1986 (7) TMI 5 - SC - Income Tax

Section 80E: 8% deduction limited to each priority industry's own profits; other industries' losses cannot be set off

Commissioner of Income-Tax, (Central) Madras Versus Canara Workshops Pvt. Limited

SC held that, for deduction under section 80E, each priority industry must be assessed on its own profits and gains; losses (including unabsorbed ... Priority Industry - claimed relief under section 80E - Whether, in computing the profits for the purpose of deduction u/s 80E, the loss incurred by the assessee in the manufacture of alloy steels could not be set off against the profits of the manufacture of automobile ancillaries - Held That:- The assessee in this case carries on two industries, both of which find places in the list in the Fifth Schedule and can, therefore, be described as priority industries. It is urged by the learned Additional Solicitor General, appearing for the Revenue, that on a true application of section 80E, the profit in the industry of automobile ancillaries must be reduced by the loss suffered in the manufacture of alloy steel, and reference has been made to a number of cases to which we shall presently refer. After giving the matter careful consideration, we do not find it possible to accept the contention. It seems to us that the object in enacting section 80E is properly served only by confining the application of the provisions of that section to the profits and gains of a single industry. The deduction of eight per cent. is intended to be an index of recognition, that a priority industry has been set up and is functioning efficiently. It was never intended that the merit earned by such industry should be lost or diminished because of a loss suffered by some other industry. It makes no difference that the other industry is also a priority industry. The coexistence of two industries in common ownership was not intended by Parliament to result in the misfortune of one being visited on the other. In our opinion, each industry must be considered on its own working only when adjudging its title to the deduction under section 80E. It cannot be allowed to suffer because it keeps company with some other industry in the hands of the assessee. To determine the benefit under section 80E on the basis of the net result of all the industries owned by the assessee would be, moreover, to shift the focus from the industry to the assessee. We hold that in the application of section 80E, the profits and gains earned by an industry mentioned in that section cannot be reduced by the loss suffered by any other industry or industries owned by the assessee. No doubt the depreciation loss arose in that case from non-priority industries, but in view of what we have said earlier, that should make no difference whatever. We think it unnecessary to refer to other cases on the point. We think it sufficient to indicate that distinction must be drawn between a case where the loss or unabsorbed depreciation pertains to the same industry whose profits and gains are the subject of relief under section 80E and a case where the loss or unabsorbed depreciation relates to industries other than the one whose profits and gains constitute the subject of relief. In the result, we affirm the answer returned by the High Court to the question raised in the income-tax references. The appeals are dismissed with costs. Issues Involved:1. Whether the loss incurred in the manufacture of alloy steels should be set off against the profits of the manufacture of automobile ancillaries when computing the profits for the purpose of deduction under section 80E of the Income-tax Act, 1961.Detailed Analysis:Issue 1: Set-off of Losses in Alloy Steels Against Profits in Automobile AncillariesThe primary question in the appeals was whether the loss incurred by the assessee in the manufacture of alloy steels could be set off against the profits of the manufacture of automobile ancillaries for the purpose of computing the deduction under section 80E of the Income-tax Act, 1961.Facts and Background:The assessee, a public limited company, engaged in the manufacture of automobile spares and alloy steels, claimed deductions under section 80E for the assessment years 1966-67 and 1967-68. The Income-tax Officer denied the full relief claimed, stating that the losses from the alloy steel industry should be set off against the profits from the automobile ancillaries industry before calculating the deduction.High Court's Decision:The Karnataka High Court ruled in favor of the assessee, stating that the loss from the alloy steel industry should not be set off against the profits from the automobile ancillaries industry for the purpose of section 80E deductions.Supreme Court's Analysis:The Supreme Court examined the object and provisions of section 80E, which provides a rebate for profits and gains from specified industries. The Court noted that the intention of Parliament was to encourage the setting up and efficient functioning of priority industries listed in the Fifth Schedule, which includes both alloy steels and automobile ancillaries.Key Points from the Judgment:- Separate Consideration of Industries: The Court emphasized that each priority industry should be considered on its own merits when adjudging its entitlement to the deduction under section 80E. The coexistence of multiple industries under common ownership should not result in the profits of one being diminished by the losses of another.- Legislative Intent: The legislative intent was to reward the efficient functioning of priority industries without penalizing them for losses incurred in other industries, even if those other industries are also priority industries.- Case References: The Court differentiated this case from others cited, such as CIT v. English Electric Co. Ltd. and Cambay Electric Supply Industrial Co. Ltd. v. CIT, clarifying that the losses or unabsorbed depreciation considered in those cases pertained to the same industry whose profits were being computed for relief under section 80E.- Supportive Case Law: The Court agreed with the Mysore High Court's decision in CIT v. Balanoor Tea and Rubber Co. Ltd., which held that losses from a different industry (plastic business) should not be deducted from the profits of the tea industry for section 80E computations.Conclusion:The Supreme Court affirmed the High Court's decision, holding that for the purpose of section 80E, the profits and gains of a priority industry should not be reduced by the losses incurred in another priority industry. The appeals were dismissed with costs.Final Judgment:The appeals were dismissed, and the High Court's affirmative answer to the question raised in the income-tax references was upheld.Appeals Dismissed.