# CAMBAY ELECTRIC SUPPLY INDUSTRIAL CO. LTD v. THE COMMISSIONER OF INCOME TAX, GUJARAT-II AHMEDABAD (AND VICE VERSA)

- **Citation:** [1978] 3 S.C.R. 660
- **Court:** Supreme Court of India
- **Decided:** 1978-04-11
- **Case number:** Civil Appeal Nos. 785 and 783 of 1977
- **Bench:** Y. V. Chandrachud, V. D. Tulzap\!Rkar
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/cambay-electric-supply-industrial-co-ltd-v-the-commissioner-of-income-tax-7414
- **Pages:** 15

## Headnote

Income Tax Act, 1961 Sections 32(2), 33(2), 41(2), 72 and SOE(l)-
Co1np111atton of tlic 1node in which and the fund fron1 which deduction of 8%
under Section SOE(l) is to be 1nade, explained.
The assessee company carries on the business of generation and distribution
of electricity at Cambay and as such is covered by the provisions of Section
SOE(l) and is entitled to claim the deduction contemplated by the said provision.
During the accounting period which ended on March
31,
1967
i.e.
assessment
year
1967·68,
the assessee Company
earned
an income
of
Rs. 46,319/- from its business.
The assessce company had sold some of its old
machinery and buildings resulting in balancing charges contemplated by section
41(2) v.1hich worked out to Rs. 7,55,807/-.
There were unabsorbed depreciation of Rs. 1,42,955/- and unabsorbed development rebate of Rs. l,11,658/-
aggregating to Rs. 2,54,613/- of the earlier years which \Vere required to be
set off against the profits of that period. The Income Tax Officer, while com~
pleting the assessment treated the item of Rs. 7,55,807 /- as profits attributable
to the business of generation and distribution of electricity and a1lo¥.'ed deduction at 8% thereon under Section 80E(l). The Income Tax Officer. thus computed the relief/deduction admissible to the assessee under section 80E(l) at
8% on the amount of Rs. 8,02,126/- ,(46,319+7,55,807). that is to say, on
the income without adjusting or setting off the unabsorbed depreciation
and
development rebate carried forward from the earlier year. In exercise of his
revisional powers under section 263 of the Act, the· Additional Commissioner of
E
Income Tax called for examined the records and took the view that the manner
of computing the deduction admissible to the assessee under Section SOE ( 1)
was erroneous and prejudicial to the interests of the Revenue, in that the deduc·
tion of 8% on the item of profit of Rs. 7,55,807 arising under Section 41(2)
had been wrongly allowed and that for the purpose of calculating the deduction of 8%, the items in respect of the unabsorbed depreciation and development rebate should not have been excluded and that, if proper calculations as
suggested by him were made, the assessee was not entitled to any deduction. In
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the appeal, the Tribunal took the view that the item of Rs. 7,55.807
being
profits arising from the sale of old machinery and buildings under S. 41(2) of
the Act, could not be treated in isolation or divorced from the
profit'!
and
gains of the business of generation and distribution of electricity done by the
assessee~company and that the said item will have to be regarded as
profits
"attributable to'', though not "derived from" the business of generation
and
distribution of electricity and, as such, the said item was exigible to the deduction of 8 % under Section SOE( I) of the Act.
On the question whether the
unabsorbed depreciation and development rebate would be deductible in computing the profits under Section 80E of the Act, fo11owing 93 ITR, 115, the
Tribunal held that these items could not be deducted in computing the deduction admissible under Section SOE.
The Tribunal allowed the appeal and set
aside the orders of the Additional Commissioner.
By its judgn1ent, dated 11th and 24th of December 1975 disposing of the
Reference, the Gujarat High Court upheld the view .of the Tribunal re·garding
the item of Rs. 7,55,807/- and answered in favour of the assessee.
As to the
items of unabsorbed depreciation and development rebate, the
High
Court
held that they \Vere deductible befor€
arriving at the figure that would be
exi.dble to the deduction of 8% under Section 80E(1) and. therefore. after
deducting the aggregate amount of Rs. 2,54,613 from Rs. 8,02.126, the balance
of Rs. 5,47,513 was exigible to the deduction of 8% under the said provision.
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CAMBAY ELECTRIC SUPPLY V. C.I.T. GUJARAT
661
Both the assessee and the Revenue preferred separate appe

## Text

_Characters 0–39,883 of 50,244. This is a partial read: ask again with offset=39883 for what follows._

660
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CAMBAY ELECTRIC SUPPLY INDUSTRIAL CO. LTD.
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v.
THE COMMISSIONER OF INCOME TAX, GUJARAT-II
AHMEDABAD (AND VICE VERSA)
April 11, 1978
[Y. V. CHANDRACHUD, C.J. AND V. D. TULZAP\!RKAR, J.J
Income Tax Act, 1961 Sections 32(2), 33(2), 41(2), 72 and SOE(l)-
Co1np111atton of tlic 1node in which and the fund fron1 which deduction of 8%
under Section SOE(l) is to be 1nade, explained.
The assessee company carries on the business of generation and distribution
of electricity at Cambay and as such is covered by the provisions of Section
SOE(l) and is entitled to claim the deduction contemplated by the said provision.
During the accounting period which ended on March
31,
1967
i.e.
assessment
year
1967·68,
the assessee Company
earned
an income
of
Rs. 46,319/- from its business.
The assessce company had sold some of its old
machinery and buildings resulting in balancing charges contemplated by section
41(2) v.1hich worked out to Rs. 7,55,807/-.
There were unabsorbed depreciation of Rs. 1,42,955/- and unabsorbed development rebate of Rs. l,11,658/-
aggregating to Rs. 2,54,613/- of the earlier years which \Vere required to be
set off against the profits of that period. The Income Tax Officer, while com~
pleting the assessment treated the item of Rs. 7,55,807 /- as profits attributable
to the business of generation and distribution of electricity and a1lo¥.'ed deduction at 8% thereon under Section 80E(l). The Income Tax Officer. thus computed the relief/deduction admissible to the assessee under section 80E(l) at
8% on the amount of Rs. 8,02,126/- ,(46,319+7,55,807). that is to say, on
the income without adjusting or setting off the unabsorbed depreciation
and
development rebate carried forward from the earlier year. In exercise of his
revisional powers under section 263 of the Act, the· Additional Commissioner of
E
Income Tax called for examined the records and took the view that the manner
of computing the deduction admissible to the assessee under Section SOE ( 1)
was erroneous and prejudicial to the interests of the Revenue, in that the deduc·
tion of 8% on the item of profit of Rs. 7,55,807 arising under Section 41(2)
had been wrongly allowed and that for the purpose of calculating the deduction of 8%, the items in respect of the unabsorbed depreciation and development rebate should not have been excluded and that, if proper calculations as
suggested by him were made, the assessee was not entitled to any deduction. In
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the appeal, the Tribunal took the view that the item of Rs. 7,55.807
being
profits arising from the sale of old machinery and buildings under S. 41(2) of
the Act, could not be treated in isolation or divorced from the
profit'!
and
gains of the business of generation and distribution of electricity done by the
assessee~company and that the said item will have to be regarded as
profits
"attributable to'', though not "derived from" the business of generation
and
distribution of electricity and, as such, the said item was exigible to the deduction of 8 % under Section SOE( I) of the Act.
On the question whether the
unabsorbed depreciation and development rebate would be deductible in computing the profits under Section 80E of the Act, fo11owing 93 ITR, 115, the
Tribunal held that these items could not be deducted in computing the deduction admissible under Section SOE.
The Tribunal allowed the appeal and set
aside the orders of the Additional Commissioner.
By its judgn1ent, dated 11th and 24th of December 1975 disposing of the
Reference, the Gujarat High Court upheld the view .of the Tribunal re·garding
the item of Rs. 7,55,807/- and answered in favour of the assessee.
As to the
items of unabsorbed depreciation and development rebate, the
High
Court
held that they \Vere deductible befor€
arriving at the figure that would be
exi.dble to the deduction of 8% under Section 80E(1) and. therefore. after
deducting the aggregate amount of Rs. 2,54,613 from Rs. 8,02.126, the balance
of Rs. 5,47,513 was exigible to the deduction of 8% under the said provision.
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CAMBAY ELECTRIC SUPPLY V. C.I.T. GUJARAT
661
Both the assessee and the Revenue preferred separate appeals againSt the said
A
judgment.
Dismissing both the appeals, the Court
HELD : 1. (a) On true constructioa of the
prov1s1on
itself,
both
the
Tribunal and the High Court were right in taking the view that the item of
Rs. 7,55,807 was required to be taken into account while computing the deduction of 8% contemplated by S. SOE(!) of the Act. [668 A]
B
(b) Three important 5teps are requi1ed to be taken
before
the
special
deduction pe1miss1ble under section 80E(I) of Income Tax Act, is allowed and
the net total income exigible to tax is determined.
First, compute the total
income of the concerned assessee in accordance with the other provisions of
the Act i.e., in accordance \vith all the provisions except Sec. SOE; secondly,
ascertain \;,.hat part of the total incon1c so con1puted represents the profits and
gains attributable to the business of the specified industry (here generation and
distribution of electricity); and thirdly, if there be profits and gain.;; so attributable; deduct 8% thereof from such profits and gains and then arrive at the
net total income exigible to tax.
As regards the first step mentioned above, the
i1npo1iant words in sub-s. 1 are those that appear in parenthesis, namely, "as
computed in accordance \Vith the other provisions of this Act", and these \VOrds
clearly contain a n1andate that the total income of the concerned assessee must
be computed in accordance with the other provisions of the Act without reference to S. SOE and since in the instant case it is income from business
the
same as per s. 29 will have to be computed in accordance with Ss. 30 to 43A
\Vhich would include s. 41(2). It is also clear that under the second step the
profits and gains attributable to the business of the specified
industry
(here
generation and distribution of electricity) forms a component of
the
total
income spoken of in the first step.
Reading these two steps together, therefore,
it is obvious that in computing the total income of the concerned assessee the
balancing charge arising as a result of the sale of old machinery and buildings
and worked out as per s. 41(2), irrespective of its real character, will have to
be taken into account and included as income of the business.
In other words,
the balancing charge as worked out under s. 41(2) "'ill have to be taken into
account before computing the deduction of 8% under the
third
step.
On
proper construction of sub-s. (1) and having regard to the legislative mandate
contained in the three steps that are required to be taken in the manner indicated above it is clear that the item of Rs. 7.55,807/- will have to be taken into
account
before computing the So/o deduction
comtemplated by
the
said
provision. [667 G-H, 668 A]
Comn1issioner of l11con1e Tax, Bon1bay City v. Bipinchandra Maganlal and
Co. Ltd., (1961) 41 ITR 290 and Commissioner of Income Tax,
Madras
v.
Express N'ewspaper Ltd., (1964) 53 I.T.R. 250; discussed.
(c) It is true that by legal fiction created under S. 41(2) a balancing charge
arising from sale of old machinery or building is treated as deemed income and
the same is brought to tax; in other 'vords the le.cal fiction enables the Revenue
to take back what it had given by way of depreciation allowance in the preced·
ing years since what was given in the preceding years was in excess of that
\Vhich ought to have been given. This shows that the fiction has been created
for the purpose of computation of the assessable income of the assessee under
the head 'bu~iness Income'. f669 A-B]
(d) Legal fictions are created only for a definite purpose and they should
be limited to the purpose for \\1hich they are created and should not be extended
beyond their legitimate field.
The fiction under s. 41(2) is created
for
the
purpose of computation of assessable income of the assessee under the
bead
"business income" and under s. 80E(1 ). in order to compute and a11ow
the
permissible special deduction, computation of total income in accordance with
the other provisions of the Act is required to be done and after allowing such
deduction the net assessable income chargeable to tax is to be determined, in
other words, the lec:al fiction under S. 41(2) and the grant of special deduction
in case of specified industries are so closely connected with each
other that
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662
SUPREME COURT REPORTS
[1978] 3 S.C.R.
taking into account the balancing charge (i.e. deemed profits) before computing
8% deduction under S. SOE(l) would amount to extending the legal fiction
within the limits of the purpose for which the said fiction had been created.
[669 B-El
(e) Whenever the Legislature wanted to give a restricted meaning it
has
used the expression"derived from", as for instance in S. 80J.
Since the
expression of wider import, namely, "attributable to" has been used, the legislature intended to cover receipts from sources other than the actual conduct of
the business of generation and distribution of electricity. [669 G-ll]
2. (a) The High Court was right in deducting unabsorbed depreciation and
development rebate aggregating to Rs. 2,54,613 from Rs. S,02,126 and bold!ng
the balance of Rs. 5,47,513/- being exigible to the S% deduction. [670 El
(b), !laving regard to the construction placed on sub-s. ( 1) of Section SOE
as above it is obvious that, in computing the total income of the concerned
assessee items of unabsorbed depreciation and unabsorbed development rebate
will have to be deducted before arriving at the figure that will become exigible
to the deduction of S% contemplated by s. SOE(!) [670 D-El
( c) In sub-s. ( 1) of S. SOE the expression "total income'' is followed by the
words "as computed in accordance with the other provisions of this Act"
in
parenthesis and the mandate of these words clearly negatives the argument that
the expression "total income" has been used in the sense of commercial profits.
The expression "total income" has been defined ins. 2(45) of the Act as meaning "the total amount of income referred to in Section 5, computed in the
manner laid dolvn in this Act" and when this definition has been furnished by
the Act itself the expression as appearing in S. SOE(l) must be in the absence of
anything in the context suggesting to the contrary be construed in accordance
w•ith such definition. Since the words in the parenthesis occurring in sub-s. ( 1)
lay down the manner in which the total income of the concerned assessee is to
be computed there would be no scope for excluding items
like
un::ibsorbed
depreciation and unabsorbed development rebate while computing
the
total
income on the basis that the total income spoken of by sub-s. ( 1) means commercial profits. [670 G-H, 671 A-Bl
3. S. 72(1) has a direct impact upon the computation
under the
head
'tirofits and gains' of business or profession.
In other words, the correct figure
of total income, which is otherwise as 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. The question whether
special benefit under s. SOE 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 vie\v of the matter it is extremely doubtful, whether in spite of the legislative mandate contained in the three steps provided by sub-s. ( 1) of s. SOE,
carried forward losses would not be deductible before working out the 8 %
deduction contemplated by s. SOE and, therefore, the contention that by parity
of reasoning or on a priori reasoning unabsorbed
develo~ment rebate and
unabsorbed depreciation should be heW to be non-deductible before working
out the 8% deduction under s. 80E(l) cannot be accepted. On proper comtruction of the provisions contained in sub-s. (1) of s. 80E item like unabsorbed
depreciation and absorbed development rebate will have to
be
deducted in
arriving at the figure which would be exigl"ble to deduction of S%
under
s SOE(!). [673 C-Fl
Indian Transformers Ltd. v. Commissioner of Income
Tax,
Ernakulam,
(1972) 86 I.T.R. 192, Comml99loner of Inca- Tax, Madras v. L, M.
Van
Moppes Dia1nond Tools (India) Ltd., (1977) 107 I.T.R. 386, Comn1issioner
of Income Tax, Madras v. Lucas T. V. S. Ltd. (No. 2); (1977) 110 I.T.R. 346
discussed and criticised.
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Com1nissioner of Income Tax, Mysore v. Balasoor Tea and Rubber Co. Ltd.,
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93 I.T.R. 115 held inapplicable.
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CAMBAY ELECTRIC SUPPLY v. C.I.T. GUJARAT (Tulzapurkar, J.) 663
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 785 and 783
of 1977.
AJilpeals by Special Leave from the Judgment and Order dated
11 /24-12-1975 of the Gujarat High Court in Income Tax Reference
No. 115 of 1974.
S. T. Desa,i, P. H. Parekh and K. Vasudev, for the Appellant.
S. N. Kacker, Sol. Genl. J. Ramamurthi and (Miss) A. Subhashini,
for the Respondent.
The Judgment of the Court wa·s delivered by
TVLZAPURKAR. J.-These two appeals by special leave, one by
the Commissioner of Income Tax, Gujarat and the other by the assessee,
against the judgment of Gujarat High Court in Income Tax Reference
No. 115 of 1974 raise two inte.resting questions regarding the mode in
which and the fund from which deduction of 8 % contemplated by
section SOE(!) of the Income Tax Act,
1961 (as it stood at the
relevant time) should be computed.
The short facts giving rise to the questions may be stated : The
assessee-Cambay Electricity
Supply and
Industrial Co.
Ltd.,-
carries on the Business of generation and distribution of electricity at
Cambay and, as such, is covered by the provisions of s. 80E(I) and is
entitled to claim the deduction contemplated by the said
provision.
The assessment in question relates to the assessment year 1967-68,
the accounting year for which is the financial year ending March 31,
1967: During the accounting period which ended on March 31. 1967,
the asses'see company earned an income of Rs. 46,319 /- from its said
business.
It appears that during this period .it had sold some of its
old machinery and buildings resulting in balancing charges contemplated by s. 41 (2) which the Income Tax
Office.r worked out at
Rs. 7,55,807 /-. It further appears that there wa's unabsorbed depreciation of Rs. 1,42,955 /- and unabsorbed development rebate
of
Rs. 1,11,658/- aggregating to
Rs. 2,54,613/- of the earlier years
which were required to be set off against the profits of that period.
The Income Tax Officer while completing the assessment, determined
the deduction admissible to the assessee under s. SOE( 1) of the Act
in the following manner :
Income from business a computed
Rs. 46,319
in the assessment order
Add : Profit u/s. 41 (2) in respect
of sale of machinery and
buildings
Rs. 7 ·55,807
Total
Less : 8 %deduction u/s SOE (l) on
Rs. 8.02,126
Less : Unabsorbed depreciation
and development rebate :
Depreciation :
Rs. 1 ·42,955
Development Rebate : Rs. I ·l l ,658
Net Income chargeable to
tax:
Rs. 8.02,126
Rs. 64.170
Rs. 7 ·37,956
Rs. 2,54,613
Rs. 4.8.3,343
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664
SUPREME COURT Hf:l'ORTS
(J \178] 3 S.C.R.
It will appear clear. from the above computation that the Income Tax
Officer treated the item of Rs. 7,55,807 /- as profits attributable to the
business of generation and distribution of electricity and allowed deduct10n at 8 % thereon nnder s. 80E(l). It would also be clear that
the Income Tax Officer computed the relief/deduction admissible to the
assessee under s. 80E(l) at 8% on the amount of Rs. 8 02 126 that
.
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JS to say,_ on the mcome before adjusting or setting off the unabsorbed
depreciation and development rebate earned forward from the earlier
year.
When the aforesaid assessment order came to his knowledge,
the. Additional Commissioner of Income Tax called for and examined
the record and proceedings in exercise of his powe.rs under s. 263 of
the Act and after giving an opportunity to the assessee-company to show
cause, took the view that the manner of computing the deduction admissible to the assessee under s. 80E(l) was erroneous and prejudicial to the intere'sts of the Revenue, in that the deduction of 8 % on the
item of profit of Rs. 7,55,807 arising under s. 41 (2) had been wrongly
allowed and that for the purpose of calculating the deduction of 8%
the items in respect of the unabsorbed depreciation and development
rebate should not have been excluded, and that if proper calculations as
suggested by him were made, the assessee wa·s not entitled to any deduction. He, therefore, set aside the ordeJC of the Income Tax Officer
and directed that fresh assessment be made in accordance with Jaw.
Feeling aggrieved by the order passed by the Additional Commissioner
of InrnmeTax the assessee preferred an appeal to the Income Tax
Tribunal. In the appeal as rega<ds the item of Rs. 7,55,807 being
profits arising from the sale of old machinery and buildings under s.
41 (2) of the Act, tbe Tribunal took the view that the said item of
profits could not be treated in isolation or divorced from the profits
and gains of the business of generation and distribution of electricity
done by the asse5see-company and that the said item will have to be
regarded as profits "attributable to". though not "derived from"
the
business of generation and distribution of electricity and, as such, the
said item wa's exigible to the deduction of 8 % under s. SOE(!) of
the Act.
On the question whether the unabsorbed depreciation and
development rebate would be deductible in computing the prnfits under
s. SOE of the, Act, the Tribunal following the decision of the Mysore
High Court in the case of C.l.T. Mysore v. Balanoor T~a & Rub?er
Co.(') held that these two items could not be deducted m computmg
the dednction admissible under s. SOE of the Act.
The
Tribunal
accordingly allowed the appeal, set aside the order of the Additional
Commissioner and restored that of the Income Tax Office.r.
At the instance of the Commissioner of Income Tax, the Tribunal
referred the following two questions to the Gujarat High Court for its
opinion :
"(1) Whether the Tribunal was correct in holding that
the p.rofit's under section 41 (2) of the Income Tax Act 1961
arising from the sale of machinery and building, amounting
to Rs. 7,55,807 /- should be taken into account while computing the deduction of 8 per cent under section SOE (1) of
the Act?
(3) (1964) 53 T.T.R. 250.
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CAMBAY EI-ECTRJC SUPPLY v. C.I.T. GUJARAT (Tulzapurkar, J.) 665
(2) Whether unabsorbed depreciation and development
rebate amounting to Rs. 2,54,613 is not deductible in computing profits under section 80E(l) of the Act ?"
The High Court by its judgment dated 11th and 24th December, 1975
disposed of !he Reference by answering the first question in favour of
the assessee and the second question in favour of the Revenue. In
other words the High Court upheld the view of the Tribunal on the
first question while on the s~cond question it took the view that the
unabsorbed depreciation and
development
rebate were
deductible
before arriving at the figure that would be exigible to the deduction
of 8% under s. 80E(l) and therefore. after deducting the aggregate
amount of Rs. 2,54,613 from Rs. 8,02,126 the balance of Rs. 5,47,513
was exigible to the deduction of 8 % under the said provision. Civil
Appeal No. 783(NT) of 1977 has been preferred by the Revenue
in so far as the answer to the first question has gone against it while
Civil Appeal No. 785(NT) of 1977 has been preferred by the as·sessee
inasmuch as the second question has been answered in favour of the
Revenue.
As regards the question raised in C.A. No. 783(NT) of 1977,
the learned Solicitor General appearing for the Revenue has contended
that the item of Rs. 7,55,807 /- represents the
balancing
charges
arising out of the sale of old machinery and buildings
worked out
under s. 41 (2) of the Act and the same cannot be treated as any
profits or gains "attributable to" the business of generation and distribution of electricity carried on by the. as'sessee and as such the said
item shonld not be taken into account while computing the deduction
of 8% under s. 80E(l) of the Act. He emphasized that under that
section a deduction of 8 %. is permissible from "such profits and gains"
meaning "profits and gains attributable to the business of generation
and distribution of electricity" carried on by an assessee. He contended that a balancing charge contemplated under s. 41 (2) is really in the
nature of a return of capital and not a return of revenue and it is only
by reason of the fiction created by s. 41 (2) that the same is deemed
to be a revenue receipt and has been made chMgeable to jncome tax
as income of the business but it is well seU!ed that a legal fiction is to
be limited to the purpose for which it i's created and should not be
-,_ extended beyond its legitimate field.
He urged that the very fact that
a deeming provision has been made under s. 41 (2) shows that it is
not a revenue receipt but a capital receipt in the hands of an assessee.
In suooort of his contention he placed reliance upon a decision of this
Court in Commissioner of Income-Tax. Bombay City v. llipinchnndra
· Ma!!anlal & Co. Ltd.,(') where the real nature of the balancing charge
arisi'ng under the corresponding provision of the 1922 Act has been
explained by this Court as being a capital return or a capital receipt.
He. therefore, contended that item of Rs. 7,55,807/- which is not
really any profit or gain earned in the conduct of the business of
generation and diRtribution of electricity cannot be taken i'nto account
·-~,
whHe computing the deduction of 8% under s. 80E(1) of the Act.
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(!) (1961) 41 I.T.R. 290.
8-3 l 5SCI/78
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666
SUPREME COURT REPORTS
(197S] 3 S.C.R.
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On the other hand, Mr. S. T. Desai, appearing, for the assessee,
~ontended that both the Tribunal as well as the High Court were right
m coming to the conclusion that the said item of Rs. 7,55,807/- was,
on proper construction of s. SOE(l), required to be taken into account
before computing the permissible deduction of 8 % contemplated by
that provision. He pointed out that s. SOE in the first place requires
the computation of the total income of the assessee carryinr- on speciB fied industry "in accordance with the other provisions of
0this Act";
secondly, such total income so computed should include "profits and
gains attributable to the busines·s of" the specified industry (here generation and distribution of electricity); and thirdly, it is from such profits attributable to the business of the specified industry that the deducticm of S % should be made.
He laid considerable emphasis on the
aspect that the Legi'slature has used the expression "attributable to the
business of" instead of "derived from the business of" and according
to him the former being an expression of wider import would include
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an item like the balancing charge which may not be directly derived
from the conduct of the business of the specified industry (here generation and distribution of electricity) . He also urged that in its subsequent decision in the case of Comtnissioner of Income-Tax, Madras v.
Express Newspapers Ltd.,(') this Court has explained that the balancing charge contemplated under s. 41 (2) in substance partakes the
character of "e'scaped profits" of the busine~s carried on by an assessee
and as such the item of Rs. 7,55,S07 /-could be treated as profits
attributable to the business of generation and distribution of electricity
by the assessee.
He also contended that even if the matter were to
be looked at from the angle of the legal fiction created by s. 41 (2) of
the Act, the said fiction could be extended so a's to take into acco?nt
the said item of Rs. 7,55,S07 /- before computing the S% deducllon
for such extension of the fiction would be within and for the purpose
for which the same has been created.
In our view the answer to the question raised before us really turns
upon the proper construction of the provision contained in s. SOE(l)
of the Act rather than on what is the real nature or character of a
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balancing charge arising under s. 41 (2) of the Act and it would,
therefore, be proper to set out the provisions of s. SOE as it stood at
the relevant time :
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"SOE. 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 article's
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.
(1) (1964) 53 I.T.R. 250.'
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CAMBAY ELECTRIC SUPPLY v. C.I.T. GUJARAT (Tulzapurkar, J.) 66 7
(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 or other company is a company referred
to in section 1 OS and its total income as computed before
applying the provisions of sub-section (1) does not exceed
twenty-five thousand rupees."
,......,_ It was not disputed before u·s that the aforesaid provision contained
m s. SOE( 1) has been enacted for the purpose of providing for certain
special deduction to be made in computing the total income in the case
of specified industries, over and above the other general deductions
contemplated by the Act. It was further not disputed before us that
the asses·see being an Indian company engaged in the business of generation and distribution of electricity is a company to which the section
applies and is entitled to claim the deduction of S % contemplated by
that provision and the only question is how and in what manner the
said deduction should be computed. On reading suh-s.
(1) it will
become clear that three important steps are required to be taken before
the 'special deduction permissible thereunder is allowed and the net
total income exigible to tax is determined.
First, compute the total
income of the concerned assessee in accordance with the other pro-
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visions of the Act i.e. in accordance with all the provisions except
s. SOE; secondly, ascertain what part of the total income so computed
represents the profits and gain's attributable to the business
of the
specified industry (here generation and distribution of electricity) ; and
thirdly, if there be profits and gains so attributable, deduct S % thereof
from such profits and gains and then arrive at the net total income
exigiblc to tax.
As regards the first step mentioned above, the important words in sub-s. ( 1) are those that appear in
parenthesis,
namely, "as computed in accordance with the other provisions of this
Act" and these words clearly contain a mandate that the total income
--.,....,. of the concerned assessee must be computed in accordance with the
- other provisions of the Act without reference to s. SOE and since in
the instant ca·se it is income from business the same as per s. 29 will
have to be comnuted in accordance with ss. 30 to 43A which would
includes. 41 (2)°. It is also clear that under the second step the profits
aud gains attributable to the business of the specified industry (here
generation and distribution of electricity) forms a component of the
total income 'snoken of in the first step.
Reading these two steps
together, therefore, it is obvious that in computing the total income
o( the concerned assessee the balancing charge arising as a result of
the sale of old machinery and buildings and worked out as per s. 41 (2),
irresnective of its real character, will have to be taken into account
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and included as income of the business. In other words, the balancing
~I charge as worked out nnder s. 41 (2) will have to be taken into account
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SUPREME COURT REPORTS
[1978] 3 S.C.R.
A before computii:g the deduction of 8 % under the third step.
On
proper constru_ctlon. of sub-s. ( 1) and having regard to the legislative
mandate conta111ed m the three steps that are required to be taken in
the manner md1cated above we are clearly of the view that the item of
Rs. 7,55,807 /- will have to be taken into account before computincr
the 8 % deduction contemplated by the said provision.
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The learned Solic!tor General has argued to the contr~ry by laying
cons1d~rable emphasis on two aspects, first, the real nature of the
balancmg charge under s. 41(2), which according to him is a return of
capital and not a return of revenue and, secondly, under the second and
thlfd steps the 8 % deduction is to be made from "profits and gains
attributable to the business of" the specified industry (here generation
and distribution of electricity). As regards the first aspect, on the
c question of real nature or true character of a balancing charge two ~
apparently divergent views would appear to have been taken by this
Court in two decisions.
In the case of Bipinchandra Maganlal & Co.
Ltd. (supra) the question that arose for determination was whether
a balancing charge which was brought to tax on the basis of deemed
income and was, therefore, included in the assessable income of an
assessee under the second proviso to cl. (vii) of sub-s. (2) of s. 10
D of the 1922 Act (equivalent to s. 41(2) of the 1961 Act) could be
taken into account while considering "smallness of profit" for purposes
of deciding whether the case attracted the applicability of S. 23A of
the Act and this Court took the view that the balancing charge was
not real income but was made taxable income for the purpose of computation of the asses'sable income by legal fiction but on that account
it did not become commercial profit and was not liable to be taken into
E account in asse·ssing whether in view of the smallness of profits a larger
dividend would be unreasonable; in that context this Court observed
that what in truth was a capital return was by a fiction regarded for
...
the purposes of the Act as income and was made chargeable to income
· . ,.
tax but because of that its character was not altered and it was not
converted into asses'see's business profits and that smallness of protlt
in s. 23A had to be adjudged in the light of commercial principles
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and not in the light of total receipts, actual or fictional. Jn the subsequent decision in the Express Newspapers cas·~ (supra) this Court bas
regarded a balancing charge as being the "escaped profits" of the
business for which the assessee is made liable to tax.
At pag<" 254
of the report the Court explained the nature of the balancing Mlirge ,.--c~
by way of i!lustration thus : "assume that the original cost of a mach\-
·
nery or plant is Rs. 100 and depreciation allowed is Rs. 25; the written
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G down value is Rs. 75. If the machinery is sold for Rs. 100. it i\!
obvious that depreciation of Rs. 25 was wrongly allowed. If •t had
not been allowed that amount would have swelled the profits to that
extent.
When it is found that it was wrongly allowed that profit I•
brought to charge. The second proviso, therefore, in substance, brings
to charge an escaped profit or gain of the business carried on by the
a·ssessee;'. These apparently divergent views have given rise to tw"
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rival contentions urged before us by counsel on other side. It is unnecessarv in this case to go into the question whether the divergenc~
is teol or merelv apparent, for. as we have said above, the answer to the
qu>' >stion raised before ns doe's not depend upon the real nature 01
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CAMBAY_ ELECTRIC SUPPLY v. C.I.T. GUJARAT (Tulzapurkar, !.) 669
true character of the balancing charge but upon proper construction of
the su!J.-s. (I) which contains the legislative mandate with regard to
the manner iu which three steps indicated therein are required to be
taken for computing the deduction of 8 % contemplated by that provision.
Jt. is true that by a legal fiction created under s.
41 (2) a
balancing charge arising from sale of old machinery or building is
treated as deemed income and the same is brought to tax; in other
words the legal fiction enables the Revenue to take back what it had
given by way of depreciation allowance in the preceding years since
what was given in the preceding years was in excess of that which
ought to have been given. This shows that the fiction has been created
for the purpose of computation of the asses·sable income of the assessee
under the head "Business Income". It was rightly pointed ont by the
learned Solicitor General that legal fictions are created only for a
_..'- definite purpose _and they should be limited to the pnrpose for which they
are created and should not be extended beyond their legitimate field .
But as indicated earlier the fiction under s. 41 (2) is created for the
purpose of computation of a·ssessable income of the assessee under the
head 'Busines's Income' and under s. 80E(l) in order to compute
and allow the permissible special deduction, computation of total income
in accordance with the other provisions of the Act is required to be
done and after allowing such deduction the net
assessaole
income
chargeable to tax is to be determined; in other words, the legal fiction
under s. 41 (2) and the grant of special deduction in case of specified
industries are so closely connected with each other that taking ir.to
account the balancing charge (i.e. deemed profits) before computing
the 8 % deduction unde.r s. 80E(l) would amount to extending the
legal fiction within the limits of the purpose for which the said fiction
had been created .
...
As regards the aspect emerging from the expression "attributable
to" occurring in the phrase "profits and gains attributable to the business of" the specified industry (here generation and distribution of
electricity) on which the learned Solicitor General relied, it will be
pertinent to observe that the Legislature has deliberately used the ex_pression "attributable to" and not the expression "derived from"· It
caanot be disputed that the expression "attribntable to" is certainly
wider in import than the expression "derived from".
Had the exgession "derived from" been used. it could have with some force been
..__ -contended th;tt a balancing charge arising from the sale of old machi-
•
nery· and buildings cannot be regarded as profits and gains derived
from the conduct of the business of generation and distribution
of
electricity.
In this connection it may be pointed out that whenever
the Legislature wanted to give a restricted meaning iu the manner
, sugoested by the learned Solicitor General it has used the expression
"'derlved from", as for instance in s. 80J.
In our view (since the
expression of wider import, namely, "attributable to" has_ been used,
ihe Legislature intended to cover receipts from sources other than the
·actual conduct of the business of generation and distribution of electri-
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oeity.
For the aforesaid reasons and particularly on true construction of
the provision itself we are of the view that both the Tribunal and the
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SUPREME COURT REPORTS
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High Court were right in taking the view that the item of Rs. 7,55,807 /-
was required to be taken intq_ account while computing the deduction
of 8 % contemplated by s. SOE( 1) of the Act. The Revenue's appeal,
therefore, fails and is dismissed.
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Turning to the appeal of the assessee, being Civil Appeal No. 785'
(NT} of 1977, the question is whether unabsorbed depreciation and
development rebate are deductible or not in computing_ profits under
s. 80E(l) of the Act.
Here again the answer to the question must
depend upon the construction of sub-s. ( 1) of s. SOE and the construction which we have placed on the said provision while disposing of
the Revenue's. appeal will furnish the correct answer to the question
posed.
As indicated earlier sub-s. (1) contemplates three steps being
taken for computing the special deduction permissible thereunder and
arriving at the net income exigible to tax and the first two steps read
together contain the Legislative mandate as to how the total incomcof which the profits and gains attributable to the business of the specified industry forms a part-of the concerned assessee is to be computed and according to the parenthetical clause, which contains the
key words, . the same is to be computed in accordance with the provisions of the Act except s. SOE and since in this case it is income from
busiuess the same will have to be computed in accordance with ss. 30
to 43A which would include s. 32(2) (which provides for carry forward of depreciation) ands. 33(2) (which provides for carry forward
of development rabate for eight years).
In other words, in computing
the total income of the concerned assessee items of unabsorbed depreciation and unabsorbed development rebate will have to be deducted before arriving at the figure that will become exigible to the deduction oE 8 % contemplated by s. SOE(l). On this construction, therefore, the High Court, in our view, was right in deducting unabsorbed
depreciation and development rebate aggregating to Rs. 2,54,613
from Rs. 8,02,126 and holding the balance of Rs. 5,47,513/- being
exigible to the 8 % deduction.
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The assessee attempted to challenge the aforesaid view by raising a
couple of contentions.
In the first place before the High Court it was
strenuously urged, though not seriously before us, that the expression·
"totol income" appearing in s. SOE ( 1) has been used in its commercial
sense and since neither the unabsorbed depreciation nor the unabsorb- ___,'
ed development rebate has anything to do with commercial pr?fits.
attributable to the business, the said two items would not be. deductible
before arriving at the figure that would be exigible to the 8% deduction.
It is not possible to accept this contention for more than one reason.
•
First. in sub-s. ( 1) of s. SOE the expre·ssion "total income" is followed
by the words ''.as computed in accordance with the other provisions of
this Act" in parenthesis and the mandate of these words clearly negatives the argument that the expression "total income" has been used in
the sense of commercial profits. Secondly, the expression "total income'"
has been defined ins. 2(45) of the Act as meaning "the total amount of
income referred to in section 5, computed in the manner laid down in
this Act" and when this definition has been furnished by the Act itself
the expression as appearing ins. 80E(l) must, in the absence of any-
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CAMBAY ELECTRIC SUPPLY v. C.I.T. GUJARAT (Tulzapurkar, J.) 671
thing in the context suggesting to the contrary, be construed in accordance with such definition.
Since the words in the parenthesis occmA.
ring in 'sub-s. ( 1) lay down the manner in which the total income of
the concerned assessee is to be computed there would be no scope
for excluding items like unabsorbed depreciation and unabsorbed de'IClopmenl rebate while computing the total income on the basis that lhe
total income spoken of by sub-s.