Bombay H.C : Whether the Tribunal was right in remanding the matter back to the AO with a direction to examine the issue again in the light of accounting standards, particularly alternative II.?

Counsel Appeared

R.V. Desai with P.S. Jetley i/b. R.N. Bandopadhyay, for the Appellant : S.N. Inamdar with P.Y. Vaidya, for the Respondent

JUDGMENT

S.H. KAPADIA, J. :

The following question of law has been raised by the Department in this appeal under s. 260A of the IT Act : Whether the assessee was entitled to claim 40 per cent of the profit as deduction (20 per cent under s. 80HH and 20 per cent under s. 80-I) even though s. 80HH(9) provides that deduction under s. 80HH shall be given first, followed by deduction under s. 80-I ? The facts giving rise to this appeal are as follows. The assessee is a specific family trust, carrying on proprietary business in the name and style of Nirma Detergent in Gujarat. It is assessable to tax under s. 161(1A) of the IT Act. In this appeal, we are concerned with the asst. yr. 1988-89 relevant to the accounting year ending 31st Dec., 1987. The AO allowed the deduction claimed by the assessee under s. 80-I at 20 per cent of the total income and on the balance income, the AO granted deduction under s. 80HH at 20 per cent. Being aggrieved by the order of AO, the matter was carried in appeal to the CIT(A) by the assessee. The CIT(A) rejected the appeal on the above point. The assessee carried the matter in appeal to the Tribunal. In view of the decision for the earlier asst. yr. 1987-88, the appeal was allowed. Hence, the Department has come in appeal against the said decision of the Tribunal. Mr. Desai, learned senior counsel appearing on behalf of the Department, contended that s. 80HH provides for deductions to assessees who set up industrial undertakings in backward areas. He contended that s. 80-I which also falls under Chapter VI-A provides for deductions in respect of profits from industrial undertakings set up after the certain date. He contends that both the above sections fall in Chapter VI-A. He submits that the unit in question in the present case, attracts both the above sections. He contends that under s. 80HH(9) where an assessee is entitled to the abovementioned two deductions then the legislature has expressly provided for priority to be given to the deductions under s. 80HH. He contended that the object of s. 80HH(9) was to restrict the quantum of deduction under s. 80-I particularly in view of the fact that the assessee was also entitled to deduction under s. 80HH. He further points out that s. 80HH(9) indicates priority to be given to the deduction under s. 80HH before giving effect to the deduction under s. 80-I. He submitted that the bracketed portion in s. 80HH(9) which contains the words viz., “s. 80-I or” were introduced by Finance Act, 1980, w.e.f. 1st April, 1981. He submitted that under the same Finance Act, the legislature also revived and brought back, simultaneously, s. 80-I and it is for this reason that the legislature has introduced the abovementioned bracketed portion in s. 80HH(9). Therefore, according to the learned counsel, the intention of the legislature is clearly established viz., that where an assessee is entitled to two deductions, priority shall be given first to the deduction under s. 80HH(9). He further contended that s, 80-I was a dead section from 1st April, 1973, up to 31st March, 1981. During that period, s. 80J was on the statute book. He contended that under s. 80J, as it stood at the relevant time, the legislature had expressly reduced the quantum of deduction.

He invited our attention to s. 80J(1) as it stood at the relevant time. Under s. 80J, it was provided, inter alia, that where the gross total income of an assessee included any profits derived from an industrial undertaking to which the said section applied then there shall be allowed in computing the total income of the assessee a deduction from such profits of the eligible undertaking as reduce by the deduction admissible to the assessee under s. 80HH. He invited our attention to the bracket portion in s. 80J(1) viz. “reduced by the deduction admissible to the assessee under s. 80HH” Hence, he contended that the legislature had always intended to reduce the quantum of deduction in cases where an assessee was entitled to benefit under the above two sections. He accordingly contended that if an assessee was entitled to two deductions then the quantum of deduction under s. 80-I which was preceded by s. 80J stood correspondingly reduced. He, therefore, submitted that the assessee was not entitled to claim 40 per cent of the profit as deduction particularly in view of s. 80HH(9).

4. Per contra, Mr. Inamdar, learned counsel for the assessee, contended that s. 80HH which gives deduction to the assessee for setting up industry in a backward area is on the statute from 1st April, 1974. That, the legislature in its wisdom saw that the same unit may also satisfy the conditions of s. 80J which dealt with deductions given to certain newly set up industries in certain places. He pointed out that at the relevant time between 1st April, 1973 and 1st April, 1981, s. 80I was a dead section. That, only two sections were in the field viz. s. 80HH and s. 80J and it is for this reason that the legislature gave priority to the deduction under s. 80HH in cases where the units set up by the assessee also attracted s. 80J. It is for this reason that when s. 80-I came to be reintroduced w.e.f. 1st April, 1981, that the legislature introduced the bracketed portion in s. 80HH (9) which reads as “under s. 80-I or s. 80J”. He further points out that the legislature was fully aware that s. 80J which provided for special deduction to newly set up industrial undertakings was required to be contained because s. 80J gave deductions to newindustries which were set up before a cut-off date. It is for this reason that s. 80J continued to remain on the statute book till 1st April, 1989. Therefore, under s. 80HH(9). It is expressly laid down that in a case where the assessee is entitled also to the deduction under s. 80-I or s. 80J in relation to profits of the eligible industrial undertaking, then effect shall be given first to the provisions of s. 80HH. The learned counsel accordingly has given reasons forintroducing the above words in s. 80HH(9) which are put expressly in the bracketed portion by Finance Act, 1980. He accordingly contended that it is for this reason that the legislature has used the word “or” to indicate that in cases where the assessee is entitled to deduction under s. 80-I or under s. 80J as also under s. 80HH, then, priority shall be given first to s. 80HH. He further contended that the concept of priority contemplated by s. 80HH (9) was different from quantum of deduction. He contended that quantum of deduction does not come into picture under s. 80HH(9). In this connection, he has submitted that right from 1st April, 1974, s. 80HH(9) has remained the same. He pointed out that even when s. 80-I was a dead section during the period 1st April, 1973 to 1st April, 1981, s. 80HH remained on the statute. During that period, 80J was in the field. He pointed out that during the period when s. 80-I was dead and when s. 80-I was in the field in cases where the assessee had set up a new industry which also satisfied the conditions of s. 80HH the deductions were computed on the footing that priority was to be given first to the deductions under s. 80HH followed by deductions under s. 80J. He accordingly contended that s. 80J referred to quantum of deduction whereas s. 80HH(9) referred to priority being given to the deduction under s. 80HH. He accordingly contended that these two were separate and distinct concepts. He contended that after 1st April, 1989, when s. 80J was omitted, s.80-I had come back on the statute book w.e.f. 1st April, 1981. He submitted that s. 80-I was brought back with an entire different structure. Initially, before 1st April, 1973 s. 80-I deduction was based on stipulated percentage of the capital employed in the eligible industrial undertaking whereas after 1st April, 1989, the deduction under s. 80-I was based on stipulated percentage of profits derived from that undertaking. Similarly, he contended that under the new scheme of s. 80-I, the provision for carry forward of deficiency which was there in s. 80J(3), was given a go-by. In other words there was a complete overhaul of the scheme under s. 80J and 80-I. It is for this reason that s. 80J ultimately stood omitted w.e.f. 1st April, 1989. It is for this reason that the legislature has continued the same phraseology in s. 80HH(9) which only deals with the concept of priority and not with the quantum of deduction which was there in-built into s. 80J till 1st April, 1989, when it was omitted from the IT Act. Mr. Inamdar further contended that the phraseology used in s. 80J, as it then stood, provided that where the gross total income of an assessee included any profits derived from any eligible industrial undertaking, there shall be allowed in computing a total income of the assessee, a deduction from such profits as reduced by the deduction admissible to the assessee under s. 80HH of so much of the amount thereof which did not exceed six per cent per annum on the capital employed in such industrial undertaking. The bracketed portion in s. 80J, as it then stood, viz., reduced by the deduction under s. 80HH, was introduced by Taxation Laws (Amendment) Act, 1975. Such a provision does not find place in s. 80HH. It is for this reason that the Department is relying upon s. 80HH(9) which, according to the learned counsel for the assessee, only refers to priority to be given to the deductions under s. 80HH and which does not refer to the quantum of deduction, whereas the bracketed portion in s. 80J expressly refers to the quantum of deduction to be given to an assessee in cases where the assessee is entitled to deduction under s. 80J. Mr. Inamdar further pointed out that under s. 80J(3) as it stood at the relevant time, in cases where the amount of profits derived from eligible industrial undertaking included in the total income falls short of the amount of capital employed during the previous year, the amount of such shortfall or deficiency shall be carried forward and set off against the profits in the next following assessment year. Therefore, he contended that s. 80J also provided for carry forward of shortfall or deficiency. That, however, when a totally new scheme was introduced under s. 80-I and under which deductions were based on profits, s. 80J was omitted. He further pointed out that the concept of carry forward was also given a go-by under the new s. 80-I. Therefore, learned counsel for the assessee contended that it was not the object of s. 80HH(9) to reduce the deduction under s. 80-I. That, the object of the said section was to set a priority. That the section has remained unaltered even when s. 80J was on the statute book. That, s. 80-I is a successor to s. 80J. That s. 80J was kept alive from 1st April, 1981, even after introduction of s. 80-I upto 1st April, 1989, because deductions under s. 80J were made available for units which commenced their business before a prior cut-off stipulated date. All these above submissions are only to show the true meaning, scope and content of s. 80HH(9) and the difference in the phraseology used in s. 80HH(9) vis-a-vis s. 80J(1) and 80J(3) as it stood prior to 1st April, 1989. He further pointed out that s. 80HH falls in Chapter VI-A. That s. 80-B defines the expression “gross total income”. This definition is relevant in the context of Chapter VI-A which covers s. 80-A to s. 80U. He submitted that under s. 80B(5), the word “gross total income” has been defined to mean an income arrived at before making any deductions under Chapter VI-A. He, therefore, contended that the legislature has not intended to reduce the quantum of deductions falling under s. 80HH or 80-I (after deletion of s. 80J). He pointed out that if the legislature intended to prescribe a ceiling on deduction under s. 80HH, then the legislature would have so stated in s. 80HH, as they did, at the relevant time, under s. 80J. On the contrary, in the structural change in s. 80-I, no suchlimitation has been prescribed, particularly in view of the fact that deduction is now based on profits and not on capital employed. In the circumstances, he contended that the Tribunal was right in not restricting the claim for deduction made by the assessee in this case under s. 80-I. Mr. Inamdar further pointed out that, however, under s. 80A, the legislature has provided an in-built ceiling on the amount of deduction under s. 80-I where the assessee claims deduction, both under s. 80HH and s. 80-I. He points out that under s. 80A(2), it is laid down, inter alia, that the aggregate amount of the two deductions shall not exceed the gross total income of the assessee. To that extent, he contended that there is a ceiling/limit placed on the claim for deductions, particularly when the aggregate amount of deduction exceeds the gross total income. He further pointed out that in the facts of the present case, the Tribunal has given effect to s. 80HH(9) by giving priority to the deductions under s. 80HH. Similarly, theTribunal has also given effect to s. 80-I. He accordingly submitted that this Court should not interfere with the decision of the Tribunal. He also relied upon the judgment of the Madhya Pradesh High Court in J.P. Tobacco Products (P) Ltd. vs. CIT (1997) 140 CTR (MP) 329 : (1998) 229 ITR 123 (MP) : TC S25.2587. “Sec. 80HH 5. For the sake of convenience, s. 80HH(9) is quoted hereinbelow along with s.80J(1), as it stood at the relevant time : (9) In a case where the assessee is entitled also to the deduction under [s. 80-I or] s. 80J in relation to the profits and gains of an industrial undertaking or the business of a hotel to which this section applies, effect shall first be given to the provisions of this section.” “Sec. 80J (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains [(reduced by the deduction, if any, admissible to the assessee under s. 80HH (or s. 80HHA)] of so much of the amount thereof as does not exceed the amount calculated at the rate of six per cent per annum on the capital employed in the industrial undertaking or ship or business of the hotel, as the case may be, [computed in the manner specified in sub-s. (1A)] in respect of the previous year relevant to the assessment year (the amount calculated as aforesaid being hereafter, in this section, referred to as the relevant amount of capital employed during the previous year ) : (2)………… (3) Where the amount of the profits and gains derived from the industrial undertaking or ship or business of the hotel, as the case may be, included in the total income (as computed without applying the provisions of s. 64 and before making any deduction under Chapter VI-A [**] in respect of the previous year relevant to an assessment year commencing on or after the 1st day of April, 1967, (not being an assessment year prior to the initial assessment year or subsequent to the fourth assessment year as reckoned from the end of the initial assessment year) falls short of the relevant amount of capital employed during the previous year, the amount of such shortfall, or, where there are no such profits and gains, an amount equal to the relevant amount of capital employed during the previous year (such amount, in either case, being hereafter, in this section, referred to as deficiency) shall be carried forward and set off against the profits and gains referred to in sub-s. (1) (as computed after allowing the deductions, if any, admissible under [**] s. 80HH [or s. 80HHA] [**] and the said sub-s. (1) in respect of the previous year relevant to the next following assessment year and, if there are no such profits and gains for that assessment year, or where the deficiency exceeds such profits and gains for the next following assessment year and if and so far as such deficiency cannot be wholly so set off, it shall be set off against such profits and gains assessable for the next following assessment year and so on: Provided that : (i) in no case shall the deficiency or any part thereof be carried forward beyond the seventh assessment year as reckoned from the end of the initial assessment year; (ii) where there is more than one deficiency and each such deficiency relates to a different assessment year, the deficiency which relates to an earlier assessment year shall be set off under this sub-section before setting off the deficiency in relation to a later assessment year : Provided further that in the case of an assessee being a co- operative society, the provisions of this sub-section shall have effect as if for the words “fourth assessment year”, the words, “sixth assessment year” had been substituted.”

6. Sec. 80HH falls in Chapter VI-A of the IT Act. Chapter VI-A deals with deductions in respect of certain payments. Sec. 80A lays down that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of Chapter VI-A, the deductions specified in ss. 80C to 80U. It further provides that the aggregate amount of deductions under Chapter VI-A shall not, in any case, exceed the gross total income of the assessee. Sec. 80B(5) defines “gross total income” to mean total income computed in accordance with the provisions of the Act, before making any deductions under Chapter VI-A. Sec. 80HH falls under heading ‘C’ which deals with deductions in respect of certain incomes. Sec. 80HH comes under this category. It lays down that where the gross total income, as defined above, includes any profits and gains derived from industrial undertaking to which the said section applies, there shall be allowed, in computing the total income of the assessee, a deduction from such profits derived from such industrial undertaking equal to twenty per cent thereof. Briefly, a special deduction is provided in cases where the assessee has established an industrial undertaking in a backward area. This section indicates that the deduction contemplated is based on profits derived from such industrial undertakings. Hence, deduction is profit-based. As stated above, Sec. 80HH was inserted by Direct Taxes (Amendment) Act, 1974 w.e.f. 1st April, 1974. It has continued to remain without any change on the statute book. Sec. 80J, prior to it’s omission w.e.f. 1st April, 1989, also fell under Chapter VI- A. It dealt with deductions in respect of profits from newly established industrial undertakings in certain cases. The quantum of deduction under s. 80J(1) was limited upto six per cent per annum of the capital employed in the new undertaking. Therefore, although the base for calculation of the quantum of deduction was supplied by the amount of capital employed, the deduction was made from the profits of the new unit. Under s. 80J(3) as it stood prior to 1st April, 1989, the amount by which the profits derived by an assessee from the eligible undertaking and included in gross total income fell short of the amount calculated at six per cent per annum on the capital employed, constituted deficiency or shortfall which was allowed to be carried forward. Sec. 80J(3) was required to be r/w s. 80J(1). Reading s. 80J(1) with s. 809-J (3), it is clear that where there is profit the relevant amount of capital employed during the previous year shall be allowed as deduction and if there is deficiency, it shall be carried forward and set off against the profit of the following assessment year. Sec. 80J(1) provided that where the gross total income of an assessee includes any profits, there shall be allowed, in computing the total income, a deduction from such profits as reduced by the deduction admissible under s. 80HH of so much of the amount which did not exceed the amount calculated at the rate of six per cent per annum on the capital employed in the eligible industrial undertaking. The bracketed portion in s. 80J(1) quoted above was introduced by Taxation Laws (Amendment) Act, 1975. It was during the period when s. 80J was in force. Such similar provision does not find place in s. 80HH. This bracketed portion in s. 80J not only provides for priority to s. 80HH, but also restricts the quantum of deduction. The phraseology of s. 80HH(9) and the above quoted bracketed portion in s. 80J(1) is quite different. Sec. 80HH(9) refers to priority. In other words, if a unit is eligible for deductions, both under s. 80HH and 80J, as it stood at the relevant time, then priority to the deduction under s. 80HH would be given before calculating the deduction under s. 80J. After 1st April, 1989, however, s. 80J came to be omitted. At this stage, it is also important to bear in mind that s. 80-I was a dead section during the period 1st April, 1973 upto 1st April, 1981. Sec. 80-I was brought back into the IT Act by Finance Act, 1980, w.e.f. 1st April, 1981. Under s. 80-I, as inserted w.e.f. 1st April, 1981, it was provided that where the gross total income of an assessee included profits derived from industrial undertaking, after a certain date, to which the section applied, there shall be a deduction from such profits of an amount equal to twenty per cent.

This s. 80-I was in a way, a successor to s.80J. However, s. 80J was founded on the concept of capital employed which has been done away with by the successor s. 80-I which was now based on profits as is the case with deductions under s. 80HH. Moreover, the concept of shortfall in s. 80J(3) was also done away with by s. 80-I. Sec.

80J however, continued to remain on the statute book till 1st April, 1989, so that assessees who had set up new industries before the specified date would get the tax-holiday for the entire period as promised. However, after 1st April, 1989, s. 80J was deleted. It is for this reason that the same Finance Act, 1980, which reintroduced s. 80-I, also brought into force, the bracketed portion in s. 80HH(9). Reading the bracketed portion in s. 80HH(9), it is clear that s. 80I is a successor to s. 80J. Under s. 80HH(9), it is provided that where the unit is entitled to relief under s. 80HH and also under s. 80J, then priority shall first be given to the deduction under s. 80HH. However, from 1st April, 1981, since there was an entire structural change brought into force in s. 80-I under which deduction became profit-based, and not capital employed based, and particularly after 1st April, 1989, when s. 80J stood omitted, the legislature also introduced the bracketed portion in s. 80HH(9) which shows that where the assessee was entitled to deduction under s. 80-I or s. 80J as well as s. 80HH, then priority shall be given to s. 80HH. The word “or” is very important in support of our above conclusion. Therefore, s. 80HH(9) only talks about priority. It does not refer to the quantum of deduction as was the case under s. 80J(1). Sec. 80HH does not talk of carry forward of shortfall as in the case of s. 80J(3). In fact, after 1st April,1981. Sec. 80HH and s. 80-I are both dealing with deductions based on profits. The concept of deduction based on capital employed is completely given a go-by. Our interpretation is also supported by a hypothetical example submitted by the parties. In a given case, profit derived from a new industrial undertaking eligible under s. 80HH and 80-I is, let us say, Rs. 80. The loss in another unit is Rs. 50. The gross total income would be Rs.30. Deduction under s. 80HH at 20 per cent of such profits of Rs. 80 would be Rs. 16 and, thereafter, the deduction will be calculated under s. 80-I also at 20 per cent of such profits which would be Rs. 16. Therefore the total deduction available would be Rs.

32. However, the total deduction available would become Rs. 32 (Rs. 16 + Rs. 16). In view of s. 80A(2), as interpreted above, the deductions under Chapter VI-A shall be restricted to gross total income of Rs. 30 because the total deduction of Rs. 32 would then exceed the gross total income of Rs. 30. The illustration points out that due weightage is given to the priority under s. 80HH(9). That, to the extent of provisions of s. 80A(2), deductions are restricted to Rs. 30 and to that extent, there is an inbuilt ceiling prescribed on the amount of total deductions. Accordingly, the above example shows that deduction is firstly given to the benefit under s. 80HH at twenty per cent of Rs. 80 which works out to Rs. 16 and then, deduction shall be given under s. 80-I to the extent available i.e. Rs. 14. However, according to the Department, in the above example, there is no dispute upto the first deduction under s. 80HH calculated at Rs. 16. However, according to the Department, after deducting Rs. 16 from Rs. 80, the balance would be Rs. 64 and in view of s. 80I, twenty per cent of Rs. 64 should be calculated for the purposes of calculating the deduction under s. 80-I. Hence, according to the Department, the deduction under s. 80-I should be Rs. 14 and not Rs. 16 [the Department has applied twenty per cent of Rs. 64 whereas the assessee claims full deduction of twenty per cent under s. 80-I of the profit of Rs. 80. As stated hereinabove, s. 80HH(9) only refers to priority unlike s. 80J(1) which also restricts the quantum of deduction. This was at the time when deductions were based under s. 80J on capital employed in the unit. At that time also, deduction under s. 80HH was profit-based whereas deduction under s. 80J was based on capital employed in the unit. This difference has been done away with. Sec. 80J has been followed by s. 80-I. Both s. 80HH and s. 80-I are based on profits. Therefore, s. 80HH only states that in cases where the unit is entitled to the benefit both under s. 80HH and s. 80- I, then priority shall be given first to the deduction under Rs. 80HH. We agree respectfully with the judgment of the Madhya Pradesh High Court in the case of J.P. Tobacco Products (P) Ltd. vs. CIT (supra). For the above reasons, the above question is answered in the affirmative i.e., in favour of the assessee and against the Department. Question No. 2 has not been properly framed by the appellants. The Tribunal has remitted the matter back to the AO for want of particulars. Therefore, the correct question, which is reframed by us, is as follows :

“Whether the Tribunal was right in remanding the matter back to the AO with a direction to examine the issue again in the light of accounting standards, particularly alternative II.?” We agree with the order of the Tribunal in remanding the matter for want of particulars. Hence, the above question, as reframed, is answered in the affirmative, i.e. in favour of the assessee and against the Department.

9. Appeal is accordingly disposed of with no order as to costs.

[Citation : 248 ITR 29]