Commissioner of Income Tax - II vs Salzer Electronics Ltd.

P.D. Dinakaran, J.—The vexed substantial question of law, as raised by the Revenue, arises for consideration in these appeals is,

Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that for computation of profit u/s

80HHC, business profit should be adopted without taking into account unabsorbed depreciation carried forward from the earlier year ?

under the following facts and circumstances of the case.

2.1. The assessment years involved in these appeals are 1993-94 and 1994-95. The assessing officer, while processing the return of income filed

by the assessee for the assessment year 1994-95 u/s 143(1)(a), worked out the deduction u/s 80HHC of the Income Tax Act, 1961 (in brevity

''the Act''), after deducting unabsorbed depreciation carried forward from the earlier year, by his assessment order dated 30.3.95. Aggrieved by

the same, the assessee went on appeal before the Commissioner of Income Tax (Appeals), who, by order dated 16.1.96, following the earlier

order in the assessee''s own case, held that the deduction u/s 80HHC has to be computed after setting off of carried forward unabsorbed

depreciation and that such an adjustment was possible u/s 143(1). But, on further appeal by the assessee, the Income Tax Appellate Tribunal, by

its order dated 13.11.2003, following the decision of the Bombay High Court in the case of Commissioner of Income Tax Vs. Shirke Construction

Equipments Ltd., , allowed the claim of the assessee. Against the said order of the Tribunal, the Revenue has come forward with T.C. (A) No.

431 of 2004.

2.2. The Assessing Officer, while completing the assessments for the assessment years 1993-94 and 1994-95, disallowed the claim of the

assessee with regard to deduction u/s 80HHC before setting off of unabsorbed depreciation and computed the deduction after adjusting the

unabsorbed depreciation brought forward by assessment orders dated 12.2.96. The said orders of the Assessing Officer were confirmed by the

Commissioner by common order dated 10.9.96, on appeals at the instance of the assessee. But, the Tribunal by its common order dated

13.1.2004 in the appeals filed by the assessee, reversed the order of the Commissioner following the decision of the Bombay High Court in

Commissioner of Income Tax Vs. Shirke Construction Equipments Ltd., . Against the said order of the Tribunal, the Revenue has filed T.C. (A)

Nos. 264 and 301 of 2004.

Heard both sides.

4.1. When an identical issue came up for consideration before this Court in Asvini Cold Storage (P) Ltd. (now amalgamated with Asvini Fisheries

Ltd.) Vs. The Commissioner of Income Tax, , a Division Bench of this Court, while rejecting the case of the assessee therein, who placed reliance

on the decision of the Bombay High Court in Commissioner of Income Tax Vs. Shirke Construction Equipments Ltd., , followed the decision of

the Apex Court in IPCA Laboratory Ltd. Vs. Deputy Commissioner of Income Tax, Mumbai, , and held as hereunder:

... Section 80HHC of the Income Tax Act, 1961, provides for deduction of profits from the gross total income. Sub-section (3) is a machinery

provision which lays down the manner of circulating the profits which constitute deduction u/s 80HHC(1). Consequently, Section 80HHC(3) aids

in the working of the deduction u/s 80HHC(1). Considering the fact that Section 80HHC is a section which comes under Chapter VI-A providing

for special deduction in gross total income, necessarily, the computation for deduction has to be in accordance with the total income computed in a

manner provided fro u/s 80AB. It is relevant to note that Section 80A deals with deduction to be made under Chapter VI-A in computing the total

income. It may also be noted that Section 80A(2) lays down that the aggregate amount of the income under Chapter VI-A shall not exceed the

gross total income of the assessee. Read in the context of Section 80A and Section 80AB, the scheme of deduction u/s 80HHC has to be

computed out of the income from profits and gains of business in accordance with the provisions of the Act, as stated so u/s 80AB.... Section

80AB starts with the words ""Where any deduction is required to be made or allowed under any section included in this Chapter,...notwithstanding

anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed

in accordance with the provisions of this Act, (before making any deduction under this Chapter), shall alone be deemed to be the amount of

income of that nature which is derived or received by the assessee and which is included in his gross total income"". It may be seen that the

provisions of Section 80AB contemplate that the gross total income has first to be computed in accordance with the provisions of the Act. When it

comes to a deduction, Section 80AB further provides that for the purpose of deduction under any of the sections in Chapter VI-A, the amount of

income of that nature has to be computed in accordance with the provisions of the Act, which means, necessarily for the purpose of deduction, the

income of that nature computed for deduction must have a working in accordance with the provisions of this Act. If that be so, income from profits

and gains of business must necessarily conform to the provisions in Part D, including set off and carry forward.

4.2. While holding as above, the Division Bench in the above case held that the unabsorbed depreciation and unabsorbed investment allowance of

earlier years should be set off while computing the profits of business for the purpose of determining the relief u/s 80HHC.

4.3. The view taken by this Court in the case of Asvini Cold Storage, referred supra, was subsequently followed by this Court in an unreported

case in T.C. No. 62 of 2004 (between Commissioner of Income Tax-III v. Sharon Vaneers P. Ltd.), wherein this Court by order dated

26.2.2007 held as follows:

It is not in dispute that Section 80HHC of the Act, which provides for deduction in respect of profits retained for export business, has been

incorporated in the Income Tax Act, 1961, with a view to providing incentive for earning foreign exchange. A plain reading of Section 80HHC

makes it clear that in arriving at profits earned from export of both self manufactured goods and trading goods, the profits and losses in both trades

have to be taken into consideration. If, after such adjustments, there is a positive profit the assessee would be entitled to deduction u/s 80HHC(1)

of the Act and if there is a loss the assessee would not be entitled to deduction. In arriving at the figure of positive profit, both the profits and the

losses will have to be considered. If the net figure is a positive profit then the assessee will be entitled to deduction and if the net figure is a loss then

the assessee will not be entitled to deduction. A plain reading of Sub-section (3)(c) shows that ""profits from such exports"" has to be profits of

exports of self-manufactured goods plus profits of exports of trading goods. The opening words ""profit derived from such exports"" together with

the word ""and"" clearly indicate that the profits have to be calculated by counting both the exports. Deduction can be permitted u/s 80HHC(1) only

if there is a positive profit in the exports of both self-manufactured goods as well as trading goods. If there is a loss in either of the two, then the

loss has to be taken into account for the purposes of computing the profits. On the other hand, the Section 80AB of the Act, which is also in

Chapter VI-A, starting with the words ""where any deduction is required to be made or allowed under any section of this Chapter"" would include

Section 80HHC also. Further, Section 80AB of the Act provides that ""notwithstanding anything contained in that section"". Thus Section 80AB of

the Act has been given an overriding effect over all other sections in Chapter VI-A. But, Section 80HHC does not provide that its provisions are

to prevail over Section 80AB of the Act or over any other provision of the Act. Section 80HHC of the Act would thus be governed by Section

80AB of the Act. [vide: IPCA Laboratory Ltd. Vs. Deputy Commissioner of Income Tax, Mumbai, .

In this view of the matter, we are of the view that it is not correct to say that Section 80HHC of the Act is a self-contained provision and

Section 80AB of the Act cannot be applied to Section 80HHC of the Act. In other words, Section 80AB of the Act will prevail over any other

provision in Chapter VIA of the Act and Section 80HHC of the Act would thus be governed by Section 80AB of the Act. We therefore hold that

the unabsorbed business losses, unabsorbed depreciation, etc. should be taken into account while computing income for the purpose of deduction

u/s 80HHC of the Act. The Appellate Tribunal is not correct in holding that the unabsorbed depreciation, unabsorbed business loss and

unabsorbed investment allowance of earlier years cannot be deducted before granting deduction u/s 80HHC of the Act and that the provisions of

Section 80AB of the Act cannot be applied while determining the business profits u/s 80HHC.

4.4. To both the above decisions of this Court, viz., (2007) 105 ITD 1 and T.C. No. 62 of 2004 (between Commissioner of Income Tax-III v.

Sharon Vaneers P. Ltd.), one of us was a party (P.D. Dinakaran, J.).

5.1. That apart, the view taken by the Bombay High Court in Commissioner of Income Tax Vs. Shirke Construction Equipments Ltd., , which is

relied upon by the assessee in the case of Asvini Cold Storage and in the case of Sharon Vaneers P. Ltd., referred supra, has now been reversed

by the Apex Court in the recent decision reported in Commissioner of Income Tax, Pune Vs. Shirke Construction Equipment Ltd., , wherein the

Apex Court has held as follows:

...Section 80AB of the Income Tax Act, 1961, specifying that profits are those as determined for the purpose of the Act, will apply for determining

profits from export business for the purposes of the deduction u/s 80HHC.... In determining business profits for the deduction u/s 80HHC, the

unabsorbed business losses of earlier years u/s 72 should be set off.

Under such circumstances, since the law on the point is well settled, as fortified by the decision of the Apex Court in Commissioner of Income

Tax, Pune Vs. Shirke Construction Equipment Ltd., , we answer the substantial question of law raised by the Revenue in these appeals, in the

negative, in favour of the Revenue and against the assessee. The tax case appeals are, accordingly, allowed. No costs.