The Commissioner Of Income Taxtamil Nadu-I, Madras v. M/S.viswas Footwear Companylimited, A-2 Iii Phase Guindyindustrial Estate, Chennai

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 3.7.2007 CORAM THE HON'BLE MR.JUSTICE P.D.DINAKARANANDTHE HON'BLE MR.JUSTICE P.P.S.JANARTHANA RAJA T.C.(A).No.242 of 2004 The Commissioner of Income TaxTamil Nadu-I, Madras...Appellant Vs. M/s.Viswas Footwear CompanyLimited, A-2 III Phase GuindyIndustrial Estate, Chennai...Respondent ----- Appeal under Section 260A of the Income Tax Act, 1961against the order of the Income Tax Appellate Tribunal, Madras'D' Bench dated 21.7.2003 in ITA No.1987/Mds/2002 for theassessment year 1996-97.Against the order of the Commissioner of Income Tax (Appeals)III Chennai dated 3.10.2002 made in I.T.A.No.67/2002-03/A.IIIG.I.No.PA No.422-V the year of Assessment 1996-97.Against the Deputy Commissioner of Income Tax Company CircleIII (4) Chennai dated 14.3.2002 G.I.No.422 V Assessment Year1996-97. -----For Appellant : Mrs.Pushya Sitaraman, Sr.S.C.(IT)For Respondent : Mr.T.N.Seetharaman ----- J U D G M E N T(Delivered by P.D. DINAKARAN, J.) The vexed substantial question of law, as raised by theRevenue, arises for consideration is, "Whether on the facts and in the circumstances ofthe case, the Appellate Tribunal was right inholding that deduction under section 80HHC shall begrantedbeforesetoffoftheunabsorbeddepreciation,unabsorbedbusinesslossand https://hcservices.ecourts.gov.in/hcservices/ unabsorbed investment allowance of the earlier yearsbefore grant of depreciation ?" under the following facts and circumstances of the case. 2.1. The relevant assessment year is 1996-97. Theassessee is an exporter of leather footwear. Originally, a'Nil' return of income was filed by the assessee and theassessment was completed under Section 143(3) of the IncomeTax Act, 1961 (in short 'the Act') on a total income ofRs.3,18,715/-, which was reduced to 'nil' after giving setoffof the carried forward loss for the assessment year 1993-94.Later, finding that the assessee has claimed excess deductionresulting in escapement of income, assessment was reopened byissuing notice under Section 148 of the Act. In response tothis, a return of income was filed on 12.6.2001 and theassessing officer, by his order dated 14.3.2002, held that ifthe assessee has suffered loss under any other business or hascarried forward the business loss, unabsorbed depreciation,etc., deduction under section 80HHC, though worked out onprofit of the year, would be restricted to gross total incomeand hence, the assessee is not entitled to any relief. Thesaid view of the assessing officer was also, on appeal by theassessee, confirmed by the Commissioner of Income-tax(Appeals), by his order dated 3.10.2002. 2.2. Aggrieved by the same, the assessee went on furtherappeal before the Appellate Tribunal and the Tribunal, byorder dated 21.7.2003, after considering the provisions ofsection 80 HHC(3) of the Act and various decisions of thisCourt, held the issue in favour of the assessee holding thatthe deduction under section 80HHC should be granted beforesetting off the unabsorbed depreciation, unabsorbed businessloss and unabsorbed investment allowance of the earlier years.Hence, the present appeal by the Revenue raising thesubstantial question of law, referred to above. 3. Heard both sides. 4.1. When an identical issue came up for considerationbefore this Court in Asvini Cold Storage P. Ltd. v.Commissioner of Income-tax [(2007) 290 I.T.R. 183], a DivisionBench of this Court, while rejecting the case of the assesseetherein, who placed reliance on the decision of the BombayHigh Court in Commissioner of Income-tax v. ShirkeConstruction Equipments Ltd. [(2000) 246 I.T.R. 429 (Bom.)],followed the decision of the Apex Court in IPCA LaboratoryLtd. v. Deputy Commissioner of Income-tax [(2004) 266 I.T.R.521 (SC)], and held as hereunder:- " ... Section 80 HHC of the Income-tax Act, 1961, https://hcservices.ecourts.gov.in/hcservices/ 3. Heard both sides. 4.1. When an identical issue came up for considerationbefore this Court in Asvini Cold Storage P. Ltd. v.Commissioner of Income-tax [(2007) 290 I.T.R. 183], a DivisionBench of this Court, while rejecting the case of the assesseetherein, who placed reliance on the decision of the BombayHigh Court in Commissioner of Income-tax v. ShirkeConstruction Equipments Ltd. [(2000) 246 I.T.R. 429 (Bom.)],followed the decision of the Apex Court in IPCA LaboratoryLtd. v. Deputy Commissioner of Income-tax [(2004) 266 I.T.R.521 (SC)], and held as hereunder:- " ... Section 80 HHC of the Income-tax Act, 1961, https://hcservices.ecourts.gov.in/hcservices/ provides for deduction of profits from the grosstotal income. Sub-section (3) is a machineryprovision which lays down the manner of circulatingthe profits which constitute deduction under section80 HHC(1). Consequently, section 80 HHC(3) aids inthe working of the deduction under section 80 HHC(1). Considering the fact that section 80HHC is asection which comes under Chapter VI-A providing forspecial deduction in gross total income,necessarily, the computation for deduction has to bein accordance with the total income computed in amanner provided fro under section 80AB. It isrelevant to note that section 80A deals withdeduction to be made under Chapter VI-A in computingthe total income. It may also be noted that section80A(2) lays down that the aggregate amount of theincome under Chapter VI-A shall not exceed the grosstotal income of the assessee. Read in the contextof section 80A and section 80AB, the scheme ofdeduction under section 80HHC has to be computed outof the income from profits and gains of business inaccordance with the provisions of the Act, as statedso under section 80AB. ... Section 80AB starts with the words "Where anydeduction is required to be made or allowed underany section included in this Chapter, ...notwithstanding anything contained in that section,for the purpose of computing the deduction underthat section, the amount of income of that nature ascomputed in accordance with the provisions of thisAct, (before making any deduction under thisChapter), shall alone be deemed to be the amount ofincome of that nature which is derived or receivedby the assessee and which is included in his grosstotal income". It may be seen that the provisionsof section 80AB contemplate that the gross totalincome has first to be computed in accordance withthe provisions of the Act. When it comes to adeduction, section 80AB further provides that forthe purpose of deduction under any of the sectionsin Chapter VI-A, the amount of income of that naturehas to be computed in accordance with the provisionsof the Act, which means, necessarily for the purposeof deduction, the income of that nature computed fordeduction must have a working in accordance with theprovisions of this Act. If that be so, income fromprofits and gains of business must necessarilyconform to the provisions in Part D, including setoff and carry forward." 4.2. While holding as above, the Division Bench in theabove case held that the unabsorbed depreciation andunabsorbed investment allowance of earlier years should be setoff while computing the profits of business for the purpose ofdetermining the relief under section 80 HHC. 4.3. The view taken by this Court in the case of AsviniCold Storage, referred supra, was subsequently followed bythis Court in an unreported case in T.C.No.62 of 2004 (betweenCommissioner of Income Tax-III v. M/s.Sharon Vaneers P. Ltd.),wherein this Court by order dated 26.2.2007 held as follows:- 4.2. While holding as above, the Division Bench in theabove case held that the unabsorbed depreciation andunabsorbed investment allowance of earlier years should be setoff while computing the profits of business for the purpose ofdetermining the relief under section 80 HHC. 4.3. The view taken by this Court in the case of AsviniCold Storage, referred supra, was subsequently followed bythis Court in an unreported case in T.C.No.62 of 2004 (betweenCommissioner of Income Tax-III v. M/s.Sharon Vaneers P. Ltd.),wherein this Court by order dated 26.2.2007 held as follows:- 6. It is not in dispute that section 80HHC ofthe Act, which provides for deduction in respect ofprofits retained for export business, has beenincorporated in the Income-tax Act, 1961, with aview to providing incentive for earning foreignexchange. A plain reading of section 80HHC makes itclear that in arriving at profits earned from exportof both self manufactured goods and trading goods,the profits and losses in both trades have to betaken into consideration. If, after suchadjustments, there is a positive profit the assesseewould be entitled to deduction under section 80HHC(1) of the Act and if there is a loss the assesseewould not be entitled to deduction. In arriving atthe figure of positive profit, both the profits andthe losses will have to be considered. If the netfigure is a positive profit then the assessee willbe entitled to deduction and if the net figure is aloss then the assessee will not be entitled todeduction. A plain reading of sub-section (3)(c)shows that “profits from such exports” has to beprofits of exports of self-manufactured goods plusprofits of exports of trading goods. The openingwords “profit derived from such exports” togetherwith the word “and” clearly indicate that theprofits have to be calculated by counting both theexports. Deduction can be permitted under section80HHC(1) only if there is a positive profit in theexports of both self-manufactured goods as well astrading goods. If there is a loss in either of thetwo, then the loss has to be taken into account forthe purposes of computing the profits. On the otherhand, the Section 80AB of the Act, which is also inChapter VI-A, starting with the words “where anydeduction is required to be made or allowed underany section of this Chapter” would include section80HHC also. Further, section 80AB of the Actprovides that “notwithstanding anything contained inthat section”. Thus section 80AB of the Act has been https://hcservices.ecourts.gov.in/hcservices/ given an overriding effect over all other sectionsin Chapter VI-A. But, section 80HHC does not providethat its provisions are to prevail over section 80ABof the Act or over any other provision of the Act.Section 80HHC of the Act would thus be governed bysection 80AB of the Act. [vide: IPCA Laboratory Ltd.v. Deputy Commissioner of Income-tax, 266 ITR (SC)521]. 7. In this view of the matter, we are of theview that it is not correct to say that section80HHC of the Act is a self-contained provision andsection 80 AB of the Act cannot be applied tosection 80 HHC of the Act. In other words, section80AB of the Act will prevail over any otherprovision in Chapter VIA of the Act and Section80HHC of the Act would thus be governed by section80AB of the Act. We therefore hold that theunabsorbed business losses, unabsorbed depreciation,etc. should be taken into account while computingincome for the purpose of deduction under section80HHC of the Act. The Appellate Tribunal is notcorrectinholdingthattheunabsorbeddepreciation,unabsorbedbusinesslossandunabsorbed investment allowance of earlier yearscannot be deducted before granting deduction undersection 80 HHC of the Act and that the provisions ofsection 80AB of the Act cannot be applied whiledetermining the business profits under section80HHC." 4.4. To both the above decisions of this Court, viz.,Asvini Cold Storage P. Ltd. v. Commissioner of Income-tax[(2007) 290 I.T.R. 183] and T.C.No.62 of 2004 (betweenCommissioner of Income Tax-III v. M/s.Sharon Vaneers P. Ltd.),one of us was a party (P.D.DINAKARAN, J.). 5.1. That apart, the view taken by the Bombay High Courtin Commissioner of Income-tax v. Shirke ConstructionEquipments Ltd. [(2000) 246 I.T.R. 429 (Bom.)], which isrelied upon by the assessee in the case of Asvini Cold Storageand in the case of Sharon Vaneers P. Ltd., referred supra, hasnow been reversed by the Apex Court in the recent decisionreported in [(2007) 291 I.T.R. 380 (SC)], wherein the ApexCourt has held as follows:- ".. Section 80AB of the Income-tax Act, 1961,specifying that profits are those as determined forthe purpose of the Act, will apply for determiningprofits from export business for the purposes of thededuction under section 80 HHC... In determining business profits for the deduction https://hcservices.ecourts.gov.in/hcservices/ under section 80 HHC, the unabsorbed business lossesof earlier years under section 72 should be setoff." 6. Under such circumstances, since the law on the pointis well settled, as fortified by the decision of the ApexCourt in Commissioner of Income-tax v. Shirke ConstructionEquipment Ltd. [(2007) 291 I.T.R. 380 (SC)] referred supra, weanswer the substantial question of law raised by the Revenuein this appeal, in the negative, in favour of the Revenue andagainst the assessee. The tax case appeal is, accordingly,allowed. No costs. Sd/Asst.Registrar /true copy/ Sub Asst.RegistrarsraTo1.The Assistant Registrar,Income Tax Appellate Tribunal"D" Bench, Madras.2.The Secretary, Central Board of Direct Taxes, New Delhi. 3.The Commissioner of Income-Tax (Appeals), Chennai. 4.The Deputy Commr. Of Income-tax,Company Circle-III(4), Chennai. 5.The Assistant Registrar Tax Appellate TribunalIIIrd Floor Rajaji Bhavan,Besant Nagar,Madras -90+1cc to Mr.Pushya Sitaraman, Senior Standing Counsel IncomeTax Department SR 39875AKR (CO)km/19.7. T.C.(A).No.242 of 2004