Db Income Tax Appeal v. Commissioner Of Income Tax, Alwar

IN THE HIGH COURT OF JUDICATURE FOR RAJASTHANBENCH AT JAIPUR J U D G M E N T (1)DB Income Tax Appeal No.185/2004Vijay Solvex Ltd. Vs.Commissioner of Income Tax, Alwar (2)DB Income Tax Appeal No.20/2005Vijay Solvex Ltd. Vs.Commissioner of Income Tax, Alwar (3)DB Income Tax Appeal No.31/2006Vijay Solvex Ltd. Vs. Commissioner of Income Tax, Alwar DATE OF ORDER : 06 January, 2014 PRESENTHON'BLE MR.JUSTICE AJAY RASTOGIHON'BLE MR.JUSTICE J.K. RANKA Mr.Sanjay Jhanwar, for the appellant.Mrs.Parinitoo Jain, for the respondent. *** BY THE COURT (PER HON.RANKA,J.): 1.These three Income Tax Appeals u/sec. 260A of the IncomeTax Act, (for short, 'IT Act') are directed against the order passedby the Income Tax Appellate Tribunal, Jaipur (for short, 'ITAT') inITA No.1296/JP/1996, ITA No.1694/JP/1993 & ITA No.390/JP/2002dt.12/01/2004, 14/10/2004 & 27/07/2005 respectively for theassessment years 1992-93, 1990-91 and 1998-99 respectively. 2.Since the controversy in all the three assessment years iscommon and arising in between the same parties, therefore, all these three appeals are being disposed of by this common order. 3.The appeals were admitted on the following substantialquestion of law:- -Substantial question of law in DB ITA 185/2004: “(i)Whether the term 'Profit and Gains' used in section80HH & 80I of the Income Tax Act 1961 with reference to an eligible industrial undertaking have the samemeaning as the term 'income' whereas the statute usesboth the terms independently in different provisions ofthe Act? (ii)Whether the 'Profits and Gains' of current year of the eligible undertaking would be relevant for computingdeduction u/s. 80HH and 80I of the Act or the incomecomputed after reducing depreciation allowance u/s 32(1), unabsorbed depreciation u/s 32(2) and unabsorbedloss u/s 72 shall be relevant for these deductions?” Substantial question of law in DB ITA No.20/2005. “(i)Whether the learned Tribunal was justified in holdingthat the deduction under Chapter VIA are to be givenfrom the amount of Gross Total Income for the purposeof computing the deduction u/S.80HH and 80I of theIncome Tax Act 1961? (ii)Whether the term 'Profit and Gains' used in Section80HH & 80I of the Income Tax Act, 1961 with referenceto an eligible industrial undertaking have the samemeaning as the term 'income' whereas the statute usesboth the terms independently in different provisions ofthe Act.? (iii)Whether the 'Profits and Gains' of current year ofthe eligible undertaking would be relevant for computing deduction u/S.80HH and 80I of the Act orthe income computed after reducing depreciationallowance u/S.32(1) shall be relevant for thesedeductions?” Substantial question of law in DB ITA No.31/2006 “(i) Whether the term 'Profit and Gains' used in section80HH of the Income Tax Act 1961 with reference to aneligible industrial undertaking have the same meaning asthe term 'income' whereas the statute uses these termsindependently in different provisions of the Act? (ii)Whether the 'Profits and Gains' of current year of theeligible undertaking would be relevant for computingdeduction u/s 80HH of the Act or the income computedafter reducing depreciation allowance u/s 32(1) shall berelevant for this deduction?” 4.The brief facts, as reveal from record (Assessment Year 1990-91), are that the appellant-assessee commenced its commercialproduction of crushing of oil seeds through oil mill and solvent plantand the turnover in the first assessment year is at Rs.4,58,31,787/-and it is the claim of the appellant-assessee that the major part isfrom the sale of solvent extracted mustard oil for Rs.2,63,73,825/- 5.The appellant-assessee claimed deduction u/s 80-HH & 80-I of the IT Act amounting to Rs.14,23,468/- & Rs.17,79,334/-respectively as per the audit report annexed to the return of income.The said amount had been claimed before deducting depreciation of 4.The brief facts, as reveal from record (Assessment Year 1990-91), are that the appellant-assessee commenced its commercialproduction of crushing of oil seeds through oil mill and solvent plantand the turnover in the first assessment year is at Rs.4,58,31,787/-and it is the claim of the appellant-assessee that the major part isfrom the sale of solvent extracted mustard oil for Rs.2,63,73,825/- 5.The appellant-assessee claimed deduction u/s 80-HH & 80-I of the IT Act amounting to Rs.14,23,468/- & Rs.17,79,334/-respectively as per the audit report annexed to the return of income.The said amount had been claimed before deducting depreciation of Rs.72,28,897/-. Whereas according to the Assessing Officer, thebalance-sheet and profit & loss account of the appellant-assesseeshowed net loss of Rs.1,11,559/- after deduction of depreciation ofRs.72,28,897/- and according to the Assessing Officer, since theresultant figure of Profits & Gains remained negative, no deductionwas allowable u/s 80HH and 80I of the Act and it was to beallowable only after total income of the assessee had been positiveafter allowing deductions for depreciation, investment allowance u/s32 and 32A respectively. 6.Aggrieved with the aforesaid finding appeal was preferredbefore the Commissioner of Income Tax (Appeals) (for short, the'CIT(A) and it was submitted that the relief u/s 80HH and 80I isavailable to the industrial undertaking which fulfills the requirementand it is out of the profit and gains of an industrial undertaking. Itwas argued that the relief is to be deducted first for computing thetotal income and the other deductions ought to have beenconsidered afterwards. It was the claim of the assessee that theterm profit and gains having not been defined under the provisionsof the IT Act but the income has been defined under Chapter VI-Aand the reference is to term profit and gains in majority of sub-section and only in certain sections, the term income is referred toand accordingly it was argued that the relief u/s 80HH and 80I hasto be worked out with reference to profit and gains. It was further submitted that provisions of Sec. 80HH and Sec.80I are independentand self contained. The CIT(A) did not agree with the contentionraised on behalf of the assessee and it was held that after insertionof provisions of Sec. 80AB w.e.f. 01/04/1981, the deduction u/s80HH to Sec.80 I (except Sec.80M), is to be allowed with referenceto the net income and the net income means the income arrived atafter allowing the deductions on account of the depreciation andunabsorbed losses, unabsorbed depreciation etc. etc. and afterobserving that since in the present case, the resultant figure wasminus (loss) , the relief was not available to the appellant andaccordingly, the appeal was dismissed. 7.The matter was carried in appeal by the appellant before theITAT. The ITAT agreed with the finding of the Assessing Officer aswell as CIT(A) and declined to interfere on this issue. 8.Since the Tribunal upheld the finding of the Assessing Officeras well as CIT(A), the matter has been assailed before us by raisingthe aforesaid substantial questions of law. 9.Shri Sanjay Jhanwar, ld. counsel for the appellant concededthat the issue is no more res-integra in so far as the present issuesare concerned and not only this Court but the Hon'ble Apex Courthas come to the conclusion that the deduction u/Sec.80HH and 80I 7.The matter was carried in appeal by the appellant before theITAT. The ITAT agreed with the finding of the Assessing Officer aswell as CIT(A) and declined to interfere on this issue. 8.Since the Tribunal upheld the finding of the Assessing Officeras well as CIT(A), the matter has been assailed before us by raisingthe aforesaid substantial questions of law. 9.Shri Sanjay Jhanwar, ld. counsel for the appellant concededthat the issue is no more res-integra in so far as the present issuesare concerned and not only this Court but the Hon'ble Apex Courthas come to the conclusion that the deduction u/Sec.80HH and 80I are not allowable in the facts and circumstances of the case.However, in so far as the question No.1 is concerned, he contendedthat in none of the cases, the term profit and gains has beenreferred to and in this regard he tried to distinguish and contendedthat the Calcutta High Court in the case of Commissioner of IncomeTax Vs. Orient Paper Mills Ltd., reported in (1983) 139 ITR 763(Cal); Orissa High Court in Commissioner of Income Tax Vs. TarunUdyog, reported in (1991) 191 ITR 688 (Ori.) and Karnataka HighCourt in the case of Commissioner of Income Tax Vs. H.M.T. Ltd.,reported in (1993) 1999 ITR 235 (Kar.) have considered the termincome vis-a-vis profits and gains and this is required to beconsidered in Sec.80HH and Sec.80I as well. He contended that boththese sections specifically deals about the term profit and gains andnowhere refers to word 'income' and, therefore, he contended thatthe term profit and gains is wider than income and in the instantcase, the profits and gains were substantially higher and onlybecause of the claim of depreciation that it had gone minus (loss)otherwise for all practical purposes, the assessee had shownsubstantial profits. He contended that Sec.80HH and Sec.80I arebeneficial provisions and is allowable for a particular industry whichis to be set up in remote areas and being beneficial provisions, theclaim deserves to be allowed on profits and gains and not income. submits that deduction u/s 80HH & 80I is allowable on net profitafter deducting deprecation, unabsorbed depreciation, unabsorbedlosses etc. and in the instant case, there is a loss, hence no benefitu/s 80HH & 80I could be allowed. She further contended that theHon'ble Supreme Court in the case of Motilal Pesticides (I.) Pvt. Ltd.Vs. Commissioner of Income Tax, reported in (2000)9 SCC 63 hadan occasion to consider this very issue and after analyzing theprovisions affirmed the judgment of Delhi High Court which hadconsidered the issue at length. She also contended that again theHon'ble Supreme Court in the case of SYNCO Industries Ltd.,reported in (2008) 299 ITR 444 has come to the same conclusion.She also contended that this Court had consistently held in favour ofrevenue and against the assesseee in the cases of Commissioner ofIncome Tax vs. Loonkar Tools (I) Ltd., reported in (1995) 213 ITR721 (Raj.); Commissioner of Income Tax vs. Vishnu Oil & Dal Mills(1996) 218 ITR 71 (Raj.); Commissioner of Income Tax vs. SeaHawk (I)(P) Ltd. (1994) 75 Taxman 381 (Cal); Commissioner ofIncome Tax. vs. Agarwal Gum Industries (2001) 250 ITR 843(Raj.),Commissioner of Income Tax vs. Rajendra Textiles, reported in(1997) 225 ITR 516 (Raj.); Commissioner of Income Tax vs. Sunil &Co. , reported in (1996) 132 CTR (Raj.) 202 and Commissioner ofIncome Tax vs. Rajasthan Co-operative Spinning Mills Ltd. (1997)225 ITR 574 (Raj.) and accordingly submitted that the issue iscovered in favour of revenue and against the assessee. 11.In so far as the contention raised by counsel for the appellantabout income and profits and gains cited by the ld. counsel for theappellant, as referred to supra, she contended that the same aredistinguishable on facts and when the Hon'ble Apex Court hasconsidered this very issue, then no interference is required in thematter. 12.We have considered the arguments advanced by counsel forthe parties. 11.In so far as the contention raised by counsel for the appellantabout income and profits and gains cited by the ld. counsel for theappellant, as referred to supra, she contended that the same aredistinguishable on facts and when the Hon'ble Apex Court hasconsidered this very issue, then no interference is required in thematter. 12.We have considered the arguments advanced by counsel forthe parties. 13.The Hon'ble Apex Court in the case of SYNCO Industries Ltd.:(2008) 299 ITR 444, while considering the question whetherdeduction under Section 80HH and 80I were allowable, observedas under:- “The above discussion makes it very evident thatpredominant majority of the High Courts have taken theview that while working out gross total income of theassessee the losses suffered have to be adjusted and ifthe gross total income of the assessee is 'Nil' the assesseewill not be entitled to deduction under Chapter VI-A of theAct. It is well settled that where the predominant majorityof the High Courts have taken certain view on theinterpretation of certain provisions, the Supreme Courtwould lean in favour of the predominant view. therefore,this Court is of the opinion that the High Court wasjustified in holding that gross total income must be determined, by setting off against the income, thebusiness losses of earlier years, before allowing deductionunder Chapter VI-A and if the resultant income is 'Nil',then the Assessee cannot claim deduction under ChapterVI-A. However, this Court finds that the non-obstante clauseappearing in Section 80-I(6) of the Act, is applicable onlyto the quantum of deduction, whereas, the gross totalincome under Section 80B(5) which is also referred to inSection 80I(1) is required to be computed in the mannerprovided under the Act which presupposes that the grosstotal income shall be arrived at after adjusting the lossesof the other division against the profits derived from anindustrial undertaking. If the interpretation as suggestedby the appellant is accepted it would almost render theprovisions of Section 80A(2) of the Act nugatory andtherefore the interpretation canvassed on behalf of theappellant cannot be accepted. It is true that under Section80-I(6) for the purpose of calculating the deduction, theloss sustained in one of the units, cannot be taken intoaccount because Sub-section 6 contemplates that only theprofits shall be taken into account as if it was the onlysource of income. However, Section 80A(2) and Section80B (5) are declaratory in nature. They apply to all theSections falling in Chapter VI-A. They impose a ceiling onthe total amount of deduction and therefore the non-obstante clause in Section 80-I(6) cannot restrict theoperation of Sections 80A(2) and 80B(5) which operate indifferent spheres. As observed earlier Section 80-I(6)deals with actual computation of deduction whereasSection 80- I(1) deals with the treatment to be given to such deductions in order to arrive at the total income ofthe assessee and therefore while interpreting Section 80-I(1), which also refers to gross total income one has toread the expression 'gross total income' as defined inSection 80B(5). therefore, this Court is of the opinion thatthe High Court was justified in holding that the loss fromthe oil division was required to be adjusted beforedetermining the gross total income and as the gross totalincome was 'Nil' the assessee was not entitled to claimdeduction under Chapter VI-A which includes Section 80-Ialso. The proposition of law, emerging from the abovediscussion is that the gross total income of the assesseehas first got to be determined after adjusting losses etc.,and if the gross total income of the assessee is 'Nil' theassessee would not be entitled to deductions underChapter VI-A of the Act.” 14.The Hon'ble Apex Court in the case of Motilal Pesticides (I)Pvt. Ltd. (supra) had also an occasion to consider the above issueand observed as under:- The proposition of law, emerging from the abovediscussion is that the gross total income of the assesseehas first got to be determined after adjusting losses etc.,and if the gross total income of the assessee is 'Nil' theassessee would not be entitled to deductions underChapter VI-A of the Act.” 14.The Hon'ble Apex Court in the case of Motilal Pesticides (I)Pvt. Ltd. (supra) had also an occasion to consider the above issueand observed as under:- “Both sections 80HH and 80M fall in Chapter VI-Arelating to deductions to be made in computing totalincome. It will be seen that the language of sections80HH and 80M is the same. It was held in Cloth Traders(P.) Ltd.'s case : [1979] 118 ITR 243 (SC) that deductionis to be allowed on the gross total income and not onthe net income. But then the decision in Cloth Traders(P.) Ltd.'s case: [1979] 118 ITR 243 (SC) was overruled in Distributors (Baroda) P. Ltd. v. Union of India: [1985]155 ITR 120 (SC) . After the decision in Cloth Traders(P.) Ltd.'s case [1979] 118 ITR 243 (SC) , two sections80AA and 80AB were introduced by the Finance (No. 2)Act, 1980. While Section 80AA was to have retrospectiveeffect with effect from April 1, 1968, Section 80AB wasto have operation with effect from April 1, 1981. Section80AA had the effect of effacing the decision of this courtin Cloth Traders (P.) Ltd.'s case : [1979] 118 ITR 243(SC) , which had interpreted Section 80M. Section 80ABwas made applicable to all the sections in Chapter VI-Aexcept Section 80M. In Distributors (Baroda) P. Ltd.'scase: [1985] 155 ITR 120 (SC) , however, this courtspecifically overturned its earlier decision in ClothTraders (P.) Ltd.'s case: [1979] 118 ITR 243 (SC) andheld that deduction is to be allowed only on the netincome and not on the gross income. With reference toSection 80AB, this court said it was merely of aclarificatory nature and the decision of this court inDistributors (Baroda) P. Ltd.'s case: [1985] 155 ITR 120(SC) is thus irrespective of Section 80AB of the Act. TheHigh Court, therefore, relying on the decision of thiscourt in Distributors (Baroda) P. Ltd.'s case : [1985] 155ITR 120 (SC) answered the question in favour of theRevenue and against the assessee.” 15.Recently, the Hon'ble Apex Court, in the case of M/s.Himatsingka Seide Ltd. Vs. CIT, Civil Appeal No.1501/2008, decidedon 19/09/2013 also took similar view. In the case of M/s.Himatsingka Seide Ltd. the assessee filed nil return claiming 12 exemption u/s 10B and the assessee computed the profits of theEOU without adjusting the brought forward unabsorbed deprecationof Assessment Year 1988-89. It is claimed that as Sec. 10Bconferred “exemption” for the profits of the EOU, the said broughtforward deprecation could not be set-off from the profits of the EOUbut was available to be set-off against income from other sources. Itwas also claimed that the profits had to be computed on a“commercial” basis. It also adjusted brought forward unabsorbeddeprecation against income from other sources. The assessingOfficer, accepting assessee's claim, assessed total income at nil. TheCommissioner, in exercise of powers u/s 263, set aside assessmentorder holding that exemption u/s 10B was allowed on an inflatedamount without deducting unabsorbed deprecation from exportincome. On appeal by the assessee, the Tribunal reversed the orderof CIT. On appeal by the department, the High Court in CIT Vs.Himatsingka Seide Ltd, 286 ITR 255 (Kar) reversed the Tribunal'order and held that the brought forward deprecation had to beadjusted against the profits of the EOU before computing theexemption allowable u/s 10B. On appeal, the Hon'ble Apex Courtheld as under:- “Having perused the records and in view of the facts &circumstances of the case, we are of the opinion thatthe Civil Appeal being devoid of any merit deserves tobe dismissed and is dismissed accordingly.” 13 “Having perused the records and in view of the facts &circumstances of the case, we are of the opinion thatthe Civil Appeal being devoid of any merit deserves tobe dismissed and is dismissed accordingly.” 13 16.This Court in the case of Loonkar Tools (I) Ltd. (supra)observed as under:- “In view of the above discussion, we are of the viewthat the depreciation and investment allowance have tobe deducted before giving the special deduction asprovided under Chapter VI-A and the "profits and gains"which are alleged to be equivalent to commercial profitshave to be restricted only to the extent of such profitsand gains which are included in the gross total incomeon which the deduction is available. In thesecircumstances, we are of the view that the Income TaxAppellate Tribunal was not justified in coming to theconclusion that the deduction under Section 80HH is tobe computed on the commercial profits and incomputing the commercial profits the assessee isentitled to require addition of the provision for tax,depreciation and investment allowance reserve to thenet profit as per the profit and loss account to arrive atthe commercial profits.” 17.This Court in the case of Vishnu Oil & Dal Mills (supra; AgarwalGum Industries (supra); Rajendra Textiles (supra); Sunil & Co.(supra); Rajasthan Cooperative Spinning Mills Ltd. (supra); VijayIndustries Vs. Commissioner of Income Tax, reported in (2004) 270ITR 175 & Commissioner of Income-Tax Vs. Surendra Textiles,reported in (2002) 258 ITR 387; Modern Syntex (India) Ltd. Vs.CIT: (2005) 142 Taxman 80 (Raj.) came to the same conclusion. 18.The Calcutta High Court in the case of Sea Hawk (I)(P)Ltd.Observed as under:- “It is also a point of interest to note that the larger Benchof the Supreme Court in Distributors (Baroda) (P.) Ltd.'scase (supra) observed that the ratio in Cambay ElectricSupply Industrial Co. Ltd.'s case (supra) was a correctone and the decision in Cloth Traders (P.) Ltd.'s case(supra) was wrongly taken and taken in oversight of theprinciple laid down by Cambay Electric Supply IndustrialCo. Ltd.'s case (supra). Therefore, we have no hesitation to say that the Tribunalerred in following the ratio in Cloth Traders (P.) Ltd.'scase (supra) and in holding that the assessee is entitledto the deduction of the profits and gains from its newhotel business before adjustment of the past unabsorbedloss carried forward for set off.” 19.After analyzing the provisions of Section 80HH & 80I of the ITAct and the judgments rendered by the Hon'ble Apex Court and thisCourt (supra), we are of the view that for claiming deduction underany provision of Chapter VIA, of which Section 80HH & 80I are alsopart, then it has to be after allowance of all deductions such asdepreciation, unabsorbed depreciation & unabsorbed losses andtherefore, in order to compute the profit and loss of income from anindustrial undertaking, to which Section 80HH & 80I applies, theprovisions of Part D of Chapter IV has to be taken into consideration 15 19.After analyzing the provisions of Section 80HH & 80I of the ITAct and the judgments rendered by the Hon'ble Apex Court and thisCourt (supra), we are of the view that for claiming deduction underany provision of Chapter VIA, of which Section 80HH & 80I are alsopart, then it has to be after allowance of all deductions such asdepreciation, unabsorbed depreciation & unabsorbed losses andtherefore, in order to compute the profit and loss of income from anindustrial undertaking, to which Section 80HH & 80I applies, theprovisions of Part D of Chapter IV has to be taken into consideration 15 and it is only after computing the income in accordance with theprovisions contained in the Chapter that income from such industrialundertaking, included in the gross total income of an assessee,could be found out. We are in conformity with the observations ofthe authorities referred to herein above that deduction can only becalculated with reference to the profit and loss account of theassessee and after deductions on account of depreciation oradditional depreciation unabsorbed depreciation, unabsorbed lossesetc. and only if such income is positive would be eligible fordeduction under Section 80HH & 80I of the IT Act. The gross totalincome of the assessee has to be worked out after deducting theaforesaid deductions only to arrive at the net income and in case,after deducting all these statutory deductions, some incomeremains, then obviously the assessee would be entitled to deductionunder Section 80HH & 80I of the IT Act. However, when there is notaxable income, then no deduction under Chapter VIA could beallowed. 20.It is an admitted fact that in so far as the present facts andcircumstances of the case are concerned, after allowingdepreciation, unabsorbed loss and unabsorbed depreciation, therewas no positive income and we accordingly hold that the assesseewas not entitled to any deduction under Section 80HH & 80I of theIT Act. 16 21.The judgments relied upon by learned counsel for theappellant are of no assistance. In our view, no different answer isrequired to be given in the facts and circumstances of the presentcases and consequently, the substantial questions are answered inthe negative i.e. against the assessee and in favour of the revenue. 22.Consequently, the appeals, being devoid of merit, are herebydismissed. No order as to costs. [J.K. RANKA],J ,J. Raghu/p.16/ Certificate:All corrections made in the judgment/order have beenincorporated in the judgment/order being e-mailed./Raghu, PA.