Holding

The profits and gains of a priority industry cannot be reduced by the loss suffered by any other industry owned by the same assessee; each industry must be considered separately for the deduction under section 80E.

Summary

Canara Workshops Ltd., a company engaged in automobile ancillaries, also commenced an alloy‑steel manufacturing unit, both of which are listed as priority industries under the Fifth Schedule of the Income Tax Act, 1961. The company claimed an 8% deduction under section 80E (then s. SOE) on the profits from its automobile‑ancillary business without setting off the loss incurred in the alloy‑steel business. The Assessing Officer and the Appellate Assistant Commissioner held that the loss from the alloy‑steel unit must be set off against the automobile‑ancillary profits before the deduction could be granted. The Income Tax Appellate Tribunal allowed the company’s contention that each priority industry should be assessed separately for the deduction, and the matter was referred to the Karnataka High Court, which affirmed the Tribunal’s view. The Supreme Court held that the deduction under s. 80E is to be computed on the profits of each individual priority industry and cannot be reduced by losses of any other industry owned by the same assessee, thereby dismissing the Revenue’s appeal.

Issues considered

Whether, for the purpose of computing the deduction under section 80E (s. SOE) of the Income Tax Act, 1961, a loss incurred in one priority industry (alloy steel) can be set off against the profits of another priority industry (automobile ancillaries) owned by the same assessee.

Legislation cited

Income Tax Act, 1961s. 80E

Subjects

Income TaxSection 80Epriority industriesdeductionloss set‑offstatutory interpretationassessment yearindustrial policy

Judgment

A (
C.I.T. (CENTRAL), MADRAS
v.
CANARA WORKSHOPS (P) LTD.,
B KODIALBALL, MANGALORE

JULY 15, 1986 --·
[R.S. PATHAK AND SABYASACHI MUKHARJI JJ.]
/

Income Tax Act, 1961-s. SOE-Profit and gains-Priority in-
dustries-deductions in respect of-how determined.
c
The assessee-company is engaged in the mannfactnre of autombile
spares. During the previous year relevant to the assessment year 1966-
67, the assessee also commenced the manufacturing of alloy steels. Both
-4
the industries are included in the Fifth Schedule to the Income Tax Act,
D 1961. The assessee sustained a loss in the alloys steel industry during the
previous years relevant to the assessment years 1966-67 and 1967-6S. It
claimed a loss in the sum of Rs.15,30,6SS for the assessment year 1966-
67. For the assessment year 1966-67, the assessee disclosed profits to the
tune of Rs.17,57, 129 from the industry of automobile ancillaries. The
assessee claimed relief under s. SOE at S% of this amount in the sum of
E Rs.1,40,574. Similarly the assessee claimed relief in the sum of
Rs. l,52,4S3 for the assessment year 1967-6S. The Income Tax Officer
declined to grant the relief claimed and held that the assessee would be
entitled to deduction under s. SOE on the profits from the manufacture
of automobile parts only after setting off the loss in alloy steel manu- \
facture. The Appellate Assistant Commissioner dismissed the appeal
F of the assessee. But on second appeal, the Tribunal accepted the conten-
tion of the assessee that a deduction was permissible at S% on the entire r
profits of the automobile parts industry included in the total income
without deducting therefrom the losses in the alloy steel manufacture
and directed the Income-tax Officer to recompute the relief under s.
SOE.
G
In the Reference, on the question whether in computing the pro-
fits for the purpose of dedu<tion under s. SOE of the Income-tax Act,
\
1961, the loss incurred in the manufacture of alloy steels should not be
set off against the profits of the manufacture of automobile ancillaries,
the High Court answered in favour of the assessee and against the
H Revenue.
C.l.T. (CENTRAL) v. CANARA WORKSHOPS 167

In the Appeal to this Court, on behalf of the Revenue it was A
contended that on a true application of s. SOE the profit in the industry
of automobile ancillaries must be reduced by the loss suffered in the
manufacture of alloy steels.

Dismissing the appeal, B
HELD: t. In the application of s. ·SOE of the Income-tax Act,
196 l the profits and gains earned by an industry mentioned in that

I\
section cannot be reduced by the loss suffered by any other industry or
industries owned by the assessee. [172G I

2. Each industry must be consider~ on its own working only c
when adjudging its title to the deduction under s. SOE. It cannot be
allowed to suffer because it keeps company with some other industry in
the hands of the assessee. To determine the benefit under s. SOE on the
basis of the net result of all the industries owned by the assessee would
be, to shift the focus from the industry to the assessee. I172E-F] D
Commissioner of Income-tax, Tamil Nadu-111 v. English Electric
Company Ltd., [1981] 131ITR 277 overruled.

Cambay Electric Supply Industrial Co. Ltd. v. Commia:>ioner of
Income-tax, Gujarat-II, [1978] 113 ITR 84 followed.
E
Distributors (Baroda) P. Ltd. v. Union of India & Ors., [1985]
155 ITR 120 inapplicable.

Commissioner of Income-tax, West Bengal-II v. Belliss and
-I
Marcon (I) Ltd., [1982] 136 ITR 481; and Com_ssioner of Income-tax, F
Mysore v. Balanoor Tea and Rubber Co. Ltd., [1974] 93 ITR 115
approved.

3. The object underlying the enactment of s. SOE was to encour-
age the setting up of industries concerned with the generation or dis-
tribution of electrical and other energy and the construction, manu- G
facture or production of articles or things specified in the list in the
Fifth Schedule. By making a provision for a rebate year after year on
j
- the industry making profits and gains during the year, the intention
also was to provide an incentive for promoting efficiency in the in·
dustry. The benefit was directed to the setting up and also the efficient
working of the priority industries. [171E-F) H
168 SUPREME COURT REPORTS 11986] 3 S.C.R.

A 4. The object in enacting s. SOE is properly served only by confin- ~
ing the application of the provisions of that section to the profits and ?
gains of a single industry. The deduction of S% is intended to be an
index of recognition that a priority industry has been set up and is
functioning efficiently. It was never intended that the merit earned by
B such industry should be lost or diminished because of a loss suffered by
some other industry. It makes no difference that the other industry is
also a priority industry. The co-existence of two industries in common
ownership was not intended by Parliament to result in the misfortune of
one being visited on the other. The legislative intention was to give to
the meritorious its full reward. To construe s. SOE to mean that one
J
I must determine the net result of all the priority industries and then !
c apply the benefit of the deduction to the figure so obtained will be, to
undermine the object of the section. [172B-E]

Iu the instant case, both the industries carried on by the assessee
find place in the list in the Fifth Schedule and represent separate prior- '>
o ity industries. ll72A]

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos.
1685 and 1686(NT) of 1974

From the Judgment and Order dated 21st February, 1974 of the
E Karnataka High Court in Tax Reference Nos. 67 and 68 of 1972.

M.K. Banerjee, Additional Solicitor General, Ms. A. Subha-
shini and B.B. Ahuja for the Appellant.

G. Sarangan and Mukul Mudgal for the Respondent.
I
F
The Judgment of the Court was delivered by

PATHAK, J. These appeals are directed against the judgment of
the Karnataka High Court disposing of two Income-tax References.
The question in each Reference, which was answered by the High
G Court in favour of the assessee and against the Revenue, is whether in
computing the profits for the purpose of deduction under section BOE
of the Income Tax Act, 1961, the loss incurred by the assessee in the
manufacture of alloy steels could not be set off against the profits of ,\
the manufacture of automobile ancillaries.

H The assessee is a public limited company engaged in the
C.l.T. (CENTRAL) v. CANARA WORKSHOPS [PATHAK, J.] 169

manufacture of automobile spares. The products manufactured by it A
are covered by the list in the Fifth Schedule to the Income Tax Act.
During the previous year relevant to the assessment year 1966-67, the
assessee commenced another activity, the manufacture of alloy steels,
which was also an industry included in the Fifth Schedule. The asses-
see sustained a loss in the alloy steel industry during the previous years B
relevant to the assessment years 1966-67 and 1967-6S. It claimed a loss
in the sum of Rs. 15,30,6SS for the assessment year 1966-67. For the
assessment year 1966-67, the assessee disclosed profits from the in-
.dustry of automobile ancillaries in the following detail:

l. Manufacture of Springs at Mangalore Rs. 7,54,107
2. Manufacture of Springs at Nagpur Rs. 9,61,SOS
c
3. Manufacture of Hubs and Brake Drums Rs. 41,214
Rs.17,57,129

D
The assessee claimed relief under section SOE at S per cent of this
amount in the sum of Rs.1,40,574. In the same manner, the assessee
claimed relief under section SOE in the sum of Rs. l,52,4S3 for the
assessment year 1967-6S. Tlie Income Tax Officer declined to grant the
relief claimed by the assessee in the two assessment years. He noticed
that the assessee had not taken into account the losses incurred in the E
alloy steel industry, and he held that the assessee would be entitled to
deduction under section SOE on the profits from the manufacture of
automobile parts only after setting off- the loss in alloy steel manu-
facture. After making certain adjustments in the computation of the
total income, the Income Tax Officer gave relief under section SOE in
the sum of Rs.24,S96 for the assessment year 1966-67 and Rs. l,20,9S6 F
for the assessment year 1967-68, computing the deduction at S per cent
on the amount of profits from the manufacture of automobile parts as
reduced by the losses from the alloy steel manufacture. An appeal by
the assessee was dismissed by the Appellate Assistant Commissioner
of Income-tax. But on second appeal, the Income Tax Appellate Tri-
bunal accepted the contention of the assessee that a deduction was G
permissible at S per cent on the entire profits of the automobile parts
industry included in the total income without deducting therefrom the
losses in the alloy stecil manufacture. It directed the Income Tax Officer
to recompute the relief under section SOE.

At the instance of the Revenue, the Appellate Tribunal referred H
170 SUPREME COURT REPORTS [1986] 3 S.C.R.

A the case for each of the two assessment years 1966-67 and 1967-68 to
the Karnataka High Court for its opinion on the following question of
law:

"Whether on the facts and in the circumstances of the case,
the Appellate Tribunal was right in holding that in com-
B
puting the profits for the purpose of deduction under sec-
tion SOE of the Income Tax Act, 1961 the loss incurred in
the manufacture of alloy steels should not be set off
against the profits of the manufacture of automobile
ancillaries?"
i

C The High Court answered the question in the affirmative.

To appreciate the merits of the controversy in these appeals it
would be as well to set forth at this point the relevant provisions of
section SOE of the Income Tax Act as they stood at the time:
D
80E. "Deduction in respect of profits and gains from
specified industries in the case of certain com-
panies-
•
( 1) In the case of a company to which this section i
applies, where the total income (as computed in ac-
E
cordance with the other provisions of this Act) in-
cludes any profits and gains attributable to the busi-
ness of generation or distribution of electricity or
any other form of power or of construction, manu-
facture or production of any one or more of the \
F articles and 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."

G It is not disputed that the assessee is a company to which section SOE
applies. The question is whether for the purpose of granting relief
under s. SOE the loss suffered by the assessee in the manufacture of
alloy steels can be set off against the profits arising from the manu-
facture of automobile ancillaries. It is apparent that section 80E pro-
vides for the grant of a rebate when computing the total income of a
H company carrying on the business of generating or distributing elect-
C.I.T. (CENTRAL) e. CANARA WORKSHOPS [PATHAK, J.] 171

nc1ty or other form of power or of constructing, manufacturing or A
producing any one or more of the articles and things specified in the
list in the Fifth Schedule. Popularly, the list is known as the list of
Priority Industries. A perusal of the entries in the list makes it clear that
they are concerned with articles and things which are regarded of
primary importance in the industrial and economic development of the B
country. Some of them form part of the industrial and economic base
of the country while others enter into the industrial and economic
infrastructure considered necessary or desirable for its development.
A certain priority has been assigned to the construction, manufacture
or production of those articles and things. They find place in section
SOE along with the business of generation or distribution of electricity
or other form of power. Nobody can dispute that electrical energy or c
other form of energy is crucial to industrial and economic develop-
ment. The nature of articles and things included in the list in the Fifth
Schedule possesses the same character. Alloy steels are undoubtedly
covered by Entry (1) "Iron and steel (metal), ferro-alloys and special
steels", while automobile ancillaries appear clearly by that description D
in Entry 20 of the list. Both represent separate priority industries.

It is obvious from the object underlying the enactment of s. SOE
and the terms in which it provides relief that the intention of Parlia-
ment in enacting the provision was to encourage the setting up of
industries concerned with the generation or distribution of electrical E
and other energy and the construction, manufacture or production of
articles or things specified in the list in the Fifth Schedule. The inten-
tion goes further. By making a provision for a rebate year after year on
the industry making profits and gains during the year, the intention
J also was to provide an incentive for promoting efficiency in the in-
dustry. It is clear that the benefit was directed to the setting up and F
also the efficient working of the priority industries. How is the benefit
to be worked out? First, it must be a company to which s. SOE applies,
that is to say a company which satisfies the requirements of sub-s. (2)
of s. SOE. Second, the total income, as computed in accordance with
the Income-tax Act 1961 without taking into regard the provisions of s.
SOE, should include profits and gains attributable to the business or G
the industry mentioned in the section. Third, from the profits and
gains attributable to such business or industry a deduction has to be
allowed of an amount equal to eight per cent of such profits and gains
and effect must be given to this deduction when computing the total
income of the company.
H
172 SUPREME COURT REPORTS [1986] 3 S.C.R.

A The assessee in this case carries on two industries, both of which
find place in the list in the Fifth Schedule and can, therefore, be
described as priority industries. It is urged by the learned Additional
Soliciter General, appearing for the Revenue, that on a true applica-
tion of s. SOE the profit in the industry of automobile ancillaries must
be reduced by the loss suffered in the manufacture of alloy steel, and
B
reference has been made to a number of cases to which we shall pre-
sently refer. After giving the matter careful consideration we do not
find it possible to accept the contention. It seems to us that the object
in enacting s. SOE is properly served only by confining the application
of the provisions of that section to the profits and gains of a single
industry. The deduction of eight per cent is intended to be an index of
c recognition, that a priority industry has been set up and is functioning
efficiently. It was never intended that the merit earned by such in-
dustry should be Jost or 'diminished because of a loss suffered by some
j
other industry. It makes no difference that the other industry is also a
priority industry. The coexistence of two industries in common owner-
ship was not intended by Parliament to result in the misfortune of one
D
being visited on the other. The legislative intention was to give to the
meritorious its full reward. To construes. SOE to mean that you must
determine the net result of all the priority industries and then apply the
benefit of the deduction to the figure so obtained will be, in our opi-
nion, to undermine the object of the section. An example will illus-
trate this. An industry entitled to the benefit of s. SOE could have its
E
profits wholly wiped out on adjustment against a heavy loss suffered
by another industry, and thus be totally denied the relief which should
have been its due by virtue of its profits. In our opinion, each industry
must be considered on its own working only when adjudging its title to
the deduction under s. SOE. It cannot be allowed to suffer because it '\
keeps company with some other industry in the hands of the assessee.
F
To determine the benefit under s. SOE on the basis of the net result of
all the industries owned by the assessee would be, moreover, to shift
the focus from the industry to the assessee. We hold that in the appli-
cation of s. SOE the profits and gains earned by an industry mentioned
in that section cannot be reduced by the loss suffered by any other
industry or industries owned by the asscssee.
G
We shall now tum to the cases cited before us. In the view
which has found favour with us it is apparent that the Madras High ).
Court erred in holding in Commissioner of Income-tax, Tamil Nadu-1/I
v. English Electric Company Ltd.,[1981] 13! ITR 277, that in granting
H relief under s. SOE the adjustment of certain losses in other trading
C.l.T. (CENTRAL) v. CANARA WORKSHOPS [PATHAK, J.[ 173

transactions was permissible in determining the quantum of profits and A
gains attributable to the priority industry claiming relief under that
provision. The High Court did not correctly appreciate the law laid
down by this Court in Cambay Electric Supply Industrial Co. Ltd., v.
Commissioner of Income-tax, Gujarat-II., [1978] 113 IlR 84. That was a
case where this Court held that, for the purpose of granting relief
B
under s. SOE to an industry, account must be taken when computing
the profits and gains attributable to that industry of the balancing

I charge worked out under sub-s. (2) of s. 41 as well as items of unab-
sorbed depreciation and any depreciation development rebate carried
forward from earlier years. It appears from the facts of that case that
the balancing charge as well as the unabsorbed depreciation and unab-
sorbed development rebate related to the particular ind us try itself. c
The only business carried on by the assessee there was generation and
distribution of electricity at Cambay. The balancing charge arose be-
cause during the relevant accounting period the assessee had sold
some of its machinery and buildings. The unabsorbed depreciation and
development rebate also appear to relate to the same business. There
D
is no indication that any of them related to a business or industry
distinct from that whose profits and gains formed the subject of com-
putation under s. SOE. Our attention has been invited by the Revenue
to Distributors (Baroda) P. Ltd.v. Union of India and Others, [19S5]
155 ITR 120. That is a case in which the Constitution Bench of this
Court was called upon to consider the scope of s. SOM of the Income-
E
tax Act. We do not see how that case is in any way relevant to the case
before us. The point before the Court appears to have been whether
the income by way of dividends from a domestic company, which fell
to be included in the gross total income of the assessee, should be the
) amount computed in accordance with the provisions of the Act or the
full amount received from the paying company. We may refer at this
F
point to Commissioner of Income-tax, West Bengal-II v. Belliss and
Marcon (I.) Ltd., [19S2] 136 ITR 481 a decision of the Calcutta High
Court to which one of us (Sabyasachi Mukharji J.) was a party. That
decision supports the view taken by us in so far as it lays down that in
applying s. SO I of the Income-tax Act (which replaced s. SOE) it is not
permissible to compute the profits of the priority industry, respecting
G
which the relief is claimed, by taking into account the depreciation loss
from other industries. No doubt the depreciation loss arose in that case
from non-priority industries, but in view of what we have said earlier
that should make no difference whatever. We think it unnecessary to
refer to other cases on the point. We think it sufficient to indicate that
a distinction must be drawn between a case where the loss or un- H
174 SUPREME COURT REPORTS [1986] 3 S.C.R.

A absorbed depreciation pertain to the same industry whose profits and
gains are the subject of relief under s. SOE and a case where the loss or
unabsorbed depreciation relate to industries other than the one whose
profits and gains constitute the subject of relief.

While concluding we may point out that the Mysore High Court
B
seems, in our opinion, to be perfectly right in holding in Commissioner
of Income-tax, Mysore v. Balanoor Tea and Rubber Co. Ltd., [1974] 93
ITR 115 that the loss from the plastic business carried on by the asses-
see could not be deducted from the profits and gains attributable to the
tea industry for the purpose of computing the quantum of the profits I
and gains attributable to the tea industry under s. SOE.
c
In the result, we affirm the answer returned by the High Court to
the question raised in the Income-tax References. The appeals are
dismissed with costs. +-
A.P.J. Appeals dismissed.