Indian Rayon Corporation Ltd. vs Commissioner of Income Tax

B.P. Saraf, J.—By this common reference u/s 256(1) of the Income Tax Act, 1961, for the three assessment years, viz., 1974-75, 1975-76 and 1976-77, the Income Tax Appellate Tribunal has referred the following four questions of law to this court for opinion at the instance of the assessee :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in not allowing the claim of deduction of gratuity liability of Rs. 5,28,289 (assessment year 1974-75), Rs. 3,29,037 (assessment year 1975-76) and Rs. 1,24,730 (assessment year 1976-77) ?

Whether, on the facts and circumstances of the case, the Tribunal was correct in law in not allowing the claim of deduction of surtax liability ?

Whether, on the facts and circumstances of the case, the Tribunal was correct in law in holding that the deficiencies in respect of the assessment year 1968-69 amounting to Rs. 31,42,777 and 1969-70 amounting to Rs. 31,39,662 u/s 80J of the Income Tax Act, 1961, cannot be set off against the profits of the assessment year 1975-76 ?

Whether, on the facts and circumstances of the case, the Tribunal was correct in law in upholding the application of Rule 6B of the Income Tax Rules, 1962, to presentation articles ?"

Question No. 1 is common for all the three assessment years whereas question No. 2 is common for the assessment years 1975-76 and 1976-77 only. The controversy in questions Nos. 3 and 4 pertains to the assessment year 1975-76.

So far as the controversy in question No. 1 is concerned, learned counsel for the parties are agreed that the controversy therein now stands concluded in favour of the Revenue by the decision of the Supreme Court in Shree Sajjan Mills Ltd. Vs. Commissioner of Income Tax, M.P., Bhopal and Another, . In view of the above, question No. 1 is answered in the affirmative and in favour of the Revenue.

The controversy in question No. 2 now stands concluded in favour of the Revenue by the decision of this court in Lubrizol India Ltd. Vs. Commissioner of Income Tax, and the decision of the Supreme Court in Smith Kline and French (India) Ltd. and Others Vs. Commissioner of Income Tax, . Following the above decisions, this question is also answered in the affirmative and in favour of the Revenue.

So far as question No. 4 is concerned, the controversy therein pertains to the application of Rule 6B of the Income Tax Rules, 1962 ("the Rules"), to presentation articles. According to learned counsel for the assessee, this controversy now stands concluded in favour of the assessee by the decision of this court in Commissioner of Income Tax Vs. Allana Sons Pvt. Ltd., . Learned counsel for the Revenue submits that the ratio of the said decision has no application because in this case, there is no finding that the articles in question did not advertise assessee''s products. We have perused the facts of this case and the decision of this court referred to above. In that case, there was a finding of the Tribunal that the presentation articles did not bear either the name of the company or its logo and hence could not be considered as meant for advertisement. It was in view of these findings of fact arrived at by the Tribunal that this court observed that the Tribunal was right in its conclusion that Rule 6B of the Rules was not attracted. That is not the position in this case. Here, there is no such finding. On the other hand, in this case, the Tribunal declined to interfere with the order of the Commissioner of Income Tax (Appeals) affirming the disallowance on the ground that no material was placed before it to show how the action of the Commissioner (Appeals) was contrary to the provisions of Rule 6B(2) of the Rules. Situated thus, we do not find any infirmity in the finding of the Tribunal. Moreover, as observed by this court in Commissioner of Income Tax Vs. Allana Sons Pvt. Ltd., , the finding is primarily a finding of fact. This finding has not been challenged on the ground of perversity. In view of the above, we answer question No. 4 in the affirmative, i.e., in favour of the Revenue and against the assessee.

The only question left for our consideration is question No. 3. The controversy therein pertains to the assessment year 1975-76. The material facts of the case relevant for deciding the above controversy are as follows : The assessee is an industrial company. The assessee set up a new unit known as production unit No. 1 at an approximate cost of rupees five crores. It went into production in calendar year 1964, the relevant assessment year being 1965-66. The controversy pertains to the allowability of set off of the deficiencies of the amount allowable as a deduction u/s 80J of the Act for the assessment years 1968-69 and 1969-70 under Sub-section (3) of Section 80J of the Act against the profits of the assessment year 1975-76. The deficiency of the assessment year 1968-69 was Rs. 31,42,777 and of the assessment year 1969-70, Rs. 31,39,662.

The assessee had no profits in the assessment year 1969-70 and thereafter. For the first time in the previous year relevant to the assessment year 1975-76, the assessee earned business profits from the said unit. The assessee wanted to carry forward the above deficiency of the assessment years 1968-69 and 1969-70 to set off the same against the business profits of the assessment year 1975-76. This claim of the assessee was rejected by the Income Tax Officer as being barred by limitation. According to the Income Tax Officer, the deficiency could not be carried forward under Sub-section (3) of Section 80J of the Act beyond the seventh assessment year as reckoned from the end of the assessment year in which the industrial undertaking commenced manufacture or production. There is no dispute in this case that the industrial unit of the assessee went into production in the previous year relevant to the assessment year 1965-66 and the seventh assessment year reckoned from the end of that assessment year was the assessment year 1973-74. Aggrieved by the order of the Income Tax Officer, the assessee appealed to the Commissioner of Income Tax (Appeals). The contention of the assessee before the Commissioner of income tax (Appeals) was that the limitation of seven years for the purpose of carry forward and set off of deficiency under Sub-section (3) of Section 80J should be reckoned not from the assessment year relevant to the year of production referred to as the "initial assessment year" but from the assessment year in which the deficiency arose. The Commissioner of Income Tax (Appeals) refused to accept the above contention of the assessee in view of Clause (i) of the proviso to Sub-Section (3) of Section 80J of the Act. The assessee went in further appeal before the Income Tax Appellate Tribunal ("the Tribunal"). Before the Tribunal, it was contended by the assessee that the expression "initial assessment year" appearing in Clause (i) of the proviso to Sub-section (3) of Section 80J of the Act should be interpreted in the light of the object of Section 80J and, so construed, it should be interpreted to mean the assessment year to which the deficiency pertains. It was also contended by the assessee before the Tribunal that the definition of "initial assessment year" appearing in Sub-section (2) of Section 80J of the Act is only for the purposes of that sub-section and the same should not be applied to Sub-section (3) of Section 80J. The above contention of the assessee did not find favour with the Tribunal. The Tribunal was of the opinion that on a reading of Sub-sections (2) and (3) of Section 80J of the Act, it was clear that the limitation of seven years was to be reckoned from the end of the initial assessment year meaning thereby the assessment year relevant to the previous year in which the unit went into production and not the assessment year in which the deficiency arose. Hence, this reference at the instance of the assessee.

We have heard Shri J. D. Mistry, learned counsel for the assessee, who contended before us that the expression "initial assessment year" appearing in Clause (i) of the proviso to Sub-section (3) of Section 80J of the Act should not be construed to mean the assessment year in which the industrial undertaking begins to manufacture or produce articles, referred to as the "initial assessment year" in Sub-section (2) but it should be construed to mean the assessment year in which the deficiency arose. It was submitted that Section 80J being a beneficial provision, it should be construed in a manner beneficial to the assessee. On the other hand, the submission of learned counsel for the Revenue is that the language of Sub-section (3) of Section 80J and Clause (i) of the proviso to Sub-section (3) thereof being clear and unambiguous, the definition of "initial assessment year" given in Sub-section (2) cannot be given a go-by and a fresh definition substituted in its place to give the benefit of carry forward and set off of deficiency to the assessee for a period beyond the one stipulated by law.

We have carefully considered the rival contentions. The controversy is about carry forward and set off of the deficiency under Sub-section (3) of Section 80J of the Act. Section 80J was inserted, in the place of Section 84 which was deleted, by the Finance (No. 2) Act, 1967, with effect from April 1, 1968. The provisions of this section are virtually the same as those of Section 84 except that this section provides an additional benefit to the assessees by way of enabling them to carry forward the "deficiency" in their profits in any year during the specified number of years referred to as "tax holiday period" for being set off against the profits in the subsequent years, up to a specified period . Section 80J, as it stood at the material time, so far as relevant, reads as follows:

"80J. Deduction in respect of profits and gains from newly established industrial undertakings or ships or hotel business in certain cases --(1) 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 this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains (reduced by the deduction, if any, admissible to the assessee u/s 80HH) of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent. per annum on the capital employed in the industrial undertaking or ship or business of the hotel, as the case may be, computed in the prescribed manner in respect of the previous year relevant to the assessment year (the amount calculated as aforesaid being hereafter, in this section, referred to as the relevant amount of capital employed during the previous year) : . .

(2) The deduction specified in Sub-section (1) shall be allowed in computing the total income in respect of the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or to operate its cold storage plant or plants or the ship is first brought into use or the business of the hotel starts functioning (such assessment year being hereafter, in this section, referred to as the initial assessment year) and each of the four assessment years immediately succeeding the initial assessment year :

Provided that in the case of an assessee, being a co-operative society, the provisions of this sub-section shall have effect as if for the words ''four assessment years'', the words ''six assessment years'' had been substituted.

(3) Where the amount of the profits and gains derived from the industrial undertaking or ship or business of the hotel, as the case may be, included in the total income (as computed without applying the provisions of Section 64 and before making any deduction under Chapter VI-A or Section 280-0) in respect of the previous year relevant to an assessment year commencing on or after the 1st day of April, 1967 (not being an assessment year prior to the initial assessment year or subsequent to the fourth assessment year as reckoned from the end of the initial assessment year) falls short of the relevant amount of capital employed during the previous year, the amount of such shortfall, or, where there are no such profits and gains, an amount equal to the relevant amount of capital employed during the previous year (such amount, in either case, being hereafter, in this section, referred to as deficiency) shall be carried forward and set off against the profits and gains referred to in Sub-section (1) [as computed after allowing the deductions, if any, admissible u/s 80HH and the said Sub-section (1)] in respect of the previous year relevant to the next following assessment year and, if there are no such profits and gains for that assessment year, or where the deficiency exceeds such profits and gains, the whole or balance of the deficiency, as the case may be, shall be set off against such profits and gains for the next following assessment year and if and so far as such deficiency cannot be wholly so set off, it shall be set off against such profits and gains assessable for the next following assessment year and so on :

Provided that-

(i) in no case shall the deficiency or any part thereof be carried forward beyond the seventh assessment year as reckoned from the end of the initial assessment year ;

(ii) where there is more than one deficiency and each such deficiency relates to a different assessment year, the, deficiency which relates to an earlier assessment year shall be set off under this Sub-section before setting off the deficiency in relation to a later assessment year.

Provided further that in the case of an assessee being a co-operative society, the provisions of this sub-section shall have effect as if for the words ''fourth assessment year'', the words ''sixth assessment year'' had been substituted. . ."

From a plain reading of Section 80J, it is clear that deduction under this section is available for the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture articles and for the next four assessment years (six years in the case of co-operative societies), referred to as the "tax holiday period". Sub-section (3) provides for grant of relief in respect of any deficiency of profits in relation to any assessment year falling within the "tax holiday period". The deficiency is the amount by which the profits and gains derived by the assessee from the eligible industrial undertaking included in the gross total income for any assessment year within the "tax holiday period" falls short of the amount calculated at 6 per cent. per annum of the capital employed in the eligible industrial undertaking. Where there are no profits and gains or where there is loss, the deficiency in relation to that assessment year is to be taken to be an amount calculated at 6 per cent. per annum of the capital employed in the undertaking. For the purpose of Sub-section (3) of Section 80J of the Act, no "deficiency" is to be computed in relation to any assessment year prior to the assessment year 1967-68. Thus, the earliest assessment year in respect of which any relief on account of the deficiency can be allowed is the assessment year 1967-68. The relief in respect of deficiency relating to any assessment year is granted by way of carrying it forward and setting it off against the assessable profits of the assessee from the industrial undertaking for seven assessment years as reckoned from the end of the "initial assessment year". Clause (ii) of the proviso to Sub-section (3) provides that where the assessee is entitled to set off against the assessable profits of an assessment year any deficiency relating to two or more past assessment years, the "deficiency" relating to the earlier one of such assessment years is to be set off first, followed by a set off of "deficiency" in respect of the next assessment year, and so on.

In the instant case, the new industrial undertaking of the assessee commenced manufacturing articles in the calendar year 1964, the relevant assessment year being the assessment year 1965-66. The "initial assessment year", within the meaning of Sub-section (2) of Section 80J of the Act is, therefore, the assessment year 1965-66. The assessee would be entitled to carry forward the "deficiency" only up to the seventh assessment year reckoned from the end of the above assessment year. The assessment year up to which the deficiency could thus be carried forward is the assessment year 1973-74. The assessee would not be entitled to get the benefit of carry forward and set off in any assessment year thereafter. The assessee, in the instant case, claimed the benefit of carry forward and set off of the "deficiency" under Sub-section (3) against the profits of the assessment year 1975-76. This claim of the assessee cannot be sustained in any manner on the face of the express prohibition contained in Clause (i) of the proviso to Sub-section (3) of Section 80J of the Act.

We do not find any merit in the contention of learned counsel for the assessee that the expression "initial assessment year" appearing in Clause (i) of the proviso to Sub-section (3) of Section 80J should not be given the meaning contained in Sub-section (2) thereof and in view of Clause (ii) of the proviso to Sub-section (3), this expression should be construed to mean "during the assessment year in which the ''deficiency'' arose". Such an interpretation, in our opinion, will be contrary to all known principles of interpretation. It is a well-settled principle of law that a statutory enactment must ordinarily be construed according to the plain natural meaning of its language and that no words should be added, altered or modified unless it is plainly necessary to do so in order to prevent a provision from being unintelligible, absurd, unreasonable, unworkable or totally irreconcilable with the rest of the statute. As stated in Crawford''s Construction of Statutes (1980 edition), where the statute''s meaning is clear and explicit, words cannot be interpolated. In the first place, in such a case they are not needed. If they should be interpolated, the statute would more than likely fail to express the legislative intent, as the thought intended to be conveyed might be altered by the addition of new words. They should not be interpolated even though the remedy of the statute would thereby be advanced, or a more desirable or just result would occur. In the instant case, the language of Clause (i) of the proviso to Sub-section (3) of Section 80J is clear and unambiguous. It says in clear terms that in no case shall the "deficiency" or any part thereof be carried forward beyond the seventh assessment year as reckoned from the end of the "initial assessment year". The expression "initial assessment year" has been defined in Sub-section (2) of the very same section to mean "the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles". Sub-section (2) clearly provides that such assessment year thereafter in that section (which obviously includes Sub-section (3) thereof) shall be referred to as the "initial assessment year". On the face of such clear and unambiguous language of Sub-section (2) there is no scope for any doubt about the true meaning of the expression "initial assessment year" appearing in Clause (i) of the proviso to Sub-section (3) of Section 80J of the Act. We do not find any substance in the submission of learned counsel for the assessee that the interpretation suggested by the assessee being beneficial to the assessee, the same should be accepted in view of the principle of beneficial interpretation, because the principle of beneficial interpretation has no application to the facts of the present case. As observed by this court in Commissioner of Income Tax Vs. Mirza Ataullaha Baig and another, , this principle applies only when there is reasonable and genuine doubt in regard to the interpretation of a particular provision. It has no application to a case where the provision is clear and the law is well-settled. It cannot be stretched too far. It cannot be used to misinterpret a statutory provision which is otherwise clear and brooks no doubt about its meaning or interpretation just to give benefit to the taxpayer, which the statute did not intend to give. The doubt as to the true meaning of the words or language of the statute should be "real" and not merely conjectural or fanciful. It is not for the courts to invent fancied ambiguities and stretch or pervert the language of the enactment in favour of the taxpayer. The principle of beneficial interpretation or interpretation in favour of the assessee would, therefore, apply only in a case where, on a proper interpretation, the court is in doubt about the true scope and ambit of the provision or finds that two equally reasonable interpretations--one in favour of the assessee and the other in favour of the Revenue--are possible. It is only in such cases that the question of accepting one of the two reasonably possible interpretations would arise. It has no application in a case like the one before us where the words of the statute are plain, precise and unambiguous. In such a case, the courts have no option but to give effect to the plain meaning of the statute.

In view of the above, we are of the clear opinion that the Tribunal was correct in law in holding that in the facts and circumstances of this case, the "deficiency" u/s 80J of the Act in respect of the assessment year 1968-69 amounting to Rs. 31,42,777 and the assessment year 1969-70, amounting to Rs. 31,39,662 cannot be set off against the profits of the assessment year 1975-76. Question No. 3 is, therefore, answered in the affirmative and in favour of the Revenue and against the assessee.

This reference is disposed of accordingly with no order as to costs.