THANIKKACHALAM J. - At the instance of the Department, in accordance with the directions given by this court, under section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), the Tribunal referred the following questions for our opinion :

1967-68 :

"Whether, on the facts and in the circumstances of the cases, the Appellate Tribunal was right in holding that for the purpose of computing the profits of the priority industry under section 80E of the Act, both the bonus and the commission paid to the directors of the assess-company should not be excluded ?"

1968-79 and 1969-70 :

" Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that for the purpose of computing the profits of the priority industry under section 80-I of the Act both the bonus and the commission paid to the directors of the assessee-company should not be excluded ?"

The reference applications relate to the assessment years 1967-68 to 1969-70. The assessee-company has several manufacturing activities. The assessee has claimed for the assessment year 1967-68 deduction of Rs. 1, 82, 469 being eight per cent. on the assessable profits from the dynamo and starter motor factory (priority industry) as worked out at Rs. 22, 80, 858. In working out the profits, the assessee has not taken into account the proportionate bonus and commission payable to the directors relatable to this factory. After deducting bonus and commission to the directors at Rs. 2, 30, 020 and depreciation of Rs. 7, 931, the net profit arrived at by the Income-tax Officer was Rs. 20, 42, 907. The Income-tax Officer allowed deduction of Rs. 1, 63, 432 being eight per cent. on the net profit of Rs. 20, 42, 907 under section 80E of the Act instead of Rs. 1, 82, 469 claimed.So also for the assessment year 1968-69, the assessee has claimed deduction under section 80-I of the Act out of the profits derived from the priority industry. The profits from the above-said factory were worked out by the assessee at Rs. 4, 44, 205. After deducting the bonus payment of Rs. 1, 03, 403, commission of Rs. 5, 875 and depreciation of Rs. 4, 850, the net profit was arrived at Rs. 3, 30, 077. The Income-tax Officer allowed deduction of eight per cent. thereon amounting to Rs. 26, 406. This was allowed against Rs. 35, 536 claimed by the assessee.

Thus the Income-tax Officer in computing the relief under section 80E and section 80-I of the Act deducted the figure of bonus and commission payable to the directors and also the depreciation for the purpose of arriving at the net assessable profits. According to the assessee, deduction of eight per cent. should be given from the profits before deduction bonus, commission paid to the directors and also the depreciation. However, this was not accepted by the Income-tax Officer.

On appeal, for both the assessment year under consideration, the Appellate Assistant Commissioner held that the deduction is not to be calculated at eight per cent. of the income, but it should be calculated at eight per cent. of the profits and gains of the business. Section 80E of the Act does not permit the profits attributable to the priority industry being reduced to a portion of an amount paid to the directors. He, therefore, directed that the deduction under section 80E of the Act for the assessment year 1967-68 and under section 80-I of the Act for the assessment year 1968-69 should be granted without taking into account the proportionate bonus and commission payable to the directors.

On appeal, before the Tribunal the Revenue contended that bonus, commission and depreciation should be excluded for the purpose of calculating the relief under section 80E /sec tion 80 -I of the Act. However, the Tribunal held that the Appellate Assistant Commissioner was correct in stating that the relief under section 80E /sec tion 80 -I sho uld be granted without taking into account the proportionate bonus and commission payable to the directors. In other words, the Tribunal held that the bonus and commission paid to the directors should not be included in the profits for the purpose of calculating the relief under section 80E /sec tion 80 -I of the Act. The Tribunal held that the position with regard to the depreciation is different since this is referable to the machinery, etc., utilised in the new industrial undertaking. Accordingly, in working out the profits of the new industrial undertaking depreciation referable to that undertaking has to be deducted. In view of the matter, the order passed by the Appellate Assistant Commissioner was modified to that extent.Learned standing counsel for the Revenue submitted as under :

The relief is available to the income of a priority industry. There is no distinction for this purpose between the income or profits and gains. Under the Act no such distinction can be made. All the expenses directly relatable to the new industrial undertaking have to be deducted before the income or the profits or gains of that industrial undertaking can be worked out since the relief is not given on receipts, etc. Such income has to be worked out as per section 28 of the Act, which means that proportionate expenses such as bonus, commission, depreciation, etc., have to be allowed. Income, profits and gains which have the same meaning under the Act cannot be said to have different meanings when applied to section 80E of the Act. Learned standing counsel pointed out that the Tribunal was not correct in holding that the profits earned by the new industrial undertaking may not depend entirely on the capital employed, work done or expenditure incurred in connection with the undertaking. Learned standing counsel further pointer out that the Tribunal was not justified in stating that to a very large extent the goods manufactured by the new industrial undertaking might have been purchased only because it goes with the goodwill of the company of which the new industrial undertaking is a part. The Tribunal was not correct in stating that the entire company was looked after by several directors, and therefore, the profits earned by the priority industrial unit alone cannot be attributable to a particular director. Learned standing counsel pointed out that simply because the new industrial unit has made profits, it cannot be said that commission on proportionate basis should be considered as earned by the director from that unit. It was, therefore, submitted that the Tribunal was not correct in holding that relief under section 80E /sec tion 80 -I of the Act should be granted before deducting commission and bonus payable to the director from the profit earned by the new industrial undertaking.On the other hand, learned counsel for the assessee-company submitted as under :

For the purpose of working out the profit, if at all any deduction can be made, that should be a payment before the profit is earned. Chapter VI-A of the Act does not deal with a deduction of expenditure but with reliefs. Bonus is a payment after the income or profits is made and business has been completely done. It cannot have any bearing on the business results of any particular undertaking not to mention the new undertaking. Commission is paid to a director at a particular percentage on the working of the entire company and on the entire results of the company. Therefore, it is not correct to state that the new industrial undertaking has in any way contributed to the success of the assessee-company on a proportionate basis. Hence, according to learned counsel, both the commission and the bonus formed concepts outside to the working of the undertaking and, therefore, they should be excluded.

We have heard the rival submissions. The point that arises for consideration in these references is whether the assessee is entitled to claim eight per cent. deduction before deducting commission and bonus payable to one of its directors or after deducting commission and bonus payable to the director from the profits earned by the new industrial undertaking.

After the enactment of the Payment of Bonus Act, 1965, bonus paid to an employee is part of his salary or wages. Payment of bonus is no longer considered as a share of profits or gift or bounty given by an employer at his sweet will and pleasure. The employee by reason of his contribution or participation in the business of the employer is considered to be entitled to payment of the same though the exact amount payable depends on various circumstances. (See CIT v. Indian Radiators Ltd. So also in Gestetner Duplicators P. Ltd. v. CIT, the Supreme Court held that :

"the commission paid by the assessee to its salesmen would clearly fall within the expression 'salary' as defined in rule 2(h) of Part A of the Fourth Schedule to the Act, and, therefore, that would be taxable under section 36(1) (iv) of the Act".

The Supreme Court while considering the provisions of section 80E of the Act in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT held as under (at page 91) :

"On reading sub-section (1) of section 80E , it will become clear that three important steps are required to be taken before the special deduction permissible thereunder is allowed and the net total income exigible to tax is determined. First, compute the total income of the concerned assessee in accordance with the other provisions of the Act, i.e., in accordance with all the provisions except section 80E ; secondly, ascertain what part of the total income so computed represents the profits and gains attributable to the business of the specified industry (here generation and distribution of electricity); and, thirdly, if there be profits and gains so attributable, deduct eight per cent thereof from such profits and gains and then arrive at the net total income exigible to tax.".

The above decision was followed by the Supreme Court while considering the provisions of section 80M of the Act in the case of Distributors (Baroda) (P) Ltd. v. Union Of India.

Learned counsel appearing for the assessee relied upon the decision of the Supreme Court in the case of CIT v. Canara Workshops P. Ltd. In that case, the question that arose before the Supreme Court was whether in the application of section 80E of the Act, the profits and gains earned by one priority industry can be reduced by the loss suffered by any other industry or industries owned by the assessee. The Supreme Court held that :
"each industry must be considered on its own working only, when adjudging its title to the deduction under section 80E. It cannot be allowed to suffer because it keeps company with some other industry in the hands of the assessee. It makes no difference that the other industry is also a priority industry."*
Therefore, this decision would not render any assistance to learned counsel appearing for the assessee to contend that eight per cent. deduction should be given before deducting the payment of bonus and commission payable to the director.Learned counsel for the assessee relied upon another decision of the Punjab and Haryana High Court in the case of CIT v. Patiala Flour Mills Co. P. Ltd. In that case while considering the relief under section 80J of the Act, the said High Court pointed out that while calculating the gross income the benefits permissible under sections 33(1) (c) and 33(2) of the Act are to be allowed and only then the figure regarding gross total income will be arrived at. It is on this figure that the deduction in respect of profits and gains from a newly established industrial undertaking are to be allowed. If the deductions permissible, like depreciation or development rebate, have already been adjusted against the profits or income from other business concerns, the said development rebate cannot again be adjusted against the income from the newly established industrial undertaking.

According to the facts arising in the aforesaid case, the assessee which owned two flour mills started a cold storage unit in the previous year relevant to the assessment year 1967-68. For the assessment year 1971-72, the total income of the assessment was computed at Rs. 10, 60, 240 after deduction of development rebate of Rs. 41, 174 in respect of the cold storage unit. The profit attributable to the unit was Rs. 47, 027, and there was a deficiency for purposes of section 80J of Rs. 1, 09, 329 for that year. The assessee claimed that the deduction under section 80J should be allowed before considering the deficiency of earlier assessment years. It also contended that since the Income-tax Officer himself, while computing its total income at Rs. 10, 60, 240, had worked out the gross total income by allowing a deduction of development rebate in respect of the unit, the same amount should not be reduced while working out the profit from the industrial undertaking for the purpose of the relief under section 80J. It is on these facts that the Punjab and Haryana High Court held as above. Therefore, his decision would not be applicable to the facts of the present case.Sub-section (1) of section 80E of the Act contemplates three steps being taken for computing the special deduction permissible thereunder and arriving at the net income exigible to tax and the first two steps read together contain the legislative mandate as to how the total income of which the profits and gains attributable to the business of the specified industry form a part of the concerned assessee is to be computed and according to the parenthetical clause, which contains the key words, the same is to be computed in accordance with the provisions of the Act except section 80E and since in this case it is income from business the same will have to be computed in accordance with sections 30 to 43A which would include section 32(2). In other words, in computing the total income, the concerned assessable items of commission and bonus paid to the director of the new industrial undertaking will have to be deducted before arriving at the figure that will become exigible to the deduction of eight per cent. contemplated by section 80E(1). In sub-section (1) of section 80E the expression "total income" is followed by the words "as computed in accordance with the other provisions of this Act" in parenthesis and the mandate of these words clearly negatives the argument that the expression "total income" has been used in the sense of commercial profits. Secondly, the expression "total income" has been defined in section 2(45) of the Act as meaning

"the total amount of income referred to in section 5 , computed in the manner laid down in this Act"

and when this definition has been furnished by the Act itself the expression as appearing in section 80E(1) must, in the absence of anything in the context suggesting to the contrary, be construed in accordance with such definition. Since the words in parenthesis occurring in sub-section (1) of section 80E lay down the manner in which the total income of the concerned assessee is to be computed, there would be no scope for excluding items like commission and bonus while computing the total income as contemplated under section 80E , sub-section (1) of the Act.Learned counsel for the assessee lastly relied on a decision in the case of CIT v. Balanoor Tea and Rubber Co. Ltd. This decision was considered by the Supreme Court in the decision in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT, wherein the Supreme Court held as under (at page 98) :

"Reference was also made by counsel for the assessee to the decisions of the Mysore High Court in the case of CIT v. Balanoor Tea and Rubber Co. Ltd. In our view that decision has nothing whatever to do with the question posed before us. In that case the question was whether the loss incurred by an assessee in non-priority business could be set off against the profits and gains made by the assessee in the priority business while computing the eight per cent. deduction under section 80E and the High Court upheld the Tribunal's view that, for the purpose of allowing a deduction under section 80E , the words 'such profits' occurring in that section mean 'the profits and gains attributable to an activity as specified in the Fifth Schedule of the Act' and, therefore, the deduction was required to be worked out without reference to the loss incurred in non-priority business. The decision was rendered on the language of section 80E(1) , but it cannot avail the assessee on the point raised in the appeal."

The requirement of section 80E of the Act are : (i) determination of the profits attributable to the priority industry, (ii) a sum calculated at eight per cent, from such profits is liable to be deducted in arriving at the total income of the assessee. The deduction is not calculated at eight per cent. of the income, but it is calculated at eight per cent. of the profits and gains of the business. According to the assessee, eight per cent. deduction should be given on profits earned by the new industrial undertaking before deducting the amounts paid by way of bonus and commission to its directors. The section had to be so constructed as to effectuate the object of the Legislature. The manner in which the benefits are contemplated under section 80E of the Act is clearly chalked out in the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT. This decision was relied on by the Supreme Court in the subsequent decision rendered in the case of Distributors (Baroda) (P) Ltd. v. Union Of India. The above two decisions were referred to in the subsequent decision of the Supreme Court in the case of CIT v. Canara Workshops P. Ltd. In the above-said three decisions of the Supreme Court, it was clearly held that the benefit under section 80E is exigible on the net profits of the new industrial undertaking and not on the gross profit. That is in the present case the benefit under section 80E of the Act is available only after deduction of bonus and commission payable to the director. The reasons given by the Tribunal in order to support its view are totally outside the purview of what is stated in section 80E of the Act. Since the reasons given by the Tribunal are extraneous to the provisions contained in section 80E of the Act, we are unable to agree with the conclusion arrived at by the Tribunal that the benefits under section 80E of the Act would be available on the profit of the new industrial undertaking before deduction of the bonus and commission payments made to its directors. Accordingly, we answer the questions referred to us for the assessment years 1967-68 and 1968-69 in the negative and in favour of the Revenue. The question referred to us for the assessment year 1969-70 does not arise out of the order of the Tribunal. Therefore, we are not answering the same. No costs. Counsel's fee is fixed at Rs. 1, 000.