JUDGMENT

GOSWAMI, J. :—An important question of law as to the interpretation of Section 80K of the Income-tax Act, 1961 (briefly the Act) is raised in these four appeals by special leave.

2. M/s. Coromandel Fertilizers Limited (First Respondent) is a registered company incorporated on October 16, 1961, under the Companies Act and the 2nd Respondent is one of its shareholders holding two hundred equity shares in the paid-up capital of the company out of the total number of 95,82,010 equity shares issued by it. The company was engaged in manufacture of fertilizers at its factory at Vishakhapatnam and it commenced production in December 1967.

3. There is no dispute that the company as such fulfilled the appropriate conditions laid down under sub-section (4) of Section 80 J of the Act to qualify for deduction in respect of profits upto an extent of six per cent per annum on the capital employed in respect of profit for the purpose of computation of tax.

4. The company was assessed to income-tax as an industrial under-taking for the first time for the assessment year 1969-70. The orders of assessment were passed on 23-11-1972 and 4-1-1973. The said orders disclosed a sum of Rs. 11,10,176/- being carried forward as unabsorbed losses to the succeeding year and a sum of Rs. 9,73,93,861/- being carried forward as unabsorbed depreciation to the subsequent year.

5. The capital employed by the company in its new industrial undertaking was Rs. 48,87,38,018/- and 6 per cent thereof under Section 80J (1) amounted to Rs. 2,93,24,281/-. Out of this amount, the amount relating to the ten months of the year confined to the period during which the industrial undertaking was in operation was determined by the Income-tax Officer at Rs. 2,44,36,901/-. As no profit was made in the assessment year 1969-70 the aforesaid "deficiency" within the meaning of section 80J (3) was carried forward to the succeeding year 1970-71. Similarly for the next assessment year 1971-72 it was recorded in the assessment order that the company was entitled to deduction of Rupees 2,58,31,806/- under Section 80J. As there were no profits to be absorbed, the said amount has been carried forward under Section 80J (3) to the succeeding assessment year 1971-72. The returns filed for the assessment year 1971-72 by the company have not been finalised. But all the same the company, as per its books, had made a profit of Rs. 4.55 crores approximately in the accounting year 1972 corresponding to the assessment year 1973-74. It does not appear to be disputed that for the assessment year 1973-74, the company s income after deducting depreciation for that year would come to Rs. 6.16 crores. This amount would be subject to set off against unabsorbed depreciation and business losses which would exceed the said Rs. 6.16 cores resulting in nil total income with some unabsorbed depreciation and business loss to be carried forward to the next assessment year 1974-75. It is not disputed that after setting off the brought-forward allowances the company will not be assessable to any income-tax upon the assessment year 1973-74.

6. The company made business profit of Rs. 4.55 crores in the year 1972. The Board of Directors at their meeting held on March 14, 1973, recommended declaration of a maiden dividend of Rs. 76,65,608/- out of the profits of that year. The company represented to the Income-tax Officer 608 on March 3, 1973, seeking a certificate under Section 197(3) of the Act pointing out that the dividend payable by it would qualify for deduction in the hands of the share-holders under Section 80K of the Act. The company sought permission of the Income-tax Officer not to deduct tax at source out of the dividend payable to the shareholders. The request of the company was rejected by the Income-tax Officer holding that the shareholders were not entitled to the benefit of Section 80K of the Act. On coming to know about the declaration of the dividend by the company, even the Respondent-shareholder