# RAJAPALAYAM MILLS LTD v. COMMISSIONER OF INCOME TAX, MADRAS

- **Citation:** [1979] 1 S.C.R. 1138
- **Court:** Supreme Court of India
- **Decided:** 1978-10-06
- **Bench:** P. N. Bhagwati, V. D. Tulzapurkar, R. S. Pathak
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/rajapalayam-mills-ltd-v-commissioner-of-income-tax-madras-7564
- **Pages:** 18

## Headnote

Income 1ax Act, 1922, Sec. 15C and Sec. 84 of Jnco111e Tax Act,
1~61,
interpretation of.
The appellact assessee, a public limited company carrying on business in
manufacture and sale of yarn, set up a new industrial undertaking during the
financial year ending 31st March, 1959 being the accounting year relevant to
C
the assessment year 1959-60. The entire amount of depreciation and development rebate in respect of this new unit for the assessment years 1959-60 and
1960-61 were set off against the total profit of the assessee arising out of all
units old and new, and therefore nothing remained unabsorbed to be carried
forward to the next aesessment year 1961-62. In the assessment year 1961-62,
the assessee earned a net business income of Rs. 12,69,403 /- which included
a sum of Rs. 1,36,822/- representing the income from the new unit. The
D
assessee in its assessment to t.ax for this assessment year claimed exemption
of the income from the new unit to the extent of 6% of the average capital
employed in it under section 15C of the Income Tax Act 1922.
Taking the
view that the benefit of Sec. 15 ( c) sub-section (1) could be claimed by the
assessee only if there was any profit derived from the new unit '1nd since
the profit was, by reason of sub-section (3) of Sec. 15C required to be com-
\
puted in accordance with the trading result of the new unit without reference
E
to any other activity carried on by the assessee and if that was done, the
result would clearly show that there was a loss in the working of the new
unit in the assessment year 1961-62, the Income Tax Officer held that the
benefit of exemption under Sec. 15C, sub-section (1) was not available to
the assessee and thus the claim of the assessee for exemption was rejected.
In
appeal, the Appellate Assistant Commissioner set aside the order of the Income
Tax Officer but on further appeal by the Revenue to the Tribunal the order
F
of the Income Tax Officer was restored. The, same view was taken by the
Tribunal in regard to the assessment in the year 1962-63. The High Court,
on a .reference, agreed with the view taken by the Tribunal. Hence the appeals
by special leave in respect of the afisessment years 1961-62 and 1962-63.
Allowing the appeals, the Court,
G
HELD : ( 1 ) The law of income tax in a mcxlern society is intended to
achieve various social and economic objectives and is used as an instrument
for accelerating economic growth and development. Sec. 15C is a provisiofi
intrcxluced in the Indian Income Tax Act, 1922 with a vie\V to carrying out
this objective and it is calculated to encourage setting- up of new industrial
undertakings. [1147 A-Bl
H
Sub-section (l) of Sec. 15C exempts from tax so much of the profits or
gains derived from a new industrial undertaking as do not exceed 6% per
annum of the capital employed in the undertaking and, therefore, there must
'
./
j
RAJAPALAYAM MILLS V. C.I.T. (Bhagwati, /.)
1139
be profits or gains derived from the new industrial undertaking in the assessA
ment year in question before any claim for exemption can be sustained under
Sec. I SC, sub-sec. (I). If there are no profits or gains derived from the
new industrial undertaking in any particular assessment year, there can be no ques·
tion of any exemption, because it is only where there are such profits or gains
that to the extent of 6% per annum of the capital employed, tney become
eligible for exemption [1147 B, C·D]
(2) Though the profits of each distinct business carried on by an assessee
have to be con1puted separately, in accordance with the provisions of Sec. 10,
the tax is chargeable under that .section not separately on the profits of each
business, but on the aggregate of the profits of all the business carried on by
the assessee.
Therefore, where the assessee carries on several businesses he is
entitled under sction 10 to set off loss in one business against profits of another.
If there is any loss in ai business carried on by the a.ssessee by reason of the
pro

## Text

_Characters 0–39,547 of 50,892. This is a partial read: ask again with offset=39547 for what follows._

A
B
1138
RAJAPALAYAM MILLS LTD.
v.
COMMISSIONER OF INCOME TAX, MADRAS
October 6, 1978
(P. N. BHAGWATI, V. D. TULZAPURKAR AND R. S. PATHAK, JJ.]
Income 1ax Act, 1922, Sec. 15C and Sec. 84 of Jnco111e Tax Act,
1~61,
interpretation of.
The appellact assessee, a public limited company carrying on business in
manufacture and sale of yarn, set up a new industrial undertaking during the
financial year ending 31st March, 1959 being the accounting year relevant to
C
the assessment year 1959-60. The entire amount of depreciation and development rebate in respect of this new unit for the assessment years 1959-60 and
1960-61 were set off against the total profit of the assessee arising out of all
units old and new, and therefore nothing remained unabsorbed to be carried
forward to the next aesessment year 1961-62. In the assessment year 1961-62,
the assessee earned a net business income of Rs. 12,69,403 /- which included
a sum of Rs. 1,36,822/- representing the income from the new unit. The
D
assessee in its assessment to t.ax for this assessment year claimed exemption
of the income from the new unit to the extent of 6% of the average capital
employed in it under section 15C of the Income Tax Act 1922.
Taking the
view that the benefit of Sec. 15 ( c) sub-section (1) could be claimed by the
assessee only if there was any profit derived from the new unit '1nd since
the profit was, by reason of sub-section (3) of Sec. 15C required to be com-
\
puted in accordance with the trading result of the new unit without reference
E
to any other activity carried on by the assessee and if that was done, the
result would clearly show that there was a loss in the working of the new
unit in the assessment year 1961-62, the Income Tax Officer held that the
benefit of exemption under Sec. 15C, sub-section (1) was not available to
the assessee and thus the claim of the assessee for exemption was rejected.
In
appeal, the Appellate Assistant Commissioner set aside the order of the Income
Tax Officer but on further appeal by the Revenue to the Tribunal the order
F
of the Income Tax Officer was restored. The, same view was taken by the
Tribunal in regard to the assessment in the year 1962-63. The High Court,
on a .reference, agreed with the view taken by the Tribunal. Hence the appeals
by special leave in respect of the afisessment years 1961-62 and 1962-63.
Allowing the appeals, the Court,
G
HELD : ( 1 ) The law of income tax in a mcxlern society is intended to
achieve various social and economic objectives and is used as an instrument
for accelerating economic growth and development. Sec. 15C is a provisiofi
intrcxluced in the Indian Income Tax Act, 1922 with a vie\V to carrying out
this objective and it is calculated to encourage setting- up of new industrial
undertakings. [1147 A-Bl
H
Sub-section (l) of Sec. 15C exempts from tax so much of the profits or
gains derived from a new industrial undertaking as do not exceed 6% per
annum of the capital employed in the undertaking and, therefore, there must
'
./
j
RAJAPALAYAM MILLS V. C.I.T. (Bhagwati, /.)
1139
be profits or gains derived from the new industrial undertaking in the assessA
ment year in question before any claim for exemption can be sustained under
Sec. I SC, sub-sec. (I). If there are no profits or gains derived from the
new industrial undertaking in any particular assessment year, there can be no ques·
tion of any exemption, because it is only where there are such profits or gains
that to the extent of 6% per annum of the capital employed, tney become
eligible for exemption [1147 B, C·D]
(2) Though the profits of each distinct business carried on by an assessee
have to be con1puted separately, in accordance with the provisions of Sec. 10,
the tax is chargeable under that .section not separately on the profits of each
business, but on the aggregate of the profits of all the business carried on by
the assessee.
Therefore, where the assessee carries on several businesses he is
entitled under sction 10 to set off loss in one business against profits of another.
If there is any loss in ai business carried on by the a.ssessee by reason of the
profits of su~h business not being sufficient to absorb the depfeciation ii1Jowance,
such loss can be set off against the profits of another business carried on by
the assessee.
If, however there are no profits charge\.ble under
the head
'Business or profession' or if the profits chargeable under that head are insufficient to cover the depreciation allowance, the amount of the allowance to the
extent to which it is not absolved can be set off against profits chargeable under
any other head for the assessment year. This is the plain and undouOted effect
of Section 24 sub-~c1,;lion (1). [1148 A-E]
Anglo-French J'cxtile Co. Ltd. v. Commissioner of Incon1e Tax, 23 ITR 82
at 86; Conu11issio11er of Income Tax v. Inda-Mercantile Bank Ltd., 36 rTR I
at 6; Co1nnds.~inncr of Income Tax v. Mutlzuraman Chettiar 44 l'rR 710 at 713
referred to.
B
c
D
(3) It is clear on a plain reading of the language of proviso {b)
to
E
clause (vi) of Section 10 of the Act, that it comes into operation only where
full effect cannot be given to the depreciation allowance for the ass~ment
year in question owing to there being no profits or gains chargeable for that
year or profits or ga-ins chargeable being less than the depreciation allowance.
[1149 B-C]
( 4) The words 'no profits or gains chargeable for that year' are not confined
to profits and gains derived from the business whose income is being computed
under section 10, but they refer to the totality of the profits or gains computed
under the various heads and chargeable to tax.
It is, therefore, clear that
effect must be given to depreciation allowance- first against the profits or gains
of the particular business whose income is being computed under section 10
and if the profits of that business are not sufficient to absorb the depreciation
allowance, the allowance to the extent to which it is not absorbed would be
set off against the profits of any other business and if a part of the depreciation
a.Uowance stilJ remains unabsorbed., it would be liable to be set off against the
profits or gains chargeable under any other head and it iis only if some part
of the depreCiation allowance still remains unabsorbed that it can be carried
forward to the next assessment year. Obviously, therefore, there would be
no scope for the applicability of proviso (b) to clause (vi) if the total income
of the assessee chargeable to tax is sufficient to absorb the depreciation allow·
ance, for then there would not be any unabsorbed depreciation allowance to
be carried forward to the following assessment yeor.
But where any part of
F
G
H
1140
SUPREME COURT REPORTS
[1979] 1 s.c.R.
A
B
c
the depreciation allowance remains unabsorbed after being set off ag3.inst tbe
total income chargeable to· tax, it can be carried forwa·rd under proviso (b)
to clause (vi) to the following year and set off against Lhat year's income and
so on for succeeding years. The method adopted by ihe statute for achieving
this result is that the carried forward depreciation allowance is deemed to be
part of and stands on exactly the same footing as, the current depreciation
for the assessment year and is thus allowable as a deduction under clause (vi).
Therefore, when the profits or gains of a business for a pa•rticular a§essment
year are to be computed under Sec. 10, the current depreciation allowance for
the assessment year in question is deductible under clause (vi) but the depreciation allowance of the preceding years would be liable to be taken into
account only if, and to the extent to which, it is not :i.bsorbed by lhe total
inconie of the assessee computed under different heads and chargeable to tax
for those assessment years. [1149 D-H, 1150 A-BJ
D
E
F
G
H
Commissioner of Income Tax v. Jaipuria China Clay Mines, 59 ITR 555
followed.
(5) Though the amount of the development rebate is, under the main provision in sub-clause (ii) of clause (vi-b), allowable in the first instance against
the profits or gains of the particular business whose profits or gains are being
computed. clause (i) of Explanation (I) makes it clear that if any part of
the development rebate remains unabsorbed, it is to be set off against the
other incoille of the assessee under any of the chargeable heads and it is only
if some part of the development rebate still remains outstanding that it can
be carried fonvard to the following assessment year and set off against the
total income of the assessee for that year. The amount of the development
rebate is to be set off &gainst the total income of the :iss~see and not merely
against the profits or gains Of the particular business in respect of which the
development rebate is granted and so also the development rebate ·which remains
unabsorbed and is carried forward to the next assessment year is by reason of
cloose (ii) of Explanation I to be set off not merely against the profits or
gains of the particular business but against the total income of the assessee
for that year. Therefore it is only where the amount of development rebate
has not been fu11y set off against the total income of the assessee in the past
assessment years oo.d a part of it still remains unabsorbed and is carded forward
to the assessment year in question that it can be allowed against the profits or
gains of the business for the particular assessment year and if there is still
some balance outstanding, then agafilst the other income of the assessec: for that
assessment year. But if the amount of the development rebate is wholly set
off against the total income of the assessee in the past assessment years and
there is no unabsorbed development rebate to be c3.tried forward to the assessment year in question, there would be nothing in respect of the past development rebate to be set off against the profits or gains of th: business under
clause (ii) of Explanation I. [1151 D-H, 1152 A-BJ
(6) As sub-section (3) of Sec. 15C provides that the profits or gains of a
new industrial undertalting shall be computed under Sec. 10,
and therefore,
according to clause (vi) read with proviso (b), no part of depreciation allowance and according to clause (vi-b) Explanation I, no part of the development
rebate in respect of the new industrial undertaking for the past assessment
yean can be allowed as a deduction in computing the profits and gains. unless
..
•
RAJAPALAYAM MILLS v. C.I.T. (Bhagwati, !.)
1141
'it boo ren1ained unabsorbed by rea<;On of inadequacy of the total income chargeA
.able to tax in the past assessment years, and is carried forward to the assessment
year in question. Total income means not only profits or gains derived from
the new industrial undertaking but the t.otality of profits or gains computed
under various heads. [1152 F-G]
(7) There is nothing in sub-section (3) of Sec. 15C or in any-Other provi-
--sion of the Act which requires that in ,computing the profits or gains of a new
B
industrial undertaking under section 10, depreciation allowance or development
rebate in respect of the new industrial undertaking for the past assessment years
should be taken into account, even if it ha'i been set off fully aga.inst the
profits or gains of any other business carried on by the assessee or against
income under any other head and there is no unabsorbed depreciation allowance
·Or development rebate to be carried fonvard. [1152 G-H, 1153 AJ
(8) Effect cannot be given to depreciation allowance
and
development
rebate twice O\'er, once in the past assessment years and again in the assessment
year in question. To give effect to depreciation allowance or development
rebate for the past assessment years, even though it has been set off and absorbed
..completely against the total income of the assessee for those a~ment years
would be to allow a deduction not warranted by any provision of the Act and
c
jrufecd it \\'OU]d be going contrary to the express provision of proviso (b) to
D
clause (vi) and Explanation 1 to clause (vi-b). Sub-section (3) Of Sec. 15C
clearly docs not ·have any such effect.
What it does is no more than provide
as to bow "the profits or gains derived from new
industrial undertaking"
referred to in sub-section (i) of Section 15C shall be computed. [1153 A-01
(9) Sub-section (3) of Sec. 15C does not enact any legal fiction providing
that the profits or gains of the new industrial undertaking ~hall be computed
E
as if the new industrial undertaking were the only business of the assessee from
1he date of its establishment or the past years depreciation or development rebate
had not been set off against other income of the assessee. The new industrial
undert.aking is not retrospectively quarantined or isolated from the other income
producing activities of the assessec for determining its profits or gains for the
purpose of applicability of sub-section (1) of section 15C. What sub-section
(3) of section 15C does is merely to lay down the same rule of coniputation
F
for the profits or gains of a new industrial undertaking as in respect of any
other business and. therefore, neither depreciation allowance nor development
rebate in respect of the new industrial undertaking for the past assessment years
can be allowed as a deduction in computing the profits or gains for the assessment year in question, except where and to the extent to which, it has not
been set off against the total inco1ne of the assessee for those assessment years
and has remained unabsorbed. This is the plain and undoubted effect of the
G
language used in sub..gection (3) of section 15C. Indeed the language is so
clear and unambiguous that it is impOflsible to place any other construction upon
it. [1153 E-H, 1154 A]
(JO) Apart from the language of the section, if the construction contended
for on behalf of the Revenue and upheld by the High Court as well as the
Tribunal were accepted, it would lead to the highly anomalous result that
II
though, for the purpose of computing the total income chargeable to tax, the
depreciation allowance and development rebate which have been set off against
1142
SUPREME COURT REPORTS
[1979] 1 s.c.R.
A
the other income of the assessee for the pa<St assessment years Vvou1d not bl!'
liable to be taken into. account, they would have to be deducled in cornputing
the profits or gains of the business for the purpose of vpplicability of subsection (1) of Section 15C.
Thus, there would be t\vo different 1nodes of
determining the profits or gains of the business, one for computing the total
...i
income chargeable to tax and the other for applying
the
provisions of sub-
.,
section (1) of Section 15C.
Such a consequence
could
never
have
been·
'\,
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intended by the legislature. [1154 A-CJ
_,,,..
CrvIL APPELLATE JURISDICTION : Civil Appeal Nos. 1989 and
2418/77.
From the Judgments and Orders dated 3-1-1970 and 18-1-1973 of
the Madras High Court in Tax Case Nos. 112 of 1966 and 84 of
C
1971 respectively.
T. A. Ramachandran for the Appellant in C.A.1989 and Jntcrvener-Sepapati Whitely.
P. A. Francis and Miss A. Subhaslzini for the Respondent in C.A.
1969/72
D
Devi Pal, S. Swarup and J. B. Dadac!wnji for the Intervener (The
Indian Aluminium Co. ;'n C.A. 1989 /72.
J. Ramamurthi and Miss R. Vaigai for the Appellant in
C.A.
2418/77.
B. B. Ahuja and Miss A. Suhhashini for the Respondent in C.A.
E
2418/77.
F
G
R. N. Bajoria, P. V. Kapur, U. K. Khaitan, Praveen Kumar and
R. K. Ciuwdhary for the Intervener (M/s Orient Paper Mills Ltd.)
The Judgment of the Court was delivered by
BHAGWATI J.,
These two appeals by special leave raise a short
but interesting question of Law relating to the interpretation of section
!SC of the Indian Income Tax Act. 1922 and section 84 of the Income Tax Act, 1961. These two sections are in material respects
in identical terms and the interpretation we place on section I SC is
bound to apply equally to section 84.
We will,
therefore. first deal
with Civil Appeal 1989 of 1972 which involves the interpretation of
section lSC and then tum to Civil Appeal 2418 of 1977 which deals
with section 84.
The assessee in Civil Appeal
1989 of 1972 is a public limited
company carrying on business in manufacture and sale of yarn.
During the financial year ending 31st March. 1959. being the accounting
H
year relevant to the assessment year 1959·60, the assessee set up a
new industrial undertaking which admittedly satisfied the requirement
of section 15C(2) of the Indian Income Ta" Act, 1922.
The profit.
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RAJAPALAYAM MILLS v •. C.I.T. (Bhagwati, !.)
1143
depreciation and development rebate in respect of this new un[t for
A
tbe assessment years 1959-60 and 1960-61 were as follows:
Year
Profit
Depreciation and Development Rebate
1959-60
Rs. 33, 118/-
Rs. 1,4', 361/-
Rs. 5,07, 336/-(Development rebate)
1960-61
Rs. 3, 64, 672/-
Rs. 3,19, 591/-
Rs.
1,17, 205/-(Development rebate)
Rs. 3, 97, 790/-
Rs. 10, 88,493/-
fn the assessment year 1959-60 the total profit of the assessee in respect of its
old and new units came to Rs. 2,4.2,432/-, including
B
Rs. 33, 118/- in respect of the new unit and the total depreciation
C
amounted to Rs. 2,66,651 including Rs. J,44,361 in respect of the new
unit and after setting off the amount of depreciation against the total
profit, a sum of Rs.24,183/-remained as unabsorbed depreciation which
was carried forward to the next year. The entire development rebate
which included Rs. 5,07,336/- in respect of the new unit, also remained unabsorbed owing to the smallness of the profit and that too
D
bad to be carried forward.
The total profit of the assessee in respect
of its old and new units for
the assessment year 1960-61
was
Rs. 14,13.6(}4/- inclusive of Rs 3,64,672/- in respect of the
new
unit and this was large enough to absorb the carried forward depreciation and development rebate as also the current year's depreciation
and development rebate in respect of both the units.
In fact, after
E
setting off of such depreciation and development rebate, a
sum of
Rs. 3,25,176/- remained as the taxable income of the assessee and
it was assessed to tax in its bands. The result was that no part of
the depreci~tion or development rebate for the assessment years 195960 and 1960-61 remained unabsorbed 'to be carried forward to the
next assessment year 1961-62.
· The position in the assessment year 1961-62 was that the assessee
earned a net business i'I!come of Rs. 12,69,403/- which included a
sum of Rs. 1,36,822/- repres·enting the income from the new unit.
F
The assessce in its assessment to tax for this assessment year claimed
exemption of. the income from the new unit to the extent of 6 % of
G
the average capital employed in it under section 15C.
This secti'on
insofar as material read as follows :
( 1 ) Save as otherwise hereinafter provided, the tax shall
not be payable by an assessee on so much of the
profits or gains derived from any industrial undertaki•ng (or hotel) .to which this section applies as do
not exceed six per cent per annum on the capital
H
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1144
A
B
(2)
SUPIU!ME COURT REPORTS
[1979] I s.c.R.
employed in the undertaking (or hotel), computed
in accordance with such rules as may bet made in
this behalf by the Central Board of Revenue.
x
x
x
x
x
x
(3) The profits or gains of an industrial undertaking (or
a hotel) to which this section applies shall be computed in accordance with the provisions of section
10.
( 4) The tax shall not be payable by a
shareholder in
respect of so much of any dividend paid or deemed
to be paid to him by an industrial undertaking (or a
C
hotel) as is attributable to that part of the profits or
gains on which the tax is not payable under this section.
(EXPLANATION-The amount of dividend in re•-
pect of which the tax is not payable under this sut>-
D
section shall be computed in accordance with such
rules as may be made in this behalf by the Central
Boord of Revenue.)
:E
(5) x
x
x
x
x
(6) The provisions of this section (shall, in relation to
an industrial undertaking, apply) to the assessment
for the financial year next fo!Jowing the previous year
in which the assessee begins to manufacture or produce articles and for the four assessments immediately succeeding) .
The Income-Tax Officer took the view.that the benefit of section 15C,
F
sub-6'ection ( 1) could be claimed by the assessee only if thece was
any profit derived from the new unit and since this profit wos, by
reeson of sub-section ( 3) of section l 5C, required to be computed in
accordance with the provisions of section
10, it was necessary to
worki out the trading result of the new unit without reference to any
other activity carried on by the assessee and if that was done, the
G
result would clearly show there was
a loss in the working of the
new unit in the assessment year 1961-62. The computation made by
the Income Tax Officer was as under.
The total depr~ciation and
development rebate in respect of the new unit for the assessment
years 1959-60 and 1960-61 was Rs. 10,88,493/-, while the profit
for these two a55essment years came to only Rs. 3,97,790/- so that,
H
taking into account only the trading result ot the new unit as if that
was the only source ot income of the a.Ssessee during the assessment
years 1959-60 and 1960-61, a sum of Rs. 6,90,703/-
representing
)
RAJAPALAYAM MILLS v. C.I.T. (Bhagwati, J.)
1145
the excess of depreciation and <levelopment rebate over profit remained unabsorbed to be carried forward to the next assessment ymc
1961-62. If this carried forward depreciation and development rebate amounting to Rs. 6,90,703/- were allowed against the profit of
Rs. 1,36,822/- derived from the new unit in the assessment year
1961-62, there would be a resultant loss and hence the benefit of the
exemption under section 15C, sub-section ( 1) was held not available
to the assessee and! the claim of the assessee for exemption was rejected.
The assessee carried the matter iu appeal and before the Appellate Assistant Commissioner, the assessetl succeeded in making good
its claim for exemption under section !SC, sub-secti<on
(1). The
Appellate Assistant Commissioner pointed out in a brief but prec~e
order: "The loss of Rs. 6,90,703/- being depreciation iu excess of
the income made by the new mill was set off against the income of
the old mill in both the years and the net result for the assessment
year 1960-61 was a positive figure which was assessed to tax. There
is no question of once again carrying forward the deprei:iation of the
new mill to the assessment year 1961-62 and allowing it against the
income of tho new mill. It is only when there is a loss of the
earlier year due to
depreciation attributable to the new industrial undertaking which could not be set off against the profits of
the earlier years, it has to be carried forward and set off against the
income of the current year in working out the income liable to tax
under section 10". The Appellate Assistant Commissioner accordingly allowed the claim for exemption and directed the Incdme Tax
Officer to modify the assessment in conformity with his decision.
The Revenue being aggrieved by th~ decision of the Appellate
Assistant Commissioner preferred an appeal before the Income Tax
Appellate Tribunal. The appeal was successful and the Tribunal set
aside the order of the Appellate Assistant Commissioner and restored
that of the Income Tax Officer.
The Tribunal took the view ·that the
trading result of the new unit must be considered as if it stood by
itself, ignoring every other income producing activity of the assessee
and if that was done, it was clear that there was an unabsorbed depreciation and development rebate of Rs. 6,90, 703/- in respect of the
new unit which was required to be carried forward and treated as
part of the allowance for the assessment year 1961-62 and that would
wholly wipe out the profit of Rs. 1,36,822/- leaving a resultant lOiS
in the new unit for the assessment year 1961-62. The Tribunal in
thi's view held that the benefit of the ~emption under section l SC,
sub-section (1) was not available and the Income Tax Officer was
justified in refusing to grant such exemption.
A
B
c
D
E
F
G
H
·---
_ ....
c
114 6
SUPREME COURT REPORTS
[1979] I s.c.R.
A
This led to the filing of an application for reference by the assessee
B
c
D
E
F
G
H
and· on the application, the Tribunal stated 3J case and referred the
folldwing question of law for the opinion of the High Court :
"Whether on the facts and in the circumstances of the
case the assessee company was entitled to the relief under
section 15C(2)".
The IDgh Court agreed with the view taken by the Tribunal and
proceeding on the assumption that for the purpose of determining the
appfa:ability of section 15C, sub-section (I), the new unit was required to be treated in isolation,
as if no other income producing
activity was carried on by the assessee, the High Court '>bserved that
there was unabsorbed depreciation and development rebate of
Rs. 6,90,703/- in respect of the new unit which was required to be
carried forward and set off against the profit of Rs. 1,36,822/- derived from the new unit in the assessment year 1961-62 and since
that left the new unit in a resultant position of loss, the assessee
was not entitled to claim the benefit of the exemption under section
15C, sub-section (1). The
High Court accordingly answered the
question referred by the Tribunal i'n favour of the Revenue and
against the assessee.
The assessee thereupon preferred the present
Civil Appeal No. 1989 of 1972 after obtaining certificate of fitness
from the High Court.
111e same question also arose in the assessment of the assessee to
tax for the assessment year 1962-63, but in this assessment year the
law in force was the Income Tax Act, 1961 which had come into
force with effect from 1st April, 1962. The corresponding provision
in section 84 of the new Act was however, in material respects in the
same terms as section 15C of the old Act.
The claim for exemption
made by the assessee under section 84 for the assessment year 196263 met with the same fluctuating vicissitudes of fortune as the claim
for the earlier assessment year and ultimately, the Tribunal having
decided against the assessee, a reference of the question whether on
the facts and the circumstances of the case the assessee was entitled to
exemption under section 84 was made to the High Court.
The High
Court in view of its decision for the earlier assessment year, decided
against the assessee and hence, the present Civil Appeal No. 2418 of
1977 was brought by the assessee after obtaining certificate of fitness
from the High Court. Since both sections ! 5C and 84 are, for all
material purposes, in identical terms, we will discuss the interpretation and applicability of section !SC in Civil Appeal No.
1989 of
1972 and the view we take in that appeal will equally govern the decision of Civil Appeal No. 2418 of 1977.
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RA.TAPALAYAM MILLS V, C.I.T. (Bhagwati, ],)
1147
The law of income tax in a modern society is intended to achieve
various social and economic objectives. It is often used as an instrument for accelerating economic grnwth and development. Section 1 SC
is a provision intrnduced in the Indian Income Tax Act, 1922 with a
view to carrying out this objective and it is calculated to encourage
setting up of new industri~l undertakings in the country.
Sub-section (I) of this section exempts from tax so much of the profits or
gains derived from a new industrial undertaking as do not exceed 6%
per annum of the capital employed in the undertaking. There are
rules made under the Act for computing the capital employed in a
new industrial undertaking but we are not concerned with these rules
in the present appeals.
What is material is only the provision for
exemption and according to this provision, the profits and gains of a
new industrial undertaking are exempt from tax to the extent of 6%
per annum of the capital employed, and obviously, therefore,
there
must be prnfits or gains derived from the new industrial undertaking
in the assessment year in question before any claim for exemption
can be sustained under section 15 C, sub-section (1 ) . If there are
no profit or gains derived from the new industrial undertaking in
any particular assessment year, there can be no question of any exemption, because it is only where there are such profits or gains that
to the extent of 6% per annum of the capital employed, they become
eligible for exemption.
The first question which must,
therefore,
arise for consideration in every case where a claim for exemption is
made under section !SC, sub-section(!)
is whether there are any
profits
or gains derived
from the new industrial undertaking in
the assessment year in question, and if so, what is the quantum of
such profits or gains. Now, sub-section
(3) of section 15C says
that the profits or gains of a new industrial undertaking shall be computed in accordance with the provisions of section 10 and since under
the income tax law, every assessment year is a self-contained period,
prnfits and gains of the new undertaking must be computed for the particular assessment year in respect of which the claim for exemption is
made, by applying the provisions of section 10. Sub-section (2) of that
section provides for various allowances to be made in computing profits
and gains of a business and amongst such allowances are one in respect
of depreciation and the other in respect of development rebate. Gause
(vi) of sub-section '(2) deals with allowance for depreciation and it says
that in computing the profits or gains of a business allowance shall be
made, in respect of depreciation of building, machinery, plant or furniture belonging to the assessee and used for the purpose of the business,
a sum equivalent to "such percentage on the written down value thereof
as may in any case or class of cases be prescribed". Depreciation calA
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1148
SUPREME COURT REPORTS
[1979] l s.c.Rc
culated in accordance with the provisions of clause (vi) is thus allowable
in computing the profits and gains of a business chargeable to tax and
if the profits and gains of the business are insufficient to absorb such
depreciation allowance, the .amount of the allowance to the extent it is
unabsorbed, must, like any other business loss be set off against the
profits of any other business. It is settled law that though the profits of
each distinct business carried on by an assessee have to be computed
separately in accordance with the provisions of section 10, the tax is
chargeable under that section not separately on the profits of each business, but on the aggregate of the profits of all the businesses carried on
by the assessee. Vide Anglo-French Textile Co. Ltd. v. Commissioner of
Income-tax('), Commissioner !of Income tax v. Inda-Mercantile Bank
Ltd.(") and Commissioner of Income-tax v. Muthuraman Chettiar(').
It follows, therefore, that where the assessce carries on several businesses, he is entitled under section 10 to set off loss in one business
against profits in another. If there is any loss in a business carried on
by the assessee by reason of the profits of such business not being sufficient to absorb the dep!'.eciation allowance, such loss can be set off
against the profits of another business carried on by the assessee. If,
however, there are no profits chargeable under the· head 'Business or
profession' or if the profits chargeable under that head are insufficient
to cover the depreciation allowance, the amount of the allowance to th
extent to which it is not absorbed can be set off against profits chargeable
under any other head for that assessment year. This is the plain and
undoubted effect of section 24, sub-section ( 1) as explained in Commissioner of Income-tax v. Inda-Mercantile Bank Ltd.
(supra). But
what would happen if still some part of the depreciation allowance
remains unabsorbed.
The answer is p!'.OVided by proviso (b) to clause
(vi) of section 10 which reads as follows :
"Provided that-
(a)
(b)
x
x
x
Where, (in the assessment of the assessee or if the
assessee is a registered firm, in the assessment of its
partners,) full effect cannot be given to any such
allowance in any year (not being a year which ended
prior to the 1st day of April, 1939), owing to there
being no profits or gains chargeable for that year or
owing to the profits or gains chargeable being less than
------
(!} 23 I.T.R. 82 at 86
(2) 36 I.T.R. I at 6
(3) 44 I.T.R. 710 at 713.
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RAJAPALAYAM MILLS v. C.I.T. (Bhagwati, !.)
1149
the allowance, (then, subject to the provisions of
clause (b) of the proviso to sub-section (2) of section 24), the allowance or part of the allowance to
which effect has not been given as the case may be,
shall be added to the amount of the allowance for
depreciation for the following year and deemed to be
part of that allowance, or if there is no such allowance for that year, be deemed to be the allowance
for that year, and so on for succeeding years :
lt is clear on a plain reading of the language of proviso (b} to clause
(vi) that it comes into operation only where full effect cannot be given
to the depreciation allowance for the assessment year in question owing
to there being no profits or gains chargeable for that year or profits or
gains chargeable being less than the depreciation allowance.
Now, it is
well settled, as a result of the decision of this Court in Commissioner of
Income-tax v. Jaipuria China Clay Mines( 1) that the words 'no profits
or gains chargeable for that year' are not confined to profits and gains
derived from the business whose income is being computed under section
10, but they refer to the totality of the profits or gains computed under
the various heads and chargeable to tax. It is, therefore, clear that
effect must be given to depreciation allowance first against the profits or
gains of the particular business whose income is being computed under
section 10 and if the profits of that business are not sufficient to absorb
the depreciation allowance, the allowance to the extent to which it is not
absorbed would be set off against the profits of any other business and
if a part of the depreciation allowance still remains unabsorbed, it would
be liable to be set off against the profits or gains chargeable under any
orher head and' it is only if some part of the depreciation allowance still
remains unabsorbed that it can be carried forward to the next assessment year.
Obviously, therefore, there would be no scope for the applicability ot proviso (b) to clause (vi) if the total income of the assessee
chargeable to tax is sufficient to absorb the depreciation allowance, for
then there would not be any unabsorbed depreciation allowance to be
carried forward to the following assessment year.
But where any part
of th~ depreciation allowance remains unabsorbed after being set off
against the total income chargeable to tax, it can be carried forward
under proviso (b) to clause (vi) to the following year and set off against
that years' income and so on for succeeding years. The method adopted
by the statute for achieving this result is that the carried forward depreciation allowance is deemed to be part of and stands on exactly the same
footing as, the current depreciation for the assessment year and is thus
(I} 59 I.T.R. 555.
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1150
SUPREME COURT REPORTS
[1979] l s.c.R.
allowable as a deduction under clause (vi). It would, therefore, be
seen that when the profits or gains of a business for a pa1ticular assessment year are to be computed under section 10, the current depreciation
allowance for the assessment year in question is deductible under clause
(vi) but the depreciation allowance of the preceding years would be
liable to be taken into account only if, and to the extent to which, it i•
not absorbed by the total income of the assessee computed under different heads and chargeable to tax for those '"se>Smcnt years.
The position in regard to development rebate is the same.
The
relevant provision in that behalf is to be found in clause (vi-b) of
sub-section (2) of section 10.
That clause, insofar as material,
provides as follows:
"10(2). Such profits and gains shall be computed after
making the following allowances, namely,
( vi-b) in respect of new machinery or plant installed after
the 31st day of March, 1954, which is wholly used for the
purposes of the business carried on by the assessec, a sum
by way of development rebate in respect of the year-nf
the install,ition of the machinery or plant, equivalent to,-
(i)
(ii) in the case of machinery or plant installed before the
1st day of April. 1961, twenty-five per cent and in
the case of machinery or plant installed ofter 31st
day of March, 1961, twenty per cent of the actual
cost of the machinery or plant to the assessee;
Explanation I.
In the case of --machinery or plant
installed after the 31st day of December, 1957, where
the total income of the assessee for the year of--installation (the total income for this purpose being computed without making
any allowance under this
clause) is nil or is less than the full amount of the
development rebate calculated at the rate applicable
thereto under this clause,-
(i) the sum to be allowed by way of development rebate
for that year under thi•s clause shall be only such
amount as is sufficient to reduce the said total income to nil; and
(ii) the amount of the development rebate, to the extent
to which it has not been allowed as aforesaid, shall be
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RAJAPALAYAM. MILLS v. C.I.T. (Bhagwati, J.)
1151
carried forward to the following year, and the deveA
lopment rebate to be allowed for the following year
shall be such amount as is sufficient to reduce the total
income of the assessee for that year,
computed in
the manner aforesai'd, to nil, and the balance of the
qevelopment rebate, if any, still outstanding shall be
carried forward to the following year and so on, so
however that no portion of the development rebate
shall be carried forward for more than eight years;
The amount of development rebate in
respect of new
machinery
used for the purpose of the business is allowable in the year of installation of the machinery under sub-clause (ii) of clause (vi-bJ, but·
Explanation ( 1) provides that if the total income of the assessee for
the year of installation is nil or is less than the full amount of the
development rebate, the amount of the development rebate, to the
extent to which it is not absorbed, may be carried forward to the
following year and set off against the total income of the assessee for
that year and if even thereafter, a part of the development rebate remains unabsorbed, the balance outstanding may be carried forward
to the following year and so on for an aggregate period not exceeding
eight years.
Though the amount of the development rebate
is,
under the main provision in sub-clause (ii) of clause ( vi-b), allowable in the first instance against the P\Ofits or gains of the particular
husiness wl)ose profits or gains are being computed, clause (i)
of
Explwation ( 1) makes it clear that· if any part of the development
rebate remains unabsorbed, it is to be set off against the other income
of the assessee ·under any of the chargeable heads and it is only if
some part of the development rebate still remains outstanding that
it can be carried forward to the following assessment year and set off
against the total income of the assessee for that year.