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PETITIONER: UNION OF INDIA & OTHERS

       Vs.

RESPONDENT: COROMANDEL FERTILIZERS LIMITED & ANR.

DATE OF JUDGMENT09/12/1975

BENCH: GOSWAMI, P.K. BENCH: GOSWAMI, P.K. UNTWALIA, N.L.

CITATION:  1976 AIR  606            1976 SCR  (2) 894  1976 SCC  (1) 536

ACT:      Income tax  Act (43 of 1961), ss. 80J and 80K Scope of- No deduction  from Company’s  income under  s.  80J  because Company had  no taxable  Income -If  Company entitled not to deduct tax  at source  from the  dividend income  of  share- holder.

HEADNOTE:      Section 80A(2), Income Tax Act, 1961, provides that the aggregate amount  of deductions  under Chapter VIA shall not exceed the  gross total  income of  the assessee.  Under  s. 80J(1), which  is in  Chapter VIA,  where the gross total in come of  an assessee  includes any profits and gains derived from an  industrial undertaking,  there shall be allowed, in computing the  total income  of the assessee, a deduction of so much  of the  profits and  gains as  does not  exceed the amount calculated  at 6  per cent  per annum  of the capital employed in  the industrial  undertaking, calculated  in the prescribed manner,  and referred  to as the relevant amount, and, under  s. 80J(3), where the amount of profits and gains derived from  the industrial  undertaking falls short of the relevant amount the amount of shortfall, or, where there are no profits and gains, the whole of the relevant amount shall be carried forward and set off against the profits and gains of the  next assessment  year  and  so  on  up  to  the  7th assessment year from the end of the initial assessment year. Section 80K  provides that  in computing the total income of an assessee, whose gross total income includes any income by way of  dividends, there  shall be allowed, a deduction from the dividend-income  an amount equal to such part thereof as is attributable  to profits and gains derived by the company from an industrial undertaking on which no tax is payable by the company  or in respect of which a company is entitled to a deduction under s. 80J. Under s. 197(3) if by reason of s. 80K, the  whole or  any portion  of dividend  payable  to  a share-holder will  be deductible in computing the assessee s total income,  application may  be made  to the  Income  Tax Officer to determine the amount to be deducted, and, on such determination, no  tax shall  be deducted  at source on such amount.      The  2nd  respondent  is  a  share-holder  of  the  1st respondent-company, which  is an industrial undertaking. The

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Company commenced  production in  1967 and  was assessed  to income tax  for the first time for the assessment years 1969 70. The  assessment order  disclosed unabsorbed  losses  and depreciation. The  Income Tax  officer determined  also  the amount under  s. 80J  for the  assessment years  1969-70 and 1970-71, but  as there  were no  profits in those assessment years, the amounts were directed to be carried forward to be set off  against pro  fits and gains in the succeeding years under s.  80J(3).  For  the  assessment  year  1973-74,  the Company made  a profit,  but as  the total of the unabsorbed loss and  depreciation exceeded  the Companies  income,  the total income  for that year of the Company was nil with some unabsorbed loss  and depreciation  to be  carried forward to the next  assessment year  1974-75, that is, the Company did not  have  any  income  assessable  to  income  tax  in  the assessment years  1973-74 and  hence, there was no deduction under s. 80J(1) for that year also      Out of  the profits for that year, the Company declared a dividend.  The Company thereafter sought permission of the Income Tax  officer not  to deduct  tax at source out of the dividend  payable   to  shareholders,   and  also  sought  a certificate under  s. 197(3)  pointing out that the dividend payable by  it would  qualify for  deduction in the hands of the shareholders  under  s.  80K.  The  Income  Tax  officer rejected the  request of  the Company, and the writ petition of the Company was allowed by the High Court.      In appeal  to this  Court,  it  was  contended  by  the Revenue, relying  upon Commissioner of Income Tax, Madras v. S. S. Pillay (1970) 77 I.T.R. 354, 895 that unless  there is  an actual deduction under s. 80J, the shareholder was  not entitled  to claim the benefit under s. 80K.      Dismissing the appeal. ^      HELD:  As   against  actual   deduction  the  Company’s entitlement to  deduction under  s. 80J in the relevant year is enough  to give  a right  to the shareholder to invoke s. 80K and  obtain, passu,  the benefit  of  the  section.  The Company is,  therefore, not required to deduct at source the tax from  the dividends  which they  were declaring  to  the shareholders and the Company was entitled to the appropriate certificate under s. 197(3). [901-D-E]      The case  relied upon  by the Revenue dealt with s. 15C of the  1922 Act  and does  not assist  the Revenue, because there are  the following  differences between  s 15C  of the 1922 Act and ss. 80J and 80K of the 1961 Act: [900B]      (a) Under  s. 15C,  there was  no question  of carrying forward from  one accounting  year to the succeeding year or years sums  allowable under  this section.  That feature  of carrying forward is now prominent in s. 80J(3). [900CD]      (b)  If   an  industrial  undertaking  has  no  taxable profits, it cannot claim exemption from tax under s. 15C(1); and  if   the  undertaking   cannot  claim  the  benefit,  a shareholder will  not get  the benefit under s. 15C(4). that is, under s, 15C the shareholder was entitled to relief only when the  company was  able to  get an actual deduction. The company and  the shareholder  were  at  par    Section  80K, however, shows  that there  is no  legal requirement of a de facto deduction  in the  particular assessment  year. It  is suffcient if  the company is entitled to a deduction. [900G- H, 901B]      (c) If  actual deduction is required under s. 80K also, an  anomally  would  arise,  namely,-the  company,  when  it becomes entitled  to a  deduction under  s. 80J(1)  gets  it

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either in  that year or by set off in subsequent years under s. 80J(3);  but the  shareholder will be barred from getting any relief  when the dividend is declared in a year in which the company,  because of  s. 80A(2),  is not  able to get an actual deduction.  The Legislature  has avoided this anomaly by using  the  expression  the  company  is  entitled  to  a deduction in  s.  80K  and  maintained  parity  between  the company and the shareholder. [901 B-C]

JUDGMENT:      CIVIL APPELLATE  JURISDICTION : Civil Appeals Nos. 969- 972 of 1975.      Appeals by  special leave  from the  judgment and order dated the  18th September   1974  of the Andhra Pradesh High Court in  writ petition  Nos. 2279-80  of 1973  and 4305  of 1974.      B. Sen,  M/s. B.  B. Ahuja  and S.  P.  Nayar  for  the appellants.      M/s. F.  N. Kaka,  S. N.  Talwar, J.  B. Ahuja and Shri Narain for the respondents.      The Judgment of the Court was delivered by      GWSWAMI, J.  An important  question of  law as  to  the interpretation of  section 80K  of the  Income-tax Act, 1961 (briefly the Act) is raised in these four appeals by special leave.      M/s Coromandel  Fertilesers Limited  (First Respondent) is a  registered company  incorporated on  October 16, 1961, under the Companies Act and the 2nd Respondent is one of its shareholders holding two hundred equity shares in the paidup capital of  the company  out of  a total number of 95,82,010 equity shares  issued by  it. The  company  was  engaged  in manufacture of  fertilisers at its factory at Vishakhapatnam and it commenced production in December 1967. 896      There is  no dispute that the company as such fulfilled the appropriate  conditions laid down under sub-section 4 of section 80J  of the  Act to qualify for deduction in respect of profits  upto an  extent of six per cent per annum on the capital employed  in respect  of profit  for the  purpose of computation of tax.      The company was assessed to income-tax as an industrial undertaking for the first time for the assessment year 1969- 70. The  orders of  assessment were passed on 23-11-1972 and 4-1-1973. The said orders disclosed a sum of Rs. 11,10,176/- being carried forward as unabsorbed losses to the succeeding year and a sum of Rs. 9,73,93,861/- being carried forward as unabsorbed depreciation to the subsequent year.      The  capital   employed  by  the  company  in  its  new industrial undertaking was Rs. 48,87,38,018/- and 6% thereof under section  80J(1) amounted  to Rs. 2,93,24,281/-. Out of this amount,  the amount  relating to  the ten months of the year confined  to the  period during  which  the  industrial undertaking was  in operation  was determined by the Income- tax Officer  at Rs.  2,44,36,901/-. As no profit was made in the  assessment  year  1969-70  the  aforesaid  "deficiency" within the  meaning of section 80J(3) was carried forward to the  succeeding   year  1970-71.   Similarly  for  the  next assessment year  1971-72 it  was recorded  in the assessment order that  the company  was entitled  to deduction  of  Rs. 2,58,31,806/- under section 80J. As there were no profits to be absorbed,  the said amount has been carried forward under section 80J(3)  to the  succeeding assessment  year 1971-72. The returns  filed for  the assessment  year 1971-72  by the

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company have  not been  finalised.  But  all  the  same  the company, as  per its  books, had  made a  profit of Rs. 4.55 crores   approximately   in   the   accounting   year   1972 corresponding to  the assessment  year 1973-74.  It does not appear to  be disputed that for the assessment year 1973-74, the company’s  income after  deducting depreciation for that year would  come to  Rs. 6.16  crores. This  amount would be subject to  set  off  against  unabsorbed  depreciation  and business losses  which would exceed the said Rs. 6.16 crores resulting  in   nil  total   income  with   some  unabsorbed depreciation and  business loss to be carried forward to the next assessment  year 1974-75. It is not disputed that after setting off  the brought-forward allowances the company will not be assessable to any income-tax upto the assessment year 1973-74.      The company  made business profit of Rs. 4.55 crores in the year  1972. The Board of Directors at their meeting held on March  14, 1973,  recommended  declaration  of  a  maiden dividend of Rs. 76,65,608/- out of the profits of that year. The company  represented to  the Income-tax Officer on March 3, 1973,  seeking a  certificate under section 197(3) of the Act pointing  out that  the dividend  payable  by  it  would qualify for deduction in the hands of the shareholders under section 80K  of the  Act., The  company sought permission of the Income-tax  Officer not  to deduct  tax at source out of the dividend payable to the shareholders. The request of the company was  rejected by the Income-tax Officer holding that the shareholders were not entitled to the benefit of section 80K of the Act. On coming to know 897 about the  declaration of  the dividend by the company, even the Respondent-shareholders  had also  requested the company to obtain  the necessary  certificate. The  refusal of their request led  to the  institution of writ applications by the respondents before the High Court of Andhra Pradesh.      According  to  the  High  Court  the  shareholders  are entitled to claim deduction under section 80K of the Act and the company  was entitled  to an  order  of  the  Income-tax officer under  section  197(3)  for  issuing  a  certificate enabling it not to deduct tax out of the dividend payable to the shareholders.      It is  submitted  on  behalf  of  the  appellants  that question raised  is governed  by a decision of this Court in Commissioner of  Income-tax. Madras  vs. G.  S. Sivan Pillai and others. In that case this Court was required to consider the, provisions  of section  15C of the Income-tax Act, 1922 (briefly the  old Act)  which was largely different from the present sections  with  which  we  are  concerned  in  these appeals. The assessment years that came up for consideration in that decision were 1954-55 and 1955-56.      It may be appropriate to set out section 15C:           "15C. Exemption  from  tax  of  newly  established Industrial Undertakings:           (1)  Save as  otherwise herein  provided, the  tax                shall not  be payable  by an  assessee on  so                much of the profits or gains derived from any                industrial undertaking  (or hotel)  to  which                this section  applies as  do not  exceed  six                percent, per  anum on the capital employed in                the  undertaking   (or  hotel),  computed  in                accordance with  such rules as may be made in                this behalf by the Central Board of Revenue.                     x         x          x            x           (4)  The tax shall not be payable by a shareholder                in respect of so such of any dividend paid or

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              deemed to  be paid  to him  by an  industrial                undertaking (or  a hotel), as is attributable                to that part of the profits or gains on which                the tax is not payable under the section.           Explanation:-The amount  of dividend in respect of      which the  tax is  not payable  under this  sub-section      shall be  computed in  accordance with such ruleless as      may be  made in  this behalf  by the  Central Board  of      Revenue".      While  dealing   with  the  above  section  this  Court observed in  the Commissioner  of Income-tax vs. S. S. Siven Pillai (supra) as under:-           "Exemption under  section 15C(1)  from payment  of      income-tax is  not related  to the business profits; it      is related 898      to the taxable profits. The language of sub-section (3)      is  clear;  the  profits  or  gains  of  an  industrial      undertaking have  to be  determined under section 10 of      the Act. Even if the undertaking has earned profits out      of its  commercial  activity,  if  it  has  no  taxable      profits it  cannot claim  exemption from payment of tax      under sub-section  (1)  of  section  15C;  and  if  the      undertaking cannot  claim the benefit under sub-section      (1) the  shareholders will  not get the benefit of sub-      section(4), for  there is  no dividend  paid  which  is      attributable to  that part  of the  profits or gains on      which the tax was not payable by the undertaking.           The company  had no  taxable profit in the year of      account; it  did not  accordingly qualify for exemption      from payment  of tax  under sub-section  (1), and since      there was no such taxable profit, the dividend received      by  the   shareholders  could   not  be   said  to   be      attributable to  that part  of the pro fits or gains on      which the  tax was not payable under subsection (1). On      the plain  terms of section 15C the shareholders cannot      obtain the benefit of exemption from payment of tax".           "The right  of  the  shareholders  to  obtain  the      benefit of  exemption under section 15C(4) depends upon      the company  obtaining the  benefit of  exemption under      sub-section (1)  of section 15C, for the exemption from      payment  of   tax  on  the  dividend  received  by  the      shareholders is  admissible only  on that  part of  the      profits or gains on which the tax is not payable by the      company under sub-section (1)".      As will be shown later this decision will not be of aid to the appellants in view of the changes in the law.      With a  view to  offer incentive to investment, section 15C of  the Old  Act was dealing with the principle of truce with tax  for a  limited period  of what is described as tax holiday benefit  with which  we are  concerned. The  Finance (No. 2)  Act of  1967 substituted  the earlier provisions in that behalf  in Chapter VI-A in the Income-tax Act 1961 with effect from  April 1,  1968. We  will, therefore,  read  the provisions of the material sections in this Chapter, namely, sub-sections (1) and (3) of section 80J and section 80K:           "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 aggregate  of the  deductions, if any,      admissible  to  the  assessee  under  section  80H  and

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    section 80-(I) 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 899      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).           (3) where  the amount  of the  profits  and  gains      derived from  the industrial  undertakings 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(O)  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 prior  to  the  initial      assessment year  or subsequent to the fourth assessment      year as reckoned from the end of the initial assessment      year) fails  short of  the relevant  amount of  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 definition) 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  80H,      section 80-I 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 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  and 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  later                assessment year:           Provided further  that in  the case of an assessee      being a  co-operative society,  the provisions  of this      sub-section shall 900      have effect  as if  for the  words  "fourth  assessment      year", the  words  ’sixth  assessment  year’  had  been      substituted".           "80K. Where the gross total income of an assessee,      being the  owner of  any share  or shares in a company,      includes any  income by way of dividends paid or deemed

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    to have  been paid  by the  company in  respect of such      share or  shares, there shall subject to any rules that      may be made by the Board in this behalf. be allowed, in      computing his  total  income,  a  deduction  from  such      income by  way of  dividends of an amount equal to such      part thereof  as is  attributable to  the  profits  and      gains  derived   by  the  company  from  an  industrial      undertaking or ship or the business of a hotel on which      no tax is payable by the company under this Act for any      assessment year  commencing prior  to the  1st  day  of      April, 1968,  or in  respect of  which the  company  is      entitled to a deduction under section 80J".      A perusal of sections 80J(3) and 15C would clearly show the difference  in the scheme of the two provisions. Broadly speaking, there  was no question of "carry forward" from one accounting year  to the  succeeding year  or years  the sums allowable under  section 15C.  That feature is now prominent in section 80J in clearly providing that "where there are no such profits  and gains,  an amount  equal to  the  relevant amount or  capital employed  during the previous year (viz., the six per cent of the capital employed).. shall be carried for ward  and set  off against profits and gains referred to in sub-section, (1) ........".      There  is  another  vital  distinction.  While  section 15C(4) refers  to relief  in case  of only  taxable profits, section 80K  provides that  in computing the total income of an assessee  whose gross total income includes any income by way of  dividends, there  shall be  allowed in computing his total  income  a  deduction  from  such  income  by  way  of dividends an  amount  equal  to  such  part  thereof  as  is attributable to  profits and  gains derived  by the  company from an  industrial under  taking on which no tax is payable by the  company under  the Act  or in  respect of  which the company is entitled to deduction under section 80J (emphasis supplied). The  expression  "or  in  respect  of  which  the company is  entitled  to  a  deduction  under  section  80J" introduces a new concept. There is no legal requirement of a de  facto  deduction  of  the  amount  in  question  in  the particular assessment  year. As against actual deduction the company’s entitlement  to deduction  in the relevant year is enough  to   answer  the   requirement   of   section   80J. Necessarily, therefore,  the dividend-earner  will  also  be entitled to  invoke section  80K and  obtain pari  passu the benefit of the provision.      It is submitted on behalf of the appellants that unless there is actual deduction under section 80J, the shareholder is not  entitled to  claim benefit  under section  80K.  The appellants further contend that section 80A(2) of the Act is a complete  answer to  the claim of the respondents. By sub- section (2)  of section  80A the  entire amount of deduction under Chapter VI-A shall not in any case exceed the gross 901 total income  of the  assessee. It was, therefore, submitted that as  there were not assessable incomes of the company in the particular  years, the  question  of  deduction  of  the monetary benefit  by the shareholder would not arise. We are unable to accept this submission. Under old section 15C, the shareholder was entitled to relief only when the company was able to  get actual  deduction. Both were at par. The parity has  been   sought  to   be  maintained  under  the  amended provisions of  sections 80J  and 80K between the company and the shareholder.  The  company,  when  becomes  entitled  to deductions under section 80J(1), gets it either in that year or by  a set off in subsequent years. If the interpretations which we have put to the new sections were not to hold good,

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the result  will be  that the  shareholder will  be debarred from getting  any relief when dividend is declared in a year in which the company, because of section 80A(2), is not able to get actual deduction. The company will reap the advantage of set  off under  section 80J(3) in subsequent years, while the shareholder  for the dividend declared in the past, will get no  relief, under  section 80K. This anomaly is avoided, and the  legislature intended  to avoid  it, by  use of  the expression "the  company is  entitled  to  a  deduction"  in section 80K and on the interpretation we have put above.      We are,  therefore, clearly of opinion that the company was not  required under the law to deduct at source tax from the dividends  which they were declaring to the shareholder. The company  was entitled to an appropriate certificate from the Income-tax  Officer under  section 197(3).  The  appeals are, therefore,  dismissed and  the impugned  orders are set aside. The  company will be entitled to approach the Income- tax Officers for such appropriate certificates under section 197(3), as may be admissible on proper computation under the relevant rules. There will be no order as to costs. V.P.S.                                    Appeals dismissed. 902