High Court Of Karnataka
CIT & Anr. vs. R.P.G. Telecoms Ltd.
Sections 80AB, 80-I
Asst. Year 1994-95
R. Gururajan & N. Ananda, JJ.
IT Appeal No. 238 of 2001
14th November, 2006
Counsel Appeared
M.V. Seshachala, for the Appellants : S. Parthasarathi, for the Respondent
JUDGMENT
R. Gururajan, J. :
Revenue is before this Court challenging the order dt. 26th Feb., 2001 passed in ITA No. 1039/Bang/1998 for the asst. yr. 1994-95.
2. Assessee carried on the business of manufacturing and sale of telecommunication cables. In respect of the asst. yr. 1994-95 return of income was filed by the assessee showing a total income of Rs. 8,43,81,674 on 28th Nov., 1994. The AO is computing the relief under s. 8 (sic–80-I) of the Act. Assessee had considered only business income from telecables and the assessee did not take into account the loss on account of lease business. The AO concluded that the net income has to be based on the income of the manufacturing business and also the lease business in the light of the judgment of the Supreme Court in CIT vs. P.K. Jhaveri (1990) 181 ITR 79 (SC). Aggrieved by the order of the assessing authority an appeal was filed before the CIT(A). The CIT(A) ruled that the assessing authority is not justified in reducing the eligible profits on which deduction under s. 80-I is to be given by the loss incurred by the appellant in its leasing business. He allowed the appeal. Aggrieved by the same, an appeal was filed by the Revenue before the Tribunal. Both the assessee as well as the Revenue filed two appeals before the Tribunal. The Tribunal rejected the appeal of the Revenue. Revenue aggrieved by the order of the Tribunal is before us in this appeal.
The following question of law is raised : “Whether the assessee is entitled to deduction under s. 80-I out of the gross total income computed from the manufacturing business of the assessee or the entire and the loss incurred in the leasing business should be taken into consideration for the purpose of computation of deduction ?”
Sri Seshachala, learned counsel would invite our attention to the material produced namely ss. 80-I and 80AB have to be given an higher status other than s. 80-I of the Act. He says s. 80AB would provide in terms of the material placed in the case on hand. According to him, if s. 80AB is understood in a proper way the loss is also to be considered for the purpose of deduction in terms of the IT laws. He would rely on the Constitutional Bench judgment of the Supreme Court in Distributors (Baroda) (P) Ltd. vs. Union of India (1985) 47 CTR (SC) 349 : (1985) 155 ITR 120 (SC) and also the judgment of the Supreme Court in IPCA Laboratory Ltd. vs. Dy. CIT (2004) 187 CTR (SC) 513 : (2004) 266 ITR 521 (SC). He would also rely on Motilal Pesticides (I) (P) Ltd. vs. CIT (2000) 160 CTR (SC) 389 : (2000) 243 ITR 26 (SC). He would invite our attention to the judgment of this Court in IT Appeal No. 86 of 1999, dt. 12th July, 2006 [reported as Asstt. CIT vs. Abcon Engineering & Systems (P) Ltd. (2007) 208 CTR (Kar) 146—Ed]. While concluding he would invite our attention to a judgment of the Bombay High Court reported in Synco Industries Ltd. vs. AO (2002) 173 CTR (Bom) 1 : (2002) 254 ITR 608 (Bom) in which the Bombay High Court has considered CIT vs. Canara Workshops (P) Ltd. (1986) 58 CTR (SC) 108 : (1986) 161 ITR 320 (SC) for the purpose of consideration of s. 80AB of the IT Act. He would say that the CIT(A) has committed a legal error in granting the relief, which is confirmed by the Tribunal. He would request us to answer the question of law in favour of the Revenue. Per contra, learned counsel Sri Parthasarathi appearing for the assessee would support the order of the Tribunal, in addition he would invite our attention to the judgment of the Supreme Court in (1986) 58 CTR (SC) 108 : (1986) 161 ITR 320 (SC) (supra) and also CIT vs. Siddaganga Oil Extractions (P) Ltd. (1993) 109 CTR (Kar) 119 : (1993) 201 ITR 968 (Kar) and CIT vs. H.M.T. Ltd. (1992) 108 CTR (Kar) 215 : (1993) 199 ITR 235 (Kar) and also Sterling Foods vs. CIT (1985) 47 CTR (Kar) 157 : (1984) 150 ITR 292 (Kar). He would also argue that even assuming that s. 80AB is applicable, it has to be understood in a reasonable manner and the words ‘of that nature’ have to be understood with reference to the activity of the industry.
After hearing, we have carefully perused the material on record. The AO has chosen to say that in computing the base figure of business income, assessee has considered only business income from telecables. The loss on account of lease business is not taken into account in arriving at the above base figure. It has not netted the business income figure. This method is fairly wrong because for the computation of s. 80-I deduction, net income of all the types of income whether manufacturing business or lease business should be taken. He has noticed the judgment of the Supreme Court in (1990) 181 ITR 79 (SC) (supra). This order was challenged before the CIT(A). Assessee filed written statement in the course of hearing before the CIT(A). The CIT(A) would say that though for the purpose of considering deductions, the entire income has to be reckoned for the purpose of claiming relief under s. 80-I, it is only income of that undertaking that has to be considered for the purpose of s. 80-I of the Act in the light of s. 80AB of the Act. The CIT(A) without taking note of the impact of s. 80AB to our surprise has chosen to say that the AO is not justified in reducing the eligible profit on which deduction under s. 80-I of the Act is to be given by loss incurred by the appellant in its lease business. The CIT(A) has noticed the judgment of the Supreme Court in (1986) 58 CTR (SC) 108 : (1986) 161 ITR 320 (SC) (supra).
When this order was challenged before the Tribunal, the Tribunal has chosen to hold in favour of the assessee by saying that the Supreme Court has itself taken a different view and that it is clear that two views are possible on this issue. The Tribunal was of the view that when two views are possible on an issue, one which is beneficial to the taxpayer has to be taken. The Tribunal therefore has upheld the order of the CIT(A) in its order. The Tribunal has chosen to notice (1985) 47 CTR (SC) 349 : (1985) 155 ITR 120 (SC) (supra) and (1986) 58 CTR (SC) 108 : (1986) 161 ITR 320 (SC) (supra). Let me see as to whether the CIT(A) is justified in granting relief in terms of s. 80-I of the Act without considering the loss suffered in lease business by the very assessee.
7. Before we touch upon the merits of the matter, we have considered the legal provisions which have some impact on the facts of this case. Sec. 80-I provides for deduction in respect of profits and gains from industrial undertaking. After certain date s. 80AB has been introduced retrospectively. Courts have considered the impact of s. 80AB in the matter of deduction in terms of Chapter VI-A of the Act. The Supreme Court in (2004) 187 CTR (SC) 513 : (2004) 266 ITR 521 (SC) (supra) has referred to s. 80HHC and thereafter the Supreme Court at p. 530 (of 266 ITR) has chosen to notice the profit and loss of an undertaking for the purpose of deduction in terms of Chapter VI-A of the IT Act. The Supreme Court has ruled as under: “Sec. 80AB is also in Chapter VI-A. It starts with the words ‘where any deduction is required to be made or allowed under any section of the chapter.’ This would include s. 80HHC. Sec. 80AB further provides that ‘notwithstanding anything contained in that section’. Thus s. 80AB has been given an overriding effect over all other sections in Chapter VI-A. Sec. 80HHC does not provide that its provisions are to prevail over s. 80AB or over any other provision of the Act. Sec. 80HHC would thus be governed by s. 80AB. The decisions of the Bombay High Court and the Kerala High Court to the contrary cannot be said to be the correct law. Sec. 80AB makes it clear that the computation of income has to be in accordance with the provisions of the Act. If the income has to be computed in accordance with the provisions of the Act, then not only profits but also losses have to be taken into consideration.”
8. The Supreme Court in a judgment reported in (2000) 160 CTR (SC) 389 : (2000) 243 ITR 26 (SC) (supra) has chosen to notice its earlier judgments in Cloth Traders (P) Ltd. vs. CIT (1979) 10 CTR (SC) 393 : (1979) 118 ITR 243 (SC) and (1985) 47 CTR (SC) 349 : (1985) 155 ITR 120 (SC) (supra) and thereafter the Supreme Court has chosen to any at p. 27 reading 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.’s case (1979) 10 CTR (SC) 393 : (1979) 118 ITR 243 (SC) 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) (P) Ltd. vs. Union of India (1985) 47 CTR (SC) 349 : (1985) 155 ITR 120 (SC). 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.”
9. These two judgments make it very clear that s. 80AB would override all other sections for the purpose of deduction in Chapter VI-A of the IT Act.
10. In fact this very issue has been considered by various Courts.
11. In CIT vs. Chemical & Metallurgical Design Company Ltd. (2001) 165 CTR (Del)(FB) 201 : (2001) 247 ITR 749 (Del)(FB), a Full Bench judgment of the Delhi High Court has chosen to say that in terms of the stipulation contained in s. 80AB of the Act on one thing which emerges clearly is that the mode of computation as indicated in s. 80AB has full application to the case relating to s. 80-O.
The Calcutta High Court in CIT vs. M.N. Dastur & Co. (P) Ltd. (2000) 159 CTR (Cal) 417 : (2000) 243 ITR 10 (Cal) has chosen to take a similar view. A Division Bench of this Court consisting one of us (RGRJ) in IT Appeal No. 86 of 1999, after noticing all these judgments, has chosen to hold that s. 80AB has overriding effect on all the deductions in terms of Chapter VI-A of the IT Act. Having come to this conclusion, we are of the view that the Tribunal is not justified in giving relief to the assessee.
The Tribunal has chosen to place reliance on the (1986) 58 CTR (SC) 108 : (1986) 161 ITR 320 (SC) (supra). In the said judgment, there is no reference to s. 80AB of the Act. Therefore the Tribunal is not justified in placing reliance on the said judgment and the said judgment is totally inapplicable and it is distinguishable on facts. The Bombay High Court in (2002) 173 CTR (Bom) 1 : (2002) 254 ITR 608 (Bom) (supra) has chosen to notice the judgment of the Supreme Court in (1986) 58 CTR (SC) 108 : (1986) 161 ITR 320 (SC) (supra) and thereafter the Bombay High Court would say that the judgment of the Supreme Court on the facts would not apply to the present case. Bombay High Court has noticed in detail the effect of ss. 80A(2) and 80B(5) in the light of s. 80-I(6) in the said judgment. This is what the Bombay High Court would say : “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.” We are in full agreement with the views expressed by the Bombay High Court.
Learned counsel for the assessee would place reliance on a judgment of this Court in CIT vs. Siddaganga Oil Extractions (P) Ltd. (supra). In the said judgment, the two other judgments of this (Court) have been noticed CIT vs. H.M.T. Ltd. (supra) and Sterling Foods vs. CIT (supra). A careful reading of the said judgment would show that the said Division Bench of this Court has not taken into consideration the impact of s. 80AB of the Act. In the light of the subsequent judgment of the Supreme Court these judgments are of no assistance to the assessee. In the given circumstances, we deem it proper not to place reliance on this judgment for the purpose of consideration of s. 80AB and that too in the light of the subsequent judgment of the Supreme Court which is binding on us.
Lastly, with regard to the contention with regard to s. 80AB of the Act, learned counsel would say that the wordings in s. 80AB would indicate that the deduction has to be with reference to total income of the assessee and for the purpose of computing deduction in that section, the amount of income of that nature as computed in accordance with the provisions of this Act has to be taken note of. According to the learned counsel, the words ‘of that nature’ have to be with reference to the activity of the telecables and not with reference to lease business. We are not prepared to accept this submission. Sec. 80AB has been introduced with the laudable object of considering deduction with reference to gross total income. Any acceptance of the argument of the assessee, would result in our diluting the words ‘gross total income’.
Before concluding, we are slightly disturbed by the order of the Tribunal. Sec. 80AB has been considered by the apex Court with reference to deduction in the light of the other provisions of Chapter VI-A of the Act. The apex Court in unmistakable terms has stated that s. 80AB overrides Chapter VI-A in two judgments. Even the assessee before the CIT(A) has chosen to probably, directly or indirectly accept that the income from lease business is also to be included. A reference is also made to s. 80AB in the written statement as we see from the order of the CIT(A) at p. 56 of the paper book. The CIT(A) to our surprise has not even chosen to refer to s. 80AB in granting relief in para 5.2 of the order of the CIT(A). When this order was challenged before the Tribunal, it is rather un- understandable as to why the assessee as well as Department have not chosen to invite the attention of the Tribunal with regard to applicability of s. 80AB despite argument before the CIT(A). We would be failing in our duty, if we do not remind the parties with regard to placing all case laws supporting or opposing their stand for a decision before the judicial forum.
In the case on hand, unfortunately both the parties have not chosen to refer to the Tribunal the impact of s. 80AB. If only the Department had invited the attention of the Tribunal to the impact of s. 80AB, the Tribunal would not have passed this order. We express our displeasure in the matter. To avoid such recurring instances in future, the IT Department is well advised to engage competent legal counsel before the Tribunal, whenever large sums of money are involved with complicated questions of law. Income-tax provides revenue to the Government. If the Department is not properly defended, it would result in unnecessary references to this Court and loss of time of everybody concerned including the time of this Court. We deem it proper to direct the learned counsel to place our order before the CIT for proper remedial action in future cases.
18. In the result, this appeal is accepted. The order of the Tribunal insofar as this issue is concerned, is set aside. No costs.
[Citation : 292 ITR 355]
