Royal Cushion Vinyal vs Commissioner of Income Tax

The Income Tax Tribunal has referred the following question to us, for our answer. The above Reference pertains to assessment year 1990-91.

Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in confirming the order of the Commissioner of Income Tax (Appeals) holding that the Assessing Officer was within his powers in making the impugned rectification order u/s 154 of the Act?

Facts of the case

Under the normal provisions of Income Tax Act, 1961 (i.e., under Sections 28 to 44D), the assessee computed the income which was adjusted against the brought forward losses and depreciation of the earlier years and accordingly, the total income was computed at Rs. Nil The assessee company computed the book profit u/s 115J at Rs. Nil after adjusting deduction u/s 80HHC and after adjusting the unabsorbed depreciation of the earlier years.

The Deputy Commissioner of Income Tax had passed the order u/s 143(3) on 26-3-1991 and computed the income at Rs. 19,30,154 under the normal provisions of the Act wherein he had made certain disallowances.

The first order u/s 154 was passed on 17-9-1991 whereby the Deputy Commissioner of Income Tax had computed the income at Rs. M7 after adjusting the carried forward unabsorbed depreciation and unabsorbed losses of the earlier years which were not fully allowed by him in the original order u/s 143(3) of the Act.

On 24-10-1991 the Deputy Commissioner of Income Tax once again gave a notice u/s 154 for rectifying his order on the ground that book profit is required to be computed u/s 115J of the Act. While computing book profit u/s 115J, the Deputy Commissioner of Income Tax had held that the assessee-company is entitled to deduction u/s 80HHC at Rs. Nil as there is no positive income after setting off of the unabsorbed depreciation and unabsorbed business losses of the earlier years. Accordingly, the Deputy Commissioner of Income Tax computed the book profit at Rs. 17,88,952. The assessee-company strongly objected to the rectification proposed by the Deputy Commissioner of Income Tax vide its letter dated 18-11-1991. The Deputy Commissioner of Income Tax had passed the order on 8-1-1992 and had computed the book profit at Rs. 17,88,952. While computing the book profit, the Deputy Commissioner of Income Tax did not allow deduction u/s 80HHC of the Act.

The Commissioner (Appeals) and the Appellate Tribunal did not find favour with the contention of the assessee company that to deduct or not to deduct unabsorbed depreciation and unabsorbed losses of the earlier years from the profit of the business while computing deduction u/s 80HHC of the Act is a debatable issue and therefore, the Deputy Commissioner of Income Tax has no jurisdiction to pass the order u/s 154 of the Act.

The Commissioner of Income Tax (Appeals) and the Appellate Tribunal did not accept the contention of the assessee company that while computing deduction u/s 80HHC of the Act unabsorbed depreciation and unabsorbed business losses of the earlier years are not to be deducted from the profits of the business as shown in the Profit & Loss Account.

Mr. Jhaveri, the learned Counsel for the assessee contended that it is the case of the assessee company that on 8-1-1992 when the second order u/s 154 of the Act was passed by the Deputy Commissioner of Income Tax, the issue regarding deduction of unabsorbed carried forward depreciation and unabsorbed losses of the earlier years from the profits of the business computed as per Profit & Loss Account for the purpose of Section 80HHC was debatable and it was not free from doubt as the Appellate Tribunal had in the following cases held that unabsorbed depreciation and unabsorbed losses of the earlier years is not to be deducted from the profit of the business while computing deduction u/s 80HHC of the Act. Mr. Jhaveri, the learned Counsel also relied upon:

(a) ITO v. Shalina Trading Co. (P.) Ltd. [1992] 24 BCAJ 1062 (Mum.);

(b) (1989) 31 ITD 41 .

Mr. Jhaveri, then contended that our High Court in the case of Commissioner of Income Tax Vs. Shirke Construction Equipments Ltd., held that the Legislature has provided for an artificial formula only in Section 80HHC(3) under which the profits of the business are required to be computed on the basis of Sections 28 to 44D. It excludes Section 72. This is because the Legislature wants the profit of the current year to be taken into account. The object appears to be to give maximum benefit to the exporter who earns foreign exchange for the country and to encourage exports. Therefore, even though Section 80AB contemplates non obstante clause, the said Section 80AB will be subject to Section 80HHC to the extent of export profits being worked out from business profits. Our High Court held that the judgment of the Hon''ble Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, has no application to the facts before them. Similarly, the judgment of the Supreme Court in the case of Distributors (Baroda) Pvt. Ltd. Vs. Union of India (UOI) and Others, has no application to the facts before them.

Mr. Jhaveri, the learned Counsel, then pointed out that the following High Courts of India had also taken the same view as that of the Bombay High Court in the case of Shirke Construction Equipments Ltd. (supra).

(a) Commissioner of Income Tax Vs. A.V. Thomas and Co. Ltd., ;

(b) Commissioner of Income Tax Vs. Gogineni Tobacco Limited, ;

(c) Commissioner of Income Tax Vs. G.T.N. Textiles Ltd., ;

(d) Commissioner of Income Tax Vs. Arvind Mills Ltd., ;

(e) Commissioner of Income Tax Vs. Harisons Malayalam Ltd., ;

(f) Commissioner of Income Tax Vs. Smt. T.C. Usha, .

Mr. Jhaveri, therefore submitted that the issue regarding deduction of unabsorbed depreciation and unabsorbed losses from the profits and gains of business or profession while computing deduction u/s 80HHC was not free from doubt and, therefore, it was a debatable issue.

Mr. Jhaveri then referred to the case of T.S. Balaram, Income Tax Officer, Company Circle IV, Bombay Vs. Volkart Brothers, Bombay, , wherein the Supreme Court held that a mistake apparent on the record must be an obvious and patent mistake and not something which can be established by a long drawn process of reasoning on points on which there may be conceivably two opinions. A decision on a debatable point of law is not a mistake apparent from the record.

Even Mr. Parag Vyas, the learned Counsel for the revenue could not refute that various High Courts in India had followed four High Court''s judgment in Shirke Construction Equipments Ltd.''s case (supra).

Hence, we are clearly of the view that the Deputy Commissioner of Income Tax had no jurisdiction to pass an order u/s 154 of the Act on 6-1-1992 as the issue of computation of deduction u/s 80HHC was a debatable issue.

Hence, we answer the above question in the negative, against the revenue and in favour of the assessee.