Commissioner of Income Tax, Patiala v. Patiala Flour Mills Co. Pvt. LTD., Patiala
BHAGWATI, J.-The assessee, a private limited company, carried
on several businesses amongst which there was a business of cold sto
rage plant. This cold storage plant was put up in the accounting
year relevant to the assessment year 1967-68 and it was a new in
dustrial undertaking to which sub-section ( 4) of section 80J of the
Income Tax Act, 1961 applied. The assessee did not make any
profit in the business of cold storage plant during the assessment
years 1967-68, 1968-69 and 1969-70, but there was profit in the
other businesses and the losses, depreciation allowance and develop
ment rebate in respect of the cold storage plant were adjusted against
the profit from the other businesses in computing the total i~ome
of the assessee charg~able to tax for those assessment years. No
loss and no part of the depreciation allowance or development rebate
in respect of the cold storage plant remained un-absorbed so as to
be available for carry forward and set olI in the as.sessment year
1970-71. The business of cold storage plant turned the comer after
the initial teething trouble and it made a profit of Rs. 1,51,011/- in
the assessment year 1970-71 after taking into account the current
year's depreciation allowance and development rebate. The assessee
claimed in its assessment to tax for the assessment year 1970-71 that
the amounts of deficiency under section 80J for the current as well
as past asseosment years were liable1 to be adjusted against the pro
fit of Rs. 1,51,011/- for that assessment year. Since the claim was
based on section 80J, it would be convenien.t at this ~tage to ref~r to
the relevant provisions of that section. Section 80J was introduced
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C.I.T. v. PATIALA FLOUR MILLS (Bhagwati, J.) 1131
in the Act in place of section 84 by Finance Act, 1967 with effect from
1st April, 1968. The material portions of that section read as under :
"80J. (1) Where the gross total income of an assessee
includes any profits and gains derived from an industrial
undertaking or a ship or the business of a hotel, to which
this section applies, there shall, in accordance with and sub
ject to the provisions of this section, be allowed, in com
puting the total income,_ of the a§sessee, a deduction from
such profits and gains (reduced by the deduction, if any,
admissible to the assessee, under section 80HH) of so much
of the amount thereof as do~s not exceed the amount cal
culated at the rate of six per cent per annum on the '
capital employed in the industrial undertaking or ship or
business of the hotel, as the case may be, computed in the
prescribed manner in respect of the previous year relevant
to the assessment year (the amount cl)lculated as aforesaid
being hereafter, in this section, referred to as the relevant
amount of ca.Pital employed during the previous year) :
x x x x x
(2) The deduction specified in sub-section ( 1) shall be
allowed in computing the total income in respect of the
assessment year relevant to the previous year in which the
the industrial undertaking begins to manufacture or produce
'!rticles or to operate its cold storage plant or plants or the
ship is first brought into use or the business of the hotel starts
functioning (such assessment year being hereafter, in this
section, refer.red to as the initial assessment year) and each
of the four assessment years immediately succeeding the
initial assessment year:
x x x x x
(3) Where the amount of the profits and gains derived
from the industrial undertaking or ship or busines~ of the
hotel, as the case may be, included in the total income (as
computed without applying the provision~ of section 64 and
before making any deduction under Chapter VI-A or sec
ti_on 280-D) in respect of the previous year relevant to an
assessment year commencing on or after the 1st day of Apd,
1967, (not being an assessment year or subsequent to the.
fourth assessment year as reckoned from the end of the
initial assessment year) falls short of the relevant al!J.ount of
,,~~-;.
capital employed during the previous year, the amount of
such shortfall, or, where there are no such profi!S and gains,
an amount equal to the relevant amount of c~pital employed
during the previous year (such amount, in either case, being
hereafter, in this section referred to as deficiency) shall be
carried forward and set off against the profits and gains refer
red to in sub-section (1) [as computed after allowing the
deductions, if any, admissible under section 80 BB and the
said sub-section (1)] in respect of the previous year relevant
to !he next following assc~sment year and, if there are .no such
profits and gains for that assessment year, or where the defi
ciency exceeds such profits and gains, the whole or balance
of the deficiency, as the case may be, shall be set off against
such profits and gains for the next following assessment year
and if so far as such deficiency cannot be wholly so set
off, it shall be set off against such profits and gains. assessable
for the next following assessment year and so on:
Provided that-
(i) in no case shall the deficiency or any part thereof
be carried forward beyond the seventh assessment
year as reckoned from the end of the initial assess
ment year;
(ii) where there is more than one deficiency and each such
deficiency relates to a different assessment year, the
deficiency which relates to an earlier assessment year
shall be set off under this sub-section before setting
off the deficiency in relation to a latter assessment
year:
x x x x x
( 4) This section applies to any industrial undertaking
which fulfils all the following conditions, namely :-
(i) it is not formed by the splitting up, or the recons
truction, of a business already in existence;
(ii) it is not formed by the transfer to a new business
of machinery or plan previously used for any pur
pose;
(iii) it manufactures or produces articles, or operates one
or more• cold storage plant or plants, in any part
of India, and has begun or begins to operate such
plant or plants, at any time within the period of
)
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C.J.T. v. PATIALA FLOUR MILLS (Bhagwati, J.)
thirty-three years next following tjle 1st day of April,
1948, or such further period as the Central Govern
ment may, by notification in the Official Gazette,
specify with reference to any particular industrial
undertaking;
(iv) in a case where the industrial undertaking manl!f
factures or produces articles, the undertaking em
ploys ten or more workers in a manufacturing pro
cess carried on with the aid of power, or employs
twenty or more workers in a manufacturing process
carried on without the aid or power;
1133
Since there was no profit from the cold storage plant in the assess
ment years 1967-68, 1968-69 and 1969-70, the whole of the relevant
amount of capital employed during each of the relevant previous years
remained unabsorbed and constituted deficiency for e~ch of those
assessment years and had to be carried forward from year to year
upto the assessment year 1970-71 under seb-section (3) of section
80J. The amounts of deficiency for the assessment years 1967-68,
1968-69 and 1969-70 came to Rs. 11,155/-, Rs. 1,14,153/- and
Rs. 90,228 /-. The relevant amount of capital employed during the
previous year relevant to the assessment year 1970-71 was
Rs. 83,391/-. The assessee claimed thl).t this amount of Rs. 83,391/
representing the relevant amount of capital employed in the assessment
year 1970-71 was liable to be set of! against the profit of
Rs. 1,51,011/- derived from the cold storage business under sub
section (1) of section 80J and so far as the balance of the profit was
concerned. the amounts of deficiency for the past assessment years,
namely, Rs. 11,155/-, Rs .. 1,14,153/- and Rs. 90,228/- which were
carried forward to the assess_ment year 1970-71, were liable to be
adjusted against it under sub-section (3) of section 80J. The Income
Tax Officer did not dispute the figures of the relevant amount of capi
tal employed in the assessment year 1970-71 or of the amounts of
deficiency for the past assessment years, but held that there was no
profit from the business of cold storage plant in the assessment year
1970-71 against which any part of the relevant amount of capital
employed during the assessment year 1970-71 could be adjusted
under sub-section ( 1) of section 80J or any part of the carried for
ward amounts of deficiency for the past assessment years, deducted
under sub-section (3) of section 80J. It was not possible to dis
agree with the assessee that the business of the cold storage plant had
resulted in a profit of Rs. 1,51,011/- in the assessment year 1970-71
and in fact it was conceded that this was the amount of profit liable
to be taken into account in computing the total income of the
assessee chargeable to tax, but the Income Tax Officer took the view
that in computing the profit of the cold storage business for the pur
pose of applying the provision contained in sub-sections (1) and (3)
of section 80J, the losses as well as the depreciation allowa:nce and
development rebate in respect of that busin(oss for the past assess
ment years should be adjusted aganst the profit of Rs. 1,51,011/-,
since there was no profit at all from that business in the past assess
ment years against which any part of such lo~ses, depreciation allow
ance or development rebate could be absorbed. The Income Tax
Officer ignored the fact that the lossess as well as the depreciation
allowance and development rebate in respect of the cold storage
business for the past assessment years were already adjusted against
the profit of the assessee from other businesses and no part of the
losses, depreciation allowance or development rebate remained un
l!_bsorbed for being carried forward and set off against the profit of
Rs, 1,51,011/- in the assessment year 1970-71 <1nd proceeded on
the assumption that for the purpose of snb-secton (1) and (3) of
section 80J, the cold storage business was to be treated in isolation
and its profit was to be computed as if the earlier years' losses, de
preciation allowance and development rebate had not been set off
against the profit from other businesses. The I11come Tax Officer
accordingly declined to allow any deduction from the profit of
Rs. 1,51,011/- in respect of the relevant amount of ca.Pita! employ
ed in the assessment year 1970-71 under sub-section (1) of section
80J and in respect of the amounts of deficiency for the past assess
ment years under sub-section (3) of section 80J •nd made assess
ment on the assessee wthout permitting such deduction. The asses
see challenged the decision of the Income Tax Officer by preferring
an appeal to the Appellate Assistant Commissioner but the Appellate
Assistant Com:missioner took the same view and rejected the appeal.
The assessee thereupo_n carri~d the matter in further appeal aJ1d in
the appeal, the assessee succeeded in persuading the Tribunal to hold
that since the losses as well as depreciation allowance and develop
ment rebate in respect of the cold storage business for the past assess
ment years were already adjusted against the profit from other busi
nesses, no part of such los~es, depreciation allowance or development
rebate remained unabsorbed so as to be carried forward and set off
~gainst the profit for the assessment year 1970-71 and hence the
profit of Rs. 1,51,011/- from the cold storage business was not liable
to be reduced by any such set off and the assessee was entitled to
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c.I.T. v. PATIALA FLOUR MILLS (Bhagwati, J.) 1135
claim that from out of such profit there should be deducted, first, the A
amount of Rs. 83,891/- representing the relevant amount of capital
employed during the previous year and then, the amounts of defi
ciency for the past assessment years. The Revenue being aggrieved
by the order of the Tribun~ llJ!lde an applcation for a reference
and on the application, the following question of .law was referred·
for the opinion of the High Court : B
"Whether on the facts and in the circumstances of the
case, the Appellate Tribunal was right in law in allowing
the deduction under section 80J of the Income Tax Act,
1961 ?"
The High Court agreed with the view taken by the Tribunal and
answered the question in favour of the assessee and against the
Revenue. The Revenue thereupon preferred the present appeal with
special leave obtained from this Court.
Now it is clear from the language of sub-section ( 1) of section
80J that the profits or gains of a new industrial undertalcing from
which deduction of the relevant amount of capital employed during a
particular assessment year is allowable under that provision, are the
profits or gains includible in the computation of the total income
chargeable to tax. Therefore, whatever be the profits or gains of the
new industrial undertaking computed for the purpose of arriving at
the total income chargeable to tax, would have to be taken to be the
profits or gains for applying the provision contained in sub-section
(1) of section 80J. There are no two modes of computation of the
profits or gains of the new industrial undertaking contemplated by
sub-section (1) of section 80J, one for determining the total income
chargeable to tax and the other for applying the provision contained
in that sub-section. The language of sub-section ( 1) of section 80J
is clear and explicit and leaves no doubt that the profits or gains of
the new industrial undertaking for the purpose of allowing the de
duction provided in that sub-section, have to be COJ!1Puted in the
same manner in which they would be in determining the total income
chargeable to tax and a deducton has then to be made from such pro
fits or gains, of the relevant amount of capital employed during the
assessment year in question. It is impossible to see how, by any
process of constructioQ, even by turning and twisting the language
of sub-section (1) of section 80J, it can be held that for the purpose
of allowing the deduction contemplated under that section the profits
or gains of the new industrial U!ldertaking must be computed in a
manner different from that in which they would be computed in de
termining the total income chargeable t9 tax. Sub-section ( 1) of
section 80J does not create a legal fiction that for the purpose of
applying the provision contained in that sub-secton, the profits or gains
of the new industrial undertaking shall be computed as if the new in
dustrial undertaking were the only business of the assessee right from
the date of its establishment or the lossess, depreciation allowance
or development rebate in respect of the new industrial undertaking
for the past asse~sment years were not set off against the profit from
other businesses. If the construction of sub-section ( 1) of section
80J contended for and on behalf of the Revenue were accepted, it
would lead to the absurd result that there would be two species of
profits or gains of the new industrial undertaking, one for inclusion
in the total income chargeable to tax and the other for determining
the availability of the deduction under sub-section ( 1) of section
80J. That would be plainly contrary to the express language of sub
section (1) of section 80J. The proper construction of sub-section
( 1) of section 80J must, therefore, be taken to be that the profits
or gains of the new industrial undertaking must be computed in
accordance with the provisions of the Act in the same manner as
they would be in determining the total income chargeable to tax and it
must follow ai fortiori that if the losses, depreciation allowance and
development rebate in respect of the n_ew industrial undertaking for
the pas_t asses.sment years have been fully set off against the profit of
the assessee from other busin_esses or for the matter of that, against
the income of the assessee under any other head by reason of sections
70 and 71 read with sub-section (2) of section 32 and sub-section
(2) of section 32A, no part of such losses, depreciation allowance
or development rebate would be liable to be adjusted over again in
computing the profits or gains of the new industrial undertaking for
applying the provision cont;iined in sub-section ( 1) of section 80J.
The same mode of computation must prevail also in applying the pro
vision contained in sub-section (3) of section 80J, because that sub
section provides for setting off the carried-forward amount of defi
ciency of the past assessment ye_ars again.st "the profits and gains re
ferred to in sub-section (1)" of section 80J, as computed after
allowing inter alia the deduction admissible under that sub-section and,
therefore, if, for the purpose of sub-section (1) of section 80J, the
profits or gains of the new industrial undertaking are to be computed
in accordance with the provisio11s of the Act and no part of the
losses, depreciation allowance or development rebate for the past
assessment years which has been fully set off :igainst the profit from
other businesses or income under any other head is liable to be ad-
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c.I.T. v. PATIALA FLOUR MILLS (Bhagwati, J.) 1137
justed over again in computing the profits or gains of the new in
dustrial undertaking; no such adjustment would equally be permissi
ble in applying the provision contained in sub-~ection (3) of sec
tion 80J.
Here, in the present case, it was common ground th<!J the losses
as well as deprecation allowance and development rebate in respect
of the cold f;1orage business for the past assessment years were fully
adjusted against the profit of the ass~ssee from other businesses and
no part of such losses, depreciation allowa!lce or development re
bate remained unabsorbed so as to be carried forward to the assess
ment year 1970-71. The profit of Rs. 1,51,011/- derived from the
cold storage business in the assessment year 1970-71 was, therefore,
not liable to be wiped out or reduced by adjustment of any part of
the losses, depreciation allowance or development rebate for the past
assessment years. The profit of the assessee from the cold storage
business in the assessfi!ent year 1970-71 thus came td Rs. 1,51,011/
and from out of that profit, a sum of Rs. 83,391/- representing the
relevant amount of capital employed in the a~sessment year 1970-71
was liable to be deducted undoc sub-section (1) of section 80J and
since that left a balance of Rs. 67,620/-, the amount of Rs. ll,155/
representing deficiency for the assessment year 1967-68 was liable
to be deducted first and then, since a part of the profit, namely,
Rs. 56,465/- still remained available for deduction, the amount of
deficiency for the assessment year 1968-69 was liable to be deducted
to the extent of Rs. 56,465/-, leaving the profits or gains of the
new industrial undertaking includible in the total income chargeable
to tax as nil. The High Court as well as the Tribunal were, therefore,
right in adjusting the relevant amount of Cl!Jlital employed during the
ll.Ssessment year 1970-71 as also the amounts of deficiency for the
assessment years 1967-68 and 1968-69 against the profit of
Rs. 1,51,011/- derived by the assessee from the cold storage busi
ness and holding: that the profit of the cold storage business was nil
in computing the total income chargeable to tax.
We accordingly uphold th(l order of the High Court answering the
question referred by the Tribunal in favour of the assessee and against
the Revenue and dismiss the apneal with costs.
S.R. Appeal dismissed.
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