Section 104 relief turns on positive qualifying income in gross total income; nil income from set-off defeats the industrial company exception.

Section 104 relief for industrial or mining companies depends on the gross total income including positive income from the qualifying manufacturing, processing or mining activity, and that income forming at least 51 per cent of the total. Where brought-forward losses and unabsorbed depreciation reduce the qualifying activity's income to nil, the statutory exception does not apply and levy under section 104 remains attracted. A plea that inadequate profits or lack of distributable surplus should defeat the levy was rejected on the facts because the company had substantial free reserves and no weak liquid position. The tax rate, however, had been wrongly applied as for an investment company and required correction.

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Issues: (i) Whether a company whose manufacturing or mining profits were reduced to nil by set-off of brought forward losses and unabsorbed depreciation could still be treated as a company engaged mainly in manufacture, processing of goods or mining for the purposes of section 104 of the Income-tax Act, 1961. (ii) Whether the assessee could avoid levy under section 104 on the ground of inadequacy of profits or non-availability of distributable surplus, and whether the rate of tax applied by the authorities was correct.

Issue (i): Whether a company whose manufacturing or mining profits were reduced to nil by set-off of brought forward losses and unabsorbed depreciation could still be treated as a company engaged mainly in manufacture, processing of goods or mining for the purposes of section 104 of the Income-tax Act, 1961.

Analysis: The expression "gross total income" under section 109(iv) means total income computed in accordance with the Act before Chapter VI-A deductions, and the Explanation to section 104(4)(a) requires that income attributable to manufacturing, processing or mining be included in that gross total income and be not less than 51 per cent of such total income. The setting off of carried forward losses and depreciation under the computation provisions may reduce the manufacturing income to nil. If no positive income from the qualifying activity is included in the gross total income, the statutory exception for industrial or mining companies does not apply.

Conclusion: The assessee was not entitled to the exemption from section 104 on this ground, and the applicability of section 104 was upheld against the assessee.

Issue (ii): Whether the assessee could avoid levy under section 104 on the ground of inadequacy of profits or non-availability of distributable surplus, and whether the rate of tax applied by the authorities was correct.

Analysis: The company had substantial free reserves and no weak liquid position, and its profit and loss account did not show a debit balance. The plea of inadequate profits was therefore rejected. However, the authorities were not correct in applying the rate applicable to an investment company when the case fell, at the highest, within the special treatment contemplated for companies covered by section 104(4)(a).

Conclusion: The plea of inadequacy of profits failed, but the assessee succeeded on the limited question of the rate of tax.

Final Conclusion: The levy under section 104 was sustained, but the appeal succeeded to the limited extent that the rate of tax required correction.

Ratio Decidendi: For the exclusion in section 104(4)(a) to apply, the gross total income must include positive income attributable to the qualifying manufacturing or mining activity; if that income is eliminated by set-off so that no such income remains in the gross total income, the company cannot claim the statutory exception.

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