Shareholder exemption tied to industrial undertaking profits fails where unabsorbed depreciation eliminates taxable profits.

Shareholder exemption under section 15C(4) depended on the industrial undertaking first qualifying for exemption under section 15C(1). In computing the undertaking's profits under section 15C(3), unabsorbed depreciation carried forward under section 10(2)(vi), proviso (b), had to be taken into account along with current depreciation, because the statutory computation followed section 10 without distinguishing between them. As the company had no taxable profits after giving effect to unabsorbed depreciation, it was not entitled to exemption on those profits, and no dividend could be treated as attributable to profits on which tax was not payable. The shareholders therefore could not claim the derivative exemption.

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Issues: Whether the shareholders were entitled to exemption under section 15C(4) of the Income-tax Act, 1922 in respect of dividend received from an industrial undertaking when the company had no taxable profits after giving effect to unabsorbed depreciation, and whether such unabsorbed depreciation had to be taken into account while computing the profits of the undertaking under section 15C(3).

Analysis: Section 15C(1) granted exemption only from tax on the taxable profits derived from an industrial undertaking, and section 15C(3) required those profits or gains to be computed in accordance with section 10. The statutory scheme made no distinction between current depreciation and unabsorbed depreciation carried forward under proviso (b) to section 10(2)(vi); both formed part of the depreciation allowance for the relevant year. The right to carry forward unabsorbed depreciation arose under section 10(2)(vi), proviso (b), and not under section 24(2). Since the company had no taxable profits in the relevant years, it was not entitled to exemption under section 15C(1), and therefore no dividend could be treated as attributable to profits on which tax was not payable under that section. The exemption for shareholders under section 15C(4) was thus dependent on the company first satisfying section 15C(1).

Conclusion: The shareholders were not entitled to the benefit of section 15C(4), and the answer to the referred question was in the negative.

Ratio Decidendi: Where exemption for shareholders is made dependent on profits of an industrial undertaking on which tax is not payable under the statute, unabsorbed depreciation must be taken into account in computing taxable profits under the relevant computation provision, and shareholder exemption cannot arise unless the undertaking itself qualifies for exemption on those taxable profits.

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