by  Special Leave  from the  Judgment and  Order dated 28-10-1976  of the  Punjab and  Haryana High  Court in I.T. Ref. No. 16/74.      P. A.  Francis, B.  B. Ahuja and Miss A. Subhashini for the Appellant.      G. C. Sharma and S. P. Nayar for the Respondent.      Devi Pal,  S. R.  Banerjee, J.  B. Dadachanji, Ravinder Narain and  Mrs A  K Verma  for the  Intervener (The  Indian Aluminium)      R. N.  Bajoria, P.  V. Kapur,  U. K.  Khaitat,  Praveen Kumar and  R.K. Chaudhary  for the  Intervener (orient Sugar Mills)      The Judgment of the Court was delivered by      BHAGWATI, J.-The  assessee, a  private limited company, carried on  several businesses  amongst which  there  was  a business of  cold storage plant. This cold storage plant was put up  in the  accounting year  relevant to  the assessment year 1967-68  and it  was a  new industrial  undertaking  to which sub-section  (4) of section 80J of the Income Tax Act, 1961 applied.  The assessee  did not  make any profit in the business of  cold storage  plant during the assessment years 1967-68, 1968-69  and 1969-70,  but there  was profit in the other businesses  and the losses, depreciation allowance and development rebate in respect of the cold storage plant were adjusted against  the profit  from the  other businesses  in computing the total income of the assessee chargeable to tax for those  assessment years.  No loss  and no  part  of  the depreciation allowance  or development  rebate in respect of the cold  storage plant  remained unabsorbed  so  as  to  be available for  carry forwarded and set off in the assessment year 1970-71.  The business of cold storage plant turned the corner after  the initial  teething trouble  and it  made  a profit of  Rs. 1,51,011/-  in the  assessment  year  1970-71 after taking  into account  the current  year’s depreciation allowance and  development rebate.  The assessee  claimed in its assessment  to tax  for the assessment year 1970-71 that

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 9  

the amounts  of deficiency under section 80J for the current as well  as past assessment years were liable to be adjusted against the  pro fit  of Rs.  1,51,011/- for that assessment year. Since  the claim was based on section 80J, it would be convenient at this stage to refer to the relevant provisions of that section. Section 80J was introduced 1131      in the  Act in place of section 84 by Finance Act, 1967 with effect  from  1st April, 1968. The material portions of that section read as under:           "80J. (1)  Where the  gross  total  income  of  an      assessee includes any profits and gains derived from an      industrial undertaking  or a  ship or the business of a      hotel, to  which this  section applies, 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 profits and gains      (reduced by  the deduction,  if any,  admissible to the      assessee, under  section 80HH) of so much of the amount      thereof as does not exceed the amount calculated at the      rate of  six per cent per annum on the capital employed      in the  industrial undertaking  or ship  or business of      the  hotel,  as  the  case  may  be,  computed  in  the      prescribed manner  in  respect  of  the  previous  year      relevant to  the assessment year (the amount calculated      as aforesaid being hereafter, in this section, referred      to as  the relevant  amount of  capital employed during      the previous year):           (2) The  deduction specified  in  sub-section  (1)      shall be  allowed in  computing  the  total  income  in      respect of the assessment year relevant to the previous      year in  which the the industrial undertaking begins to      manufacture or  produce articles or to operate its cold      storage plant  or plants  or the  ship is first brought      into  use   or  the   business  of   the  hotel  starts      functioning (such  assessment year  being hereafter, in      this section,  referred to  as the  initial  assessment      year) and each of the four assessment years immediately      succeeding the initial assessment year:           (3) Where  the amount  of the  profits  and  gains      derived from  the industrial  undertaking  or  ship  or      business of  the hotel, as the case may be, included in      the total  income (as  computed  without  applying  the      provisions  of   section  64   and  before  making  any      deduction under  Chapter  VI-A  or  section  280-D)  in      respect of  the previous year relevant to an assessment      year commencing  on or after the 1st day of April 1967,      (not being  an assessment  year or  subsequent  to  the      fourth assessment  year as reckoned from the end of the      initial assessment  year) falls  short of  the relevant      amount of 1132      capital employed  during the  previous year, the amount      of such  shortfall, or, where there are no such profits      and gains,  an amount  equal to  the relevant amount of      capital employed during the previous year (such amount,      in  either  case,  being  hereafter,  in  this  section      referred to as deficiency) shall be carried forward and      set off  against the  profits and  gains referred to in      sub-section  (1)   [as  computed   after  allowing  the      deductions, if  any, admissible under section 80 HH and      the said  sub-section (1)]  in respect  of the previous      year relevant  to the  next following  assessment  year      and, if  there are  no such  profits and gains for that      assessment year,  or where  the deficiency exceeds such

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 9  

    profits  and   gains,  the  whole  or  balance  of  the      deficiency, as  the case  may  be,  shall  be  set  off      against such  profits and  gains for the next following      assessment year and if so far as such deficiency cannot      be wholly  so set off, it shall be set off against such      profits and  gains assessable  for the  next  following      assessment year and so on:           Provided that-           (i)  in no  case shall  the deficiency or any part                thereof be carried forward beyond the seventh                assessment year  as reckoned  from the end of                the initial assessment year;           (ii) where there  is more  than one deficiency and                each such  deficiency relates  to a different                assessment year, the deficiency which relates                to an  earlier assessment  year shall  be set                off under this sub-section before setting off                the  deficiency   in  relation  to  a  latter                assessment year:           x      x      x      x       x           (4)  This   section  applies   to  any  industrial      undertaking which fulfils all the following conditions,      namely:-           (i)  it is  not formed by the splitting up, or the                reconstruction,  of  a  business  already  in                existence;           (ii) it is  not formed  by the  transfer to  a new                business of machinery or plan previously used                for any purpose;            (iii) it  manufactures or  produces articles,  or                operates one  or more  cold storage  plant or                plants, in  any part  of India, and has begun                or begins to operate such plant or plants, at                any time within the period of 1133                thirty-three years next following the 1st day                of April, 1948, or such further period as the                Central Government  may, by  notification  in                the official  Gazette, specify with reference                to any particular industrial undertaking;           (iv) in a  case where  the industrial  undertaking                manufactures  or   produces   articles,   the                undertaking em ploys ten or more workers in a                manufacturing process carried on with the aid                of power,  or employs  twenty or more workers                in a manufacturing process carried on without                the aid or power; Since there was no profit from the cold storage plant in the assessment years  1967-68, 1968-69 and 1969-70, the whole of the relevant  amount of  capital employed during each of the relevant previous  years remained unabsorbed and constituted deficiency for  each of those assessment years and had to be carried forward  from year  to year upto the assessment year 1970-71 under sub-section (3) of section 80J. The amounts of deficiency for  the assessment  years 1967-68,  1968-69  and 1969-70  came  to  Rs.  11,155/-,  Rs.  1,14,153/-  and  Rs. 90,228/-. The relevant amount of capital employed during the previous year  relevant to  the assessment  year 1970-71 was Rs.83,391/-. The  assessee claimed  that this  amount of Rs. 83,391/ representing the relevant amount of capital employed in the  assessment year  1970-71 was  liable to   be set off against the  profit of  Rs.1,51,011/- derived  from the cold storage business  under subsection (1) of section 80J and so far as  the balance of the profit was concerned, the amounts of deficiency  for the  past assessment  years, namely,  Rs.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 9  

11,155/-, Rs. 1,14,153/- and Rs. 90,228/- which were carried forward to  the assessment  year 1970-71,  were liable to be adjusted against  it under  sub-section (3)  of section 80J. The Income  Tax officer  did not  dispute the figures of the relevant amount  of capital  employed in the assessment year 1970-71 or  of  the  amounts  of  deficiency  for  the  past assessment years, but held that there was no profit from the business of  cold storage plant in the assessment year 1970- 71 against  which any part of the relevant amount of capital employed  during   the  assessment  year  1970-71  could  be adjusted under sub-section (1) of section 80J or any part of the carried  forward amounts  of  deficiency  for  the  past assessment years,  deducted under sub-section (3) of section 80J. It  was not possible to disagree with the assessee that the business of the cold storage plant had 1134 resulted in  a profit  of Rs.  1,51,011/- in  the assessment year 1970-71  and in  fact it was conceded that this was the amount  of  profit  liable  to  be  taken  into  account  in computing the  total income  of the  assessee chargeable  to tax, but  the Income  Tax officer  took  the  view  that  in computing the  profit of  the cold  storage business for the purpose of  applying the provision contained in sub-sections (1) and  (3) of  section 80J,  the losses  as  well  as  the depreciation allowance  and development rebate in respect of that business  for  the  past  assessment  years  should  be adjusted against  the profit  of Rs. 1,51,011/-, since there was no  profit  at  all  from  that  business  in  the  past assessment years  against which  any part  of  such  losses, depreciation  allowance   or  development  rebate  could  be absorbed. The  Income Tax  officer ignored the fact that the loses as  well as the depreciation allowance and development rebate in  respect of the cold storage business for the past assessment years were already adjusted against the profit of the assessee  from other  businesses  and  no  part  of  the losses,  depreciation   allowance  or   development   rebate remained unabsorbed  for being  carried forward  and set off against the  profit of Rs, 1,51,011/- in the assessment year 1970-71 and proceeded on the assumption that for the purpose of subsection  (1) and  (3) of section 80J, the cold storage business was  to be  treated in isolation and its profit was to be computed as if the earlier years’ lossess depreciation allowance and  development  rebate  had  not  been  set  off against the  profit from  other businesses.  The Income  Tax officer accordingly declined to allow any deduction from the profit of  Rs. 1,51,011/-  in respect of the relevant amount of capital  employed in  the assessment  year 1970-71  under sub-section (1)  of section  80J  and  in  respect  of  the. amounts of  deficiency for  the past  assessment years under sub-section (3)  of section  80J and  made assessment on the assessee without  permitting such  deduction.  The  assessee challenged  the  decision  of  the  Income  Tax  officer  by preferring an appeal to the Appellate Assistant Commissioner but the  Appellate Assistant Commissioner took the same view and rejected  the appeal. The assessee thereupon carried the matter in  further appeal  and in  the appeal,  the assessee succeeded in persuading the Tribunal  to hold that since the losses as  well as  depreciation allowance  and  development rebate in  respect of the cold storage business for the past assessment years  were already  adjusted against  the profit from other  businesses, no part of such losses, depreciation allowance or development rebate remained unabsorbed so as to be carried  forward and  set off  against the profit for the assessment  year   1970-71  and  hence  the  profit  of  Rs. 1,51,011/- from  the cold storage business was not liable to

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 9  

be reduced by any such set off and the assessee was entitled to 1135 claim that from out of such profit there should be deducted, first, the  amount of Rs. 83,891/- representing the relevant amount of  capital employed  during the  previous  year  and then, the  amounts of  deficiency for  the  past  assessment years. The  Revenue being  aggrieved by  the  order  of  the Tribunal made  an application  for a  reference and  on  the application, the  following question of law was referred for the opinion of the High Court:           "Whether on  the facts and in the circumstances of      the case,  the Appellate  Tribunal was  right in law in      allowing the  deduction under section 80J of the Income      Tax Act, 1961?" The High  Court agreed  with the  view taken by the Tribunal and answered  the question  in favour  of the  assessee  and against the  Revenue. The  Revenue thereupon  preferred  the present appeal with special leave obtained from this Court.      Now it  is clear  from the  language of  sub-section of section 80J  that the  profits or  gains of a new industrial undertaking from  which deduction  of the relevant amount of capital employed  during a  particular  assessment  year  is allowable under  that provision,  are the  profits or  gains includible in the computation of the total income chargeable to tax.  Therefore, whatever  be the profits or gains of the new industrial  undertaking  computed  for  the  purpose  of arriving at  the total  income chargeable to tax, would have to be  taken to  be the  profits or  gains for  applying the provision contained  in sub-section    of section 80J. There are no  two modes  of computation of the profits or gains of the new  industrial undertaking  contemplated by sub-section of  section  80J,  one  for  determining  the  total  income chargeable to  tax and  the other for applying the provision contained in  that sub-section.  The language of sub-section (1) of  section 80J is clear and explicit and leave no doubt that the  profits or gains of the new industrial undertaking for the  purpose of  allowing the deduction provided in that sub-section, have to be computed in the same manner in which they would  be in determining the total income chargeable to tax and a deduction has then to be made from such profits or gains, of the relevant amount of capital employed during the assessment year in question. It is impossible to see how, by any process  of construction,  even by turning, and twisting the language  of sub-section  (1) of  section 80J, it can be held  that   for  the  purpose  of  allowing  the  deduction contemplated under  that section the profits or gains of the new industrial undertaking must be computed in a 1136 manner different  from that  in which they would be computed in determining  the total  income chargeable  to  tax.  Sub- section (1)  of section  80J does not create a legal fiction that for  the purpose of applying the provision contained in that sub-section, the profits or gains of the new industrial undertaking shall  be computed  as  if  the  new  industrial undertaking were  the only  business of  the assessee  right from  the   date  of   its  establishment  or  the  lossess, depreciation allowance  or development  rebate in respect of the new industrial undertaking for the past assessment years were not  set off  against the profit from other businesses. If the  construction  of  sub-section  (1)  of  section  80J contended for and on behalf of the Revenue were accepted, it would lead  to the  absurd result  that there  would be  two species  of   profits  or   gains  of   the  new  industrial undertaking,  one   for  inclusion   in  the   total  income

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 9  

chargeable  to   tax  and  the  other  for  determining  the availability of  the  deduction  under  sub-section  (1)  of section 80J.  That would  be plainly contrary to the express language of  sub-section (1)  of  section  80J.  The  proper construction  of   sub-section  (1)  of  section  80J  must, therefore, be  taken to  be that the profits or gains of the new industrial  undertaking must  be computed  in accordance with the  provisions of  the Act  in the same manner as they would be  in determining  the total income chargeable to tax and  it   must  follow   a  fortiori  that  if  the  losses, depreciation allowance  and development rebate in respect of the new industrial undertaking for the past assessment years have been  fully set  off against the profit of the assessee from other businesses or for the matter of that, against the income of  the assessee  under any  other head  by reason of sections 70  and 71  read with sub-section (2) of section 32 and sub-section  (2) of section 32A, no part of such losses, depreciation allowance or development rebate would be liable to be  adjusted over again in computing the profits or gains of the new industrial undertaking for applying the provision contained in  sub-section (1)  of section 80J. The same mode of computation  must prevail  also in applying the provision contained in  sub-section (3)  of section  80J, because that subsection provides  for  setting  off  the  carried-forward amount of  deficiency of  the past  assessment years against "the profits  and gains  referred to  in sub-section (1)" of section 80J,  as computed  after  allowing  inter  alia  the deduction admissible  under that sub-section and, therefore, if, for  the purpose  of sub-section (1) of section 80J, the profits or gains of the new industrial undertaking are to be computed in accordance with the provisions of the Act and no part of  the losses,  depreciation allowance  or development rebate for  the past  assessment years  which has been fully set off  against the  profit from other businesses or income under any other head is liable to be ad- 1137 justed over  again in  computing the profits or gains of the new industrial undertaking, no such adjustment would equally be permissible  in applying  the provision contained in sub- section (3) of section 80J.      Here, in  the present  case, it  was common ground that the losses  as well as deprecation allowance and development rebate in  respect of the cold storage business for the past assessment years  were fully  adjusted against the profit of the assessee  from other  businesses and  no  part  of  such losses,  depreciation   allowance  or   development   rebate remained unabsorbed  so as  to be  carried  forward  to  the assessment  year  1970-71.  The  profit  of  Rs.  1,51,011/- derived from  the cold  storage business  in the  assessment year 1970-71  was, therefore,  not liable to be wiped out or reduced  by   adjustment  of   any  part   of  the   losses, depreciation allowance  or development  rebate for  the past assessment years.  The profit  of the assessee from the cold storage business in the assessment year 1970-71 thus came to Rs. 1,51,011/-and  from out  of that  profit, a  sum of  Rs. 83,391/-representing the relevant amount of capital employed in the  assessment year  1970-71 was  liable to  be deducted under sub-section  (1) of  section 80J and since that left a balance  of   Rs.  67,620/-,  the  amount  of  Rs.  11,155/- representing deficiency  for the assessment year 1967-68 was liable to  be deducted  first and  then, since a part of the profit, namely,  Rs. 56,465/-still  remained  available  for deduction, the  amount of deficiency for the assessment year 1968-69 was  liable to  be deducted  to the  extent  of  Rs. 56,465/-, leaving the profits or gains of the new industrial

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 9  

undertaking includible in the total income chargeable to tax as nil.  The High  Court  as  well  as  the  Tribunal  were, therefore, right in adjusting the relevant amount of capital employed during  the assessment  year 1970-71  as  also  the amounts of  deficiency for  the assessment years 1967-68 and 1968-69 against  the profit of Rs. 1,51,011/- derived by the assessee from the cold storage business and holding that the profit of the cold storage business was nil in computing the total income chargeable to tax.      We accordingly  uphold the  order  of  the  High  Court answering the question referred by the Tribunal in favour of the assessee  and against the Revenue and dismiss the appeal with costs. S.R.                                       Appeal dismissed. 1138