H. H. SRI. RAMA VARMA v. COMMR. OF INCOMETAX — 1978 DIGILAW 292 (KER)

Judgment :- 1. The Reference is by the Income-tax Appellate Tribunal, Cochin Bench, at the instance of the assessee under S.256(1) of the Income-tax Act, 1961. The question of law referred for our opinion is: 'Whether S.80T relief is to be given only for the amount of capital gains after the capital loss is set off?' The assessment year concerned is 1970-71. The assessee is H. H. Sri Rama-varma of Trivandrum. In the assessment year in question the assessee had long term capital gains. The assessee had also suffered long term capital loss brought forward from previous assessment years to be set off against the capital gains of the assessment year in question. The assessee was entitled to relief under S.80-T of the Income-tax Act. The question was how the amount of capital gains had to be quantified, on which the relief under S.80-T had to be worked out. The Income-tax Officer reckoned the capital gains at the net figure after setting off the capital loss for the previous years against the capital gains of the assessment year. It was assessee's contention that for the purpose of working out the relief under S.80-T, the amount of capital gains should be taken at the very same figure before setting off the loss of the previous, assessment years. On appeal by the assessee, the Appellate Assistant Commissioner agreed with the assessee's contention and allowed the appeal. On appeal by the Revenue, the Tribunal found against the assessee and allowed the Department's appeal. It followed the principle of the unreported judgment of a Division Bench of this Court in I.T.R. No. 17 of 1972 interpreting S.80-M of the Act, which, according to the Tribunal, was analogous to S.80-T in its phraseology as well as in its scope. At the instance of the assessee the question of law has been referred. 2. S. 80-T of the Act reads: '80T. At the instance of the assessee the question of law has been referred. 2. S. 80-T of the Act reads: '80T. Where the gross total income of an assessee not being a company includes any income chargeable under the head 'Capital gains' relating to capital assets other than short-term capital assets (such income being, hereinafter, referred to as long-term capital gains), there shall be allowed, in computing the total income of the assessee, a deduction from such income of an amount equal to, (a) in a case where the gross total income does not exceed ten thousand rupees or where the long-term capital gains do not exceed five thousand rupees, the whole of such long-term capital gains; (b) in any other case, five thousand rupees as increased by a sum equal to (i) forty-five percent of the amount by which the long-term capital gains relating to capital assets, being buildings or lands, or any rights in buildings or lands, exceed five thousand rupees; (ii) sixty five per cent of the amount by which the long-term capital gains relating to any other capital assets exceed five thousand rupees: Provided that is a case where the long-term capital gains relate to buildings or lands, or any rights in buildings or lands, as well as to other assets, the sum referred to in sub-clause (ii) of clause (b) shall be taken to be (A) where the amount of the long-term capital gains relating to the capital assets mentioned in sub-clause (i) is less than five thousand rupees, sixty five per cent of the amount by which the long-term capital gains relating to any other capital assets exceed the difference between five thousand rupees and the amount of the long-term capital gains relating to the capital assets mentioned in sub-clause (i); and (B) where the amount of the long-term capital gains relating to the capital assets mentioned in sub-clause (i) is equal to or more than five thousand rupees, sixty five per cent of the long-term capital gains relating to any other capital assets.' (as it stood at the relevant time) Concentrating attention on the language of the Section, the question for consideration would be the meaning to be attached to the expression'such incomdoccurring towards the end of the first paragraph of the Section, and, before the commencement of clause (a). The assessee has no case that it relates to 'the gross total income' referred to in the opening part of the Section. To us, it seems it can, refer only to the computed total income, or the total income computed in accordance with the provisions of the Act, as reference is made towards the closing part of the first paragraph to a computation of the total income. If that is so, the Tribunal was right in its conclusion. 3. Our impression on the language of the Section, is supported by the principle of the decision of the unreported Division Bench ruling of this Court in ITR. No. 17 of 1972. The question referred for decision of this Court was: 'Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the assessee company is eligible for deduction only of Rs. 15,885, that being 60 percent of the net dividend of Rs. 26,475/-under S.80M of the Income-tax Act, 1961 and not to a deduction of 60 per cent of Rs. 65,507 under the aforesaid section?'. S. 80M of the Act with respect to which the question had to be answered as it stood at the relevant time read: '80M(1). Where the gross total income of an assessee being a company includes any income by way of dividends received by it from a domestic company, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such income by way of dividends of an amount equal to (a) where the assessee is a foreign company Table:1 Explanation. For the purposes of this section, a company shall be deemed to be mainly engaged in a priority industry if the income attributable to any such industry or industries included in its gross total income for the previous year is not less than fifty-one per cent of such gross total income. (2) Where a company to which this section applies is entitled also to the deduction under S.80K. (2) Where a company to which this section applies is entitled also to the deduction under S.80K. or S.80L, the deduction under subsection (1) of this section shall be allowed in respect of income by way of dividends referred to therein as reduced by any such income in relation to which the company is entitled to a deduction under S.80K or S.80L.' The learned judges dealt with the question as follows: 'That the assessee is a domestic company is not disputed. That the gross total income of the assessee includes the income by way of dividends from domestic company is also not in dispute. In that event it is agreed that in computing the total income of the assessee a deduction from such income by way of dividends of an amount equal to 60 per cent of such income is to be made. But the controversy is about the scope of the term 'such income' occurring in the section, and that is whether the income referred to in this context is the gross receipt of dividends or income from dividends as determined under S.57 of the Act.' (para 3). The learned judges noticed the definition of 'gross total income' under S.80B (5) of the Act and observed that it is computed in accordance with the provisions of the Income-tax Act. It includes the different heads of income categorised under S.14 of the Act. Dividend income would come under the category of 'other sources' provided for in that section. In the determination of Dividend Income certain deductions had to be made under S.57 of the Act. The learned judges held that the 60 per cent to be computed for the purpose of S 80M is to be worked out not on the totality of the dividend receipts, but on the amount of the dividend after giving effect to the deductions mentioned by S 57 of the Act. The principle of the decision strikes us as apposite to the present context. But counsel for the assessee invited our attention to the decision of a Division Bench of this Court in Indian Transformers Ltd. v. Commissioner of Income-tax, Ernakulam (86 ITR.192). That was rendered with respect to the provisions of S, 80-E (subsequently re-numbered as S.804). The Section dealt within the decision read as follows: '80E. Deduction in respect of profits and gains from specified industries in the case of certain companies. That was rendered with respect to the provisions of S, 80-E (subsequently re-numbered as S.804). The Section dealt within the decision read as follows: '80E. Deduction in respect of profits and gains from specified industries in the case of certain companies. (1) In the case of a company to which this section applies, where the total income (as computed in accordance with the other provisions of this Act) includes any profits and gains attributable to the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule, there shall be allowed a deduction from such profits and gains of an amount equal to eight per cent thereof, in computing the total income of the company. (2) This section applies to (a) an Indian company; or (b) any other company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, but does not apply to any Indian company referred to in clause (a), or to any other company referred to in clause (b), if such Indian are other company is a company referred to in S.108 and its total income as computed before applying the provisions of sub-section (1) does not exceed twenty-five thousand rupees.' The Division Bench observed thus: 'S. 80E seems to be a special provision and permits deduction from profits and gains attributable to specific activities like business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or things specified in the List in the Fifth-Schedule. The set-off under S.72 is applicable in relation to the profits and gains arising from any business or profession. We, therefore, think that the deduction under S.80E is a special benefit given to a company which satisfies the conditions under S.80E and the deduction of 8 per cent permissible under that section is only from profits and gains attributable to the specific activities to which we have referred. This is a special benefit. This must refer to the results of that particular activity. This benefit should not be diminished by the other benefits conferred by the Act, such as the right to have the previous losses set off. This is a special benefit. This must refer to the results of that particular activity. This benefit should not be diminished by the other benefits conferred by the Act, such as the right to have the previous losses set off. The two serve different purposes and the benefit of both must be available to an assessee, without the one impinging on the other. The acceptance of the contention of the revenue would have the result of substantially depleting the benefit under S.80E. This is not permissible. Even apart from this, we think, the wording of S 80E. which talks of 'total income' is also an indication that the deduction under S.80E must be before the set-off permissible under S.72 is made. In the case before us the total income consists exclusively of profits and gains arising from the specific activities mentioned in S.80E. This refers to the total income of a particular year, namely, the previous year. And from this the deduction under S.80E has to be made as the deduction is related to the profits and gains from specified activities of a particular period. The figure arrived at after setting off the losses under S.72 is certainly not the total income arising from the profits and gains attributable to the activities in the year. We, therefore, answer the question referred to us in the negative, that is in favour of the assessee and against the department. There will be no order as to costs.' The attention of the learned judges was not drawn to the unreported judgment in ITR. 17 of 1972. That apart, the reasoning in the above judgment came in for consideration at the hands of the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. Commissioner of Income-tax, Gujarat-11 (113 ITR. 84). We may extract the relevant portion of the observation of the Supreme Court: 'In our opinion, the view taken in Indian Transformer's case (86 ITR. 192) and L. M. Van Moppes' case (107 ITR. 386) in regard to the non-deducibility of unabsorbed losses of the earlier years in the context of computing the deduction under S.80E of the Act is open to grave doubts in the first place, such a view runs counter to the legislative mandate contained in the three steps required to be taken under sub-section (1) of S.80E as discussed earlier. 386) in regard to the non-deducibility of unabsorbed losses of the earlier years in the context of computing the deduction under S.80E of the Act is open to grave doubts in the first place, such a view runs counter to the legislative mandate contained in the three steps required to be taken under sub-section (1) of S.80E as discussed earlier. Secondly, the main reasoning given by the Kerala High Court for taking such a view in Indian Transformer's case the Madras High Court in L. M. Van Moppes case has merely followed the Kerala decision does not bear scrutiny. After pointing out that Chapter IV of the 1961 Act deals with the computation of income falling under the various heads mentioned in S.14 of the Act, that Chapter VI in which S.72 occurs deals with the aggregation of income and set-off or carry forward of loss and that S.80E deals with deduction to be made in computing total income, the Kerala High Court has proceeded to observe thus See (1917) 86 ITR 192, 194: 'Computation as such is used only in the heading in Chapter IV. S.66 also provides that in computing the total income of an assessee there shall be included all income on which no income-tax is payable under Chapter V11, etc. What is provided in S.66 is also relating to computation. Similarly, the same words are used in S.67. But, there are no such words in S.72. S.72 speaks of the net result of the computation under the bead 'Profits and gains of business or profession'. We consider that the set-off permitted under S.72 is from an amount arrived at after applying the provisions of Chapter IV along with other sections of the Act such as S.66 and 67, etc., dealing with computation of income and after permitting the deductions under S.80E.' The Court has further observed that in its opinion the deduction under S.80E is a special benefit given to a company which satisfies the conditions under S.80E and the deduction permissible thereunder is only from profits and gains attributable to the specified activities and this benefit should not be diminished by the other benefits conferred by the Act, such as the right to have the previous losses set off, that the two serve different purposes and the benefit of both must be available to an assessee, without the one impinging on the other. It will thus appear that the Kerala High Court has regarded S.72 appearing in Chapter VI as a provision unconnected with the computation of the total income of an assessee and a provision which comes into operation at a stage subsequent to the computation of the total income arising from business done in accordance with S.30 to 43A occurring in Chapter IV of the Act and, therefore, the unabsorbed losses cannot be set off before calculating the deduction under S.80E. It is not possible to accept the view that S.72 has no bearing on, or is unconnected with, the computation of the total income of an assessee under the head 'Profits and gains of business or profession'. Actually, S.72 (1) provides that where the net result of computation under the head 'Profits and gains of business or profession' is a loss and such loss cannot be or is not wholly set off against the income under any head of income in accordance with the provisions of S.71, so much of the loss as has not been so set off, subject to the other provisions of the Chapter, shall be carried forward to the following assessment year and shall be set off against the profits and gains, if any, of any business or profession for that assessment year. Therefore, S.72 (1) has a direct impact upon the computation under the head 'Profits and gains of business or profession'. In other words, the correct figure of total income, which is otherwise taxable under other provisions of the Act, cannot be arrived at without working out the net result of computation under the head 'Profits and gains of business or profession'. Further, the question whether special benefit under S.80E as well as the normal or usual benefit of carry forward of losses of previous years should both be available to an assessee, without one impinging on the other must depend upon the intention of the legislature and such intention has to be gathered from the language employed. Further, the question whether special benefit under S.80E as well as the normal or usual benefit of carry forward of losses of previous years should both be available to an assessee, without one impinging on the other must depend upon the intention of the legislature and such intention has to be gathered from the language employed. In this view of the matter it is extremely doubtful whether in spite of the legislative mandate contained in the three steps provided for by sub-section (1) of S.80E, the carried forward losses would not be deductible before working out the 8% deduction contemplated by S.80E and, therefore, the contention that by parity of reasoning or on a priori reasoning unabsorbed development rebate and unabsorbed depreciation should be held to be non-deductible before working out the 8 % deduction under S.80E (1) cannot be accepted. As observed earlier, on a proper construction of the provision contained in sub-section (1) of S.80E, items like unabsorbed depreciation and unabsorbed development rebate will have to be deducted in arriving at the figure which would be exigible to deduction of 8% under S.80E (1).' (pp. 96-98) It appears to us that in view of the above observations, the authority of the decision of this Court in the Indian Transformer's case has been considerably shaken. Besides, on our impression of the language of the Section and the scope of the provision, we are of the opinion, that the principle in ITR 17 of 1972 is the more appropriate principle that has application to the case on hand. In that view, we think the view taken by the Tribunal was correct. We answer the question referred in the affirmative, that is, in favour of the Revenue and against the assessee. There will be no order as to costs. A copy of this judgment under the signature of the Registrar and the seal of this Court, will be communicated to the Income-tax Appellate Tribunal, Cochin Bench, as required by law.