Commissioner of Income Tax and Another vs Hindustan Pipe Udyog Ltd.

We have heard Sri Dhananjai Awasthi for the appellant-Department. Shri Bhoopesh Jain and Sri R.S. Agarwal appear for the respondent-assessee. This appeal was admitted on the following questions of law:

(1) Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that for purposes of computing relief under s. 80-I, relief granted under s. 80HH cannot be deducted from the gross total income ?

(2) Whether on facts and in the circumstances of the case, the learned Tribunal was legally justified in directing the AO to recompute the allowable deduction in view of the decision of the Hon''ble High Court of Madhya Pradesh in the case of J.P. Tobacco Products Pvt. Ltd. Vs. Commissioner of Income Tax, whereas provisions of sub-s. (9) of s. 80HH provide that where the assessee is entitled for deduction both under ss. 80HH and 80-I/80J, the effect first is to be given to s. 80HH of IT Act ?

(3) Whether on the facts and in the circumstances of the case, the learned Tribunal was legally justified in holding that the change in method of charging depreciation from straight line to WDV method is approved under the Companies Act and there is no specific prohibition under s. 115J of IT Act whereas the assessee has arbitrarily short computed its tax liability under s. 115J and depreciation charged to books was considerably swelled by adopting methods not permissible under relevant provisions of IT Act, 1961 ?

The facts giving rise to this appeal, as given in the assessment order, are as follows:

The assessee is engaged in manufacture of steel pipes synthetic filament yarn and polyster clips. During the year under consideration, total sales have been shown at Rs. 109.1 crores as against Rs. 39.67 crores of last year giving GP rates of steel unit and PPFY unit at 10.56 per cent and 20.12 per cent respectively whereas last year''s rates were 14.06 per cent and 13.64 per cent. The consolidated GP rate comes to 15.34 per cent as against 13.91 per cent of last year. Though there is fall in GP rate in steel unit by 0.5 per cent, the consolidated GP rate has increased by 1.43 per cent owing mainly to a substantial increase in the GP rate of PPFY Unit. During the year under consideration the assessee has also set up a new WDS unit for manufacturing of polyster clips. Gross profit from this new Unit has been shown at Rs. 12.20 lacs giving GP rate at 3.94 per cent

On the question of allowing deduction under ss. 80-I and 80HH, the Tribunal held in para, 3 as follows:

The next ground is in regard to deduction under ss. 80I and 80HH. The assessee raised the ground that the CIT(A) was wrong in law in building what relief under s. 80-I is to be allowed only with reference to the remaining eligible profit after relief under s. 80HH has already been allowed. In this regard, both the parties are agreed that the issue is now squarely covered by decision of the Hon''ble High Court of Madhya Pradesh in the case of J.P. Tobacco Products Pvt. Ltd. Vs. Commissioner of Income Tax, . In that case, it was held that the provision of law is clear that insofar as benefit of s. 80-I is concerned, it has to be granted on the gross total income and not on the income reduced by the amount allowed under s. 80HH. It was, therefore, held that for purposes of computing relief under s. 80-I, relief granted under s. 80HH cannot be deducted from the gross total income. Respectfully, following the above decision, we direct the AO to recompute the allowable deduction on the above basis.

We find that the question Nos. (1) and (2) are covered by decision of this Court in The Commissioner of Income Tax Vs. Lucky Laboratories Ltd., . It was rightly pointed out by the learned counsel for the assessee that the view taken by this Court in Lucky Laboratories Ltd. (supra) was in conformity with the views taken by the Bombay High Court, Rajasthan High Court, Gujarat High Court, Madhya Pradesh High Court and Punjab & Haryana High Court, which were affirmed by the Supreme Court in (2007) 107 ITD 327 . In the short but conclusive judgment, the Supreme Court has held as follows:

The point involved in the present case is whether ss. 80HH and 80-I of the IT Act, 1961, are independent of each other and therefore a new industrial unit can claim deductions under both the sections on the gross total income independently or that deduction under s. 80-I can be taken on the reduced balance after taking into account the benefit taken under s. 80HH.

The Madhya Pradesh High Court in J.P. Tobacco Products Pvt. Ltd. Vs. Commissioner of Income Tax, took the view that both the sections are independent and, therefore, the deductions could be claimed both under ss. 80HH and 80-I on the gross total income. Against this judgment a SLP was filed in this Court which was dismissed on the ground of delay on 21st July, 2000 [see (2000) 245 ITR (St) 71]. The decision in J.P. Tobacco Products (P) Ltd. (supra) was followed by the same High Court in the case of CIT vs. Alpine Solvex (P) Ltd. in IT Appeal No. 92 of 1999 decided on 2nd May, 2000. SLP against this decision was dismissed by this Court on 12th Jan., 2001 [see (2001) 247 ITR (St) 36]. This view has been followed repeatedly by different High Courts In a number of cases against which no special leave petitions were filed meaning thereby that the Department has accepted the view taken in these judgments. See The Commissioner of Income Tax Vs. NIMA Specific Family Trust, ; Commissioner of Income Tax, Jodhpur Vs. M/s. Chokshi Contacts (P) Ltd. Udaipur, ; Commissioner of Income Tax Vs. Amod Stamping, ; Commissioner of Income Tax Vs. Mittal Appliances and Others, ; Commissioner of Income Tax Vs. Rochi Ram and Sons, ; Commissioner of Income Tax Vs. Prakash Chandra Basant Kumar, ; Commissioner of Income Tax Vs. S.B. Oil Industries Pvt. Ltd., ; The Commissioner of the Income Tax-III Vs. S.K.G. Engineering Pvt. Ltd., and The Commissioner of Income Tax Vs. Lucky Laboratories Ltd., .

Since the special leave petitions filed against the judgment of the Madhya Pradesh High Court have been dismissed and the Department has not filed the special leave petitions against the judgments of different High Courts following the view taken by the Madhya Pradesh High Court, we do not find any merit in this appeal. The Department having accepted the view taken in those judgments cannot be permitted to take a contrary view in the present case involving the same point. Accordingly, the civil appeal is dismissed. No costs.

On the third question, regarding change in method of charging depreciation from straight line to WDV method, the question, as rightly pointed out by the learned counsel for the respondent-assessee, is also covered by the decision of the Supreme Court in Apollo Tyres Ltd. Vs. Commissioner of Income Tax, Kochi, . In Malayala Manorama Co. Ltd. Vs. Commissioner of Income Tax, Trivandrum, , the Supreme Court following the ratio of the judgment in Apollo Tyres (supra) held as follows:

In Apollo Tyres (supra), this Court examined the object of introducing s. 115J in the 1961 Act. The Court relied on the Budget Speech of the then Hon''ble Finance Minister of India made in the Parliament while introducing the said section. The relevant portion of the Speech is reproduced as under:

It is only fair and proper that the prosperous should pay at least some tax. The phenomenon of so-called ''zero-tax'' highly profitable companies deserves attention. In 1983, a new s. 80VVA was inserted in the Act so that all profitable companies pay some tax. This does not seem to have helped and is being withdrawn. I now propose to introduce a provision whereby every company will have to pay a ''minimum corporate tax'' on the profits declared by it. in its own accounts. Under this new provision, a company will pay tax on at least 30 per cent of its book profit. In other words, a domestic widely held company will pay tax of at least 15 per cent of its book profit. This measure will yield a revenue gain of approximately Rs. 75 crores.

The Court held that the purpose of introducing this section was that the IT authorities were unable to bring certain companies within the net of income tax because these companies were adjusting their accounts in such a manner as to attract no tax or very little tax. It is with a view to bring such of these companies within the tax net that s. 115J was introduced in the 1961 Act with a deeming provision which makes the company liable to pay tax on at least 30 per cent of its book profits as shown in its own account. For the said purpose, s. 115J makes the income reflected in the companies books of accounts as the deemed income for the purpose of assessing the tax. If we examine the said provision in the above background, we notice that the use of the words in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act was made for the limited purpose of empowering the assessing authority to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, an AO under the IT Act has to accept the authenticity of the accounts with reference to the provisions of the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinized and certified by statutory auditors and will have to be approved by the company in its general meeting and thereafter to be filed before the RoC who has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. In spite of all these procedures contemplated under the provisions of the Companies Act, the Court observed that it is difficult to accept the argument of the Revenue that it is still open to the AO to scrutinize this account and satisfy himself that these accounts have been maintained in accordance with the provisions of the Companies Act. The Court categorically held that:

... the AO while computing the income under s. 115J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The AO thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put it differently, the AO does not have the jurisdiction to go behind the net profit shown in the P&L a/c except to the extent provided in the Explanation to s. 115J

...

Mr. Vellapally has also drawn our attention to the Division Bench judgment of the Bombay High Court in Kinetic Motor Co. Ltd. Vs. Deputy Commissioner of Income Tax, and submitted that in this case the Bombay High Court relied on the said judgment of Apollo Tyres (supra) and held the Issue in favour of the assessee. In this case, the Division Bench of the Bombay High Court observed as under:

The short question that arises for consideration in this tax appeal is whether it is open to the AO to make adjustment to the book profits beyond what is authorised by the definition given in Explanation to s. 115J of the IT Act, if the accounts are prepared and certified to be in accordance with Parts II and III of Sch. VI to the Companies Act, 1956. In the case of Apollo Tyres Ltd. Vs. Commissioner of Income Tax, Kochi, , the apex Court held that while computing the income under s. 115J of the IT Act, the AO has only power to examine whether the books of account were certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. It is further held that the AO thereafter has limited powers of making increases and reductions as provided for in the Explanation to the said section. The apex Court further held that the AO does not have the jurisdiction to go beyond the net profits shown in the P&L a/c, except to the extent provided in the Explanation to s. 115J of the IT Act. In the instant case, the accounts maintained by the assessee are certified by the auditors. Under the circumstances, the book adjustment made by the AO being contrary to the decision of the apex Court, question No. 1 is answered in the negative and in favour of the assessee.

In view of our answer to question No. 1, question No. 2 becomes academic. It is not in dispute that under the Companies Act, 1956, both straight line method and WDV method are recognised. Therefore, once the amount of depreciation actually debited to the P&L a/c is certified by the auditors, then, as per the decision of the apex Court in the case of Apollo Tyres Ltd. (supra), question No. 2 has to be answered in the negative and in favour of the assessee.

In view of the aforesaid judgments, we find that the questions of law are covered by the judgment of the Supreme Court. All the three questions are thus decided against the Revenue and in favour of respondent-assessee. The Department will proceed accordingly.