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AMICUS AI
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • Sethuraman
  • Balasubrahmanyan, JJ.
Acts
  • FINANCE ACT 1965
  • s. 42 of the Indian I.T Act, 1922,
  • s. 9(1)(i), Expln. (a), of the 1961 Act.
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • Sethuraman
  • Balasubrahmanyan, JJ.
Acts
  • FINANCE ACT 1965
  • s. 42 of the Indian I.T Act, 1922,
  • s. 9(1)(i), Expln. (a), of the 1961 Act.
See more information ...
Smart Summary

Structured Summary of the Opinion (Sethuraman, J.)

Factual and Procedural Background

The assessee is a company engaged in the manufacture of motor cars. For the assessment year 1965-66 (previous year the calendar year) and subsequent assessment years (1966-67, 1968-69 and 1969-70), the assessee claimed tax reliefs under the Finance Act provisions and the Income-tax Act provisions applicable to priority or specified industries (including a 35% rebate under the Finance Act, 1965 First Schedule, Part I Para F read with Part III; s. 80E for 1966-67; and s. 80-1 for 1968-69 and 1969-70).

The Income-tax Officer (ITO) denied the claimed reliefs on the ground that the items relied on (internal combustion engines, automobile ancillaries, gears, etc.) either were not separately listed as manufactured articles for the purpose or, if listed, their manufacture formed part of the manufacture of automobiles and therefore did not qualify. The Assistant Commissioner of Income-tax (AAC) confirmed the rejections in the years under consideration. The assessee appealed to the Appellate Tribunal, which allowed the assessee's claims, holding that an undertaking that manufactures and uses listed components in producing finished products (motor cars) could still claim the relief because the relevant legislation referred to profits "attributable to" manufacture of the listed articles. The Appellate Tribunal, under section 256(1) of the Income-tax Act, referred four specific questions to the court.

Legal Issues Presented

  1. Whether the Appellate Tribunal was right in holding that the assessee is entitled to the rebate of 35% on the profits attributable to the manufacture and sale of internal combustion engines, automobile ancillaries and gears for the assessment year 1965-66?
  2. Whether the Appellate Tribunal was right in holding that the assessee is entitled to the rebate under the provisions of section 80E/80-I for the assessment years 1966-67, 1968-69 and 1969-70?
  3. Whether the Appellate Tribunal was right in holding that the assessee should be allowed the relief under section 80-1 being worked out without setting off the brought forward loss from the earlier years for the assessment year 1968-69?
  4. Whether the Appellate Tribunal was right in holding that the assessee should be allowed the relief under section 80-1 for the assessment year 1969-70, since there is a positive income?

Arguments of the Parties

Commissioner (Revenue) / ITO's Contentions

  • The assessee is not entitled to the relief unless it manufactured and sold the particular listed items (e.g., internal combustion engines, ancillaries, gears) as such — i.e., sold separately rather than using them as parts in automobiles.
  • Even if the items were manufactured and used in the assessee's own automobile production, it would be impractical or impossible to determine the profits "attributable to" such manufacture when the items are incorporated into finished cars; therefore the relief should be denied.

Assessee's Contentions

  • The statute does not require that listed items be sold separately; it requires relief where total income includes profits attributable to manufacture or production of the listed items, and that expression contemplates attribution of profits even when the items are used in producing other goods.
  • It is possible to attribute value and profit to the components (e.g., by using unit prices for parts produced or by reference to purchase prices for parts bought in), so computation of profits attributable to the listed articles is feasible and should not be the basis for denying the relief.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
CIT v. Ahmedbhai Umarbhai & Co. [1950] 18 ITR 472 (SC) Illustration that profit-making activity may consist of several operations and profit can be attributed to each stage (supporting the concept of attributing profits to specific parts of a composite business). The court relied on this authority to underline that the expression "attributable to" contemplates attribution of profit across different operations and stages — supporting the conclusion that profits attributable to manufacture of listed items can be identified even if used in manufacture of other goods.
Commissioners of Taxation v. Kirk [1900] AC 588 (PC) Authority for the proposition that, for certain tax computations, income/profit for different stages can be attributed (used as an example of statutory computation requiring stage-by-stage attribution). Invoked as a supporting authority for the approach that income must be computed by attributing profit to stages/operations; used to buttress the reasoning that attributable profits can be determined.
Commissioner Of Income-Tax, Tamil Nadu-III v. English Electric Company Ltd. (No. 277 of 1976), judgment dated 13 Dec 1979 Authority concerning whether relief under provisions similar to s.80-1 (s.80E in that case) can be claimed prior to setting off brought forward losses — holds that relief cannot be allowed before adjustment of earlier losses. The court applied that decision to answer Question 3: it followed English Electric in holding that relief cannot be worked out before setting off brought forward losses; consequently rejected the assessee's contention on that point.

Court's Reasoning and Analysis

The court proceeded by examining the statutory language and the factual matrix for each set of years and questions. The analysis is rooted in textual interpretation of the relevant statutory expressions and practical considerations about accounting and attribution of profits.

1. Interpretation of "attributable to": The court emphasized the import of the phrase "profits and gains attributable to the business of manufacture or production of any one or more of the articles or things specified in the list." It concluded that "attributable to" contemplates profit attribution even where the manufacture of listed items forms only part of a broader manufacturing business (e.g., where engines or ancillary parts manufactured are used in producing motor cars). There is no textual limitation requiring the listed items to be sold separately to qualify for relief.

2. Practical computation: Addressing the revenue's contention that it would be impossible to determine profits attributable to components used internally, the court found that computation is practicable. The assessee would attribute unit values to parts when making up the cost of an automobile; for purchased parts the cost is known, and for parts manufactured internally the assessee can attribute a price (or use what it would cost to purchase the part externally) to arrive at profit attributable to manufacture of the listed item. The court rejected the notion that hypothetical accounting difficulties can justify denying a statutory relief.

3. Consistency across statutory provisions: For 1965-66 the court applied the Finance Act, 1965 (35% rebate on profits attributable to specified manufacture) and read Part III entries (including internal combustion engines, automobile ancillaries and gears) as applicable to the assessee's manufacture even when those items were incorporated into finished motor cars. For 1966-67 (s.80E) and 1968-69/1969-70 (s.80-1), the court observed that the provisions are substantively similar and thus the same interpretive approach applies; s.80-1 further used the defined notion of "priority industry" tied to the Sixth Schedule.

4. Brought forward losses (Question 3): The court treated the question of whether relief under s.80-1 may be computed without setting off earlier-year losses as controlled by an earlier decision (English Electric). Following that authority, the court held that the assessee's claimed relief could not be allowed prior to adjustment of brought forward losses; the assessee is only eligible to the extent of any positive balance remaining after such adjustments.

5. Specific arithmetic and findings for 1969-70: On the facts of the assessment order for 1969-70, the ITO's assessment showed a positive total income (Rs. 1,78,560 as determined by the ITO; the opinion notes the assessable positive income of Rs. 1,78,556 including business income of Rs. 1,74,331). The Tribunal's approach to allow relief to be worked out on the positive income was endorsed; the quantum is to be determined in accordance with s.80-1.

Holding and Implications

The court answered the four referred questions as follows:

  • Question 1: Answered in the affirmative and in favour of the assessee. The assessee is entitled to the 35% rebate (Finance Act, 1965) on profits attributable to manufacture of internal combustion engines, automobile ancillaries and gears even when those items are used in manufacturing automobiles.
  • Question 2: Answered in the affirmative and in favour of the assessee. The assessee is entitled to the relief under s.80E (and substantively similar s.80-1) for the assessment years considered because the statutory language likewise allows relief where profits attributable to manufacture of listed items are included in total income.
  • Question 3: Answered in the negative and in favour of the revenue. Following the court's prior decision (English Electric), the relief under s.80-1 for 1968-69 cannot be worked out without first setting off brought forward losses; relief is available only to the extent of any positive balance after such adjustments.
  • Question 4: Answered in the affirmative and in favour of the assessee. For assessment year 1969-70 the assessee is entitled to relief under s.80-1 on the income attributable to the manufacture of listed items, and the quantum must be computed in accordance with s.80-1.

Implications:

  • Direct effect: The assessee succeeds on the interpretive questions about eligibility to claim rebates/deductions where listed components are manufactured and used internally in producing finished goods; the revenue succeeds on the question concerning adjustment of brought forward losses (Question 3).
  • No new procedural or doctrinal precedent beyond applying established principles: The court relied on existing authorities and statutory interpretation; it explicitly followed its prior decision on the brought forward loss point. The opinion does not purport to create a novel rule superseding earlier authorities.
  • Practical consequence: Taxing authorities are required to compute profits "attributable to" listed items even when used internally, and cannot refuse relief merely on speculative or alleged accounting difficulties; however, any relief must be computed after adjusting carried-forward losses where relevant.

Final administrative note from the opinion: "There will be no order as to costs."

Show full summary ...

    Commissioner Of Income-Tax, Tamil Nadu-I v. Standard Motor Products Of India Ltd.

    Sethuraman, J.:— The Appellate Tribunal has referred the following questions under s. 256(1) of the I.T Act:

    “1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee is entitled to the rebate of 35% on the profits attributable to the manufacture and sale of the internal combustion engine, automobile ancillaries and gears for the assessment year 1965-66?

    2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee is entitled to the rebate under the provisions of section 80E/80-I for the assessment years 1966-67, 1968-69 and 1969-70?

    3. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee should be allowed the relief under section 80-1 being worked out without setting off the brought forward loss from the earlier years for the assessment year 1968-69?

    4. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee should be allowed the relief under section 80-1 for the assessment year 1969-70, since there is a positive income?”

    2. The assessee is a company manufacturing motor cars. The first of the assessment years under consideration is 1965-66 for which the previous year is the calendar year. In that year, the assessee claimed the relief admissible to priority industry in accordance with the Finance Act, 1965, First Schedule, Pt. I, Para. F, read with Pt. III. The ITO rejected this claim for rebate at the rate of 35% on the ground that automobiles were not listed and that the manufacture of internal combustion engines, automobile ancillaries, gear and roller bearings were all part of manufactured automobiles so that such manufacture of automobiles did not fall within the relevant provisions. The A AC, on appeal, rejected this contention. In his view, if the assessee were to claim the relief admissible as a manufacturer of internal combustion engines, etc., it should manufacture and sell them as such, so as to get the rebate and that by using such engines as one of the parts of the automobile manufacture, the assessee could not get the benefit of that provision. The assessee appealed to the Tribunal. After referring to the relevant items in Pt. Ill of the First Schedule to the Finance Act, 1965, the Tribunal held that there was no warrant to limit the expressions in the list to the manufacturer of those items alone and that the benefit could be had by an undertaking which uses those items, to make up the finished products, e.g, the motor cars in this case.

    3. For the assessment year 1966-67, the assessee claimed the same rebate under s. 80E, which was the provision in force in the relevant year. The ITO rejected this claim for the same reasons as those given for 1965-66. The AAC also confirmed the order of the ITO for the same reasons as in the earlier year. For the years 1968-69 and 1969-70, the provision under which the assessee claimed the relief was s. 80-1 and this claim was disallowed by the ITO and confirmed by the AAC, for the same reasons as in the earlier years.

    4. The assessee appealed to the Tribunal. After referring to ss. 80E and 80-1, the Tribunal held that the sections required the relief to be granted where the total income included the profits or gains attributable to the business of manufacture or production of any one or more of the articles or things specified in the list in the relevant Schedule and that the assessee would be eligible for the allowance even though the relevant components came to be used in the automobiles manufactured. The first two questions as set out earlier arise out of these claims made by the assessee and allowed by the Appellate Tribunal. We may point out that in question No. 2, there is a reference to s. 80J, which it is common ground, is a mistake for s. 80E. We shall deal with the relevant provisions separately.

    5. For the assessment year 1965-66, the question has to be considered in the light of the provisions of the Finance Act, 1965. In the case of every company, the rate of income-tax was 80 per cent, on the whole of the total income. The rebates were, however, given on the basis of the provisions of Para. F. In the case of a company, which is wholly or mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining, graded rebates are given. For instance, rebate is given on so much of the income as consists of profits and gains attributable to the business of generation or distribution of electricity or of construction, manufacture or production of any one or more of the articles or things specified in the list in Pt. III to the First Schedule to the Finance Act. The rate of 35 per cent, is applicable to so much of the profits or gains attributable to the manufacture of one or more of the articles specified in Pt. III as did not exceed Rs. 10 lakhs. If the income exceeded Rs. 10 lakhs, then the rebate was reduced to 26 per cent. Part III of the Finance Act contains several entries. We are concerned with entries Nos. 5, 21 and 23, which run as follows:

    “5. Boilers and steam generating plants, steam engines and turbines and internal combustion engines.

    21. Automobile ancillaries.

    23. Gears.”

    6. The claim of the assessee is that the articles manufactured by it fall under one or the other of these items, the internal combustion engines falling within item 5 and the other articles under item 21 or 23.

    7. The learned counsel for the Commissioner disputed this claim of the assessee by raising two contentions. The first was, that unless the assessee manufactured these particular items and sold them as such, without using them in the automobiles, it would not be eligible for the exemption. We do not find that there is any such limitation in the provision, on the grant of rebate in the manner suggested by the learned counsel for the Commissioner. Whether the internal combustion engines were sold as such or were used in the automobiles produced by the assessee, still its manufacture falls within Part III. There is no reason why Parliament should encourage its manufacture and sale as such, and should discourage the use of the article by the assessee himself in producing other articles. We do not find any logical basis for encouraging the sale by the assessee and possible use by another manufacturer in producing autombiles while discouraging their use by the assessee himself, for the same purpose. The relevant provision of the Finance Act provides for the rebate of 35% on so much of the total income as consists of profits and gains attributable to the business of manufacture or production of any one or more of the listed articles or things. The expression “attributable to” is a significant expression. It envisages an assessee producing or dealing in other goods, the manufacture of the listed item forming only a part of the business. Thus, if an assessee can carry on business of manufacturing other goods and still be eligible for the relief, there is no reason why the assessee cannot use the listed item produced by him in making other goods. The taxing authorities are required to see whether the profits attributable to the manufacture of any one or more of the listed articles form part of the taxed income. If so, the assessee would be eligible for the rebate. The contention to the contrary by the learned counsel for the Commissioner has thus neither logic nor language to commend it.

    8. Another aspect, on the basis of which the learned counsel contended that the assessee cannot have the relief in the present case, was that it would not be possible to find out the profits attributable to such manufacture, if the listed items are used in the manufacture of automobiles. The learned counsel for the assessee pointed out that if these engines are sold for a price, the profits attributable to the manufacture of the listed articles can be worked out. We consider that there is merit in this contention of the assessee. While making up the cost of the automobile, the assessee would be giving some unit price for each one of the items that go into its manufacture. Some parts may be produced by the assessee, as here, and some others may be purchased by it. With reference to the parts purchased, the price paid by the assessee would be its cost. As far as the other items are concerned, the assessee would be attributing some value to the spare parts used and that would furnish the basis for arriving at the profits attributable to the manufacture of the particular article. At any rate, by imagining some difficulties in accounting, the exemption granted by Parliament cannot be denied. The taxing authority cannot get out of its obligation to work out the statutory provisions by throwing up its hands in imaginary despair.

    9. The expression “attributable to” is not peculiar to this part of the law. The expression occurs in other sections also. For instance, the same expression found a place in s. 42 of the Indian I.T Act, 1922, which corresponds to s. 9(1)(i), Expln. (a), of the 1961 Act. The profit-making activity may consist of several operations and, for each stage, profit is to be attributed. See CIT v. Ahmedbhai Umarbhai & Co. [1950] 18 ITR 472 (SC). It is on this basis that the income will have to be computed, for instance, for the purpose of s. 9(1) as in Commissioners of Taxation v. Kirk [1900] AC 588 (PC). The automobile industry all over the world is not a mere assembly line of spare parts purchased from others. Some are manufactured by the producers of the automobile. Parliament cannot be taken to have legislated in ignorance of this world-wide phenomenon. The unit cost of the spare part produced and used can well be what it would cost if purchased from outside. There is thus no difficulty in finding out the profit attributable to the listed items. The result is that question No. 1 is answered in the affirmative and in favour of the assessee.

    10. For the other years, the provisions are different. The relevant provision applicable to. 1966-67 runs as follows:

    “80E. Deduction in respect of profits and gains from specified indusries in the case of certain companies. —(1) In the case of a company to which this section applies, where the total income (as computed in accordance with the other provisions of this Act) includes any profits and gains attributable to the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or 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.”

    11. The provision is more or less identical with the one in the Finance Act, 1965. The rebate is a straight deduction of 8% of the profits earned in the manufacture of the listed item, as against a deduction of a percentage from the gross tax. As substantially the provision is not different, the assessee would be eligible for the rebate for the year 1966-67 also.

    12. For the assessment years 1968-69 and 1969-70, the provision to be applied is s. 80-1, as it was then in force, which ran, to the extent relevant, as follows:

    “In the case of a company to which this section applies, where the gross total income includes any profits and gains attributable to any priority industry, there shall be allowed, in accordance with and subject to the provisions of this section, a deduction from such profits and gains of an amount equal to eight per cent, thereof, in computing the total income of the company.”

    13. For this year, the only additional feature to be introduced is the expression priority industry which is defined in s. 80B(7) as meaning the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Sixth Schedule. There is in substance no difference, and for the same reason for the earlier years, the assessee is eligible for the benefit of the relief in respect of the profits attributable to the items falling within the relevant Schedule to the I.T Act. Therefore, the Second question is also answered in the affirmative and in favour of the assessee.

    14. The third question arises on the following facts. In the assessment for the assessment year 1968-69, the assessee claimed the relief under s. 80-1 on the basis of the profits attributable to the manufacture of the relevant items falling within the appropriate Schedule before adjustment of the brought forward loss. The ITO and the AAC did not accept the assessee's claim. However, when the matter came before the Tribunal, it found that there was a positive figure of total income for that year before the previous year's loss were adjusted and that, therefore, the assessee was entitled to the relief as claimed by it. The corrections of the Tribunal's conclusion with reference to this aspect is the subject-matter of the third question.

    15. This point is now covered by a decision of this court in Commissioner Of Income-Tax, Tamil Nadu-Iii v. English Electric Company Ltd. No. 277 of 1976) in the judgment dated 13th December, 1979 (see p. 277 supra). Though the assessment year in that case is different and the relevant provision was s. 80E, it is not in dispute that s. 80-1 with which we are now concerned, is substantially similar to s. 80E. The learned counsel for the assessee reiterated the same contentions that were urged by him in the aforesaid decision and we have rejected his contentions. We do not think it necessary to cover the same grounds here and for the reasons stated therein, we answer the 3rd question in the negative and in favour of the revenue. However, the question of relief will have to be examined in the light of the appropriate figures and the assessee would be eligible for the relief under s. 80-1, if there is any positive balance after adjustment of the earlier years' losses.

    16. The last question also raises the point regarding the relief under s. 80-1 for the assessment year 1969-70. The ITO determined the total income to be Rs. 1,78,560. But he rejected the assessee's claim for the relief under s. 80-1 without practically any discussion. The AAC, on appeal, held that no relief was available to the assessee, as the manufacturing income was only a loss. The Tribunal, on further appeal, considered this question and held that the relief should be worked out on the positive income that was assessable in that year. As far as this year is concerned, from the assessment order itself, it is clear that the assessee had a positive income of Rs. 1,78,556, which includes Rs. 1,74,331 as business income. In the view that we have taken for the earlier years, the assessee would be eligible for the relief under s. 80-1 on the income attributable to the manufacture of the items listed in Schedule VI. The quantum of relief would have to be worked out in the light of s. 80-1. The fourth question is, accordingly, answered in the affirmative and in favour of the assessee. There will be no order as to costs.

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    Comments

    Commissioner Of Income-Tax, Tamil Nadu-I v. Standard Motor Products Of India Ltd.
    (Jan 22, 1980)