Judgment

SHAH, J.- Sri Ganapathy Mills Co. Ltd. distributed dividend to its shareholders out of the business profits earned by it in the years ending December 31, 1953 and December 31, 1954. The Company, however, carried in its accounts a large balance of unabsorbed depreciation admissible under Section 10 (2) (vi) and Section 10 (2) (vi-a) of the Income-tax Act, and on that account it had no taxable income in the relevant assessment years 1954-55 and 1955-56.

2. In assessing the income of the shareholders for the assessment years 1955-56 and 1956-57 the Income-tax Officer rejected their claim for exemption from tax under S. 15-C (4) of the Income-tax Act, 1922, and brought the dividend income to tax. This order was confirmed by the Income-tax Appellate Tribunal.

3. The Tribunal referred the following question to the High Court of Madras for opinion:

"Whether on the facts and in the circumstances of the case, the assessees are entitled to the benefit of S. 15-C (4) in respect of the dividend income received from Sri Ganapathy Mills Co. Ltd., Tinnevelly?"

The High Court answered the question in the affirmative. The Commissioner of Income-tax has appealed to this Court with a certificate under Section 66A (2) of the Income-tax Act.

4. In the year ending December 31, 1953, the Company had earned in its business transaction a profit of Rs. 87,184/-, but it had no taxable profits, for the depreciation for the current and the previous years amounted to Rs.2,83,343/- which was an admissible allowance in the computation of income under Section 10 of the Income-tax Act. Since full effect could not be given to the allowance, the Company was entitled to add to the depreciation for the following year the unabsorbed depreciation of Rs.1,96,159/- under S. 10 (2) (vi) proviso (b). In the year ending December 31, 1954, the Company earned a profit of Rs.4,36,821/- and the depreciation admissible for the year was Rs.2,41,809/-. Taking into account the unabsorbed depreciation of the previous year in computing the taxable income, it was found that the Company had suffered a loss of Rs.1,147/-. Accordingly the Company had no taxable profits in either of the two years and no tax was levied from the Company. But the Company had still distributed dividend out of profits earned by it and the taxing authorities levied tax on the dividend received by the shareholders.

5. The answer to the question referred to the Tribunal depends upon the true interpretation of S. 15-C of the Indian Income-tax Act, 1922. Section 15-C of the Income-tax Act, insofar as it is relevant, provides:

"(1) Save as otherwise hereinafter provided, the tax shall not be payable by an assessee on so much of the profits or gains derived from any industrial undertaking to which this Section applies as do not exceed six per cent per annum on the capital employed in the undertaking, computed in accordance with such rules as may be made in this behalf by the Central Board of Revenue.

(2) x x x x x

(3) The profits or gains of an industrial undertaking to which this Section applies shall be computed in accordance with the provisions of Section 10.

(4) The tax shall not be payable by a shareholder in respect of so much of any dividend paid or deemed to be paid to him by an industrial undertaking as is attributable to that part of the profits or gains on which the tax is not payable under this Section.

x x x"

The Company was an industrial undertaking to which Section 15-C applied. It had in the two relevant years derived from the industrial undertaking no profits or gains within the meaning of sub-s. (1) read with sub-s. (3) of Section 15-C. The profits or gains derived from the industrial undertaking within the meaning of sub-s. (1) of S. 15-C are not business profits; they are taxable profits computed in accordance with the provisions of Section 10 of the Income-tax Act. Under Section 15-C (1) no tax is payable by the industrial undertaking on its taxable profits equal to six per cent per annum of the c