Judgment

P. N. BHAGWATI, J.:- These two appeals by special leave raise a short but (Contd. on Col. 2) interesting question of law relating to the interpretation of S. 15-C of the Indian Income Tax Act, 1922 and S. 84 of the Income-Tax Act, 1961. These two sections are in material respects in identical terms and the interpretation we place on Section 15-C is bound to apply equally to S. 84. We will, therefore, first deal with Civil Appeal 1989 of 1972 which involves the interpretation of S. 15-C and then turn to Civil Appeal 2418 of 1977 which deals with S. 84.

2. The assessee in Civil Appeal 1989 of 1972 is a public limited company carrying on business in manufacture and sale of yarn. During the financial year ending 31st March, 1959, being the accounting year relevant to the assessment year 1959-60, the assessee set up a new industrial undertaking which admittedly satisfied the requirement of S. 15-C (2) of the Indian Income-tax Act, 1922. The profit, depreciation and development rebate in respect of this new unit for the assessment years 1959-60 and 1960-61 were as follows:

Year Profit Depreciation and Development Rebate

1959-60 Rs. 33,118/- Rs. 1,44,361/-

Rs. 5,07,336/- (Development rebate)

1960-61 Rs. 3,64,672/- Rs. 3,19,591/-

Rs. 1,17,205/- (Development rebate)

Rs. 3,97,790/- Rs. 10,88,493/-

In the assessment year 1959-60 the total profit of the assessee in respect of its old and new units came to Rs. 2,42,432, including Rs. 33,118 in respect of the new unit and the total depreciation amounted to Rs. 2,66,651, including Rs. 1,44,361 in respect of the new unit and after setting off the amount of depreciating against the total profit, a sum of Rs. 24,183 remained as unabsorbed depreciation which was carried forward to the next year. The entire development rebate, which included Rs. 5,07,336 in respect of the new unit, also remained unabsorbed owing to the smallness of the profit and that too had to be carried forward. The total profit of the assessee in respect of its old and new units for the assessment year 1960-61 was Rs. 14,13,604 inclusive of Rs. 3,64,672 in respect of the new unit and this was large enough to absorb the carried forward depreciation and development rebate as also the current years depreciation and development rebate in respect of both the units In fact, after setting off of such depreciation and development rebate, a sum of Rs. 3,25,176 remained as the taxable income of the assessee and it was assessed to tax in its hands. The result was that no part of the depreciation or development rebate for the assessment years 1959-60 and 1960-61 remained unabsorbed to be carried forward to the next assessment year 1961-62.

3. The position in the assessment year 1961-62 was that the assessee earned a net business income of Rs. 12,69,403 which included a sum of Rs. 1,08,822 representing the income from the new unit. The assessee in its assessment to tax for this assessment year claimed exemption of the income from the new unit to the extent of 6 of the average capital employed in it under S. 15-C. This section in so far as material read as follows:-

(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 (or hotel) to which this section applies as do not exceed six per cent per annum on the capital employed in the undertaking (or hotel) computed in accordance with such rules as may be made in this behalf by the Central Board of Revenue.

(2)x x x

(3) The profits or gains of an industrial undertaking (or a hotel) to which this section applies shall be computed in accordance with the provisions of S. 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 (or a hotel) as is attributable to that part of the profits or gains on which the tax is not payable under this section.

(Explanation - The amount of dividend in respect o