Ratnam, J.@mdashThe assessee is a private limited company carrying on business in mining and quarrying equipment. For the assessment year
1972-73, the assessee claimed relief u/s 80-I of the Appellate Assistant Commissioner, 1961 (hereinafter referred to as ""the Act""). In considering
this claim of the assessee, the Income Tax Officer, after arriving at the total income of the assessee at Rs. 4,86,145, proceeded to set off
unabsorbed depreciation from 1965-66 and adjust business losses of the years 1965-66 to 1970-71 to arrive at ""nil"" taxable income and, in that
view, declined to grant the relief claimed by the assessee u/s 80-I of the Act. On appeal by the assessee before the Appellate Assistant
Commissioner, it was contended that the relief u/s 80-I of the Act should have been considered without taking into account the unabsorbed
depreciation and carried forward losses of the previous years. Relying upon the decision of the Kerala High Court in Indian Transformers Ltd. Vs.
Commissioner of Income Tax, , the Appellate Assistant Commissioner took the view that the deduction u/s 80-I of the Act should have been
considered and calculated before setting off the carried forward loss and the Income Tax Officer, was, therefore, directed to work out relief u/s
80-I of the Act in respect of the profits relating to the manufacture of mining machinery by the assessee for the assessment year in question and
give suitable deduction. On further appeal by the Revenue to the Tribunal on this aspect, the Tribunal by its order dated August 27, 1977,
following the decisions of the Gujarat High Court in Commissioner of Income Tax, Gujarat II Vs. Cambay Electric Supply Industrial Co. Ltd., ,
Commissioner of Income Tax, Gujarat II Vs. Amul Transmission Line Hardware Pvt. Ltd., and Madras Auto Service v. ITO [1975] 101 ITR held
that the carried forward loss should be first deducted from the income, which the assessee received from the priority industry and only then,
deduction u/s 80-I should be worked out and allowed. Subsequently, the assessee filed an application for rectification u/s 254(2) of the Act on the
ground that though, even earlier to the decision of the Tribunal, this court in Commissioner of Income Tax Vs. L.M. Van Moppes Diamond Tools
(India) Ltd., had held that the rebate u/s 80E of the Act should be considered before adjusting the carried forward loss of the earlier years, that
had not been brought to the notice of the Tribunal and on a wrong view of the law, the Tribunal had concluded that the carried forward loss should
be set off before allowing rebate u/s 80-I of the Act and that mistake should be rectified. By its order dated February 25, 1978, the Tribunal
rectified the order passed by it on August 27, 1977, by stating that in view of the decision of this court in Commissioner of Income Tax Vs. L.M.
Van Moppes Diamond Tools (India) Ltd., , the assessee was entitled to the rebate u/s 80E of the Act before adjusting the carried forward loss of
the earlier years and as section 80E corresponded to section 80-I, the assessee was entitled to the rebate u/s 80E before adjusting the carried
forward loss of the earlier years.
2. u/s 256(1) of the Act, at the instance of the Revenue, the following two questions of law have been referred to this court for its opinion :
(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the finding given in its earlier order dated
August 27, 1977, was a mistake apparent from the record liable to be rectified u/s 254(2) of the Income Tax Act, 1961 ?
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the deduction u/s 80-I should be
allowed on the profits before setting off the carried forward loss of the earlier year ?
3. In support of this reference, learned counsel for the Revenue submitted, referring to section 254(2) of the Act, that there was no mistake at all
apparent from the record in the order of the Tribunal and that, therefore, there was no question of rectifying its earlier order dated August 27,
1977. On the second question refereed, learned counsel contended that on a proper interpretation of section 80-I of the Act (now corresponding
to section 80E of the Act), items of unabsorbed depreciation, development rebate and carried forward loss from earlier years, will have to be
deducted before arriving at the deduction at 8 per cent. provided in section 80E and strongly relied on the decisions in Commissioner of Income
Tax, Gujarat II Vs. Cambay Electric Supply Industrial Co. Ltd., affirmed by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. Vs.
The Commissioner of Income Tax, Gujarat-II, Ahmedabad, . Our attention was also drawn in this connection to the decision in Commissioner of
Income Tax (Central), Madras Vs. Canara Workshops (P) Ltd., Kodialball, Mangalore, . Per contra, learned counsel for the assessee submitted
that if this court should take the view that the second question referred is covered by the decision in Cambay Electric Supply Industrial Co. Ltd.
Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, , then, it may not be necessary to go into the first question regarding the
correctness or propriety of the rectification proceedings u/s 254(2) of the Act. However, learned counsel faintly attempted to contend that the
second question referred to us may not fall within the ratio of decision in Cambay Electric Supply Industrial Co. Ltd. Vs. The Commissioner of
Income Tax, Gujarat-II, Ahmedabad, .
4. We find that in the first order of the Tribunal dated August 27, 1977, it had applied the decision in Commissioner of Income Tax, Gujarat II Vs.
Amul Transmission Line Hardware Pvt. Ltd., as well as other decisions to hold that the carried forward loss should be first deducted form the
income received by the assessee from the priority industry and then relief u/s 80-I should be worked out and granted. However, the Tribunal was
persuaded to rectify its earlier order only on the basis of the decision reported in Commissioner of Income Tax Vs. L.M. Van Moppes Diamond
Tools (India) Ltd., . We are relieved of the necessity of considering the propriety of the rectification u/s 254(2) of the Act, as we are of the view
that if the second question referred to us is governed by the decision in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 84 (SC),
that would be sufficient to dispose of this reference, and in such an event, it may not be necessary to return any answer is so far as the first question
is concerned. We, therefore, proceed to a consideration of the second question forming the subject-matter of the reference.
5. In Commissioner of Income Tax, Gujarat II Vs. Cambay Electric Supply Industrial Co. Ltd., , the assessee maintained that the deduction of 8
per cent., u/s 80E of the Act, should be made from the profits and gains attributable to the business of generation or distribution of electricity
without making any deduction on account of depreciation or development rebate under sections 32 and 33 of the Act; but the court rejected this
plea and held that the unabsorbed depreciation and the development rebate relating to the specified industry have to be first deducted in computing
deduction of 8% u/s 80E of the Act. This view has since been upheld by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. Vs.
The Commissioner of Income Tax, Gujarat-II, Ahmedabad, . The manner in which the claim for deduction u/s 80E should be considered and given
effect to has been clearly indicated therein. According to the Supreme Court, the first step is the computation of the total income of the concerned
assessee in accordance with the other provisions of the Act, i.e., in accordance with all provisions, excepting section 80E (corresponding to
section 80-I) of the Act. The next step is to ascertain what part of the total income so computed represents the profits and gains attributable to the
business of the specified industry (here, manufacture or production of mining and quarrying equipment). The third and the final step is, if there be
profits and gains so attributable, to deduct 8% thereof from such profits and gains and then arrive at the net total income exigible to tax. This had
also been reiterated by stating that in computing the total income of the concerned assessee, items of unabsorbed depreciation and unabsorbed
development rebate will have to be deducted before arriving at the figure that will become exigible to tax at 8% contemplated by section 80E(1) of
the Act Referring to the decision in Indian Transformers Ltd. Vs. Commissioner of Income Tax, , relied on by the Appellate Assistant
Commissioner and Commissioner of Income Tax Vs. L.M. Van Moppes Diamond Tools (India) Ltd., , relied on by the Tribunal in its rectification
order dated February 25, 1978, the Supreme Court, at pages 96 and 98, has observed that the view taken in those cases about the non-
deductibility of unabsorbed depreciation and unabsorbed loss of earlier years, runs counter to the legislative mandate contained in the three steps
required to be taken under sub-section (1) of section 80E (corresponding to section 80-I of the Act) and that having regard to the impact of
section 72(1) of the Act upon the computation under the head ""Profits and gains of business"", the contention that the unabsorbed depreciation and
unabsorbed loss should be held to be not deductible before working out the 8% deduction cannot be accepted but such items will have to be
deducted in arriving at the figure which would be exigible to deduction at 8%. On that reasoning, the Supreme Court has disapproved the view
taken in Indian Transformers Ltd. Vs. Commissioner of Income Tax, and Commissioner of Income Tax Vs. L.M. Van Moppes Diamond Tools
(India) Ltd., and it follows that the Tribunal was right in the view it took first in its order dated August 27, 1977, to the effect that the carried
forward loss should be first deducted from the income which the assessee has received from the priority industry, and then, deduction u/s 80-I
should be worked out and allowed. In Commissioner of Income Tax (Central), Madras Vs. Canara Workshops (P) Ltd., Kodialball, Mangalore, ,
the Supreme Court reaffirmed the principle that for the purpose of granting relief to an industry u/s 80E of the Act, an account must be taken when
computing the profits and gains attributable to that industry of the a balancing charge worked out under sub-section (2) of section 41 as well as the
items of unabsorbed depreciation and unabsorbed development rebate carried forward from earlier years, but that for the purpose of section 80E
of the Act, such unabsorbed depreciation and unabsorbed development rebate should appear to relate to the same business and that were was no
indication in that case that any of them related to any business or industry different from that, whose profits and gains from the subject-matter of the
computation u/s 80E of the Act. The basis of the rectification order is the decision in Commissioner of Income Tax Vs. L.M. Van Moppes
Diamond Tools (India) Ltd., which, as noticed earlier, has not been approved by the Supreme Court in the decision in Cambay Electric Supply
Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, and when the basis upon which the rectification was done is no
longer available, it follows that the rectified order cannot also be sustained. We, therefore, answer the second question referred to us in the
negative and in favour of the Revenue. It, therefore, becomes unnecessary to render any answer with reference to the first question, as that
question does not really survive for consideration in the light of the answer given to the second question referred to us. We, therefore, do not
consider it necessary to answer the first question and return the reference unanswered in so far as it relates to the first question. The Revenue will
be entitled to its costs of this reference. Counsel''s fee Rs. 500.
