Commissioner of Income Tax, Tamil Nadu-II vs Madras Electrical Conductors (P.) Ltd.

Ramanujam, J.—The assessee in this case carries on business in the manufacture and sale of electrical conductors. The assessee claimed relief u/s 80-I before the ITO. The ITO computed the total business income at Rs. 10,48,390 and after deducting therefrom the profits obtained by sale of the car as also the scrap sales arrived at a net figure of Rs. 10,47,519. The ITO gave relief of 5 per cent. on this which amounted to Rs. 52,376 as the relief to which the assessee will be entitled u/s 80-I of the I.T. Act. The assessee appealed to the AAC and one of the points raised by him was whether the assessee is entitled to the relief in respect of profits assessable u/s 41(2) of the Act. The AAC held that the profit assessable u/s 41(2) is not entitled to be given as relief. On appeal, the Tribunal, however, took the view that the assessee is entitled to the relief u/s 80-I in respect of the profits assessable u/s 41(2). Aggrieved by the decision of the Tribunal, the Revenue sought and obtained a reference to this court on the following question of law :

"Whether, on the facts and in the circumstances of the case, the assessee is entitled to relief u/s 80-I in respect of profit assessable u/s 41(2) and receipts by way of sale of scraps for assessment year 1972-73 ?

The said question is now covered by a decision of the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, . In that case, the Supreme Court has held that in computing the total income of the assessee carrying on the business of an industry specified u/s 80E of the I.T. Act, for the purpose of the special deduction permissible thereunder, the balancing charge arising as a result of the sale of old machinery and buildings and worked out in accordance with section 41(2), irrespective of its real character, is to be taken into account and included as income of the business. In other words, the Supreme Court had held that the balancing charge will have to be taken into account before computing the deduction u/s 80E. The Supreme Court has specifically pointed out that the legal fiction u/s 41(2) and the grant of special deduction u/s 80E in the case of specified industries are so closely connected with each other that taking into account the balancing charge before computing the deduction u/s 80E(1) will amount to extending the legal fiction within the limits of the purpose for which the fiction has been created and that the Legislature has deliberately used the expression "attributable to" intending to cover receipts from sources other than the actual conduct of the business of the specified industry. The principle laid down in the said decision squarely applies to the facts of this case.

Therefore, following the said decision, the question referred in this case has to be answered in the affirmative and against the Revenue. There will be no order as to costs.