Tax exemption confined to industrial undertaking profits; unabsorbed depreciation must be set off against those undertaking profits before exemption.

Section 15C exemption is limited to profits or gains actually derived from the industrial undertaking; the statutory scheme distinguishes the assessee from the undertaking and requires computation of the undertaking's profits in accordance with the income tax computation rules, so the exemption cannot be extended to unrelated business income. For composite businesses, unabsorbed depreciation attributable to the industrial undertaking must be set off against that undertaking's profits when computing taxable profits under the computation rules, and only the resulting profit (up to the statutory capital employed limit) qualifies for exemption.

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Issues: (i) Whether where an assessee carries on an industrial undertaking alongside other commercial activities, the whole of the assessee's total income (even if not wholly derived from the industrial undertaking) can be exempt under section 15C; (ii) Whether unabsorbed depreciation carried forward from the previous year is a deduction only against profits identifiable as from the industrial undertaking for the purpose of computing exemption under section 15C.

Issue (i): Whether the exemption under section 15C applies to the whole of the assessee's total income or only to profits derived from the industrial undertaking.

Analysis: Section 15C grants exemption to the assessee in respect of so much of the profits or gains derived from any industrial undertaking as do not exceed six per cent per annum of the capital employed in the undertaking. The statutory text and structure distinguish between the assessee and the industrial undertaking; computation of profits of the industrial undertaking is governed by section 10. The object of section 15C is to encourage newly established industrial undertakings by exempting profits derived from that undertaking. Allowing the exemption to extend to profits derived from unrelated or non-industrial activities would defeat that object. Even where allied activities exist, limits must be observed and only profits actually derived from the industrial undertaking qualify for the section.

Conclusion: In favour of Revenue. The exemption under section 15C is confined to profits or gains derived from the industrial undertaking and does not extend to the assessee's total income derived from other business activities.

Issue (ii): Whether unabsorbed depreciation carried forward must be set off specifically against profits of the industrial undertaking before applying the exemption under section 15C.

Analysis: Sub-section (3) of section 15C contemplates that profits or gains of the industrial undertaking shall be computed in accordance with section 10. Unabsorbed depreciation carried forward must be deducted in computing taxable profits under section 10. For composite businesses, the unabsorbed depreciation referable to the industrial undertaking is to be applied in computing the profits of that undertaking; thereafter the exempt portion (up to six per cent of capital employed) is determined. Although this involves notional application of the deduction at different stages, the effect is a single overall deduction in arriving at taxable income and the procedure adopted by the department conforms with the statute.

Conclusion: In favour of Revenue. The unabsorbed depreciation referable to the industrial undertaking must be set off against the profits of that undertaking for computing the exemption under section 15C.

Final Conclusion: The court answers both referred questions against the assessee: (i) the section 15C exemption is available only for profits derived from the industrial undertaking and not for the assessee's total income from other businesses; (ii) unabsorbed depreciation referable to the industrial undertaking must be deducted in computing the undertaking's profits before applying the section 15C exemption.

Ratio Decidendi: Section 15C of the Income-tax Act confines tax exemption to profits actually derived from the industrial undertaking; such profits are to be computed under section 10 after setting off unabsorbed depreciation attributable to that undertaking, and only that computed amount up to six per cent of capital employed is exempt.

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