Deduction for priority industry profits and exclusion of cash allowance from perquisites were both upheld for the assessee.

Deduction under section 80-I was computed on the profits and gains attributable to the priority industry in their commercial sense, without first reducing them by the unabsorbed development rebate of that industry, because the provision was treated as a fiscal incentive not requiring computation under the Act in the same manner as total income; the issue was decided for the assessee. Cash allowance paid to employees was held not to constitute perquisites for disallowance under section 40(a)(v), the earlier authority on the point being applied, and that issue was also decided for the assessee. The reference was thus resolved entirely against the Revenue.

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Issues: (i) Whether relief under section 80-I of the Income-tax Act, 1961 was to be computed on the profits of the priority industry before setting off the unabsorbed development rebate of that industry. (ii) Whether cash allowance paid to employees formed part of perquisites for disallowance under section 40(a)(v) of the Income-tax Act, 1961.

Issue (i): Whether relief under section 80-I of the Income-tax Act, 1961 was to be computed on the profits of the priority industry before setting off the unabsorbed development rebate of that industry.

Analysis: The section was treated as a provision intended to grant a fiscal incentive on profits and gains attributable to priority industries. The expression used in the section was contrasted with provisions that expressly required computation in accordance with other provisions of the Act. The Court relied on the later legislative response to the interpretation of similar deduction provisions and preferred the view that, for the relevant year, the profits and gains attributable to the priority industry were to be taken in their commercial sense for the purpose of the deduction, without first reducing them by the unabsorbed development rebate of that very industry.

Conclusion: The issue was answered in favour of the assessee.

Issue (ii): Whether cash allowance paid to employees formed part of perquisites for disallowance under section 40(a)(v) of the Income-tax Act, 1961.

Analysis: The issue was treated as concluded by earlier authority. Cash allowance was distinguished from perquisites for the purpose of the disallowance provision, and the Revenue's disallowance of that amount was held unsustainable.

Conclusion: The issue was answered in favour of the assessee.

Final Conclusion: The reference was resolved entirely in favour of the assessee, with both referred questions answered against the Revenue.

Ratio Decidendi: Where a deduction provision refers to profits and gains attributable to a specified source without requiring computation under the Act in the same manner as total income, the deduction is to be worked out on the relevant profits of that source as understood for the purpose of the incentive, and not after reducing those profits by carried-forward allowances unless the statute expressly so provides.

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