Bombay H.C : Whether the AO was right in rejecting the claim of the assessee on the ground that the gross total income of the assessee, computed as per the provisions of the Act before deductions under Chapter VI-A, was Nil ?

High Court Of Bombay

Synco Industries Ltd. vs. Assessing Officer & Ors.

Sections 80A(2), 80B(5), 80HH, 80-I

Asst. Year 1990-91, 1991-92

S.H. Kapadia & V.C. Daga, JJ.

IT Appeal No. 591 of 2000

23rd July, 2001

Counsel Appeared

Pradeep Sancheti with A.H. Mehta, for the Appellant : R.V. Desai with J.P. Deodhar & P.S. Jetley i/b H.D. Rathod, for the Respondents

JUDGMENT

S.H. KAPADIA, J.:

Although several questions have been raised in the memo of appeal, the point which arises for determination by this Court in the present appeals under s. 260A of the IT Act, 1961 (‘the Act’) is as follows :

“Whether the AO was right in rejecting the claim of the assessee on the ground that the gross total income of the assessee, computed as per the provisions of the Act before deductions under Chapter VI-A, was Nil ?”

2. For the purposes of deciding these appeals, the relevant facts are as follows : In these appeals, we are concerned with the asst. yrs. 1990-91 and 1991-92. Since both the appeals raise common question of law and fact, they are disposed of by this common judgment. However, for the sake of convenience, the facts in Appeal No. 591 of 2000 are mentioned hereinbelow.

3. The assessee is engaged in the business of oil and chemicals. It has a unit for Oil Division in Sriphi District, Rajasthan. It has a Chemical Division at Jodhpur. The assessee claimed deductions under s. 80HH and s. 80-I of the Act in respect of the aforestated two Divisions. The AO rejected the claim of the assessee on the ground that the gross total income of the assessee, before deductions under Chapter VI-A, was ‘nil’ and, therefore, the AO came to the conclusion that the assessee was not entitled to the benefit of deductions under Chapter VI-A and in particular ss. 80HH and 80-I. Being aggrieved, the assessee carried the matter in appeal. The order of the AO was confirmed by the CIT(A). Being aggrieved, the assessee went in appeal to the Tribunal which dismissed the appeal of the assessee and, therefore, the assessee has come by way of appeal to this Court under s. 260A.

4. It is urged on behalf of the assessee that it had earned profits from the Chemical Division during the assessment years in question. In respect of the Oil Division, the assessee had carried forward the losses and to that extent, the assessee did not claim the deductions under ss. 80HH and 80-I. However, with regard to the Chemical Division, it was contended that s. 80HH and s. 80-I provide for a deduction in respect of profits and gains of the Undertaking/Division. It was contended that profits and gains of the Chemical Division were required to be determined in accordance with the provisions of the Act as if the only source of income of the assessee is the income from that unit. That, the assessee had earned income from the Chemical Division and that such income formed part of the gross total income. It was urged on behalf of the assessee that computation of income from profits and gains of business is to be made in accordance with the provisions of the Act. That, once the income was computed under the aforestated sections, deduction under Chapter VI-A is required to be computed. It was urged that for the purposes of applying the provisions of ss. 80HH and 80-I, each unit has got to be treated separately and the loss suffered by the Oil Division cannot be adjusted against the profits of the Chemical Division in arriving at the deductions under ss. 80HH and 80-I. In this connection, reliance was placed on the judgment of the Supreme Court in the case of CIT vs. Canara Workshops (P) Ltd. (1986) 58 CTR (SC) 108 : (1986) 161 ITR 320 (SC) : TC 25R.430.

5. On behalf of the Department, it was contended that deductions under Chapter VI-A were allowable out of the gross total income. That, in the present case, the gross total income was ‘nil’ and, therefore, deductions under s. 80HH or s. 80-I were not allowable.

6. We find merit in the stand taken by the Department. At the outset, it may be mentioned that it is not in dispute that if the interpretation placed by the assessee is accepted, then it would result in violation of the provisions of s. 80A(2) in the sense that the deductions claimed would exceed the gross total income of the assessee. In the case of CIT vs. Nima Specific Family Trust (2001) 165 CTR (Bom) 518 : (2001) 248 ITR 29 (Bom) this Court took the view that s. 80HH was inserted by Direct Tax Amendment Act, 1974 w.e.f. 1st April, 1974. That, it has continued to remain on the statute book without any change in the statute book. That, s. 80-I was a successor to s. 80J. That, under s. 80-I, as inserted w.e.f. 1st April, 1981, it was provided that where gross total income of an assessee included profits derived from an industrial undertaking to which the section applied, then there shall be a deduction from such profits of an amount equal to twenty per cent In the said judgment it was further laid down that where an undertaking/unit was entitled to relief under s. 80HH and also under s. 80-I, then priority shall be given first to the deduction under s. 80HH. This is in view of s. 80HH(9). It was also laid down that s. 80HH did not contemplate carry forward of shortfall as in the case of s. 80J(3). That, after 1st April, 1981, s. 80HH and s. 80-I both, dealt with deductions based on profits. In that matter, the Court gave a hypothetical example by pointing out that if profits derived from an industrial undertaking was Rs. 80 and simultaneously, if there was a loss from another unit of Rs. 50, then the gross total income would be Rs. 30. However, for the purposes of deductions under ss. 80HH and 80-I, the total deduction available would be Rs. 32. To this extent, there is no conflict in the views of the Department and the assessee. However, we have taken the view that in view of s. 80A(2), the deduction under Chapter VI-A is restricted to the gross total income of Rs. 30 and since the total deduction of Rs. 32 under s. 80HH and s. 80-I exceeds the gross total income of Rs. 30, the deductions are restricted to Rs. 30. In other words, the legislature has introduced s. 80A(2) and s. 80B(5) in order to put a ceiling on the claim for deduction. Sec. 80A(2), inter alia, lays down that the aggregate amount of deduction under Chapter VI-A shall not exceed the gross total income of the assessee. This indicates that if the deductions under Chapter VI-A are required to be claimed, then the gross total income should be sufficient to absorb such deduction. In other words, if the gross total income is nil, then deduction under ss. 80HH and 80-I cannot be claimed because it would mean that the aggregate amount of deduction would exceed the gross total income of the assessee. So also s. 80B(5) defines ‘gross total income’ to mean total income computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A. Therefore, it is clear that in order to determine the gross total income, the loss of Oil Division is required to be adjusted against the profit of the Chemical Division before making any deductions under Chapter VI-A. This is the view which we have taken in the aforestated judgment of Nima Specific Family Trust’s case (supra). In our view, the said judgment applies to the facts of the present case. However, it is urged on behalf of the assessee that in that matter, this Court was not required to consider the ambit of s. 80-I(6). It was contended that to a certain extent, the above judgment of this Court was applicable. It was contended, however, that under s. 80-I(6) the profits of an industrial undertaking were required to be computed as if such industrial undertaking was the only source of income and it was, therefore, contended that profits of the Chemical Division were required to be treated as the only source of income and, therefore, such profits could not be reduced to the extent of the loss suffered by the Oil Division. It was, accordingly, contended that while calculating deduction, the profits from Chemical Division alone should be taken into account and the AO erred in appropriating the loss from the Oil Division against the profits from the Chemical Division. It was contended that sub-s. (6) starts with a non obstante clause. It was, therefore, contended that the provisions of s. 80A(2) and s. 80B(5) cannot be read while interpreting sub-s. (6) of s. 80-I. In this connection, reliance was placed on the judgment of the Supreme Court in the case of Canara Workshops (P) Ltd. (supra). We do not find any merit in the above last contention of the assessee. Sec. 80-I(1) lays down that where the gross total income of an assessee includes any profits derived from a priority undertaking/unit/division, then, in computing the total income of the assessee, a deduction from such profits of an amount, equal to twenty per cent shall be made. Therefore, s. 80-I(1) lays down the broad parameters indicating circumstances under which an assessee would be entitled to claim deduction. On the other hand, s. 80-I(6) is the section which deals with determination of the quantum of deduction. Sec. 80-I(6) lays down the manner in which the quantum of deduction shall be effected. After such computation of the quantum of deduction, one has to go back to s. 80-I(1) which categorically states that where the gross total income includes any profits and gains derived from an industrial undertaking to which s. 80-I applies, then there shall be a deduction from such profits and gains of an amount equal to twenty per cent The words ‘includes any profits’ in s. 80-I (1) are very important. It indicates that the gross total income of an assessee shall include profits from a priority undertaking. Under s. 80-I(6), while computing the quantum of deduction, the AO shall, undoubtedly treat the profits from the Chemical Division as the only source of income in order to arrive at the deduction under Chapter VI-A. There is no dispute on this point. The quantum of deduction will have to be calculated on the basis of the profits derived by the assessee from the Chemical Division. However, the non obstante clause 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 the Act which presupposes that the gross total income shall be arrived at by adjusting the losses of the Oil Division against the profits of the Chemical Division. This interpretation is also important because under s. 80A(2), the total amount of deduction claimed under Chapter VI-A cannot exceed the gross total income. If the argument of the assessee was to be accepted, then there would be clear infraction of s. 80A(2). It may also be mentioned that under s. 80-I(6), for the purposes of calculating the deduction, the loss of the Oil Division 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, as held by us in the case of Nima Specific Family Trust (supra), s. 80A(2) and s. 80B(5) are declaratory in nature. They will 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 ss. 80A(2) and 80B (5). They operate in different spheres. Sec. 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 an assessee and, therefore, while interpreting s. 80-I(1), which refers to gross total income, one has to read the expression ‘gross total income’ in s. 80-I(1) as defined in s. 80B(5). In the circumstances, the judgment of this Court in Nima Specific Family Trust’s case (supra) applies to the present case also. The learned counsel for the assessee, however, vehemently relied upon the judgment of the Supreme Court in the case of Canara Workshops (P) Ltd. (supra). In our view the judgment of the Supreme Court, on facts, does not apply to the present case. In that matter, the assessee was a public ltd. co. engaged in the manufacture of automobile spares. During the asst. yr. 1966-67, the assessee commenced another activity, viz., manufacture of alloy steels. Both the activities fell within the Vth Sch. to the IT Act. The assessee sustained a loss in the manufacture of alloy steel, whereas profits were earned from the manufacture of automobile spares. The assessee claimed relief under s. 80B, as it then stood. The AO declined to grant the relief on the ground that the assessee had ignored the losses incurred in alloy steel industry. He held that the assessee would be entitled to deduction under s. 80E on the profits from manufacture of automobile spares only after setting off the loss in alloy steel. He, accordingly, granted a limited relief to the assessee under s. 80E. Ultimately, the matter reached the Supreme Court. It was held by the apex Court that the legislature, under s. 80E had clearly stipulated that while computing the deduction, the following conditions were required to be satisfied, viz., that it must be a company to which s. 80E applied; that the total income, as computed in accordance with the IT Act, should include profits and gains attributable to the business or industry mentioned in s. 80A without taking into account the provisions of s. 80E and lastly, from the profits and gains attributable to such business, a deduction has to be allowed of an amount equal to eight per cent of the profits and effect must be given to that deduction when computing the total income of the company. The Supreme Court held further that the object of s. 80E was properly served only by confining the application of that section to the profits of a single industry. In our view, the controversy before this Court in the present case was not the controversy before the Supreme Court in the case of Canara Workshops (P) Ltd. (supra). Under s. 80-I(6), the profits of the Chemical Division are required to be treated as if they were the only source of income. That, the losses from the Oil Division are required to be ignored. That, while calculating the quantum of deduction, the profits of the Chemical Division alone are to be taken. Upto this stage, there is no dispute. However, after calculating the deduction on the basis that the profit from the Chemical Division was the only source of income, one has to give effect to the computed deduction in order to arrive at the total income of the company and while giving effect one has to consider the provisions of s. 80-I(1), r/w ss. 80A(2) and 80B(5). In other words, in the example given by us in Nima Specific Family Trust’s case (supra), even if the total amount of deduction under ss. 80HH and 80-I is Rs. 32, but the gross total income is Rs. 30, then to that extent, the amount of deduction shall stand reduced. That, while calculating the gross total income of the company, one has to adjust the losses from one priority unit against the profits of the other priority unit and if the resultant gross total income is ‘nil’, then the assessee cannot claim deduction under Chapter VI-A. In the circumstances, the judgment of the Supreme Court in Canara Workshops (P) Ltd.’s case (supra) has no application to the facts of the present case.

7. For the aforestated reasons, the above question is answered in the affirmative, i.e., in favour of the Department and against the assessee. Hence, both the above appeals are dismissed. No order as to costs.

[Citation : 254 ITR 608]

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