Madhav Marbles and Granites Ltd. vs Assistant Commissioner of Income Tax

Vineet Kothari, J.—The appellant-assessee has filed this appeal under s. 260A of the IT Act, 1961 (for short, hereinafter referred to as ''Act'') being aggrieved by the order of learned Tribunal, Jodhpur Bench, Jodhpur dt. 20th July, 2007 for the asst. yr. 2003-04, whereby the learned Tribunal following the decision of Hon''ble Supreme Court in the case of IPCA Laboratory Ltd. Vs. Deputy Commissioner of Income Tax, Mumbai, ; IPCA Laboratory Ltd. Vs. Deputy Commissioner of Income Tax, Mumbai, held that the deduction under s. 80HHC(3C) can be allowed only, if there is a positive profit or income and if there is a loss in either of two separate divisions of business then the loss of one division has to be adjusted against the profit of the other division for the purposes of computing the profit for computing of deduction under s. 80HHC of the Act to the extent prescribed under sub-s. (IB) of s. 80HHC of the Act. The assessee, a manufacturer of granite and marbles slabs and tiles, during the relevant asst. yr. 2003-04, has three different units set up. Unit I is engaged in manufacturing of granite tiles, while the unit II manufactures granite slabs and unit III is again a manufacturer of marble slabs and tiles. For the asst. yr. 2003-04 in question, the assessee claimed the income of Rs. 4,37,81,709 exempt under s. 10B with respect of unit II. While In other two units, the assessee claimed deduction under s, 80HHC of Act of Rs. 2,56,46,746 in the original return, which deduction claim was revised upwardly to Rs. 3,02,97,098 during the course of assessment proceedings. The assessee claimed deduction in revised return only on the profits on export turnover of granite division (unit I), ignoring the loss on export turnover in respect of marble division (unit III).

The assessing authority disallowed such revised claim of the assessee and held that the loss of marble division (unit III) has to be first adjusted against the profit of unit I engaged in manufacturing of granite tiles and only net of the positive profit shall be the "profits of business" as defined under s. 80HHC(4C)(baa) of the Act, and therefore, the benefit of deduction under s. 80HHC of the Act, cannot be given to the extent of increased amount of Rs. 3,02,97,098. The assessee took the matter further in the first appeal before the learned CIT(A), who however, allowed the claim of the assessee following the decision of Bench of Tribunal in the case of (1999) 68 ITD 358 , in which a Bench of learned Tribunal held that for the purpose of computation under s. 80HHC in respect of leather division engaged in export, loss in the engineering division is not required to be merged with the profit of leather division, as the two divisions are independent and maintain separate books, and therefore, they cannot be combined for the purposes of working out the deduction under s. 80HHC of the Act.

Being aggrieved by these findings of learned CIT(A), the Revenue went up in the present case in a second appeal before the learned Tribunal, who allowed the Revenue''s appeal on this issue in terms of Hon''ble Supreme Court decision in the case of IPCA Laboratory Ltd. (supra) in the following terms:

..... The short controversy raised before us in this ground is about the setting off of loss in unit III against the profit of unit No. 1 for the purpose of deduction under s. 80HHC. The learned Authorised Representative has relied on the order passed by the Delhi Bench of the Tribunal in the case of (1999) 68 ITD 358 as per which the loss in one division was not to be merged with the profits of the other division. The contention of the learned Authorised Representative is without any substance in as much as in that case loss from another unit not connected with the export unit was held to be not adjustable against the profit of export unit. However, in the present case, the loss running unit is not unconnected with exports. Moreover, this contention is no more a good law in view of the decision of the Hon''ble Supreme Court in the case of IPCA Laboratory Ltd. Vs. Deputy Commissioner of Income Tax, Mumbai, in which it was held that deduction under s. 80HHC(3)(c) can be allowed only if there is a positive profit income in trading goods and if there is a loss in either of the two then that loss has to be taken into account for the purposes of computing the profits. The learned Authorised Representative unsuccessfully tried to distinguish its case by contending that cl. (a) of sub-s. (3) was applicable and not cl. (c) of s. 80HHC(3) as was dealt with by the Hon''ble Supreme Court. In our considered opinion, the Hon''ble Supreme Court has laid down a proposition for adjustment of loss in one unit against the profit of the other unit for allowing deduction by taking into consideration the provisions of s. 80AB r/w. s. 80B(5). It does not make any difference as to whether the case falls in cl. (a) or (c) of s. 80HHC(3). We, therefore, hold that the learned CIT(A) failed to take note of the binding judgment of the Hon''ble Supreme Court which was available at the time of passing of his impugned order and erred in accepting the assessee''s claim for ignoring the loss in one unit and allowing deduction on the other unit which earned income. We, therefore, set aside the impugned order on this score.

Having lost before the Tribunal, the assessee has approached this Court by way of present appeal under s. 260A of the Act, While admitting the present appeal, a Co-ordinate Bench of this Court framed the following substantial questions of law for consideration vide order dt. 13th Dec., 2007:

Whether the learned Tribunal was in error in following the judgment in IPCA Laboratory Ltd. Vs. Deputy Commissioner of Income Tax, Mumbai, as the basic facts of that case are entirely different from the facts of the present case in as much as in that case there was one unit only, and the question was of adjustment of loss in export towards the profit of trading in manufacturing of the same unit, and in the present case the two units being the unit Nos. 1 and 3 have nothing to do with each other except they are owned by one company?

Whether on the facts and in the circumstances of the case, the turnover and profits/losses of the two units being unit Nos. 1 and 3 could be clubbed together to determine the average profit/proportionate profits for the purpose of computing the deductions under s. 80HHC?

Learned counsel for the appellant, Mr. Sanjay Nahar, except relying on the findings of learned CIT(A) and the decision of Tribunal, Delhi Bench in the case of Easter Leather Products (P). Ltd. (supra) could not successfully urge anything contrary to the binding precedent of Hon''ble Supreme Court in the case of IPCA Laboratory Ltd. (supra).

On the other hand, Mr. K.K. Bissa, learned counsel for the Revenue submitted that the controversy is no more res Integra and in view of decision of Hon''ble Supreme Court in the case of IPCA Laboratory Ltd. (supra), the Tribunal was justified in denying the benefit of deduction under s. 80HHC without adjustment of loss of unit III of marble division against the profits of unit I, granite division, in the case of assessee since the owner of both the units is admittedly one limited company, namely, the assessee appellant before this Court.

We have heard learned counsel for the parties at some length and perused the impugned orders as well as the judgment cited at Bar in the case of IPCA Laboratory Ltd. (supra).

In our opinion the decision of Hon''ble Supreme Court relied upon by the learned Tribunal squarely deals with controversy in hand involved in the present before us.

The Hon''ble Supreme Court in the case of IPCA Laboratory Ltd. (supra) while dealing with situation of almost similar nature held that profit for determining the benefit of deduction under s. 80HHC has to be a positive profit/income and not a loss or negative profit and, therefore, the losses and profits of respective units of the same assessee-company have to be adjusted and if the net result of the same is the positive profit income, then the deduction under s. 80HHC of the Act has to be computed on the basis of such positive profit income only and not otherwise. It would be appropriate to quote the relevant portion of the ratio of Hon''ble Supreme Court decision in the case of IPCA Laboratory Ltd. (supra) as under:

Undoubtedly s. 80HHC has been incorporated with a view to providing incentive to export houses. Even though a liberal interpretation has to be given to such a provision the interpretation has to be as per the wordings of this section. If the wordings of the section are clear then benefits, which are not available under the section, cannot be conferred by ignoring or misinterpreting words in the section.

Sub-s. (3)(a) deals with the case where the export is only of self-manufactured goods. Sub-s. (3)(b) deals with the case where the export is only of trading goods. Thus when the legislature wanted to take exports from self-manufactured goods or trading goods separately, it has already so provided in sub-ss. (3)(a) and (3)(b). It would not be denied that the word ''profit'' in s. 80HHC(1) and ss. 80HHC(3)(a) and (3)(b) means a positive profit. In other words if there is a loss then no deduction would be available under s. 80HHC(1) or (3)(a) or (3)(b). 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 a deduction. If the net figure is a loss then the assessee will not be entitled to a deduction. Sub-s. (3)(c) deals with cases where the export is of both self-manufactured goods as well as trading goods. The opening part of subs. 3(c) states ''profits derived from such export shall''. Then follows (i) and (ii). Between (i) and (ii) the word ''and'' appears. A plain reading of sub-s. (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 profit is to be calculated in the manner laid down in subs. (3)(c)(i) and (ii). The opening words ''profit derived from such exports'' together with the word ''and'' clearly indicates that the profits have to be calculated by counting both the exports. It is clear from a reading of sub-s. (1) of s. 80HHC(3) that a decision can be permitted 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 that loss has to be taken into account for the purposes of computing profits.

Under s. 80HHC(1), the deduction is to be given in computing the total income of the assessee. In computing the total income of the assessee both profits as well as losses will have to be taken into consideration.

Sec. 80B(5) provides that ''gross total income'' means total income computed in accordance with the provisions of the IT Act.

Sec. 80AB is also in Chapter VI-A. It starts with the words ''where any deduction is required to be made or allowed under any section of this chapter''. This would include s. 80HHC. Sec. 80AB further provides that ''notwithstanding anything contained in that section''. Thus s. 80AB has been given an overriding effect over all other sections in Chapter VI-A. Sec. 80HHC does not provide that its provisions are to prevail over s. 80AB or over any other provision of the Act. Sec. 80HHC would thus be governed by s. 80AB. Decisions of the Bombay High Court and the Kerala High Court to the contrary cannot be said to be the correct law. Sec. 80AB makes it clear that the computation of income has to be in accordance with the provisions of the Act. If the income has to be computed in accordance with the provisions of the Act, then not only profits but also losses have to be taken into consideration. Even under s. 80HHC(3)(c)(i) the profit is to be adjusted profit of business. The adjusted profit of the business means a profit as reduced by the profit derived from business of exports out of India of trading goods. Thus in calculating the profits under sub-s. (3)(c)(i), one necessarily has to reduce by profits under sub-s. (3)(c)(ii). As seen above the term ''profit'' means positive profit. Thus if there is loss then those losses in export of trading goods have to be adjusted. They cannot be ignored. A plain reading of s. 80HHC makes it clear that in arriving at profits earned from export of both self-manufactured and trading goods, the profits and losses in both the trades have to be taken into consideration. If after such adjustments there is a positive profit the assessee would be entitled to deduction under s. 80HHC(1). If there is a loss he will not be entitled to any deduction.

It is undisputed before us that the words "assessee being an Indian company or a person (other than a company) resident of India" are used in s. 80HHC of the Act. The different units of the same assessee company engaged in manufacturing of different goods viz., granite slabs and tiles in unit I and marble slabs and tiles in unit III in the present case before us, does not make separate units of the same assessee company as separate and different assessable units for the purposes of IT Act, 1961, or for that matter for the purposes of s. 80HHC of the Act. The assessee, a body corporate, in the present case is one, namely, Madhav Marbles & Granites Ltd. Merely because for the purpose of its accounting policies or describing different units for the different goods manufactured and exported by it, the assessee has described the same as units I, II and III in the present case, it does not mean that benefit of s. 80HHC can be given for unit I separately on its profit earned by exports while the loss of unit III remains unadjusted against such profit of unit I. The purpose of giving benefit of deduction under s. 80HHC is to encourage the exports and profits derived by the assessee as such during the relevant year would form the basis for determining the extent of such deduction. The Hon''ble Supreme Court has put the said controversy of unit-wise profits beyond pale of doubt in the case of IPCA Laboratory Ltd. (supra) and while in that case exports of self-manufactured goods and export by way of trading activity of goods manufactured by others, were clubbed together and loss of one was held to be adjustable against the profit of other division, before deduction under s, 80HHC could be computed in the net positive profit, in the present case the profit of unit I of granite and unit III of marble cannot stand on a different footing.

In our considered opinion, the controversy is, therefore, no more res Integra and the learned Tribunal was perfectly justified in allowing Revenue''s appeal in the present case following the Hon''ble Supreme Court decision in the case of IPCA Laboratory Ltd. (supra), and the Tribunal''s Delhi Bench decision in the case of Easter Leather Products (P). Ltd. (supra), cannot be said to be good law in view of apex Court decision, Therefore, we are of the view that the present appeal of the assessee has no force and is liable to be dismissed and the substantial questions of law, framed above, deserve to be answered against the appellant-assessee and in favour of Revenue. They are answered accordingly. In view of above, the present appeal of the appellant-assessee is hereby dismissed. No costs.