JUDGMENT

PATHAK, J. :— These appeals are directed against the judgment of the Karnataka High Court disposing of two Income-tax References. The question in each Reference, which was answered by the High Court in favour of the assessee and against the Revenue, is whether in computing the profits for the purpose of deduction under section 80E of the Income-tax Act, 1961, the loss incurred by the assessee in the manufacture of alloy steels could not be set off against the profits of the manufacture of automobile ancillaries.

2. The assessee is a public limited company engaged in the manufacture of automobile spares. The products manufactured by it are covered by the list in the Fifth Schedule to the Income-tax Act. During the previous year relevant to the assessment year 1966-67, the assessee commenced another activity. the manufacture of alloy steels, which was also an industry included in the Fifth Schedule. The assessee sustained a loss in the alloy steel industry during the previous years relevant to the assessment years 1966-67 and 1967-68. It claimed a loss in the sum of Rs. 15,30,688/- for the assessment year 1966-67. For the assessment year 1966-67, the assessee disclosed profits from the industry of automobile ancillaries in the following detail :-

1. Manufacture of Springs at Mangalore Rs. 7,54,107/-

2. Manufacture of Springs at Nagpur Rs. 9,61,808/-

3. Manufacture of Hubs and Brake Drums Rs. 41,214/-

Rs. 17,57,129/-

The assessee claimed relief under section 80E at 8 per cent of this amount in the sum of Rs. 1,40,574/-. In the same manner, the assessee claimed relief under section 80E in the sum of Rs. 1,52,483/- for the assessment year 1967-68. The Income-tax Officer declined to grant the relief claimed by the assessee in the two assessment years. He noticed that the assessee had not taken into account the losses incurred in the, alloy steel industry, and he held that the assessee would, be entitled to deduction under section 80E on the profits from the manufacture of automobile parts only after setting off the loss in alloy steel manufacture. After making certain adjustments in the computation of the total income, the Income-Tax Officer gave relief under section 80E in the sum of Rs. 24,896/- for the assessment year 1966-67 and Rs. 1,20,986/- for the assessment year 1967-68, computing the deduction at 8 per cent on the amount of profits from the manufacture of automobile parts as reduced by the losses from the alloy steel manufacture. An appeal by the assessee was dismissed by the Appellate Assistant Commissioner of Income-tax. But on second appeal, the Income-Tax Appellate Tribunal accepted the contention of the assessee that a deduction was permissible at 8 per cent on the entire profits of the automobile parts industry included in the total income without deducting therefrom the losses in the alloy steel manufacture. It directed the IncomeTax Officer to recompute the relief under section 80E.

3. At the instance of the Revenue, the Appellate Tribunal referred the case for each of the two assessment years 1966-67 and 1967-68 to the Karnataka High Court for its opinion on the following question of law:-

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that in computing the profits for the purpose of deduction under section 80E of the Income-tax Act, 1961 the loss incurred in the manufacture of alloy steels should not be set off against the profits of the manufacture of automobile ancillaries?"

The High Court answered the question in the affirmative.

4. To appreciate the merits of the controversy in these appeals it would be as well to set forth at this point the relevant provisions of section 80E of the Income-tax Act as they stood at the time :

"80E. Deduction in respect of profits and gains from specified industries in the case of certain companies -

(1) In the case of a company to which this section applies, where the total income (as computed in accordance with the ot