Citation Codes

Equivalent Citations

citation codes

Case Number

Income-tax Reference No. 267 of 1982

Judges

Sujata Manohar, C.J
Dr. B.P Saraf, J.

Acts

section 10(10) read with section 17(3)(ii) of the Income-tax Act, 1961,
provisions of section 40A(5) of the Income-tax Act
INCOME TAX ACT 1961
section 256(1) of the Income-tax Act,
INCOME TAX ACT
provisions of section 17(1)(iii)
provisions of section 40(c)(i)

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Smart Summary

Summary of Opinion: Income-tax Appellate Tribunal reference under section 256(1) of the Income-tax Act, 1961

Factual and Procedural Background

The Income-tax Appellate Tribunal referred multiple questions of law to this Court under section 256(1) of the Income-tax Act, 1961. The questions arise out of disputes between an assessee-company and the Revenue concerning (inter alia) the taxability of amounts received in respect of U.P. Zamindari Abolition Rehabilitation Grant Bonds, the treatment of interest from certain compensation bonds, the computation and limitation of relief under section 80J for assessment years 1972–73 and 1973–74, the determination of capital of ships with regard to borrowals, the treatment of salary/perquisites paid to a relative of a director under sections 40(c)(i) and 40A(5), the treatment of exempted gratuity in computing disallowable expenditure under section 40A(5), and the priority between deductions under sections 80G and 80J for the assessment year 1973–74.

The Tribunal's reference presented separate sets of questions at the instance of the assessee and at the instance of the Commissioner of Income-tax (Revenue). The Court considered earlier decisions of this Court and the Supreme Court in answering the referred questions and gave its conclusions question-wise. The Court also noted the original assessments, appellate adjustments (including reliefs under section 35B(1)(b)), and the positions taken before the Appellate authorities and Tribunal in relation to computation and allocation of deductions.

Legal Issues Presented

Whether any part of the amount received by the assessee-company in respect of the U.P. Zamindari Abolition Rehabilitation Grant Bonds represented income chargeable to tax for the assessment years 1972–73 and 1973–74?
Whether any part of the amount received by the assessee-company apart from the actual interest received in respect of 2½% U.P. Zamindari Abolition Compensation Bonds was chargeable to tax for the assessment years 1972–73 and 1973–74?
Whether relief under section 80J of the Income-tax Act, 1961 is to be restricted to Rs. 90,93,431 and Rs. 29,44,727 for the assessment years 1972–73 and 1973–74 respectively and was not available to the extent of Rs. 1,11,73,180 and Rs. 75,94,038 respectively?
Whether, in determining the capital of the ships owned by the assessee, the amount of borrowal should be deducted from the written down value of each ship?
Whether the salary and perquisites of Shri T.N. Gokuldas, a relative of a director of the assessee-company, are covered by the provisions of section 40(c)(i) rather than by section 40A(5) for computing the disallowable portion of the expenditure?
Whether the exempted portion of gratuity under section 10(10) read with section 17(3)(ii) should be treated as forming part of the salary of retiring employees for the purpose of computing disallowable expenditure under section 40A(5)?
Whether the Tribunal ought to have followed the provisions of section 17(1)(iii) which specifically refers to gratuity forming part of salary for the purpose of computing disallowable expenditure under section 40A(5)?
For assessment year 1973–74: Whether the Tribunal was justified in law in holding that deduction under section 80G should be allowed first and then that due under section 80J, thereby upholding the Appellate Assistant Commissioner's order?
For assessment year 1973–74: Whether the Tribunal ought to have restricted relief under section 80J to the extent of available income only having regard to the provisions of section 80G(4)?

Arguments of the Parties

Assessee's Arguments

With respect to the computation of relief under section 80J (questions 3 for assessment years 1972–73 and 1973–74), the assessee argued that relief should be calculated on the basis of the gross total income (admitted to be Rs. 1,20,24,739), and that development rebate should be set off first against income from other sources, then against profits of ships not entitled to section 80J, and lastly against profits of ships entitled to section 80J. This allocation, the assessee contended, would leave larger business income available to absorb relief under section 80J.
With respect to priority between section 80G and section 80J deductions (questions 8 and 9 for 1973–74), the assessee (and the Tribunal) took the view that if income is insufficient to absorb both deductions, the assessee should be permitted to claim section 80G first and then section 80J, because relief under section 80J may be carried forward to subsequent years under certain circumstances.

Revenue's (Commissioner of Income-tax) Arguments

For questions 8 and 9 (1973–74), the Revenue relied on the provisions of section 80G(4) to contend that deduction under section 80J must be made first before calculating and allowing the deduction under section 80G. The Revenue's position was that section 80G(4) reduces the gross total income by amounts deductible under other provisions of Chapter VIA (including section 80J) for the purpose of computing the ceiling for section 80G, and therefore the deduction under section 80J must be determined prior to and deducted for calculation of the allowable section 80G deduction.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Commissioner Of Income-Tax, Bombay City-I v. Scindia Workshop Ltd., [1979] 119 ITR 526	Applied to questions about taxability of amounts received in respect of Zamindari Abolition Rehabilitation Grant Bonds and related receipts.	The Court treated Questions Nos. 1 and 2 as covered by this decision and answered both in the affirmative and in favour of the Revenue.
Lohia Machines Ltd. v. Union of India, [1985] 152 ITR 308	Authority on treatment relevant to determination of capital/borrowals or related issue (as relied upon by the Court for question 4).	Following this Supreme Court decision, question No. 4 was answered in the negative and in favour of the Revenue.
Commissioner Of Income-Tax v. Hico Products Pvt. Ltd. (No. 1), [1993] 201 ITR 567	Authority on the proper statutory provision to apply for disallowance of remuneration to relatives of directors (section 40(c)(i) vs. section 40A(5)).	Question No. 5 was answered in the affirmative and in favour of the assessee following this decision.
Commissioner Of Income-Tax v. Hindustan Petroleum Corporation Ltd., [1991] 187 ITR 1	Authority concerning the treatment of exempted gratuity and the relevant provisions (sections 10(10), 17(3)(ii), and 17(1)(iii)) for computation of disallowable expenditure under section 40A(5).	Questions Nos. 6 and 7 were answered in the affirmative and in favour of the assessee following this decision.
Cambay Electric Supply Industrial Co. Ltd. v. CIT, [1978] 113 ITR 84 (SC)	Principle that deductions under Chapter VIA (e.g., section 80E) are to be taken after computing total income under other provisions of the Act; emphasises "as computed in accordance with the other provisions of this Act".	The Court applied the ratio directly to section 80J: gross total income for section 80J must be computed without reference to Chapter VIA and business income must be calculated under section 29 in accordance with sections 30 to 43A. This led to answering question No. 3 in the affirmative and in favour of the Revenue.

Court's Reasoning and Analysis

The Court addressed the referred questions both by applying prior authorities and, where necessary, conducting statutory construction of the Income-tax Act provisions at issue. The reasoning followed the order in which questions and authorities were considered in the opinion:

Questions 1 and 2: The Court held these questions were covered by the decision in Commissioner Of Income-Tax, Bombay City-I v. Scindia Workshop Ltd. and, following that authority, answered both questions in the affirmative and in favour of the Revenue. The Court did not elaborate further factual analysis for these questions in the opinion beyond adopting that precedent.
Question 4: The Court followed the Supreme Court decision in Lohia Machines Ltd. v. Union of India and answered question No. 4 in the negative and in favour of the Revenue.
Question 5: Applying the Court's earlier decision in Commissioner Of Income-Tax v. Hico Products Pvt. Ltd. (No. 1), the Court concluded question No. 5 in the affirmative and in favour of the assessee, i.e., that the salary/perquisites were covered by section 40(c)(i).
Questions 6 and 7: Relying on the decision in Commissioner Of Income-Tax v. Hindustan Petroleum Corporation Ltd., the Court answered both questions in the affirmative and in favour of the assessee concerning the treatment of exempted gratuity and the applicability of section 17 provisions.
Question 3 (computation and restriction of section 80J relief): The Court examined the assessments' facts and the sequence of appellate adjustments. It analysed the nature of the development rebate (section 33) and depreciation as business deductions falling within sections 30 to 43A. Drawing on the Supreme Court's reasoning in Cambay Electric Supply Industrial Co. Ltd. v. CIT, the Court emphasised that gross total income for Chapter VIA deductions (including section 80J) must be computed "as computed in accordance with the other provisions of this Act"—i.e., without reference to Chapter VIA. Where income includes profits and gains of business, such income must be computed under section 29 and sections 30–43A. Therefore, development rebate and depreciation are to be treated as business deductions in computing business income, and relief under section 80J must be determined with that computation in place. Applying that ratio, question No. 3 was answered in the affirmative and in favour of the Revenue.
Questions 8 and 9 (priority between sections 80G and 80J for 1973–74): The Tribunal had held that when income is insufficient to absorb both deductions, the assessee could first claim deduction under section 80G and then under section 80J, because section 80J relief can be carried forward. The Revenue contended that section 80G(4) requires deduction under section 80J first. The Court analysed the statutory text of section 80G(4), which prescribes that the deduction under section 80G shall not be allowed in respect of sums exceeding ten per cent of the gross total income "as reduced by ... any amount in respect of which the assessee is entitled to a deduction under any other provision of this Chapter". The Court reasoned that to calculate the ceiling under section 80G(4) one must first determine gross total income and then deduct amounts allowed under other Chapter VIA provisions (including section 80J). Because the ceiling for section 80G depends on the gross total income as reduced by deductions such as section 80J, the quantum of section 80J deduction must be ascertained before calculating the allowable section 80G deduction. Therefore the Tribunal's approach (granting section 80G first) was rejected. On that basis, question No. 8 was answered in the negative and in favour of the Revenue; question No. 9 was answered in the affirmative and in favour of the Revenue.

The Court also recorded that there shall be no order as to costs.

Holding and Implications

Holding (core rulings):

Questions 1 and 2: Answered in the affirmative and in favour of the Revenue (following Commissioner Of Income-Tax v. Scindia Workshop Ltd.).
Question 3: Answered in the affirmative and in favour of the Revenue (applying the principle that gross total income and business income must be computed under sections 29 and 30–43A prior to applying Chapter VIA deductions, per Cambay).
Question 4: Answered in the negative and in favour of the Revenue (following Lohia Machines Ltd.).
Question 5: Answered in the affirmative and in favour of the assessee (following Hico Products Pvt. Ltd.).
Questions 6 and 7: Answered in the affirmative and in favour of the assessee (following Hindustan Petroleum Corporation Ltd.).
Question 8: Answered in the negative and in favour of the Revenue (the Tribunal's view that section 80G should be allowed first was rejected).
Question 9: Answered in the affirmative and in favour of the Revenue (section 80J relief must be ascertained for computing the ceiling under section 80G(4)).

Implications:

Direct effect: The answers determine how the parties' tax liabilities for the assessment years 1972–73 and 1973–74 are to be computed—specifically, which amounts are taxable and how deductions under sections such as 80J and 80G must be calculated and sequenced. The Revenue succeeds on questions 1, 2, 3, 4, 8 and 9; the assessee succeeds on questions 5, 6 and 7.
Statutory interpretation: The Court reaffirmed the principle that gross total income and the relevant profits/gains must be computed under the substantive provisions of the Act (sections 29 and 30–43A) before applying deductions under Chapter VIA, and held that the computation required by section 80G(4) necessitates prior determination of Chapter VIA deductions such as section 80J.
Precedential effect: The Court applied existing precedents to the questions before it. The opinion does not state that it establishes a novel rule beyond applying and explaining those precedents; the decision's practical consequence is binding as the resolution of the referred questions between these parties and persuasive for similar factual scenarios considering the cited authorities.

Other procedural note: There shall be no order as to costs.

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Scindia Steam Navigation Co. Ltd. v. Commissioner Of Income-Tax. (And Vice Versa).

Sujata Manohar, C.J:— The Income-tax Appellate Tribunal has referred the following questions of law to this court under section 256(1) of the Income-tax Act, 1961:

At the instance of the assessee:

“(1) Whether, on the facts and in the circumstances of the case, any part of the amount received by the assessee-company in respect of the U.P Zamindari Abolition Rehabilitation Grant Bonds represented income chargeable to tax for the assessment years 1972–73 and 1973–74?

(2) Whether, on the facts and in the circumstances of the case, any part of the amount received by the assessee-company apart from the actual interest received in respect of 2½ per cent. of the U.P Zamindari Abolition Compensation Bonds was chargeable to tax for the assessment years 1972–73 and 1973–74?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that relief under section 80J of the Income-tax Act, 1961, is to be restricted to Rs. 90,93,431 and Rs. 29,44,727 for the assessment years 1972–73 and 1973–74 and was not available to the extent of Rs. 1,11,73,180 and Rs. 75,94,038, respectively?”

At the instance of the Commissioner of Income-tax-Assessment years 1972–73 and 1973–74:

“(4) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that in determining the capital of the ships owned by the assessee, the amount of borrowal should not be deducted from the written down value of each such ship?

(5) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the salary and perquisites of Shri T.N Gokuldas, a relative of a director of the assessee-company was covered by the provisions of section 40(c)(i) and not by the provisions of section 40A(5) of the Income-tax Act for computing the disallowable portion of the expenditure?

(6) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the exempted portion of the gratuity under section 10(10) read with section 17(3)(ii) of the Income-tax Act, 1961, should not be treated as forming part of the salary of the retiring employees for the purpose of computing the disallowable expenditure under section 40A(5), of the Income-tax Act, 1961?

(7) Whether, on the facts and in the circumstances of the case, the Tribunal ought to have followed the provisions of section 17(1)(iii) which specifically refers to gratuity forming part of salary for the purpose of computing disallowable expenditure under section 40A(5) of the Income-tax Act, 1961?

Assessment year 1973–74:

(8) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that relevant deduction should first be allowed under section 80G of the Income-tax Act and then that due under section 80J of the Income-tax Act, thereby upholding the Appellate Assistant Commissioner's order?

(9) Whether, on the facts and in the circumstances of the case, the Tribunal ought to have restricted relief under section 80J of the Income-tax Act to the extent of available income only having regard to the provisions of section 80G(4) of the Income-tax Act, 1961?”

2. Questions Nos. 1 and 2 are covered by the decision of this court in Commissioner Of Income-Tax, Bombay City-I v. Scindia Workshop Ltd., [1979] 119 ITR 526. Following the same we answer both the questions in the affirmative and in favour of the Revenue. Following the decision of the Supreme Court in Lohia Machines Ltd. v. Union of India, [1985] 152 ITR 308, question No. 4 is answered in the negative and in favour of the Revenue.

3. Following the decision of this court in Commissioner Of Income-Tax v. Hico Products Pvt. Ltd. (No. 1). (No. 1), [1993] 201 ITR 567, question No. 5 is answered in the affirmative and in favour of the assessee.

4. In view of the decision of this court in Commissioner Of Income-Tax v. Hindustan Petroleum Corporation Ltd., [1991] 187 ITR 1, questions Nos. 6 and 7 are answered in the affirmative and in favour of the assessee.

5. We are now left with questions Nos. 3, 8 and 9 which we shall proceed to deal with. Question No. 3 is raised at the instance of the assessee. It pertains to the assessment years 1972–73 and 1973–74. In the original assessment made by the Income-tax Officer, the Income-tax Officer had computed the business income at Rs. 1,71,40,947 and the relief under section 80J was determined at Rs. 1,30,91,281. Before the Appellate Assistant Commissioner, as a result of the reliefs given by him under section 35b(1)(b), the business income was reduced to Rs. 89,57,570. As a result the Income-tax Officer, while giving effect to the appellate order, held that the relief under section 80J was admissible to the extent of Rs. 90,93,431. Before the Commissioner Income-tax (Appeals), the assessee contended that the relief under section 80J should be calculated on the basis of the gross total income which was admittedly Rs. 1,20,24,739. Instead of deducting development rebate from the business income itself, deduction should be made from the income from all other sources. This would leave larger business income for absorption of relief under section 80J. It was, therefore, contended by the assessee that the development rebate should have been set off first against the income from other sources, then against the profits of the ships not entitled to the benefit under section 80J and lastly against the profits of the ships entitled to the benefit under section 80J. Since this contention was not accepted by the Commissioner of Income-tax (Appeals), the assessee appealed before the Tribunal. The Tribunal agreed with the view taken by the Commissioner of Income-tax (Appeals). It held that the development rebate allowable under section 33 is placed between sections 30 to 43A. The wording of section 33 would also support the interpretation that it is in the nature of an allowance given against the income from business. The fact that unabsorbed development rebate gets set off in the subsequent years against the non-business income as well, would not alter this fact. The unabsorbed depreciation likewise is to be treated as current depreciation and, therefore, it is eligible for set off against the non-business income as well. It cannot, therefore, be argued that depreciation is also not a business deduction. The Tribunal, therefore, dismissed the appeal on this ground. For the assessment year 1973–74 also the position was similar and the Tribunal rejected the assessee's contention in that regard.

6. The nature of deductions under Chapter VIA has been considered by the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. y. CIT, [1978] 113 ITR 84. The Supreme Court was required to consider the provisions of section 80E. The Supreme Court held that it is first necessary to compute the total income of the assessee in accordance with the other provisions of the Act, i.e, in accordance with all the provisions except section 80E; secondly, to ascertain what part of the total income so computed represents the profits and gains attributable to the business of the specified industry; and, thirdly, if there be profits and gains so attributable, deduct the percentage fixed thereof from such profits and gains to arrive at the net total income exigible to tax. The Supreme Court emphasised the importance of the words “as computed in accordance with the other provisions of this Act” and held that the computation must be without reference to section 80E. Since, the income was business income, it was required to be computed as per section 29 in accordance with sections 30 to 43A.

7. The ratio of this judgment will apply directly to the present case. Under section 80J 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 that section applies, there shall be allowed, in computing the total income of the assessee, a deduction from such profits and gains as set out therein. “Gross total income” has been defined in section 80B(5) to mean the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter or under section 280-O. Clearly, therefore, for the purposes of section 80J gross total income must be computed without reference to Chapter VIA. If this gross total income includes income from profits and gains of business or profession it will have to be calculated under section 29 and in accordance with the provisions contained in sections 30 to 43A. In view of this ratio laid down in the case of Cambay Electric Supply Industrial Co. Ltd. v. Cit , [1978] 113 ITR 84 (SC), question No. 3 is required to be answered in the affirmative and in favour of the Revenue. We do so.

8. Questions Nos. 8 and 9 which are raised at the instance of the Revenue relate to the assessment year 1973–74. The issue relates to determination of priority between the competing claims of reliefs under section 80J and section 80G. The Department has relied upon the provisions of section 80G(4) in support of its submission that section 80J deduction must be made first before making a deduction under section 80G. The Tribunal did not accept this contention and held that when the income was not enough to absorb both the deductions, the assessee would be entitled to claim a deduction under section 80G first and then under section 80J since the relief under section 80J can be carried forward to subsequent assessment years under certain circumstances. It also held that section 80G(4) merely provides a method of calculating the ceiling of available deduction under section 80G and should not be held as laying down any priorities between the two deductions.

9. We do not agree with this view taken by the Tribunal. Undoubtedly, where two views are possible, the assessee should get the benefit of an interpretation which is favourable to him. But, in our view, section 80G(4) cannot be looked upon merely as laying down the ceiling of deduction under section 80G.

10. Under section 80G, in computing the total income of an assessee, there shall be deducted, in accordance with and subject to the provisions of that section a certain percentage of the amounts paid by the assessee in the previous year as donations which are specified in that section. Sub-section (4) is as follows:

“80G. The deduction under sub-section (1) shall not be allowed in respect of such part of the aggregate of the sums referred to… as exceeds ten per cent. of the gross total income (as reduced by any portion thereof on which income-tax is not payable under any provision of this Act and by any amount in respect of which the assessee is entitled to a deduction under any other provision of this Chapter), or two hundred thousand rupees, whichever is less:…”

(emphasis* ours).

11. In order, therefore, to calculate the maximum deduction which is allowed under section 80G(4), it is necessary to ascertain first, the gross total income. This is defined in section 80B(5) as the total income computed in accordance with the provisions of this Act, before making any deduction under Chapter VIA or under section 280-O. Secondly, from this gross total income it is necessary to deduct, inter alia, any amount which the assessee is entitled to deduct under any provision of Chapter VIA other than section 80G. This would include a deduction under section 80J also. The gross total income thus gets reduced. Ten per cent. of this reduced gross total income or two hundred thousand rupees, whichever is less, is the ceiling prescribed. Therefore, to calculate the ceiling, one must first determine the gross total income as reduced, inter alia, by a deduction under section 80J. It is, therefore, necessary to first decide the quantum of deduction under section 80J. Obviously, therefore, the quantum of deduction under section 80J cannot be calculated after reducing the income by deduction under section 80G. Because the quantum of deduction under section 80G is in turn dependent upon the gross total income as reduced by deduction under section 80J. Therefore, while section 80G(4) prescribes the ceiling of deduction under section 80G, it necessarily entails prior calculation of a deduction under any other provisions of Chapter VIA which needs to be deducted from the gross total income before the ceiling under section 80G can be ascertained. By the very nature of the calculation required to be made under section 80G(4), it is, therefore, necessary that all other deductions under Chapter VIA be first ascertained and deducted. If we accept the submission of the assessee that deduction under section 80G should be first granted, then the quantum of this deduction cannot be ascertained without reference to a deduction under section 80J. Therefore, the submission of the assessee that deduction under section 80G should be first granted before allowing deduction under section 80J cannot be accepted. In the premises, question No. 8 is answered in the negative and in favour of the Revenue. Question No. 9 is answered in the affirmative and in favour of the Revenue.

12. There shall be no order as to costs.

Scindia Steam Navigation Co. Ltd. v. Commissioner Of Income-Tax. (And Vice Versa).

Summary of Opinion: Income-tax Appellate Tribunal reference under section 256(1) of the Income-tax Act, 1961

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments

Revenue's (Commissioner of Income-tax) Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Scindia Steam Navigation Co. Ltd. v. Commissioner Of Income-Tax. (And Vice Versa).

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