M/S. Sundaram Finance Limited v. The Deputy Commissioner Of Income Tax Special Range Ii, Chennai

IN THE HIGH COURT OF JUDICATURE AT MADRAS Reserved on: 24.8.2015 and Pronounced on: 28.03.2016 The Honourable Mr.Justice V.RAMASUBRAMANand The Honourable Mr.Justice K.K.SASIDHARAN Tax Case (Appeal) No.213 of 2015 M/s. Sundaram Finance Limited21, Pattulos Road, Chennai 600 002.... Appellant/AppellantVs. The Deputy Commissioner of Income TaxSpecial Range II, Chennai.... Respondent/Respondent Prayer : Appeal filed under Section 260 A of the Income TaxAct, against the order of the Income Tax Appellate Tribunal 'B'Bench, Chennai, dated 13th July 2005 in ITA Nos.2781/(Mds)/95agaisnt the order, dt. 22.11.1995 in I.T/appeal No.141/93-94 ofthe Commissioner of Income Tax (Appeals), Chennai against theAssessment order, dated 29.10.93 of the Deputy Commissioner ofIncome Tax, Special Range-II, Madras in PAN/GIR No-47-066-Co-3051/9-5 for the assessment year 1988-89. This appeal is by the Assessee, under Section 260-A ofIncome Tax Act 1961, raising the following substantial questionsof law:-(1) Whether on the facts and circumstancesof the case, the Tribunal was right in holdingthat the unabsorbed investment allowance had tobe deducted from profits for the purpose ofcomputing and allowing deduction under Section32-AB ? https://hcservices.ecourts.gov.in/hcservices/ (2) Whether on the facts and in thecircumstances of the case the Tribunal was rightin not appreciating that deduction under Section32-AB had to be allowed before set off underSection 72 and hence before deducting unabsorbedinvestment allowance from the earlier years ? 2. Heard Mr.R.Vijayaraghavan, learned counsel for theAssessee and Mrs.Hema Muralikrishnan, learned Junior StandingCounsel for the Department. 3. The appellant is a non-banking finance company. Theirassessment for the Assessment Year 1988-89 was reopened underSection 147 of the Act by issuing a notice under Section 148 ofthe Act, on 27.9.1991. The appellant filed a Return of Incomeadmitting the same total income as declared in the OriginalReturn. 4. In the Original Assessment, the Assessing Officer alloweddeduction under Section 32-AB to the extent of Rs.57,16,131/-.But in the re-assessment proceedings, the Assessing Officerreduced the claim of deduction to Rs.17,21,922/- on the groundthat depreciation for the relevant assessment year had to berecomputed. 5. The contention of the assessee that the deduction underSection 32-AB was on the profits and gains of business beforesetting off the carried forward loss under Section 72 of theAct, was rejected and the Assessing Officer held that the carryforward of investment allowance for the earlier year was set offas per Section 32-A(3)(ii) of the Act and not under Section 72of the Act. 6. The Assessing Officer also took the view that thedepreciation written back to the extent of Rs.3,59,74,762/-would form part of the book profits of the relevant previousyear. 7. The assessee filed an appeal raising several issues. Butthe appeal was confined only to four issues namely (i) Whetherthe depreciation written back would form part of the bookprofits of the relevant previous year (ii) Whether thewithdrawal of deduction amounting to Rs.17,21,992/- underSection 32-AB on the ground that the appellant did not have apositive income under the head "profits and gains of business"was correct (iii) Whether the withdrawal of depreciation at 100%in respect of bricks for cupola was correct and (iv) Whether thelevy of interest under Section 216 was correct. 6. The Assessing Officer also took the view that thedepreciation written back to the extent of Rs.3,59,74,762/-would form part of the book profits of the relevant previousyear. 7. The assessee filed an appeal raising several issues. Butthe appeal was confined only to four issues namely (i) Whetherthe depreciation written back would form part of the bookprofits of the relevant previous year (ii) Whether thewithdrawal of deduction amounting to Rs.17,21,992/- underSection 32-AB on the ground that the appellant did not have apositive income under the head "profits and gains of business"was correct (iii) Whether the withdrawal of depreciation at 100%in respect of bricks for cupola was correct and (iv) Whether thelevy of interest under Section 216 was correct. 8. The first Appellate Authority upheld the contention ofthe assessee on the first question relating to the depreciationwritten back, on the ground that the issue is covered byCircular No.550 dated 1.1.1990 and that therefore, the AssessingOfficer should verify the claim with reference to the BoardCircular and allow relief. But the first Appellate Authorityheld against the assessee, the second question relating todeduction under Section 32-AB on the ground that if there is nopositive income under the head income from business, therecannot be any scope for allowing this deduction. 9. The assessee as well as the Revenue filed further appealsbefore the Tribunal. While the appeal filed by the Revenue wasfor the Assessment Year 1994-95, the appeal filed by theassessee was for the Assessment Years 1988-89, 1992-93, 1993-94and 1994-95. The appeal of the assessee for the Assessment Year1988-89 was with regard to deduction under Section 32-AB. Theassessee contended that deduction under Section 32-AB should becomputed before setting off of carried forward unabsorbedinvestment allowance. 10. But the Tribunal, by an order dated 13.7.2005 held thatthe total income for the purpose of deduction under Section 32-AB has to be computed as per the provisions of Sections 28 to32-A and that therefore, the investment allowance carriedforward has to be set off for the purpose of computing totalincome. Holding further that once the carry forward investmentallowance was set off admittedly, the assessee has no positiveincome for the purpose of grant of deduction under Section 32-AB, the Tribunal rejected the assessee's appeal. Therefore, theassessee has come up with the above appeal. 11. It is the contention of Mr.R.Vijayaraghavan, learnedcounsel for the assessee that deduction under Section 32-AB hasto be computed on the profits as computed under the head"profits and gains of business" and not on the total income.According to the learned counsel the profits under Section 28have to be computed first and thereafter, the eligibleallowances and deductions as enumerated in Sections 29 to 43-Chave to be allowed. Section 32-AB itself, according to thelearned counsel envisages set off of the relief under theSection against "profits and gains of business" prior to settingoff of carried forward business losses or unabsorbeddepreciation under Section 72. 12. In support of the said contentions, the learned counselrelied upon a decision of this Court in Seshasayee Paper andBoards Limited v. Deputy Commissioner of Income Tax [272 ITR165]. In the said case, this court was concerned with thequestion whether the unabsorbed depreciation should be allowedbefore the unabsorbed investment allowance and what could be the https://hcservices.ecourts.gov.in/hcservices/ 12. In support of the said contentions, the learned counselrelied upon a decision of this Court in Seshasayee Paper andBoards Limited v. Deputy Commissioner of Income Tax [272 ITR165]. In the said case, this court was concerned with thequestion whether the unabsorbed depreciation should be allowedbefore the unabsorbed investment allowance and what could be the https://hcservices.ecourts.gov.in/hcservices/ order of priority in claiming the unabsorbed depreciation andunabsorbed investment of allowance. After referring to thedecision of the Supreme Court in CIT v. Mother IndiaRefrigeration Industries [155 ITR 711], to the effect that incomputing the profits and gains of a business for the currentyear, depreciation for the current year must be deducted firstbefore deducting the unabsorbed carried forward business lossesof earlier years, this Court answered the question against theassessee. But while doing so, this Court quoted with approvalthe order of priority enumerated by the High Court of Gujarat inMonogram Mills Company Limited v. CIT [135 ITR 122]. 13. In Monogram Mills case, the Gujarat High Court held thatthe scheme of priority would be as follows:- (1) current year's depreciation-because that is the first chargeon the receipts in the P&L a/c; (2) carried forward business losses under s. 72(2) r/w s.72(1); (3) unabsorbed depreciation by virtue of the provisions of s. 32(2); (4) unabsorbed development rebate - because of the provisions ofcls. (i) and (ii) of s. 33(2); and (5) current year's development rebate. 14. Therefore, on the basis of the above decisions, thelearned counsel for the assessee contends that the priority ofsetting off the carried forward business or unabsorbedallowances against the total income should be in the followingorder of preference: Firstly, current year's depreciation and amortisedscientific expenditure have to be deducted (ss 32 & 35)Then, carried forward business loss (only from businessincome, under certain conditions) s.72(1); Then, unabsorbed depreciation and amortised scientificexpenditure of earlier years (ss 32 (2) and 35(4); Then, unabsorbed development rebate of earlier years (ss.33(2)(ii) Then, current year's development rebate (ss.33(2)(i)Then, unabsorbed development rebate (ss.33A(2)(ii)Then, current year's development allowance of earlier years(s.32A(3)(ii); and Lastly, current year's investment allowance (s.32A(3)(i).15. We have carefully considered the above submissions. 16. At the outset, it should be pointed out that Sections 28to 44DB are grouped together under the heading "D-Profits andgains of business or profession" under Chapter IV which dealswith "Computation of Total Income". Section 28 of the Act listsout the different types of income that are chargeable to incometax under the head "Profits and gains of business orprofession". Section 29 lays down that the income referred to in https://hcservices.ecourts.gov.in/hcservices/ Section 28 should be computed in accordance with the provisionscontained in Sections 30 to 43-D. 17. A close look at Sections 28 and 29 would show that alltypes of income need not necessarily be chargeable to tax underthe head "Profits and gains of business or profession". WhileSection 28 merely lists out the income chargeable to tax underthe above head, Section 29 indicates the method of computationof such income. 18. Sections 30 to 43-D, to which a reference is made inSection 29, deal with certain items of expenditure,depreciation, investment allowance etc., which could be deductedfrom the total income, for the purpose of arriving at the incomethat could be charged to tax under the head "Profits and gainsof business or profession". But these provisions do not dealwith the question of set off or carry forward. Issues relatingto set off or carry forward and set off are dealt with inChapter VI. 18. Sections 30 to 43-D, to which a reference is made inSection 29, deal with certain items of expenditure,depreciation, investment allowance etc., which could be deductedfrom the total income, for the purpose of arriving at the incomethat could be charged to tax under the head "Profits and gainsof business or profession". But these provisions do not dealwith the question of set off or carry forward. Issues relatingto set off or carry forward and set off are dealt with inChapter VI. 19. Under Section 72 (1), the assessee is allowed to carryforward to the following assessment year and get set off againstthe profits and gains of business assessable for that assessmentyear, (i) any loss that could not be set off against incomeunder any head of income in accordance with the provisions ofSection 71 or (ii) the whole loss where he has no income underany other head. But this benefit will be available under Section72(1), only where the net result of the computation under thehead "Profits and gains of business or profession" for anyassessment year is a loss to the assessee. 20. Sub-section (2) of Section 72 states that where anyallowance is to be carried forward in terms of Section 32(2) or35 (4), effect should first be given to the provisions ofSection 72. Under sub-section (2) of Section 32, as it stood atthe relevant point of time, the following rules were provided: (i) If full effect cannot be given to any allowance coveredby the section, in any previous year owing to there being noprofits or gains chargeable for that previous year or owing tothe profits and gains being less than the allowance, then theallowance to which effect has not been given may be set offagainst the profits and gains assessable for that assessmentyear. (ii) If the unabsorbed depreciation allowance cannot bewholly set off under the first rule, the amount not so set offshall be set off from the income under any other head. (iii) If the unabsorbed depreciation allowance cannot bewholly set off under rules 1 and 2 above, the amount of https://hcservices.ecourts.gov.in/hcservices/ allowance that could not be set off, shall be carried forward tothe following assessment year and set off against profits andgains assessable for that assessment year. This process can berepeated successively for a period not more than 8 assessmentyears. 21. Keeping the above in mind, if we come back to Section32-AB it could be seen that under the Finance Act, 1987, thisSection was amended. We are taking particular note of thisamendment, in view of the fact that in the case on hand we areconcerned with the assessment year 1988-89. The Explanatory noteon the provisions of the Finance Act, 1987 contained in CircularNo.495 dated 22.9.1987 states that under the Finance Act, 1986,deduction under Section 32-AB was allowed after setting offbusiness loss if any, brought forward from earlier years andthat in order to remove the hardship in cases where the assesseemay not be able to avail of this benefit because of broughtforward losses from earlier years, Finance Act, 1987 sought toprovide that the deduction will be allowed before setting off ofbrought forward losses. 22. The words inserted in Section 32-AB (1), by the FinanceAct, 1987 were "such deduction being allowed before the loss, ifany, brought forward from earlier years is set off under Section72. Therefore, it is clear that any deduction under Section 32ABhas to be allowed before a set off is made under Section 72 inrespect of the loss brought forward from the earlier years.Hence, the second question of law, is even as per the plainlanguage of Section 32AB(1), as amended by Finance Act, 1987,has to be answered in favour of the assessee. 22. The words inserted in Section 32-AB (1), by the FinanceAct, 1987 were "such deduction being allowed before the loss, ifany, brought forward from earlier years is set off under Section72. Therefore, it is clear that any deduction under Section 32ABhas to be allowed before a set off is made under Section 72 inrespect of the loss brought forward from the earlier years.Hence, the second question of law, is even as per the plainlanguage of Section 32AB(1), as amended by Finance Act, 1987,has to be answered in favour of the assessee. 23. On the first question it is seen from para 4 of theorder of the Tribunal that the Tribunal was persuaded to take aview in favour of the Revenue, only on account of the fact thatthe assessee was left with no positive income for the purpose ofgrant of deduction under Section 32AB, once carried forwardinvestment allowance was set off. But the grant of the benefitdid not depend upon the question whether the assessee was leftwith a positive income or not. If the deductions to be madeunder various provisions from Section 30 onwards, lead only to anegative income that could be chargeable to tax under the head"Profits and gains of business" in terms of Section 28, the samecannot lead to a different interpretation to the plain languageof the provisions. 24. The Assessing Officer went purely by logic, on the basisof the decision of the Supreme Court in Cambay Electric Supplyv. CIT [113 ITR 84], to hold that unabsorbed depreciation etc.,provided in earlier Sections have to be set off before making adeduction under the latter Sections. Since the carry forward ofinvestment allowance is under Section 32A(3)(ii) and not under https://hcservices.ecourts.gov.in/hcservices/ Section 72, he held that income from business has to be computedby allowing a deduction as per the benefit available under aprior Section namely Section 32A(3)(ii) before proceeding togive a deduction under the latter Section namely Section 32AB. 25. But we do not find that such a logic has anyapplication. While Section 32A deals with investment allowance,Section 32AB deals with investment deposits. We have alreadypointed out the object of the amendment made under Finance Act,1987 to Section 32AB. 26. Therefore, we are of the considered view that even thefirst question of law has to be answered in favour of theassessee. Accordingly, both questions of law are answered infavour of the assessee and the appeal allowed. No costs. Sd/- Assistant Registrar(CS III) //True Copy// Sub Assistant Registrar gr.To 1. The Income Tax Appellate Tribunal,Bench B Chennai. 2. The Deputy Commissioner of Income TaxSpecial Range II, Chennai-600 034. 3. The Commissioner of Income tax (Appeals),Chennai 600 034. + 1 cc to Mr.J. Narayanasamy, Advocate Sr.19136 T.C.A.No.213 of 2015 GJ(CO)Eu 13.04.16