Commissioner Of Income Tax-Ii, Hyderabad v. $ Premier Explosive Ltd

*HON’BLE SRI JUSTICE L. NARASIMHA REDDYANDHON’BLE SRI JUSTICE T. SUNIL CHOWDARY +I.T.T.A No. 124 OF 2002 % Dated 10-10-2014 Commissioner of Income Tax-II, Hyderabad …Appellant VERSUS $ Premier Explosive Ltd., 201, Minerva Complex, S.D. Road,Secunderabad …..Respondents ! Counsel for the Appellant: Sri S.R. Ashok, Senior Counsel ^Counsel for the Respondent: Ms.K. Mamata Chowdary <GIST: >HEAD NOTE: ? Cases referred 1.161 ITR 320 2.205 ITR 433 3.299 ITR 444 4.266 ITR 52 5.AIR 2014 SC 1745 6.251 ITR 417 HON’BLE SRI JUSTICE L. NARASIMHA REDDYAND HON’BLE SRI JUSTICE T. SUNIL CHOWDARY I.T.T.A No. 124 OF 2002 10-10-2014 BETWEEN Commissioner of Income Tax-II, Hyderabad …Appellant And Premier Explosive Ltd., 201, Minerva Complex, S.D. Road,Secunderabad …..Respondent HON’BLE SRI JUSTICE L. NARASIMHA REDDYANDHON’BLE SRI JUSTICE T. SUNIL CHOWDARY I.T.T.A No. 124 OF 2002 JUDGMENT:(per the Hon'ble Sri Justice L. Narasimha Reddy) It is too well known that the Income Tax Act, 1961 (forshort, ‘the Act’) provides for levy of tax on what is known as “totalincome” as defined under Section 10 read with Section 5 of the Act. It takes in its fold the various categories ofincomes of an assessee. One of the important steps to be taken under the Act in computing the total income is the identification ofdeductions that are permitted and provided for under Chapters VIand VI-A. While Chapter VI provides for setting off or carryforward of amounts under different heads, Chapter VI-A providesfor deduction of certain amounts from the general income of anassessee on the one hand, and deduction of certain amounts inrespect of incomes of a specified category on the other hand. Forexample, Section 80CCA provides for deduction in respect of deposits underthe National Savings Scheme or payment to a deferred annuityplan, Section 80CCB provides for deduction in respect ofinvestments made under equity linked savings scheme. Section80G is in respect of donations to certain funds, charitableinstitutions etc., from the general income of an assessee. Deductions in respect of specific incomes are covered bypart ‘C” of Chapter VI-A. Such deductions are to be made onlyfrom the income of a particular source. For example, if anassessee establishes industrial undertaking or hotel business inbackward areas, he is entitled to make deduction to the extent of20% from the profits and gains, under Section 80HH. Similarly,where the assessee establishes small scale industries in certainareas, Section 80 HHA provides for identical deduction. Deductionin respect of profits and gains from projects outside India whichearn foreign exchange is provided for under Section 80HHB. Certain complications do arise when an assessee is entitledto deductions under more than one provision, more so, when they fall within heading ‘C’ of Chapter VI-A. The controversy would beas to whether the deduction must be confined to the source ofincome of that particular category or it can be from the combinedincome from different sources referable to different sections. The respondent herein is an assessee under the Act. Forthe assessment year 1993-94, it posted incomes from varioussources including those referable to Sections 80HH and 80-I of theAct. In the returns, it sought to claim deductions from the incomescovered by respective sections, separately. While in respect ofone source of income it incurred losses, in respect of others itearned profits. The deductions sought to be made by theassessee were from the activity that yielded profits. Theassessing officer however insisted that the deductions must befrom the combined income from both the categories. That in turnhad virtually neutralised the income derived from one source, bythe loss incurred in the other source. Hence, the occasion tomake any deduction did not exist. The respondent herein is an assessee under the Act. Forthe assessment year 1993-94, it posted incomes from varioussources including those referable to Sections 80HH and 80-I of theAct. In the returns, it sought to claim deductions from the incomescovered by respective sections, separately. While in respect ofone source of income it incurred losses, in respect of others itearned profits. The deductions sought to be made by theassessee were from the activity that yielded profits. Theassessing officer however insisted that the deductions must befrom the combined income from both the categories. That in turnhad virtually neutralised the income derived from one source, bythe loss incurred in the other source. Hence, the occasion tomake any deduction did not exist. Aggrieved by the order of assessment passed by theassessing officer, the respondent filed an appeal before theCommissioner of Income Tax (Appeals)-I, Hyderabad. The appealwas allowed through order dated 31-01-1997 applying the ratio inthe judgments of the Supreme Court in CIT v. Canara Work Shops (Pvt.,) Ltd[[1]]and H.H Sir Ramavarma v. CIT[[2]]. Feelingaggrieved by the order of the Commissioner, the Revenue filed ITANo. 706/Hyd/1997 before the Hyderabad Bench of the Income TaxAppellate Tribunal (for short, ‘the Tribunal’). The Tribunal dismissed the appeal through order dated 31-01-2002. Hence, thisfurther appeal under Section 260A of the Act by the Revenue. The following questions are raised in the appeal: “(A) Whether on the facts and in thecircumstances of the case, the Appellate Tribunalis correct in law in confirming the order of CIT (A)in holding that the assessee is entitled to claimdeduction U/s.80HH and 80I, independent of the setoff and carry forward provisions? (B) Whether on the facts and in thecircumstances of the case, the Appellate Tribunalis correct in confirming the order of the CIT(A) inholding that the deduction U/s. 80HH, and 80I canbe claimed with respect to each unit, separately?” Sri S.R. Ashok, learned Senior Counsel for the appellantsubmits that the Commissioner (Appeals) as well as the Tribunaldid not take into account, the purport of the expression “gross totalincome” as defined under Section 80B(5) of the Act and the adjudication undertaken by themruns contrary to the said provision. He contends that once anassessee has income from any sources covered by Chapter VI-A, the first step must be to aggregate all the incomesand thereby arrive at the ‘gross total income’ and then to effectdeductions if permissible. According to the learned SeniorCounsel, an assessee cannot be permitted to effect deductionsseparately from any item or a head of income which forms part ofheading ‘C’. He has placed reliance upon the judgment of theSupreme Court in Synco Industries Ltd. v. Assessing Officer (I.T)[[3]]and Ipca Laboratory Ltd. vs. Deputy Commissioner of Income Tax[[4]]. Learned Senior Counsel further submits that thejudgment of the Supreme Court in Canara Workshops’ case (1supra) was delivered at a time when Section 80B(5) was not onthe statute book and that the same has no application to the factsof the case. Chapter VI-A, the first step must be to aggregate all the incomesand thereby arrive at the ‘gross total income’ and then to effectdeductions if permissible. According to the learned SeniorCounsel, an assessee cannot be permitted to effect deductionsseparately from any item or a head of income which forms part ofheading ‘C’. He has placed reliance upon the judgment of theSupreme Court in Synco Industries Ltd. v. Assessing Officer (I.T)[[3]]and Ipca Laboratory Ltd. vs. Deputy Commissioner of Income Tax[[4]]. Learned Senior Counsel further submits that thejudgment of the Supreme Court in Canara Workshops’ case (1supra) was delivered at a time when Section 80B(5) was not onthe statute book and that the same has no application to the factsof the case. Ms. K. Mamata Chowdary, learned counsel for therespondent, on the other hand, submits that the basis on which theassessing officer refused deduction as claimed by the assessee iscontrary to law and that the Commissioner and the Tribunal havetaken the correct view of the matter. She contends that each heador item of income covered by the respective provisions in heading‘C’ of Chapter VI-A has its own significance and the Parliamentitself wanted to restrict the deductions at the stipulatedpercentage, from that very item of income and not from any otherincome. She contends that though Section 80B(5) was not inexistence when the Supreme Court rendered its judgment inCanara Workshops’ case (1 supra) the basic concept wasdiscussed thread bare and the ratio laid down therein was notdisturbed in any subsequent judgments. According to the learnedcounsel, the judgment of the Supreme Court in Synco Industries’case (3 supra) rendered in the year 2008 did not take into account,its own judgment in Canara Workshops’ case (1 supra) decided inthe year 1986. She contends that the principle of stare decisismandates that if there are conflicting judgments rendered by theBenches of same strength on a particular principle, the one earlier in point of time deserves to be taken into account. She has placedreliance upon the judgment of the Supreme Court in SundeepKumar Bafna v. State of Maharashtra[[5]]. Reliance is alsoplaced upon a Division Bench judgment of this Court in CIT v.Visakha Industries Ltd[[6]]. It is not in dispute that the respondent became entitled toclaim deductions under Section 80HH of the Act on the one handand Section 80-I on the other hand. The entire controversy is asto whether the deductions under the respective provisions must bemade from the respective incomes of the concerned sources orthe aggregate of both. A subsidiary to this would be, as to whetherthe deductions must be effected after the carry forward loss is setoff from the profits, if any, or whether such a setting off must beafter the deductions are effected. On both counts, the assessingofficer held against the respondent. It has already been mentioned that the respondent earnedprofits from an activity covered by Chapter VI-A and incurredlosses in another activity covered by that very chapter. TheTribunal took into account the judgment of the Supreme Court inCanara Workshops’ case (1 supra). In that case, the facts were:the assessee company established a factory for manufacture ofautomobiles and spares. It has also established factory formanufacture of alloy steels. The matter arose in respect of theassessing year 1966-67, by which time Chapter VI-A was notenacted. Section 80E (as it stood then) provided for deduction to It has already been mentioned that the respondent earnedprofits from an activity covered by Chapter VI-A and incurredlosses in another activity covered by that very chapter. TheTribunal took into account the judgment of the Supreme Court inCanara Workshops’ case (1 supra). In that case, the facts were:the assessee company established a factory for manufacture ofautomobiles and spares. It has also established factory formanufacture of alloy steels. The matter arose in respect of theassessing year 1966-67, by which time Chapter VI-A was notenacted. Section 80E (as it stood then) provided for deduction to the extent of 8% of the profits and gains, if the assessee isinvolved in manufacture or production of articles or thingsspecified in the fifth schedule, appended to the Act. The articlesmanufactured by the assessee in both the factories figured in thefifth schedule. While in one industry the assessee earned profits,in the other industry, it suffered losses. In the context of effectingdeductions provided for under Section 80E of the Act (as it stoodthen), while the assessee pleaded that the deduction must be fromthe income of the concerned industry, the assessing officerinsisted on clubbing of incomes from both the sources and thenmaking of deductions. Dealing with this aspect, the SupremeCourt held: “The assessee in this case carries on twoindustries, both of which find place in the list in the FifthSchedule and can, therefore, be described as priorityindustries. It is urged by the learned Additional SolicitorGeneral, appearing for the Revenue, that on a trueapplication of Section 80E, the profit in the industry ofautomobile ancillaries must be reduced by the losssuffered in the manufacture of alloy steel, and referencehas been made to a number of cases to which we shallpresently refer. After giving the matter carefulconsideration we do not find it possible to accept thecontention. It seems to us that the object in enactingSection 80E is properly served only by confining theapplication of the provisions of that section to the profitsand gains of a single industry. The deduction of eightper cent is intended to be an index of recognition, that apriority industry has been set up and is functioningefficiently. It was never intended that the merit earnedby such industry should be lost or' diminished becauseof a loss suffered by some other industry. It makes nodifference that the other industry is also a priorityindustry. The coexistence of two industries in common ownership was not intended by Parliament to result inthe misfortune of one being visited on the other. Thelegislative intention was to give to the meritorious its fullreward. To construe section 80E to mean that you mustdetermine the net result of all the priority industries andthen apply the benefit of the deduction to the figure soobtained will be, in our opinion, to undermine the objectof the section. An example will illustrate this. Anindustry entitled to the benefit of section 80E could haveits profits wholly wiped out on adjustment against aheavy loss suffered by another industry, and thus betotally denied the relief which should have been its dueby virtue of its profits. In our opinion, each industry mustbe considered on its own working only when adjudgingits title to the deduction under section 80E. It cannot beallowed to suffer because it keeps company with someother industry in the hands of the assessee. Todetermine the benefit under section 80E on the basis ofthe net result of all the industries owned by theassessee would be, moreover, to shift the focus from theindustry to the assessee. We hold that in the applicationof section 80E, the profits and gains earned by anindustry mentioned in that section cannot be reduced bythe loss suffered by any other industry or industriesowned by the assessee. (emphasis supplied)” (emphasis supplied)” Similar factual situation obtains in the case on hand. It isno doubt true that the present case is governed by Chapter VI-A ofthe Act. The fact however remains that Chapter VI-A, for the mostpart of it, is an exercise of consolidation than introduction of a totalnew phenomenon. Except that the items that qualified fordeduction were extended and the extent of deduction was varied,the concept and mechanism remained the same. Barring the rearrangement of the section that provide for deductions, the same concept came to be introduced through theFinance Act, 1967 which added Chapter VI-A to the Act. Theimprovement is mostly the method of deduction under the chapter,in the form of Section 80AB and the concept of gross total incomeunder Section 80B(5). The relevant provisions as they stand nowread as under: “Deductions to be made with reference to theincome included in the gross total income. 80AB. Where any deduction is required to be madeor allowed under any heading “C. – Deductions inrespect of certain incomes” in respect of any incomeof the nature specified in that section which isincluded in the gross total income of the assessee,then, notwithstanding anything contained in thatsection, for the purpose of computing the deductionunder that section, the amount of income of thatnature as computed in accordance with theprovisions of the Act (before making any deductionunder this Chapter) shall alone be deemed to be theamount of income of that nature which is derived orreceived by the assessee and which is included inhis gross total income.” 80B(5). In this Chapter – “gross total income” meansthe total income computed in accordance with theprovisions of this Act, before making any deductionunder this Chapter.” The basis of the argument of the learned Senior Counsel forthe Revenue is that deductions provided for under Chapter VI-Acan be made only from the aggregate of the incomes from varioussources covered by the relevant provisions of the chapter. Expanding further, he pleaded that it is only after the income or loss, as the case may be, from various sources are clubbedtogether, that the deductions can be made. Incidentally, thoughthe assessing officer also referred to the definition of gross totalincome under Section 80B(5), his understanding of the gross totalincome was, income under various heads as per Chapter IV plusincome includable whenever necessary as per Chapter V minusset off of current year losses or brought forward losses etc. Itwas opined that the deduction under Chapter VI-A can be madeonly in respect of such gross total income. He has also referredto Section 80AB in support of his view. The deductions claimed by the respondent are underSection 80HH on the one hand and Section 80-I on the other hand. Both the provisions occur in heading ‘C’ of ChapterVI-A. Section 80AB deals with deductions of that nature. Therefore, it needs to be seen as to whether Section 80AB is suggestive of any mechanism for clubbing of theincomes of various sources covered by heading ‘C’. A close perusal of Section 80AB extracted above, discloses that,for the purpose of deduction under a particular section, it is onlythe income of the nature provided for only under that section,which shall be deemed to be income derived or received by theassessee. The provision does not mandate the clubbing of theincomes from different sources. The definition of gross total income under Section 80B(5)just indicates as to what it constitutes. The total income computedin accordance with the provisions of the Act before any deductions under Chapter VI-A are made is the gross total income. Theprovision does not go further and insist that the deduction underthe respective provisions must be from the gross total income. The method of deduction is ultimately to be decided by the text ofthe respective provisions. Further, Section 80B(5) is not acharging provision. The definition of gross total income under Section 80B(5)just indicates as to what it constitutes. The total income computedin accordance with the provisions of the Act before any deductions under Chapter VI-A are made is the gross total income. Theprovision does not go further and insist that the deduction underthe respective provisions must be from the gross total income. The method of deduction is ultimately to be decided by the text ofthe respective provisions. Further, Section 80B(5) is not acharging provision. It is important to mention that the Parliament itselfemployed the expressions “gross total income” at some placesand “total income” at other places, in different provisions,depending upon the context. For example, under Section 80HHD which also occurs under heading ‘C’ in Chapter VI-A, there is no mention of ‘gross total income’, whereas in Sections80HH, 80HHA and 80-I, the expression ‘gross total income’ isemployed. The purpose appears to be to ensure that thedeductions provided for under the relevant sections are made incomputing the ‘total income’ of the assessee, in contra-distinctionto ‘gross total income’. For example, sub-section (1) of Section80HH reads as under: “Deduction in respect of profits and gains fromnewly established industrial undertakings or hotelbusiness in backward areas. 80HH. (1) Where the gross total income of an assesseeincludes any profits and gains derived from an industrialundertaking, or the business of a hotel, to which thissection applies, there shall, in accordance with andsubject to the provisions of this section, be allowed, incomputing the total incomeof the assessee, a deductionfrom such profits and gains of an amount equal to twentyper cent thereof. Similarly, Section 80-I(1) reads: 80-I. (1) Where the gross total income of an assesseeincludes any profits and gains derived from an industrialundertaking or a ship or the business of a hotel [or thebusiness of repairs to ocean-going vessels or otherpowered craft], to which this section applies, there shall, inaccordance with and subject to the provisions of thissection, be allowed, in computing the total incomeof theassessee, a deduction from such profits and gains of anamount equal to twenty per cent thereof : Provided that in the case of an assessee, being a company,the provisions of this sub-section shall have effect [inrelation to profits and gains derived from an industrialundertaking or a ship or the business of a hotel] as if for thewords “twenty per cent”, the words “twenty-five per cent” hadbeen substituted. Obviously, because there is possibility to understand theprovisions in different manner, the Parliament proceeded to addsub-section (6) to Section 80-I which reads: “(6) Notwithstanding anything contained in any otherprovision of this Act, the profits and gains of an industrialundertaking or a ship or the business of a hotel [or thebusiness of repairs to ocean-going vessels or other poweredcraft] to which the provisions of sub-section (1) apply shall,for the purposes of determining the quantum of deductionunder sub-section (1) for the assessment year immediatelysucceeding the initial assessment year or any subsequentassessment year, be computed as if such industrialundertaking or ship or the business of the hotel [or the-business of repairs to oceangoing vessels or other poweredcraft] were the only source of income of the assessee duringthe previous years relevant to the initial assessment yearand to every subsequent assessment yearup to andincluding the assessment year for which the determination is to be made.” The underlined portion becomes relevant. to be made.” The underlined portion becomes relevant. If these two provisions are kept in mind, it emerges that theintention of Section 80AB is to maintain the distinction between therespective sources of income, referable to the sections containedin heading ‘C’ of Chapter VI-A. The intention appears to be todiscourage or to prevent an assessee from avoiding tax by postingthe profits earned in one industry, against the losses incurred inthe other. Another way of looking at the provision is that, the hardwork put by an entrepreneur resulting in profits in an industrycannot be wiped away if he suffered losses in another industry ofthe same category. Except that the provisions are different, theprinciple laid down by the Hon’ble Supreme Court in CanaraWorkshops’ case (1 supra) is the same. This decision wasfollowed by our High Court in Visakha Industries’ case (6 supra). It is no doubt true that the Supreme Court in SyncoIndustries’ Case (3 supra) took a different view. Firstly, the saidjudgment was not in existence when the Commissioner and theTribunal decided the present case. Secondly, no reference wasmade to the judgment in Canara Workshops’ case (1 supra) inSynco Industries’ case (3 supra), obviously, because it was notbrought to their Lordships notice. It is quite possible to argue thatthe relevant provisions, which the Hon’ble Supreme Court wasdealing in those two cases are different. However, the principleinvolved in both, was broadly, the same. I n Synco Industries’ case (3 supra), the Supreme Court laid much emphasis upon thedefinition of gross total income under Section 80B(5) and Section80AB. It was observed that if the gross total income of an assessis determined as nil, there is no question of deduction beingallowed under Chapter VI-A in computing the total income. Forthis purpose, several judgments rendered by various High Courtswere taken note of. Be that as it may, this Court, as of now is faced with twoprecedents which cover the same factual background and similarlegal, principles. Since both the precedents are from the Hon’bleSupreme Court, they are equally binding upon this Court. The onlyexercise that is to be undertaken is, to choose one of them, as perthe settled principles of law. In the process, it cannot beconstrued, even remotely, that any disrespect whatever, is shownto the other precedent. The exercise undertaken in this behalfmay at a future point of time persuade the Hon’ble Supreme Courtto say a more authoritative word, in this context. The law in relation to stare decisis is fairly well settled. Thesituations which crop up are, where a view taken contrary to whatwas decided earlier by a Bench of the same strength on account ofthe disinclination or failure on the part of a counsel to bring to thenotice of the Court the precedents that already existed. InSundeep Kumar Bafna’s case (5 supra), the Supreme Court dealtwith this aspect in detail under the heading “Rule of Precedent andPer Incuriam”. Situations where the High Courts are faced withtwo judgments of the Supreme Court rendered by the Benches of the same strength on a particular principle, expressing differentviews was taken note of. Their Lordships held: “It is often encountered in High Courts that two or moremutually irreconcilable decisions of the Supreme Courtare cited at the Bar. We think that the inviolablerecourse is to apply the earliest view as the succeedingones would fall in the category of per incuriam.” the same strength on a particular principle, expressing differentviews was taken note of. Their Lordships held: “It is often encountered in High Courts that two or moremutually irreconcilable decisions of the Supreme Courtare cited at the Bar. We think that the inviolablerecourse is to apply the earliest view as the succeedingones would fall in the category of per incuriam.” Though we do not intend to express the view that thejudgments of the Supreme Court in Canara Workshops’ case (1supra) on the one hand and Synco Industries’ case (3 supra) onthe other hand are not reconcilable, we prefer to follow the earlierone since it spelt out the principle, in detail. This, we do evenwhile expressing our unclinching respect to the ratio in SyncoIndustries’ case (3 supra). We also make it clear that we wouldhave straightaway followed the judgment in Synco Industries’case ( 3 supra) had there been at least a passing reference to thejudgment in Canara Workshops’ case (1 supra). We therefore dismiss the appeal. There shall be no orderas to costs. ___________________________ L. NARASIMHA REDDY, J 10-10-2014 ks Note:LR Copy to be marked. B/O _________________________ T. SUNIL CHOWDARY, J ks [1]161 ITR 320 [2]205 ITR 433 [3]299 ITR 444 [4]266 ITR 52 [5]AIR 2014 SC 1745 [6]251 ITR 417