Commissioner Of Income Taxtrichy v. M/S.mallow Internationals.f

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 07.04.2015 CORAM THE HONOURABLE MR.JUSTICE R.SUDHAKARand THE HONOURABLE MS.JUSTICE K.B.K.VASUKI T.C. A. NO. 143 OF 2015 Commissioner of Income TaxTrichy. .. Appellant /Appellant versus M/s.Mallow InternationalS.F. No.535, Semmadai RoadSalem, Bye Pass RoadKarur 639 006. .. Respondent/Respondent Tax Case Appeal filed under Section 260A of the Income Tax Act,1961 against the order dated 26.06.2014 passed by the Income TaxAppellate Tribunal, Madras 'B' Bench, for the assessment year 2010-2011, made in ITA No.153/MDS/2014. For Appellant : Mr. J.Narayanaswamy Standing Counsel for Income TaxJUDGMENT (DELIVERED BY R.SUDHAKAR,J.) This appeal is filed by the Revenue as against the order of theIncome Tax Appellate Tribunal and the core issue raised in this TaxCase (Appeal) is whether, on the facts and in the circumstances ofthe case, the Tribunal is right in law in holding that therespondent/assessee is entitled to claim deduction under Section 80-IA of the Income Tax Act. 2. Though it is brought to the notice of this Court that theissue involved in this appeal has already been decided by this Courtin the decision reported in (2012) 340 ITR 477 (VelayudhaswamySpinning Mills - Vs - Asst. CIT), it is stated by the learnedStanding Counsel appearing for the Revenue that as against thedecision rendered by this Court in Velayudhaswamy Spinning Mills case(supra), the Revenue has preferred appeals before the Supreme Courtand the same are pending. https://hcservices.ecourts.gov.in/hcservices/ 3. Heard learned Standing Counsel appearing for the Revenue andperused the materials placed before this Court. 4. In the decision reported in Velayudhaswamy Spinning Millscase (supra), this Court, while dealing with the benefit underChapter VIA of the Income Tax Act, placed reliance on the decisionreported in (2009) 317 ITR 218 (SC) (Liberty India - Vs - CIT),wherein the Supreme Court considered the scope of Section 80I, 80IAand 80IB of the Income Tax Act and held that Chapter VI-A providesfor incentives in the form of tax deductions essentially belong tothe category of "profit-linked incentives". This Court also placedreliance on the decision reported in (2004) 271 ITR 311 (Raj) (CIT -Vs - Mewar Oil and General Mills Ltd.), and came to the conclusionthat once the losses and other deduction have been set off againstthe income of the previous year, it should not be reopened again forthe purpose of computation of current year income under Sections 80Ior 80IA of the Income Tax Act and the assessee should not be deniedthe admissible deduction under Section 80IA of the Income Tax Act. 5. For better understanding of the decision, we extract therelevant portion of the decision of this Court as such: 5. For better understanding of the decision, we extract therelevant portion of the decision of this Court as such: "From a reading of the above, it is clear that thebenefit is given to the profits and gains derivedfrom the business of the hotel or the business ofrepairs to ocean-going vessels or other poweredcraft. The deduction is allowed to the extent of 20per cent. from the profits and gains of the assessee.Sub-section (5) gives deduction for the period ofseven assessment years immediately succeeding theinitial assessment year. Sub-section (6) deals withcomputing the deduction under sub-section (1) and itstarts with non obstante clause and also it is adeeming provision. The fiction created by theundertaking was the only source of income during theprevious year initially and subsequent assessmentyears. Sub-section (6) was the subject-matter beforethis court in the above-mentioned unreportedjudgment, wherein this court had held that whileinterpreting the above provision, for the purpose ofallowing deduction under section 80-I brought forwardlosses and unabsorbed depreciation of the newindustry need not be taken into consideration oncethey have been set off from other sources of incomeearlier. In the present case, we are concerned withthe provision of section 80-IA. The said provisionwas introduced by the Finance Act, 1999, with effectfrom April 1, 2000. The provisions of sections 80-Iand 80-IA are also more or less identically worded.Sections 80-I and 80-IA come in Chapter VI-A of theIncome-tax Act. Chapter VI-A deals with deductions tohttps://hcservices.ecourts.gov.in/hcservices/ be made in computing total income. There are two taxincentives contemplated in Chapter VI-A. One isinvestment incentive and the other one is profit-linked investment. Chapter VI-A was introduced by theFinance Act, 1965, with effect from April 1, 1965,and it consists of four headings. They are A, B, Cand D. Heading "A" is general and it also containsdefinition. It consists of sections 80A, 80AA, 80AB,80AC and 80B. Section 80AB deals with "Deductions tobe made with reference to the income included in thegross total income", which reads as follows : "Where any deduction is required to be made orallowed under any section included in this Chapterunder the heading 'C-Deductions in respect ofcertain incomes' in respect of any income of thenature specified in that section which is includedin the gross total income of the assessee, then,notwithstanding anything contained in thatsection, for the purpose of computing thededuction under that section, the amount of incomeof that nature as computed in accordance with theprovisions of this Act (before making anydeduction under this Chapter) shall alone bedeemed to be the amount of income of that naturewhich is derived or received by the assessee andwhich is included in his gross total income." "Where any deduction is required to be made orallowed under any section included in this Chapterunder the heading 'C-Deductions in respect ofcertain incomes' in respect of any income of thenature specified in that section which is includedin the gross total income of the assessee, then,notwithstanding anything contained in thatsection, for the purpose of computing thededuction under that section, the amount of incomeof that nature as computed in accordance with theprovisions of this Act (before making anydeduction under this Chapter) shall alone bedeemed to be the amount of income of that naturewhich is derived or received by the assessee andwhich is included in his gross total income." A mere reading of the above provision makes itclear that any income of the nature specified in thatsection, which is included in the gross total incomeof the assessee for the purpose of computing thededuction under that section, the amount of income ofthat nature as computed in accordance with theprovision of this Act shall alone be deemed to be theamount of income of that nature which is derived orreceived by the assessee and which is included in thegross total income. Section 80AB defines "gross totalincome" which means the total income has to becomputed in accordance with the Act before makingdeduction under this Chapter. Heading "B" deals with"deductions in respect of certain payments" whichconsists of sections 80C to 80GGC. Heading "C" dealswith "deductions in respect of certain incomes",which consists of sections 80H to 80TT. The lastheading "D" deals with "other deductions" whichconsists of sections 80U to 80V. Heading "C" isrelevant for considering the issue in these appeals.The relevant provisions that are to be considered aresections 80-I, 80-IA and 80-IB. In the case ofLiberty India v. CIT [2009] 317 ITR 218 (SC) ; [2009]225 CTR (SC) 233 ; [2009] 28 DTR (SC) 73, the apex https://hcservices.ecourts.gov.in/hcservices/ court considered the scope of sections 80-I, 80-IAand also section 80-IB of the Act, wherein, it hasbeen held that Chapter VI-A provides for incentivesin the form of tax deductions essentially belong tothecategoryof"profit-linkedincentives".Therefore, when section 80-IA/80-IB refers to profitsderived from eligible business, it is not theownership of that business which attracts theincentives. Further, it has been held that sections80-IB/80-IA are the code by themselves as theycontain both substantive as well as proceduralprovisions. The Supreme Court further observed in thesaid judgment that sub-section (5) of section 80-IAprovides for manner of computation of profits of aneligible business. Accordingly such profits are to becomputed as if such eligible business is the onlysource of income of the assessee. Section 80-IA reads as follows : "80-IA. (1) Where the gross total income of anassessee includes any profits and gains derived by anundertaking or an enterprise from any businessreferred to in sub-section (4) (such business beinghereinafter referred to as the eligible business)there shall, in accordance with and subject to theprovisions of this section, be allowed in computingthe total income of the assessee, a deduction of anamount equal to hundred per cent. of the profits andgains derived from such business for ten consecutiveassessment years. Section 80-IA reads as follows : "80-IA. (1) Where the gross total income of anassessee includes any profits and gains derived by anundertaking or an enterprise from any businessreferred to in sub-section (4) (such business beinghereinafter referred to as the eligible business)there shall, in accordance with and subject to theprovisions of this section, be allowed in computingthe total income of the assessee, a deduction of anamount equal to hundred per cent. of the profits andgains derived from such business for ten consecutiveassessment years. (2) The deduction specified in sub-section (1) may,at the option of the assessee, be claimed by him forany ten consecutive assessment years out of fifteenyears beginning from the year in which theundertaking or the enterprise develops and begins tooperate any infrastructure facility or startsproviding telecommunication service or develops anindustrial park or develops a special economic zonereferred to in clause (iii) of sub-section (4) orgenerates power or commences transmission ordistribution or power or undertakes substantialrenovation and modernisation of the existingtransmission or distribution lines. (4) This section applies to- (i) any enterprise carrying on the business of (i)developing, or (ii) operating and maintaining, or(iii) developing, operating and maintaining anyinfrastructure facility which fulfils all thefollowing conditions, namely : https://hcservices.ecourts.gov.in/hcservices/ (a) it is owned by a company registered in India orby a consortium of such companies (or by an authorityor a board or a corporation or any other bodyestablished or constituted under any Central or StateAct) ; (b) it has entered into an agreement with theCentral Government or a State Government or a localauthority or any other statutory body for (i)developing, or (ii) operating and maintaining, or(iii)developing, operating and maintaining a newinfrastructure facility ; (c) it has started or starts operating andmaintaining the infrastructure facility on or afterthe 1st April, 1995. (5) Notwithstanding anything contained in any otherprovision of this Act, the profits and gains of aneligible business to which the provisions of sub-section (1) apply shall, for the purposes ofdetermining the quantum of deduction under that sub-section for the assessment year immediatelysucceeding the initial assessment year or anysubsequent assessment year, be computed as if sucheligible business were the only source of income ofthe assessee during the previous year relevant to theinitial assessment year and to every subsequentassessment year up to and including the assessmentyear for which the determination is to be made." From a reading of sub-section (1), it is clear thatit provides that where the gross total income of anassessee includes any profits and gains derived by anundertaking or an enterprise from any businessreferred to in subsection (4), i.e., referred to asthe eligible business, there shall, in accordancewith and subject to the provisions of the section, beallowed, in computing the total income of theassessee, a deduction of an amount equal to 100 percent. of the profits and gains derived from suchbusiness for ten consecutive assessment years.Deduction is given to eligible business and the sameis defined in sub-section (4). Sub-section (2)provides option to the assessee to choose 10consecutive assessment years out of 15 years. Optionhas to be exercised, if it is not exercised, theassessee will not be getting the benefit. Fifteenyears is outer limit and the same is beginning fromthe year in which the undertaking or the enterprisedevelops and begins to operate any infrastructureactivity, etc. Sub-section (5) deals with quantum ofdeduction for an eligible business. The words"initial assessment year" are used in sub-section (5) https://hcservices.ecourts.gov.in/hcservices/ and the same is not defined under the provisions. Itis to be noted that "initial assessment year"employed in sub-section (5) is different from thewords "beginning from the year" referred to in sub-section (2). The important factors are to be noted insub-section (5) and they are as under : "(1) It starts with a non obstante clause whichmeans it overrides all the provisions of the Act andother provisions are to be ignored ; (2) It is for the purpose of determining thequantum of deduction ; (3) For the assessment year immediately succeedingthe initial assessment year ; (4) It is a deeming provision ; (5) Fiction created that the eligible business isthe only source of income ; and (6) During the previous year relevant to theinitial assessment year and every subsequentassessment year." From a reading of the above, it is clear that theeligible business were the only source of income,during the previous year relevant to the initialassessment year and every subsequent assessmentyears. When the assessee exercises the option, theonly losses of the years beginning from initialassessment year alone are to be brought forward andno losses of earlier years which were already set offagainst the income of the assessee. Looking forwardto a period of ten years from the initial assessmentis contemplated. It does not allow the Revenue tolook backward and find out if there is any loss ofearlier years and bring forward notionally eventhough the same were set off against other income ofthe assessee and the set off against the currentincome of the eligible business. Once the set off istaken place in earlier year against the other incomeof the assessee, the Revenue cannot rework the setoff amount and bring it notionally. A fiction createdin sub-section does not contemplates to bring set offamount notionally. The fiction is created only forthe limited purpose and the same cannot be extendedbeyond the purpose for which it is created. In the present cases, there is no dispute thatlosses incurred by the assessee were already set offand adjusted against the profits of the earlieryears. During the relevant assessment year, theassessee exercised the option under section 80-IA(2).In Tax Case Nos. 909 of 2009 as well as 940 of 2009, https://hcservices.ecourts.gov.in/hcservices/ the assessment year was 2005-06 and in Tax Case No.918 of 2008 the assessment year was 2004-05. Duringthe relevant period, there were no unabsorbeddepreciation or loss of the eligible undertakings andthe same were already absorbed in the earlier years.There is a positive profit during the year. Theunreported judgment of this court cited supraconsidered the scope of sub-section (6) of section80-I, which is the corresponding provision of sub-section (5) of section 80-IA. Both are similarlyworded and, therefore, we agree entirely with theDivision Bench judgment of this court cited supra. Inthe case of CIT v. Mewar Oil and General Mills Ltd.(No. 1) [2004] 271 ITR 311 (Raj) ; [2004] 186 CTR(Raj) 141, the Rajasthan High Court also consideredthe scope of section 80-I and held as follows (page314 of 271 ITR) : "Having considered the rival contentions whichfollow on the line noticed above, we are of theopinion that on finding the fact that there was nocarry forward losses of 1983-84, which could beset off against the income of the currentassessment year 1984-85, the recomputation ofincome from the new industrial undertaking bysetting off the carry forward of unabsorbeddepreciation or depreciation allowance fromprevious year did not simply arise and on thefinding of fact noticed by the Commissioner ofIncome-tax (Appeals), which has not been disturbedby the Tribunal and challenged before us, therewas no error much less any error apparent on theface of the record which could be rectified. Thatquestion would have been germane only if therewould have been carry forward of unabsorbeddepreciation and unabsorbed development rebate orany other unabsorbed losses of the previous yeararising out of the priority industry and whetherit was required to be set off against the incomeof the current year. It is not at all requiredthat losses or other deductions which have alreadybeen set off against the income of the previousyear should be reopened again for computation ofcurrent income under section 80-I for the purposeof computing admissible deductions thereunder. In view thereof, we are of the opinion that theTribunal has not erred in holding that there wasno rectification possible under section 80-I inthe present case, albeit, for reasons somewhatdifferent from those which prevailed with theTribunal. There being no carry forward of allowable deductions under the head depreciationor development rebate which needed to be absorbedagainst the income of the current year and,therefore, recomputation of income for the purposeof computing permissible deduction under section80-I for the new industrial undertaking was notrequired in the present case. Accordingly, this appeal fails and is herebydismissed with no order as to costs." From a reading of the above, the Rajasthan HighCourt held that it is not at all required that lossesor other deductions which have already been set offagainst the income of the previous year should bereopened again for computation of current incomeunder section 80-I for the purpose of computingadmissible deductions thereunder. We also agree withthe same. We see no reason to take a different view. The standing counsel appearing for the Revenue isunable to bring to our notice any relevant materialor any compelling reason or any contra judgment ofother courts to take a different view. He only reliedheavily on the Memorandum explaining the provisionsin the Finance (No. 2) Bill, 1980, [1980] 123 ITR(St.) 154 to support this case and the same reads asfollows : "Clause 30(iii). In computing the quantum of'tax holiday' profits in all cases, taxableincome derived from the new industrial units,etc., will be determined as if such units were anindependent unit owned by a taxpayer who does nothave any other source of income. In the result,the losses, depreciation and investment allowanceof earlier years in respect of the new industrialundertaking, ship or approved hotel will be takeninto account in determining the quantum ofdeduction admissible under the new section 80-Ieven though they may have been set off againstthe profits of the taxpayer from other sources." We are not agreeing with the counsel for theRevenue. We are, therefore, of the view that loss inthe year earlier to the initial assessment yearalready absorbed against the profit of other businesscannot be notionally brought forward and set offagainst the profits of the eligible business as nosuch mandate is provided in section 80-IA(5). Under these circumstances, we set aside the orderof the Tribunal and answer all the questions infavour of the appellant/assessee and against theRevenue in Tax Case Nos. 909 and 940 of 2009https://hcservices.ecourts.gov.in/hcservices/ We are not agreeing with the counsel for theRevenue. We are, therefore, of the view that loss inthe year earlier to the initial assessment yearalready absorbed against the profit of other businesscannot be notionally brought forward and set offagainst the profits of the eligible business as nosuch mandate is provided in section 80-IA(5). Under these circumstances, we set aside the orderof the Tribunal and answer all the questions infavour of the appellant/assessee and against theRevenue in Tax Case Nos. 909 and 940 of 2009https://hcservices.ecourts.gov.in/hcservices/ respectively. Accordingly, tax cases are allowed. 6. It is relevant to note that as against the above-saiddecision rendered by this Court, the Revenue has filed appeals beforethe Supreme Court, which are stated to be pending, in which onlynotice has been ordered and they are not yet admitted by the SupremeCourt. 7. The facts in the present case is also identical to theabove-said decision of this Court that the business undertaking ofthe assessee is wind mill power generation and textile exports, andit has claimed the benefit of deduction under Section 80IA of theIncome Tax Act for the assessment year in question and for thesubsequent years as well. Having exercised its option and its losseshave been set off already against other income of the businessenterprise, the assessee in this appeal falls within the parametersof Section 80IA of the Income Tax Act. There appears to be nodistinction on facts in relation to the decision reported inVelayudhaswamy Spinning Mills case (supra). 8. Again in a batch of cases in T.C.(A) Nos.408 of 2012, etc.,by order dated 12.1.2015, this Court, following the decision reportedin Velayudhaswamy Spinning Mills case (supra), held in favour of theassessee and against the Revenue. 9. We, therefore, taking note of the decision rendered by thisCourt in Velayudhasamy Spinning Mills case (supra) and in a batch ofcases in T.C.(A) Nos.408 of 2012, etc., are inclined to dismiss thisTax Case (Appeal), and, thereby, confirm the order passed by theTribunal. Accordingly, the questions of law raised in this appealare answered against the Revenue and in favour of the assessee. 10. For the reasons afore-stated, this Tax Case (Appeal) standsdismissed. Sd/- Assistant Registrar //True Copy// GLN To 1. Commissioner of Income Tax Trichy. Trichy. 2. The Income Tax Appellate Tribunal 'B' Bench, Madras. 'B' Bench, Madras. 1 cc to Mr. J.Narayanaswamy,Advocate, SR.No.19100 T.C.A. NO. 143 OF 2015 VGI(CO)PMK.22.4.2015PMK.22.4.2015