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

CIVIL APPEAL No. 785/1977Supreme Court[1978] 3 S.C.R. 66011 April 1978Bench: 2 JudgesAuthor: Y.V. CHANDRACHUD, V.D. TULZAPURKAR A CAMBAY ELECTRIC SUPPLY INDUSTRIAL CO. LTD. B15 pages
AI SummaryPartly Allowed

What were the facts?

The assessee, Cambay Electric Supply Industrial Co. Ltd., for assessment year 1967-68, earned income of Rs. 46,319. It also had balancing charges of Rs. 7,55,807 from selling old machinery and buildings, and unabsorbed depreciation of Rs. 1,42,955 and unabsorbed development rebate of Rs. 1,11,658 from earlier years, totaling Rs. 2,54,613. The Income Tax Officer computed the deduction under Section 80E(1) at 8% on Rs. 8,02,126 (Rs. 46,319 + Rs. 7,55,807), without adjusting for unabsorbed depreciation and development rebate. The Additional Commissioner, under Section 263, revised this, holding the balancing charge was wrongly included and that unabsorbed depreciation and rebate should have been deducted before calculating the 8% deduction. The Tribunal agreed with the assessee that the balancing charge was attributable to the business and eligible for the 8% deduction, but held unabsorbed depreciation and rebate were not deductible before calculating the 80E deduction. The High Court upheld the Tribunal on the balancing charge but held unabsorbed depreciation and rebate were deductible before calculating the 80E deduction. Both the assessee and Revenue appealed to the Supreme Court.

What did the Supreme Court hold?

The Supreme Court held that the balancing charge of Rs. 7,55,807 arising under Section 41(2) must be taken into account when computing the 8% deduction under Section 80E(1). The Court explained that the computation of total income under Section 80E(1) involves three steps: first, compute total income according to other provisions (including Section 41(2)); second, ascertain profits attributable to the specified industry; and third, deduct 8% of such profits. The balancing charge, irrespective of its real character, is part of the business income and must be included before calculating the 8% deduction. The Court also held that unabsorbed depreciation and development rebate are deductible before arriving at the figure exigible to the 8% deduction under Section 80E(1). The Court reasoned that Section 72, dealing with set-off of losses, directly impacts the computation of profits and gains of business. Therefore, the benefit of Section 80E(1) and the benefit of carrying forward losses should both be available to the assessee without one impinging on the other. The Court dismissed both appeals, upholding the High Court's decision on the unabsorbed depreciation and rebate, and its own reasoning on the balancing charge.

What were the issues?

1. Whether the balancing charge of Rs. 7,55,807 arising under Section 41(2) is to be taken into account for computing the 8% deduction under Section 80E(1) of the Income Tax Act, 1961. (Question of law) Assessee's contention: The balancing charge is profits attributable to the business and thus eligible for the 8% deduction under Section 80E(1). The Tribunal and High Court correctly held this. The balancing charge, a legal fiction for computation of assessable income under 'business income', should be considered before the 8% deduction. Revenue's contention: The balancing charge, though a legal fiction, should not be extended beyond its purpose of computing assessable income. The deduction under Section 80E(1) is a special benefit and should not be diminished by other benefits like set-off of losses or unabsorbed depreciation/rebate. The High Court erred in allowing deduction of unabsorbed depreciation and rebate before computing the 8% deduction. 2. Whether unabsorbed depreciation and unabsorbed development rebate are deductible in computing the profits for the purpose of calculating the 8% deduction under Section 80E(1). (Question of mixed law and fact) Assessee's contention: Following the High Court's view, unabsorbed depreciation and development rebate should be deducted before arriving at the figure eligible for the 8% deduction under Section 80E(1). Revenue's contention: The unabsorbed depreciation and development rebate should not be deducted before computing the 8% deduction under Section 80E(1), as this would diminish the special benefit provided by Section 80E(1). The Tribunal correctly held these items were not deductible before the 8% calculation.

Which sections of the Income-tax Act were involved?

Section 32(2),Section 33(2),Section 41(2),Section 72,Section 80E(1),Section 263

AI-generated summary — verify with the full judgment below

660 A CAMBAY ELECTRIC SUPPLY INDUSTRIAL CO. LTD. B c D 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 provi- sion.

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 deprecia- tion 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

The order continues below.

Read the full judgment

A free account opens 10 full judgments a month. Re-reading one you have already opened does not count again.

Create a free accountSign in

See plans and prices

The summary, the parties, the sections and the citations above are open to everyone and always will be. Only the text of the order and the PDF are metered.

More judgments on Section 32(2)

All 315 judgments and leading authorities on Section 32(2) →

Latest GST High Court judgments

Search GST case law →