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1994 DIGILAW 561 (RAJ)

C. I. T. v. Loonkar Tools (P) Ltd.

1994-07-21

V.G.PALSHIKAR, V.K.SINGHAL

body1994
Honble SlNGHAL, J. — All the above numbered Income-tax References are decided by one common order as identical question is involved in all of them. For the purpose of disposal of all the above numbered Income-tax References, the facts of Reference No.29/1987 are being taken into consideration. (2). The Income-tax Appellate Tribunal has referred the following question of law arising out of its order dated 19th November 1986 in respect of assessment year 1981-82 under Section 256 (1) of the Income-tax Act, 1961. "Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was legally justified in coming to the conclusion that deduction u/s 80 HH be computed on commercial profits and in computing the commercial profits the assessee is entitled to require the addition of the provision for taxes, depreciation and investment allowance reserve to the net profit as per profit & loss account to arrive at commercial profits." (3). The brief facts of the case are that the assessee is a manufacturer of Cables and Conductors and claimed deduction u/s 80 HH to the extent of Rs.85,156/-. The Income-tax officer passed an order under section 154 on 23.1.1985 and allowed the deduction to the extent of 20% on the net income of Rs.1,25,236/- and had given relief of Rs.24,527/-. The assessee challenged this order of rectification before the CIT(Appeals) and contended that the net profit under profit and loss account was Rs.4,09,029/-, a sum of Rs.16,682/-in respect of inadmissible/dis-allowance of investment allowance reserve, interest, donations and subscription is to be added and, therefore, the calculation should have been made at a figure of Rs.4,25,711/-. It was found that the ITO has reduced the brought forward business loss, unabsorbed depreciation, investment allowance reserve and the brought forward deduction u/s 80J of the Act. The CIT (Appeals) had taken into consideration the provisions of Section 80 AB which were introduced by Finance Act No.44 of 1980 w.e.f. 1.4.1981. On the basis of this provision it was considered that this section was introduced to provide for the purpose of calculating deduction specified in sections 80 HH to 80 TT, the net income has to be computed in accordance with the provision of the Income-tax Act before asking any deduction under Chapter VI A which shall alone be regarded as income which is received by the assessee and which is included in his gross total income. For the purpose of computing the deduction under this Section, the amount of income of that nature has to be computed in accordance with the provisions of the Act and is to be deemed to be the amount of income of the nature, which is derived or received by the asessee and while is included in his gross total income. The appeal was accordingly dismissed. (4). In the second appeal before the Income-tax Appellate Tribunal, it was observed that the deduction is with reference to the profit and gains derived from the industrial undertaking and the various deductions which are given are only for the purpose of assessment. The provisions of Section 80 AB does not prevent the assessee from getting the deduction which is more than the amount included in the total income and, as such for computing the commercial profits, the assessee is entitled to require the additions in respect of provisions of tax, depreciation and investment allowance reserve and the net profit as per profit and loss account to arrive at the commercial profits. The provisions of Section 80 HH(1) are as under: — "where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this Section applies,there shall,in accordance with and to the subject to the provisions of this section be allowed in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to 20% thereof. This section has referred to the profit and gains derived from an industrial undertaking which should have been included in the gross total income of an assessee. This section has referred to the profit and gains derived from an industrial undertaking which should have been included in the gross total income of an assessee. The calculation thereof has to be made on the profit and gains derived from an industrial undertaking." Section 80 AB is as under: — "Where any deduction is required to be made or allowed under any section (except section 80M) included in this Chapter under the heading C- Deductions in respect of certain specified in that section which is included in the gross total income of the assessee, then notwithstanding anything contained in that section for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income." (5). In accordance with the scheme of the Act, the income has to be computed. Section 2(24) defines the income which includes profits and gains. Under section 2(45) the total income has been defined to mean the total amount of income referred to in section 5 computed in the manner laid down in this Act. Section 5 contains the sc pe of total income which includes all income from what-ever source derived which is received or is deemed to be received in India is such year by or on behalf of such person. Section 28 of the Act refers taxing of profits and gains of business or profession. The computation has been provided of the income in accordance with the provisions of Section 29 which prescribes that the income referred to in Section 28 shall be computed in accordance with the provisions contained in Section 30 to 43 A. Various deductions which are provided under Section 30 to 43 A, therefore, have to be considered in order to arrive at the gross total income. In the income of the individual, the income of the spouse, minor child etc. are computed in accordance with Section 64 of Chapter V. From the gross total income Chapter VI-A has been added to arrive at the total income. In the income of the individual, the income of the spouse, minor child etc. are computed in accordance with Section 64 of Chapter V. From the gross total income Chapter VI-A has been added to arrive at the total income. Section 80 A provides 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 this Chapter, the deductions specified in Section 80 C to 80 U. Sub-section (2) of Section 80-A provides that the aggregate amount of deductions in this Chapter shall not in any case exceed the gross total income of the assessee. Sub- section (3) makes it clear that in computing the total income of a firm, association or body of individuals, no deduction under the same section is admissible in respect of the various sections mentioned therein, in computing the total income of a partner or member of the association or persons or body of individuals in relation to the share of such partner in the income of the firm or the share of such member in the income of the association of persons or body of individuals. In other words, while computing the income of the firm associations of person or body of individual, the deduction in accordance with Section 80 HH, the provisions of Section 80 A are made applicable. According to this Section no deduction is available under this Chapter if the gross income is a loss or the amount of the deduction in any case shall not exceed the gross total income. The words gross total income have been defined u/s.80 B(5) to mean the total income computed in accordance with the provisions of this Act before making any deduction under this Chapter. The words total income therefore, which has to be arrived at from the gross total income, refers to the taxable income which is included in the gross total income and from which the deduction under Chapter VI-A are to be given. The words total income therefore, which has to be arrived at from the gross total income, refers to the taxable income which is included in the gross total income and from which the deduction under Chapter VI-A are to be given. Section 80 AB provides that where any deduction is required to be made or allowed under any section (except sec.80 M) included under this Chapter under the heading C-Deductions in respect of certain incomes in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then notwithstanding anything contained in that section for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act(before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income. This section makes it clear that in the gross total income, the amount of income of that nature for which the deduction is to be computed alone is to be considered. Section 80 HH is one of the section under the heading C-Deductions in respect of certain incomes. The provisions of Section 80 HH as reproduced above makes it clear that where the gross total income of the assessee includes any profit and gains derived from an industrial undertaking then this section is applicable. The gross total income which has been referred in the first part of this section includes the profits and gains derived from an industrial undertaking. Section 80 AB mentions that the amount of income of the nature as computed in accordance with the provisions of this Act shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income. Section 80 AB contemplates computation of the income in accordance with the provisions of this Act and, thereafter the deduction is to be made under Chapter VI-A. The income which is derived from an industrial undertaking alone is liable to the deduction in section 80 HH. The later part of Sec. 80 HH refers that the deduction equal to 20% from such profits and gains is available to the assessee. The later part of Sec. 80 HH refers that the deduction equal to 20% from such profits and gains is available to the assessee. The word .such refers to the profits and gains which are mentioned in the first part of this section and are included in the gross total income. In other words, from the gross total income of an industrial undertaking, the deduction is available to 20% of such profits and gains in computing the total income. The gross total income will not include something over and above the figure which is included in it by way of profit and gains derived from an industrial undertaking. To illustrate it more clearly, suppose an assessee is having an industrial undertaking and the profits and gains of such industrial undertaking are Rs.one crore. After computation, the income in accordance with the provisions of Sec.29 by giving the deduction as available u/s 30 to 43 C, the remaining amount comes to Rs.20 Lacs. This amount will be considered to be the gross total income and deduction is available on this 20 lacs of rupees. The gross total income as it is computed before giving deduction under Chapter VI-A,means after the deduction under Chapter IV is given. The gross total income if is 20 lacs rupees, then it cannot be considered that the profits and gains of the industrial undertaking are of Rs.one crore and, therefore, the deduction should be given at 20% on this Rs.one crore. The amounts which are included in the gross total income may be from different sources of income and the profits and gains derived from an industrial undertaking is one of such to which the deduction u/s 80 HH is available. If a person is having five different sources of income, then the total of the income computed in accordance with the provisions of the Act from all the sources would be considered to be gross total income and since the benefit is available only for the profits and gains derived from an industrial undertaking, that part of the profits and gains which is computed in accordance with the provisions of the Act alone has to be allowed for deduction. (6). In Cambay Electric Supply Industrial Co. (6). In Cambay Electric Supply Industrial Co. Ltd. Vs.Commissioner of In-come-tax (1), for the purpose of computation of deduction u/s 80-E, it was observed by the Apex Court as under: — "On reading sub-section (1) it will become clear that three important steps are required to be taken before the special deduction permissible thereunder is allowed and the net total income exigible to tax is determined. First, compute the total income of the concerned assessee in accordance with the other provisions of the Act,i.e. in accordance with all the provisions except sec.80E; secondly, ascertain what part of the total income so computed represents the profits and gains attributable to the business of the specified industry (here generation and distribution of electricity); and, thirdly, if there be profits and gains so attributable,deduct 8% thereof from such profits and gains and then arrive at the net total income exigible to tax. As regards the first step mentioned above, the important words in sub-section (1) are those that appear in parenthesis, namely, as computed in accordance with the other provisions of this Actand these words clearly contain a mandate that the total income of the concerned assessee must be computed in accordance with the other provisions of the Act without reference to section 80 E and since in the instant case it is income from business the same as per section 29 will have to be computed in accordance with sections 30 to 43 A which could include section 41(2). It is also clear that under the second step the profits and gains attributable to the business of the specified industry (here generation and distribution of electricity) forms a component of the total income spoken of in the first step. Reading these two steps together, therefore, it is obvious that in computing the total income of the concerned assessee the balancing charge arising as a result of the sale of old machinery and buildings and worked out as per section 41(2), irrespective of its real character, will have to be taken into account and included as income of the business. In order words, the balancing charge as worked out under section 41(2) will have to be taken into account before computing the deduction of 8% under the third step. In order words, the balancing charge as worked out under section 41(2) will have to be taken into account before computing the deduction of 8% under the third step. On proper construction of sub-section (1) and having regard to the legislative mandate contained in the three steps that are required to be taken in the manner indicated above we are clearly of the view that the item of Rs.7,55,807 will have to be taken into account before computing the 8% deduction contemplated by the said provision." (7). In the case the Distributors (Baroda) p.Ltd.Vs.Union of India and others (2), the earlier decision of the court in Cloth Traders P.Ltd. Vs.Addl. CIT (3), was over-ruled and while interpreting the provisions of Sec.80M,it was observed as under: — "The opening words describe the condition which must be fulfilled in order to attract the applicability of the provision contained in sub-s.(l) of S.80M. The condition is that the gross total income of the assessee must include income by way of dividends from a domestic company. Gross total income is defined in s.80B, clause (5), to mean the total income computed in accrdance with the provisions of the Act before making any deduction under Chapter VIO-A or under s.,280-0. Income by way of dividends from a domestic company included in the gross total income would, therefore, obviously be income computed in accordance with the provisions of the Act, that is, after deducting interest on monies borrowed for earning such income. If income by way of dividends from a domestic company computed in accordance with the provisions of the Act is included in the gross total income, or, in other words, forms part of the gross total income,the condition specified in the opening part of sub-s.(l) of S.80M would be fulfilled and the provisions enacted in that sub-section would be attracted. If income by way of dividends from a domestic company computed in accordance with the provisions of the Act is included in the gross total income, or, in other words, forms part of the gross total income,the condition specified in the opening part of sub-s.(l) of S.80M would be fulfilled and the provisions enacted in that sub-section would be attracted. It was further observed as under: — "As indicated earlier, sub-section (1) contemplates three steps being taken for computing the special deduction permissible thereunder and arriving at the net income exigible to tax and the first two steps read together contain the legislative mandate as to how the total income-of which the profits and gains attributable to the business of the specified industry forms a part-of the concerned assessee is to be computed and according to the parenthetical clause, which contain the key words, the same is to be computed in accordance with the provisions of the Act except section 80E and since in this case it is income from business, the same will have to be computed in accordance with sections 30 to 43A which would include section 32(2) (which provides for carry forward of depreciation) and section 33(2) (which provides for carry forward of development rebate for eight years). In other words, in computing the total income of the concerned assessee, items of unabsorbed depreciation and unabsorbed development rebate will have to be deducted before arriving at the figure that will become exigible to the deduction of 8% contemplated by section 80E(1)." It will thus be seen that,according to this decision the words such profits and gains in the latter part of sub-s.(l) of s.80E were referable to the quantum of the profits and gains attributable to the specified business included in the total income as referred to in the earlier part of the provision. If this decision lays down the correct interpretation of sub-s.(l) of s.80E,the same interpretation must also govern the language of sub-s.(l) of s.80M,Struc-turally,there is hardly any difference between s.80E, sub-s.(l) and s.80M,and the reasoning which appealed to the court in the interpretation of sub-s.(l) of s.80E must apply equally in the interpretation of sub-s.(l) of s.80M. If this decision lays down the correct interpretation of sub-s.(l) of s.80E,the same interpretation must also govern the language of sub-s.(l) of s.80M,Struc-turally,there is hardly any difference between s.80E, sub-s.(l) and s.80M,and the reasoning which appealed to the court in the interpretation of sub-s.(l) of s.80E must apply equally in the interpretation of sub-s.(l) of s.80M. We find ourselves wholly in agreement with the view taken by this court in Cambay Electric Supply Co.s case (1978)113 ITR 84 and we must,therefore, dissent from the interpretation placed on sub-s.(l) of S.80M by the decision in Cloth Traders case." (8). The words all such income by way of dividends was considered to be referring only to the category of income included in the gross total income and also the quantum of income so included and it was considered that what is included in the gross total income would be considered as the income which has to be considered for the purpose of sec. 80M. (9). Madras High Court in the case of CIT Vs. Rambal(P) Limited (4), while considering the relief under sec.80-I by taking into consideration the provision of sec.80A and 80B(5) came to the conclusion that the assessee is not entitled to relief under section 80-I as the total income computed by the Income-tax Officer under Section 80B(5) was nil. His total income was computed by the ITO after setting off carried forward loss and unabsorbed depreciation of earlier assessment years, the net taxable income was determined at nil. It was considered that the restrictions as placed u/s 80A have to be complied with before giving the deduction under the Chapter. (10). Bombay High Court in the case of Asian Cables Corporation Ltd. Vs. Commissioner of Income-tax (5), has also taken the definition as given u/s 80B(5) and came to the conclusion that before making any deduction under Chapter VI-A, the un-absorbed depreciation has to be first taken into account before the gross total income for the purposes of Chapter VI-A is considered. (11) Karnataka High Court in the case of CIT Vs. HMT Ltd. (6), has also held that for the purpose of computation under section 80J and 80HH, profits and gains of new undertakings are not commercial profits but only such profits as are computed in the manner laid down under Sec.80AB. (12). The Apex Court in the case of CIT Vs. HMT Ltd. (6), has also held that for the purpose of computation under section 80J and 80HH, profits and gains of new undertakings are not commercial profits but only such profits as are computed in the manner laid down under Sec.80AB. (12). The Apex Court in the case of CIT Vs. P. K. Jhaveri (7), while considering the deductions under section 80K has also taken into consideration the provisions of sec.80B(5) and followed the decision of Cambay Electric Supply Industrial Co. Ltd. Vs. CIT and Distributors (Baroda) P. Ltd. vs. U.O.I. referred to above. (13). In CIT Vs. S.S. Sivan Pillai and others (8), the Honble Supreme Court while considering the provisions of sec.l5C came to the conclusion that the assessee was not entitled to the exemption under sec. 15C(4) in relation to dividends received from the company since owing to the unabsorbed depreciation of earlier years admissible under sec.l0(2)(vi) and(vi-a) the company had no taxable profits in the relevant years. This also shows that the un-absorbed depreciation of the earlier years have to be taken into consideration before giving deduction under section 15C. (14). This court in the case of Jaipur Udhyog Ltd. Vs. CIT (9), while considering the provisions of sec.84 of the Act interpreted the word profits under Rule 19(5) to mean taxable profits, i.e. profits arrived at in accordance with the provisions of the Act. The decision of the Apex Court in CIT Vs. S.S. Sivan Pillai,referred to above was relied upon. (15). The Kerala High Court in the case of CIT Vs. Kerala Solvent Extractions Ltd. (10), has dealt with the matter with regard to deduction u/s 80HH and came to the conclusion that the earlier years losses, un-absorbed depreciation and un-absorbed development rebate has to be reduced before giving the deductions u/s 80HH and the decision of the Apex Court in Distribution (Baroda) P. Ltd. Vs. UOI was relied upon. (16). In CIT Vs. Canara Workshops P. Ltd.(ll), a distinction was drawn between the case where loss or un-absorbed depreciation pertaining to the same industry whose profits and gains are subject to relief u/s 80E and a case where losses or un-absorbed depreciation relates to industries other than the one whose profits and gains constitute the subject to relief. (16). In CIT Vs. Canara Workshops P. Ltd.(ll), a distinction was drawn between the case where loss or un-absorbed depreciation pertaining to the same industry whose profits and gains are subject to relief u/s 80E and a case where losses or un-absorbed depreciation relates to industries other than the one whose profits and gains constitute the subject to relief. It was a case where the profits and gains earned by one prrioty industry was held can not be reduced by the loss sufferred by any other industry or industries owned by the assessee. While holding so Apex Court has made a distinction which makes it clear that the loss or un-absorbed depriciation of the same industry can be reduced which is entitled to the relief u/s 80E and not of the other industries which is not so entitled. The word such income in section 80T was interpretated by the Apex Court in the case of CIT Vs. V.Venkatachalam (12) and it was held that the words such income in the main part of section 80T meant and referred to the capital gains and not the total income of the assessee. (17). It may be seen that the language which has been used cannot be widened by any interpretation. The interpretation should be a reasonable one which is on the plain language of the section. The submission that the words profits and gains should be considered to be without giving deductions in accordance with Chapter IV is contrary to the language used u/s 80AB and 80B(5) and, therefore,the interpretation which is not based on the plain grammatical language of the section can not be accepted. The deductions which are available under Chapter VI are special deductions and the provisions of earlier sections of this Chapter which puts restrictions on claiming the deduction can not be ignored. (18). The decision of Orissa High Court in the case of CIT Vs. Tarun Udhyog (13), has been relied upon by the learned counsel for the assessee in which it has been held that the relief u/s 80HH has to be allowed on the profits of the industrial undertaking before deducting the investment allowance allowed under section 32A. It was observed that the deduction has to be allowed on profits and gains and,therefore, sec.30 to 43 are not relevant. It was observed that the deduction has to be allowed on profits and gains and,therefore, sec.30 to 43 are not relevant. We are afraid that the view taken by the Orissa High Court is contrary to the plain language of the section 80A read with section 80AB and 80B(5) besides the interpretation given by the Apex Court and the other High Courts. The word gross total income which has been defined u/s 80B(5) is for the purpose of Chapter VI-A and, therefore, whenever the words gross total income have been used, it cannot have a different meaning than what has been defined in the said section. (19). In view of the above discussion, we are of the view that the depreciation and investment allowance has to be deducted before giving the special deduction as provided under Chapter VI- A and the words profits and gains which is alleged to be equivalent to commercial profits has 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 Income-tax Appellate Tribunal was not justified in coming to the conclusion that the deduction u/s 80HH is to be computed on commercial profits and in computing the commercial profits the assessee is entitled to require addition of provisions for tax, depreciation and investment allowance reserve to the net profit and loss account to arrive at commercial profits.