CAMBAY ELECTRIC SUPPLY INDUSTRIAL COMPANY LIMITED Vs. COMMISSIONER OF INCOME TAX GUJARAT II AHMEDABAD

JUDGEMENT

(1.) 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 S. 80-E (1) of the Income-tax Act, 1961 (as it stood at the relevant time) should be computed.

(2.) 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. 80-E (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 31/03/1967. During the accounting period which ended on 31/03/1967, the assessee company earned an income of s. 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, 807.00. It further appears that there was unabsorbed depreciation of Rs. 1,42,955.00 and unabsorbed development rebate of Rs. 1,11,658.00 aggregating to Rupees 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 : <FRM>JUDGEMENT_644_2_1978Html1.htm</FRM>

(3.) 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. 7,55,807.00 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 the business of the specified industry (here generation and distribution of electricity). He also urged that in its subsequent decision in the case of Commr. of Incometax, Madras v. Express Newspapers Ltd., 53 ITR 250 : (AIR 1965 SC 33), 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. 7,55,807.00 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.