JUDGMENT

TULZAPURKAR, J. :— These two appeals by special leave, one by the Commissioner of Income-tax, Gujarat and the other by the assessee, against the judgment of Gujarat High Court in Income-tax Reference No. 115 of 1974 raise two interesting questions regarding the mode in which and the fund from which deduction of 8 contemplated by S. 80-E (1) of the Income-tax Act, 1961 (as it stood at the relevant time) should be computed.

2. The short facts giving rise to the questions may be stated; The assessee - Cambay Electricity Supply and Industrial Co. Ltd., - carries on the business of generation and distribution of electricity at Cambay and, as such, is covered by the provisions of S. 80-E (1) and is entitled to claim the deduction contemplated by the said provision. The assessment in question relates to the assessment year 1967-68, the accounting year for which is the financial year ending March 31, 1967. During the accounting period which ended on March 31, 1967, the assessee company earned an income of s. 46,319/- from its said business. It appears that during this period it had sold some of its old machinery and buildings resulting in balancing charges contemplated by S. 41 (2) which the Income-tax Officer worked out at Rs. 7,55, 807/-. It further appears that there was unabsorbed depreciation of Rs. 1,42,955/- and unabsorbed development rebate of Rs. 1,11,658/- aggregating to Rupees 2,54,613/- of the earlier years which were required to be set off against the profits of that period. The Income-tax Officer while completing the assessment, determined the deduction admissible to the assessee under S. 80E (1) of the Act in the following manner :

Income from business as computed in the assessment order ... ... ... ... ... Rs. 46,319

Add : Profit u/s. 41 (2) in respect of sale of machinery and buildings ... ... ... Rs. 7,55,807

Total ... ... ... ... ... ... Rs. 8,02,126

Less : 8 deduction u/s. 80E (1) on Rs. 8,02,126 ... ... ... ... ... ... Rs. 64,170

Rs. 7,37,956

Less : Unabsorbed depreciation and development rebate :

Depreciation : ... ... Rs. 1,42,955

Development Rebate : Rs. 1,11,658 Rs. 2,54,613

Net Income chargeable to tax : Rs. 4,83,343

It will appear clear from the above computation that the Income-tax Officer treated the item of Rs. 7,55,807 as profits attributable to the business of generation and distribution of electricity and allowed deduction at 8 thereon under S. 80E (1). It would also be clear that the Income-tax Officer computed the relief/deduction admissible to the assessee under S. 80E (1) at 8 on the amount of Rs. 8,02,126, that is to say, on the income before adjusting or setting off the unabsorbed depreciation and development rebate carried forward from the earlier year. When the aforesaid assessment order came to his knowledge, the Additional Commissioner of Income-tax called for and examined the record and proceedings in exercise of his powers under S. 263 of the Act and after giving an opportunity to the assessee-company to show cause, took the view that the manner of computing the deduction admissible to the assessee under S. 80-E (1) was erroneous and prejudical to the interests of the Revenue, in that the deduction of 8 on the item of profit of Rs. 7,55,807 arising under S. 41 (2) had been wrongly allowed and that for the purpose of calculating the deduction of 8 the items in respect of the unabsorbed depreciation and development rebate should not have been excluded, and that if proper calculations as suggested by him were made, the assessee was not entitled to any deduction. He, therefore, set aside the order of the Income-tax Officer and directed that fresh assessment be made in accordance with law. Feeling aggrieved by the order passed by the Additional Commissioner of Income-tax, the assessee preferred an appeal to the Income Tax Tribunal. In the appeal as regards the item of Rs. 7,55,807 being profits arising from the sale of old machinery and buildings under S. 41 (2) of the Act, the Trib