Karnataka H.C : Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to deduction under s. 80J in respect of hydrogenation plant from which there was a loss although the total income was a positive figure ?

Counsel Appeared

H. Raghavendra Rao & M.V. Seshachala, for the Applicant : K.S. Ramabhadran & K. Gajendra Rao, for the Respondent

K. SHIVASHANKAR BHAT, J.:

In respect of the asst. yr. 1983-84, following questions are referred under s. 256(1) of the IT Act, 1961 (`the Act’) for our consideration :

“(1) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to deduction under s. 80J in respect of hydrogenation plant from which there was a loss although the total income was a positive figure ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that for computing the relief under s. 80HH, income from lorry hire, weighment charges, miscellaneous receipts, income from fixed deposits, etc., should not be included as they were not income of the industrial undertaking ?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that deduction under s. 80HH should be allowed in respect of the solvent plant on its income without setting off the loss incurred in respect of hydrogenation plant?”

2. The assessee is engaged in the business of extraction of oil, having two plants. The hydrogenation plant suffered loss during the relevant previous year; but the solvent plant earned profit.

3. In respect of the hydrogenation plant, assessee sought benefit under s. 80J of the Act. This was denied, in view of the loss suffered by the unit in question.

4. Assessee had also claimed the benefit of s. 80HH in respect of the solvent plant, while computing the income from this plant, income received by the assessee from lorry hire, weighment charges and other miscellaneous activities were sought to be added by the assessee, which, again was refused by the Revenue. It was held by the Appellate Tribunal that the assessee could claim the benefit of s. 80HH in respect of the exclusive income yielded by the solvent plant.

5. However, the ITO had set off the loss of the hydrogenation plant against the profits of the solvent plant to compute the benefit under s. 80HH in respect of the solvent plant. The Appellate Tribunal, upheld the assessee’s claim in this regard, and held that the solvent plant should be treated separately for purposes of s. 80HH. In these circumstances, the above questions were referred, the first two at the instance of the assessee and the third, at the instance of the Revenue.

6. The first question is concluded by our decision in CIT vs. H.M.T. Ltd. (ITRC 189/87 dt. 21st July, 1992 [since reported in (1992) 108 CTR (Kar) 215] while the second question is concluded by the decision in Sterling Foods vs. CIT (1985) 47 CTR (Kar) 157 : (1984) 150 ITR 292 (Kar). In Sterling Food’s case, it was held that under s. 80HH, the relevant profits should be `derived’ from the unit in question directly; therefore, the income earned by the sale of import entitlement is outside the purview of s. 80HH, even though the assessee earned the import entitlement by virtue of exporting the products of an industrial undertaking. The ratio of the said decision would equally govern the present case also.

7. Re. Third Question : The ITO set off the loss of the hydrogenation plant against the income from solvent plant for the purpose of calculating the deduction under s. 80HH. This view as affirmed by the CIT(A) was reversed by the Appellate Tribunal, which held that the assessee was entitled to the relief under s. 80HH in respect of the solvent plant as the net income earned by the said plant, before setting off the loss of the hydrogenation plant. Mr. Ramabhadran contended that 20 per cent of the profits and gain derived from an industrial undertaking (a unit) is allowed as a deduction, while computing the gross total income of an assessee; this is a beneficial provision enacted to encourage setting up of industrial units in backward areas and should be construed to advance the object behind it.

8. According to Mr. Raghavendra Rao, the ratio of the decision of this Court in HMT’s case (ITRC No. 189/1987) decided on 21st July, 1992 (supra), supports the contention of the Revenue, because, if it is open to deduct the depreciation pertaining to one unit, from the income derived from another unit for purposes of s. 80J same principle should govern the application of s. 80HH also.

9. In the said HMT case, exemption was allowed under s. 80J on commercial profits. Net profit of one of the units, prior to depreciation was considered to grant the benefit of s. 80J. To avail of the benefit of s. 80J, it is necessary that an industrial undertaking of an assessee should have profits and gains; in such a case six per cent on the capital employed in the said industrial undertaking is allowed as a deduction while computing the total income of the assessee; if there was no `profits and gains’ available from that unit (industrial undertaking) includible in the gross total income of the assessee, but the said unit suffered a loss, benefit of s. 80J would not be available. Question pertained the mode of arriving at the profits and gains of the unit; the assessee, there, contended that, depreciation and investment allowance should not be deducted while computing the profits and gains derived from the unit. This was, because deduction of depreciation and investment allowance could be postponed while computing the `gross total income’, having regard to ss. 28, 29 and 32 of the Act; in view of s. 32A, position was the same as investment allowance. It is in this context, it was observed that the new industrial unit is not to be treated as a compartment by itself while computing its profits and gains for the purpose of s. 80J. The Bench concluded that : “Sec. 80J nowhere compels the computation of the profits and gains apart from an industrial undertaking, by treating it as a separate entity for all purposes without reference to commercial expediency and practice.”

The above decision would in no way advance the present case of the Revenue; in fact, the ratio is against it. The case was concerned as to how the `profits and gains’ of a unit should be computed. Since depreciation could be postponed to a later stage of grossing up of the total income, it was left to the assessee to do so and compute the profits and gains of the unit without reference to the depreciation and investment allowance. The Court recognised the practice of adopting `commercial profits’ as the basis to apply s. 80J. Sec. 80HH provides for the deduction of

20 per cent from the `profits and gains’ derived from the industrial undertaking. Gross total income of the assessee would include its income derived from several sources or units. Profits and gains of one unit, is only one of the constituents of the gross total income. Every item of additions and deductions to be considered at the stage of computing the taxable income to be arrived at from the gross total income need not necessarily be considered while computing the profits and gains of one unit, for purposes of s. 80HH. Under s. 80HH, the relevant question is whether there is `profits and gains’ derived from an industrial undertaking, which was ultimately added to the gross income of the assessee. If there is any such profits and gains, assessee is entitled to the benefit of s. 80HH. If the loss sustained by another unit is set off against this profits and gains of an industrial undertaking, the resultant figure would not reflect the profits and gains of the said industrial undertaking in any sense, much less in a commercial sense; it will be an unnatural and artificial “profits and gains” of that industrial undertaking.

In Cambay Electric Supply Industrial Co. Ltd. vs. CIT 1978 CTR (SC) 50 : (1978) 113 ITR 84 (SC), while considering the scope of s. 80E of the Act, Supreme Court pointed out the difference between the `income attributable to’ the business and `income derived from the business’; the term `attributable to’ is of wider import than the expression `derived from’.

In Sterling Foods vs. CIT (supra), a Bench of this Court, in the context of s. 80HH, held that the expression

`derived from’ has a definite, but narrow meaning and it cannot receive a flexible or wider concept. Therefore, the very industrial undertaking should be the direct source of profit; income derived by the assessee from any other source, cannot be held to be the income derived from the industrial unit. Ratio of this decision would govern the present case also. Any deduction has to be a deduction pertaining directly to the very source of earning the profit. Loss sustained elsewhere cannot be fastened to the profits and gains of the industrial undertaking and treat the result as the `profits and gains’ of the industrial undertaking.

In the result, the first two questions are answered in the affirmative, and against the assessee, while the third question is answered in the affirmative and against the Revenue.

Reference is answered accordingly.

[Citation : 201 ITR 968]