Vijay Solvex Ltd. vs Commissioner of Income Tax

Jainendra Kumar Ranka, J.—These three income tax appeals under s. 260A of the IT Act (for short, ''IT Act'') are directed against the order passed by the income tax Appellate Tribunal, Jaipur (for short, ''Tribunal'') in ITA No. 1296/Jp/1996, ITA No. 1694/Jp/1993 and ITA No. 390/Jp/2002 dt. 12th Jan., 2004, 14th Oct., 2004 and 27th July, 2005 respectively for the asst. yrs. 1992-93, 1990-91 and 1998-99 respectively. Since the controversy in all the three assessment years is common and arising in between the same parties, therefore, all these three appeals are being disposed of by this common order.

The appeals were admitted on the following substantial questions of law:

Substantial questions of law in DB IT Appeal No. 185 of 2004

(i) Whether the term ''profit and gains'' used in s. 80HH and 80-I of the IT Act, 1961 with reference to an eligible industrial undertaking have the same meaning as the term ''income'' whereas the statute uses both the terms independently in different provisions of the Act?

(ii) Whether the ''profits and gains'' of current year of the eligible undertaking would be relevant for computing deduction under s. 80HH and 80-I of the Act or the income computed after reducing depreciation allowance under s. 32(1), unabsorbed depreciation under s. 32(2) and unabsorbed loss under s. 72 shall be relevant for these deductions?

Substantial questions of law in DB IT Appeal No. 20 of 2005.

(i) Whether the learned Tribunal was justified in holding that the deduction under Chapter VI-A are to be given from the amount of gross total income for the purpose of computing the deduction under s. 80HH and 80-I of the IT Act 1961?

(ii) Whether the term ''profit and gains'' used in s. 80HH and 80-I of the IT Act, 1961 with reference to an eligible industrial undertaking have the same meaning as the term ''income'' whereas the statute uses both the terms independently in different provisions of the Act?

(iii) Whether the ''profits and gains'' of current year of the eligible undertaking would be relevant for computing deduction under s. 80HH and 80-I of the Act or the income computed after reducing depreciation allowance under s. 32(1) shall be relevant for these deductions?

Substantial questions of law in DB IT Appeal No. 31 of 2006

(i) Whether the term ''profit and gains'' used in s. 80HH of the IT Act 1961 with reference to an eligible industrial undertaking have the same meaning as the term ''income'' whereas the statute uses these terms independently in different provisions of the Act?

(ii) Whether the ''profits and gains'' of current year of the eligible undertaking would be relevant for computing deduction under s. 80HH of the Act or the income computed after reducing depreciation allowance under s. 32(1) shall be relevant for this deduction?

The brief facts, as reveal from record (asst. yr. 1990-91), are that the appellant-assessee commenced its commercial production of crushing of oil seeds through oil mill and solvent plant and the turnover in the first assessment year is at Rs. 4,58,31,787 and it is the claim of the appellant-assessee that the major part is from the sale of solvent extracted mustard oil for Rs. 2,63,73,825.

The appellant-assessee claimed deduction under s. 80HH and 80-I of the IT Act amounting to Rs. 14,23,468 and Rs. 17,79,334 respectively as per the audit report annexed to the return of income. The said amount had been claimed before deducting depreciation of Rs. 72,28,897. Whereas according to the AO, the balance-sheet and P&L a/c of the appellant-assessee showed net loss of Rs. 1,11,559 after deduction of depreciation of Rs. 72,28,897 and according to the AO, since the resultant figure of profits and gains remained negative, no deduction was allowable under s. 80HH and 80-I of the Act and it was to be allowable only after total income of the assessee had been positive after allowing deductions for depreciation, investment allowance under s. 32 and 32A respectively.

Aggrieved with the aforesaid finding appeal was preferred before the CIT(A) and it was submitted that the relief under s. 80HH and 80-I is available to the industrial undertaking which fulfils the requirement and it is out of the profit and gains of an industrial undertaking. It was argued that the relief is to be deducted first for computing the total income and the other deductions ought to have been considered afterwards. It was the claim of the assessee that the term profit and gains having not been defined under the provisions of the IT Act but the income has been defined under Chapter VI-A and the reference is to term profit and gains in majority of sub-section and only in certain sections, the term income is referred to and accordingly it was argued that the relief under s. 80HH and 80-I has to be worked out with reference to profit and gains. It was further submitted that provisions of s. 80HH and s. 80-I are independent and self contained. The CIT(A) did not agree with the contention raised on behalf of the assessee and it was held that after insertion of provisions of s. 80AB w.e.f. 1st April, 1981, the deduction under s. 80HH to s. 80-I (except s. 80M) is to be allowed with reference to the net income and the net income means the income arrived at after allowing the deductions on account of the depreciation and unabsorbed losses, unabsorbed depreciation etc. etc. and after observing that since in the present case, the resultant figure was minus (loss), the relief was not available to the appellant and accordingly, the appeal was dismissed.

The matter was carried in appeal by the appellant before the Tribunal. The Tribunal agreed with the finding of the AO as well as CIT(A) and declined to interfere on this issue.

Since the Tribunal upheld the finding of the AO as well as CIT(A), the matter has been assailed before us by raising the aforesaid substantial questions of law.

Shri Sanjay Jhanwar, learned counsel for the appellant conceded that the issue is no more res Integra insofar as the present issues are concerned and not only this Court but the Hon''ble apex Court has come to the conclusion that the deduction under s. 80HH and 80-I are not allowable in the facts and circumstances of the case. However, insofar as the question No. 1 is concerned, he contended that in none of the cases, the term profit and gains has been referred to and in this regard he tried to distinguish and contended that the Calcutta High Court in the case of Commissioner of Income Tax Vs. Orient Paper Mills Ltd., ; Orissa High Court in Commissioner of Income Tax Vs. Tarun Udyog, and Karnataka High Court in the case of Commissioner of Income Tax Vs. H.M.T. Ltd., have considered the term income vis-�-vis profits and gains and this is required to be considered in s. 80HH and s. 80-I as well. He contended that both these sections specifically deal about the term profit and gains and nowhere refers to word ''income'' and, therefore, he contended that the term profit and gains is wider than income and in the instant case, the profits and gains were substantially higher and only because of the claim of depreciation that it had gone minus (loss) otherwise for all practical purposes, the assessee had shown substantial profits. He contended that s. 80HH and s. 80-I are beneficial provisions and is allowable for a particular industry which is to be set up in remote areas and being beneficial provisions, the claim deserves to be allowed on profits and gains and not income.

Per contra, Mrs. Parinitoo Jain, counsel for the respondent submits that deduction under s. 80HH and 80-I is allowable on net profit after deducting depreciation, unabsorbed depreciation, unabsorbed losses etc. and in the instant case, there is a loss, hence no benefit under s. 80HH and 80-I could be allowed. She further contended that the Hon''ble Supreme Court in the case of Motilal Pesticides (I.) Pvt. Ltd. Vs. Commissioner of Income Tax, had an occasion to consider this very issue and after analyzing the provisions affirmed the judgment of Delhi High Court which had considered the issue at length. She also contended that again the Hon''ble Supreme Court in the case of Synco Industries Ltd. Vs. Assessing Officer, Income Tax, Mumbai and Another, has come to the same conclusion. She also contended that this Court had consistently held in favour of Revenue and against the assessee in the cases of COMMISSIONER OF Income Tax Vs. 1. LOONKAR TOOLS PVT. LTD. (D. B. I. T. R. NO. 1 OF 1987) COMMISSIONER OF Income Tax v. 2. JODHPUR CABLES AND CONDUCTORS. (D. B. I. T. RS. NOS. 29 OF 1987 AND 55 OF 1988)., ; Commissioner of Income Tax Vs. Vishnu Oil and Dal Mills, ; Commissioner of Income Tax Vs. Sea Hawk (I) (P.) Ltd., ; Commissioner of Income Tax Vs. Aggarwal Gum Industries, ; Commissioner of Income Tax Vs. Rajendra Textiles, ; COMMISSIONER OF INCOME TAX Vs. SUNIL and CO., and Commissioner of Income Tax Vs. Rajasthan Co-operative Spinning Mills Ltd., and accordingly submitted that the issue is covered in favour of Revenue and against the assessee.

Insofar as the contention raised by counsel for the appellant about income and profits and gains cited by the learned counsel for the appellant, as referred to supra, she contended that the same are distinguishable on facts and when the Hon''ble apex Court has considered this very issue, then no interference is required in the matter.

We have considered the arguments advanced by counsel for the parties.

The Hon''ble apex Court in the case of Synco Industries Ltd. v. AO & Anr. (supra), while considering the question whether deduction under s. 80HH and 80-I were allowable, observed as under:

The above discussion makes it very evident that predominant majority of the High Courts have taken the view that while working out gross total income of the assessee the losses suffered have to be adjusted and if the gross total income of the assessee is ''nil'' the assessee will not be entitled to deduction under Chapter VI-A of the Act. It is well settled that where the predominant majority of the High Courts have taken certain view on the interpretation of certain provisions, the Supreme Court would lean in favour of the predominant view. Therefore, this Court is of the opinion that the High Court was justified in holding that gross total income must be determined, by setting off against the income, the business losses of earlier years, before allowing deduction under Chapter VI-A and if the resultant income is ''nil'', then the assessee cannot claim deduction under Chapter VI-A.

However, this Court finds that the non obstante clause appearing in s. 80-I(6) of the Act is applicable only to the quantum of deduction, whereas, the gross total income under s. 80B(5) which is also referred to in s. 80-I(1) is required to be computed in the manner provided under the Act which presupposes that the gross total income shall be arrived at after adjusting the losses of the other division against the profits derived from an industrial undertaking. If the interpretation as suggested by the appellant is accepted it would almost render the provisions of s. 80A(2) of the Act nugatory and therefore the interpretation canvassed on behalf of the appellant cannot be accepted. It is true that under s. 80-I(6) for the purpose of calculating the deduction, the loss sustained in one of the units cannot be taken into account because sub-s. (6) contemplates that only the profits shall be taken into account as if it was the only source of income. However, s. 80A(2) and s. 80B(5) are declaratory in nature. They apply to all the sections falling in Chapter VI-A. They impose a ceiling on the total amount of deduction and therefore the non obstante clause in s. 80-I(6) cannot restrict the operation of ss. 80A(2) and 80B(5) which operate in different spheres. As observed earlier, s. 80-I(6) deals with actual computation of deduction whereas s. 80-I(1) deals with the treatment to be given to such deductions in order to arrive at the total income of the assessee and therefore while interpreting s. 80-I(1), which also refers to gross total income, one has to read the expression ''gross total income'' as defined in s. 80B(5). Therefore, this Court is of the opinion that the High Court was justified in holding that the loss from the oil division was required to be adjusted before determining the gross total income and as the gross total income was ''nil'' the assessee was not entitled to claim deduction under Chapter VI-A which includes s. 80-I also.

The proposition of law, emerging from the above discussion is that the gross total income of the assessee has first got to be determined after adjusting losses etc., and if the gross total income of the assessee is ''nil'' the assessee would not be entitled to deductions under Chapter VI-A of the Act.

The Hon''ble apex Court in the case of Motilal Pesticides (I) (P) Ltd. v. CIT (supra) had also an occasion to consider the above issue and observed as under:

Both ss. 80HH and 80M fall in Chapter VI-A relating to deductions to be made in computing total income. It will be seen that the language of ss. 80HH and 80M is the same. It was held in Cloth Traders (P) Ltd. Vs. Additional Commissioner of Income Tax , Gujarat-I, that deduction is to be allowed on the gross total income and not on the net income. But then the decision in Cloth Traders (P) Ltd.''s case (supra) was overruled in Distributors (Baroda) Pvt. Ltd. Vs. Union of India (UOI) and Others, . After the decision in Cloth Traders (P) Ltd.''s case (supra), two ss. 80AA and 80AB were introduced by the Finance ( No. 2) Act, 1980. While s. 80AA was to have retrospective effect w.e.f. 1st April, 1968, s. 80AB'' was to have operation w.e.f. 1st April, 1981. Sec. 80AA had the effect of effacing the decision of this Court in Cloth Traders (P) Ltd.''s case (supra), which had interpreted s. 80M. Sec. 80AB was made applicable to all the sections in Chapter VI-A except s. 80M. In Distributors (Baroda) (P) Ltd.''s case (supra), however, this Court specifically overturned its earlier decision in Cloth Traders (P) Ltd.''s case (supra) and held that deduction is to be allowed only on the net income and not on the gross income. With reference to s. 80AB, this Court said it was merely of a clarificatory nature and the decision of this Court in Distributors (Baroda) (P) Ltd.''s case (supra) is thus irrespective of s. 80AB of the Act. The High Court, therefore, relying on the decision of this Court in Distributors (Baroda) (P) Ltd.''s case (supra) answered the question in favour of the Revenue and against the assessee.

Recently, the Hon''ble apex Court, in the case of Himatsingka Seide Ltd. Vs. Commissioner of Income Tax, also took similar view. In the case of Himatsingka Seide Ltd. the assessee filed nil return claiming exemption under s. 10B and the assessee computer the profits of the EOU without adjusting the brought forward unabsorber: deprecation of asst. yr. 1988-89. It is claimed that as s. 10B conferred "exemption" for the profits of the EOU, the said brought forward deprecation could not be set-off from the profits of the EOU but was available to be set-off against income from other sources. It was also claimed that the profits had to be computed on a "commercial" basis. It also adjusted brought forward unabsorbed deprecation against income from other sources. The AG, accepting assessee''s claim, assessed total income at nil. The CIT, in exercise of powers under s. 263, set aside assessment order holding that exemption under s. 10B was allowed on an inflated amount without deducting unabsorbed deprecation from export income. On appeal by the assessee, the Tribunal reversed the order of CIT. On appeal by the Department, the High Court in The Commissioner of Income Tax Vs. Himatasingike Seide Ltd., reversed the Tribunal'' order and held that the brought forward deprecation had to be adjusted against the profits of the EOU before computing the exemption allowable under s. 10B. On appeal, the Hon''ble apex Court held as under:

Having perused the records and in view of the facts and circumstances of the case, we are of the opinion that the Civil Appeal being devoid of any merit deserves to be dismissed and is dismissed accordingly.

This Court in the case of Loonkar Tools (I) Ltd. (supra) observed as under:

In view of the above discussion, we are of the view that the depreciation and investment allowance have to be deducted before giving the special deduction as provided under Chapter VI-A and the ''profits and gains'' which are alleged to be equivalent to commercial profits have to be restricted only to the extent of such profits and gains which are included in the gross total income on which the deduction is available. In these circumstances, we are of the view that the Tribunal was not justified in coming to the conclusion that the deduction under s. 80HH is to be computed on the commercial profits and in computing the commercial profits the assessee is entitled to require addition of the provision for tax, depreciation and investment allowance reserve to the net profit as per the P&L a/c to arrive at the commercial profits.

This Court in the case of Vishnu Oil & Dal Mills (supra), Agarwal Gum Industries (supra), Rajendra Textiles (supra), Sunil & Co. (supra), Vijay Industries Vs. Commissioner of Income Tax, , Commissioner of Income Tax Vs. Surendra Textiles, and Modern Syntex (India) Ltd. Vs. Commissioner of Income Tax, came to the same conclusion.

The Calcutta High Court in the case of Sea Hawk (I) (P) Ltd. (supra) observed as under:

It is also a point of interest to note that the larger Bench of the Supreme Court in Distributors (Baroda) (P) Ltd.''s case (supra) observed that the ratio in Cambay Electric Supply Industrial Co. Ltd''s case (supra) was a correct one and the decision in Cloth Traders (P) Ltd.''s case (supra) was wrongly taken and taken in oversight of the principle laid down by Cambay Electric Supply Industrial Co. Ltd.''s case (supra).

Therefore, we have no hesitation to say that the Tribunal erred in following the ratio in Cloth Traders (P) Ltd''s case (supra) and in holding that the assessee is entitled to the deduction of the profits and gains from its new hotel business before adjustment of the past unabsorbed loss carried forward for set off.

After analyzing the provisions of s. 80HH and 80-I of the IT Act and the judgments rendered by the Hon''ble apex Court and this Court (supra), we are of the view that for claiming deduction under any provision of Chapter VIA of which s. 80HH and 80-I are also part, then it has to be after allowance of all deductions such as depreciation, unabsorbed depreciation and unabsorbed losses and therefore, in order to compute the profit and loss of income from an industrial undertaking, to which s. 80HH and s. 80-I applies, the provisions of Part D of Chapter IV have to be taken into consideration and it is only after computing the income in accordance with the provisions contained in the chapter that income from such industrial undertaking, included in the gross total income of an assessee, could be found out. We are in conformity with the observations of the authorities referred to hereinabove that deduction can only be calculated with reference to the P&L a/c of the assessee and after deductions on account of depreciation or additional depreciation, unabsorbed depreciation, unabsorbed losses etc. and only if such income is positive would be eligible for deduction under s. 80HH and s. 80-I of the IT Act. The gross total income of the assessee has to be worked out after deducting the aforesaid deductions only to arrive at the net income and in case, after deducting all these statutory deductions, some income remains, then obviously the assessee would be entitled to deduction under s. 80HH and 80-I of the IT Act. However, when there is no taxable income, then no deduction under Chapter VI-A could be allowed.

It is an admitted fact that insofar as the present facts and circumstances of the case are concerned, after allowing depreciation, unabsorbed loss and unabsorbed depreciation, there was no positive income and we accordingly hold that the assessee was not entitled to any deduction under s. 80HH and 80-I of the IT Act.

The judgments relied upon by learned counsel for the appellant are of no assistance. In our view, no different answer is required to be given in the facts and circumstances of the present cases and consequently, the substantial questions are answered in the negative i.e., against the assessee and in favour of the Revenue. Consequently, the appeals, being devoid of merit, are hereby dismissed. No order as to costs.