1978 (10) TMI 4 - SC - Income Tax

Supreme Court grants tax exemption to assessee for past years, directs revenue to pay costs.

The Supreme Court allowed the appeals, setting aside the High Court's judgment. The Court held that the assessee was entitled to the benefit of the ... Computation of profits or gains under s.15C(3) by reference to section 10 - exemption under s.15C(1) only where profits or gains are derived from the new industrial undertaking - set-off of depreciation and development rebate against the total income before carry forward - carrying forward of unabsorbed depreciation or development rebate only where not absorbed by total income - no double allowance of depreciation or development rebate once absorbed in earlier years - aggregation of profits of distinct businesses for taxability and cross-set-off under section 10Computation of profits or gains under s.15C(3) by reference to section 10 - exemption under s.15C(1) only where profits or gains are derived from the new industrial undertaking - Whether profits or gains of a new industrial undertaking for the purpose of exemption under s.15C(1) are to be computed under s.10 and, if so, whether past years' depreciation and development rebate already absorbed against the assessee's total income can be again taken into account when computing those profits or gains. - HELD THAT: - Subs. (3) of s.15C requires that the profits or gains of a new industrial undertaking be computed in accordance with s.10. Under s.10(2)(vi) and cl. (vib) (and their proviso/explanation) depreciation and development rebate are allowable in computing business profits, but any allowance unabsorbed in a year is carried forward only if the total income chargeable to tax for that year is insufficient to give full effect to the allowance. Established principles permit setting off loss in one business against profits of another and require aggregation of profits for taxability. Thus, past years' depreciation or development rebate can be carried forward and deducted in a later year only to the extent that they remained unabsorbed after being set off against the assessee's total income in the earlier years. Where those allowances were fully absorbed against the total income in earlier years, there is no statutory basis to reallow them again when computing the new undertaking's profits for the purpose of s.15C(1). Allowing them twice would conflict with the proviso and explanation to s.10(2) and would create inconsistent modes of determining business profits for tax and for s.15C. Applying these principles to the present facts, the Court found that the carried forward depreciation and development rebate had been fully absorbed in the assessment years prior to 1961-62, and therefore no part remained to be carried forward and allowed against the new unit's profits for 1961-62 (and similarly for 1962-63). Consequently the profits of the new industrial undertaking for 1961-62 amounted to the positive figure found by the Court and qualified for the exemption under s.15C(1). The same reasoning applies to s.84 of the 1961 Act which is in material terms identical to s.15C.Profits or gains of the new industrial undertaking must be computed under s.10; past depreciation and development rebate already absorbed against the assessee's total income in earlier years cannot be again deducted when computing such profits for claiming s.15C(1) exemption; on the facts the assessee was entitled to the exemption for Assessment Years 1961-62 and 1962-63.Final Conclusion: Appeals allowed. The High Court and Tribunal were in error; the assessee is entitled to exemption under s.15C(1) (and, correspondingly, s.84) for the assessment years in question because no part of the past depreciation or development rebate remained unabsorbed to be carried forward and deducted against the new unit's profits. Issues Involved:1. Interpretation of Section 15C of the Indian Income Tax Act, 1922, and Section 84 of the Income Tax Act, 1961.2. Computation of profits and gains for the purpose of tax exemption.3. Treatment of unabsorbed depreciation and development rebate.Issue-wise Detailed Analysis:1. Interpretation of Section 15C of the Indian Income Tax Act, 1922, and Section 84 of the Income Tax Act, 1961:The core issue in these appeals revolves around the interpretation of Section 15C of the Indian Income Tax Act, 1922, and its corresponding provision, Section 84 of the Income Tax Act, 1961. Both sections are materially identical and aim to encourage the setting up of new industrial undertakings by providing tax exemptions. Section 15C(1) exempts from tax a portion of the profits or gains derived from a new industrial undertaking, up to 6% per annum of the capital employed. The provision requires that profits or gains must be derived from the new industrial undertaking in the assessment year in question for any claim for exemption to be sustained.2. Computation of Profits and Gains for the Purpose of Tax Exemption:The profits or gains of a new industrial undertaking must be computed in accordance with the provisions of Section 10, as mandated by Section 15C(3). This involves deducting current depreciation and development rebate allowances. The law states that depreciation and development rebate allowances should first be set off against the profits of the particular business and, if insufficient, against profits from other businesses or other income heads. Only unabsorbed allowances can be carried forward to subsequent years. Therefore, for the assessment year 1961-62, the profits or gains of the new industrial undertaking should be computed without considering depreciation and development rebate from past years if they have already been fully absorbed.3. Treatment of Unabsorbed Depreciation and Development Rebate:The ITO initially rejected the assessee's claim for exemption under Section 15C(1), arguing that the new unit's profit should be computed in isolation, resulting in a loss after accounting for unabsorbed depreciation and development rebate from previous years. However, the AAC reversed this decision, stating that once the depreciation and development rebate are set off against the total income of the assessee in the earlier years, they cannot be carried forward again. The Tribunal disagreed, reinstating the ITO's decision. The High Court upheld the Tribunal's view, but the Supreme Court found this interpretation incorrect. The Supreme Court clarified that the depreciation and development rebate for past years, once absorbed, should not be deducted again in computing the profits or gains for the assessment year in question. The Court emphasized that the new industrial undertaking should not be isolated retrospectively for this computation.Conclusion:The Supreme Court allowed the appeals, setting aside the High Court's judgment. It held that the assessee was entitled to the benefit of the exemption under Section 15C(1) for the assessment years 1961-62 and 1962-63. The Court concluded that the entire depreciation allowance and development rebate for past years were fully set off against the total income of the assessee for those years, and no part remained unabsorbed. Therefore, the profits or gains of the new industrial undertaking for the assessment year 1961-62 amounted to Rs. 1,36,822, qualifying the assessee for the exemption. The revenue was directed to pay the costs of the assessee throughout the appeals.Appeals Allowed:The appeals were allowed, and the questions referred by the Tribunal were answered in favor of the assessee and against the revenue. The revenue was ordered to pay the costs of the assessee in both appeals.