1. This appeal by the assessee for A.Y 1995-96 is directed against order under Section 263 of the I.T. Act, 1961 dated 09-03-2004 passed by the Commissioner of Income-tax, Chennai-IV. The only issue for consideration relates to setting off of loss of earlier years brought forward notionally for the purpose of deduction Under Section 80-I of the Act.
2. The facts of the case as apparent from record are that in A.Y 1995-96 the claim of assessee for deduction Under Section 80-I was rejected by the A.O in assessment order on 29.3.2000. On appeal, the Id. CIT(A) allowed the claim of the assessee in principle vide his order dated 18.10.2000 and directed the A.O to verify and allow the claim if the assessee was otherwise eligible for deduction Under Section 80-I. While giving effect to the appellate order, the A.O.allowed the claim of the assessee in full amounting to Rs. 23,28,397/- without setting off brought forward notionally unabsorbed losses and depreciation from earlier years amounting to Rs. 160. 59 lakhs. If the brought forward loss had been set off against the profit of the eligible unit for the relevant assessment year, no deduction Under Section 80-I could have been allowed in terms of Section 80-I(6) of the I.T. Act. Therefore, the ld. Commissioner considered the order passed by the A.O. giving effect to the order of CIT (A) to be erroneous and prejudicial to the interests of Revenue. He accordingly issued notice to the assessee on 06.06.2003 proposing to revise the order of the A.O.dated 28.03.2002.
3. Before the ld. Commissioner it was submitted by the assessee's counsel that since the CIT (A) has already decided the issue relating to Section 80-I no action Under Section 263 could be taken by the Commissioner of Income-tax.
4. The ld. Commissioner considered the directions given by the CIT(A) for allowing the claim of the assessee and came to the conclusion that the doctrine of merger is not applicable to the facts of the case. The Commissioner in proceedings Under Section 263 was not questioning the eligibility of the unit for deduction Under Section 80-I which was decided by the CIT(A). What was proposed to be revised in the order Under Section 263 was the exact computation of income Under Section 80-I made by the A.O in his order dated 28-3-2002. The ld. Commissioner further observed that the AO has failed to set off unabsorbed depreciation allowances and losses for earlier years pertaining to the eligible unit amounting to Rs. 160.59 lakhs while computing the profit of the unit for A.Y 1995-96 within the terms of Section 80-I(6) of the Act. The eligible unit for deduction Under Section 80-I has to be treated as a self contained independent undertaking and the profit thereof has to be computed in accordance with the relevant provisions of the Income-tax Act. He relied on the decision of Hon'ble Bombay High Court in the case of Synco Industries Ltd. v. Assessing Officer of Income Tax 254 ITR 608 and of the Calcutta High Court in the case of CIT v. Balmar Lawrie & Co. Ltd. 215 ITR 248. He therefore came to the conclusion that the order passed by the AO dated. 28-3-2002 was erroneous and prejudicial to the interests of Revenue. Aggrieved by the said order of the ld. Commissioner, the assessee is in appeal before the Tribunal.
5. Before us, the Id. AR of the assessee submitted that ITAT, Chennai Bench-C in the case of TTK Pharma Ltd. v. ACIT in ITA No. 2698/Mds/94 for A.Y 1991-92 considered this issue in favour of assessee and held that once the losses of one unit has been set off, there is no question of carrying them forward notionally and setting them off against the income of the unit in subsequent years. While allowing the claim of the assessee reliance was placed by the Tribunal on the decision of Hon'ble Supreme Court in the case of Rajapalayam Mills Ltd. v. CIT, Madras 115 ITR 777 and Calcutta High Court decision in the case of Balmer Lawrie & Co. Ltd. (supra). It was also brought to our notice by the ld. AR that in the case of Sri Ramakrishna Mills (Cbe.) Ltd. v. DCIT ITAT, Chennai Bench -D in ITA No. 84/Mds/98 for A.Y 1995-96 decided the issue against the assessee. Since conflicting decisions are available on the issue, it was argued that the matter be referred to a Special Bench.
6. On the other hand, the ld. DR submitted that the decision in the case of Balmer Lowrie & Co. Ltd. (supra) relates to deduction Under Section 80HH and has been wrongly applied by the Tribunal while deciding the issue Under Section 80-I of the Act. It is further submitted that Section 80HH does not have clause equivalent to Section 80-I(6). The Tribunal in the case of TTK Pharma referred to above has not considered the provisions of Section 80-I(6) of the Act which creates a legal fiction to brought forward depreciation allowance and losses notionally treating the eligible unit as independent unit for the purpose of deduction Under Section 80-I of the Act. Therefore, decision rendered in the case of TTK Pharma by the ITAT is per incuriam. In the case of Sri Ramakrishna Mills (Cbe.)Ltd. the provisions of Section 80-I(6) were considered and therefore the decision rendered by the Tribunal in this case is applicable to the facts of the present case. It was further submitted that in the case of Rajapalayam Mills Ltd. v. CIT, 115 ITR 777 Hon'ble Supreme Court (in the context of Indian Income-tax Act, 1922) held that there was nothing in Section 15C(3) or any other provisions of the Act which required that in computing the profits or of a new industrial undertaking Under Section 10, depreciation allowance or development rebate in respect of the new industrial undertaking for the past assessment years should be taken into account, even if it has been set off fully against the profits or gains of any other business carried on by the assessee or against income under any other head and there was no unabsorbed depreciation allowance or development rebate to be carried forward. The ld. DR further submitted that Section 80-I(6) does enact a legal fiction providing that the profits and gains of new industrial undertaking shall be computed as if the new industrial undertaking were the only business of the assessee from the date of its establishment and the past years depreciation and losses are to be set off against the income of assessee from the undertaking. Therefore, the new industrial undertaking is retrospectively quarantined or isolated from the other income producing activity for determining the profits and gains for the purpose of eligibility Under Section 80-I. He also relied on the decision of ITAT, Bombay Bench -C in the case of Tolani Ltd. v.DCIT, 89 ITD 555. Reliance was also placed on interpretation made in Chaturvedi and Pithisaria at page 3638 Vol.2, 5th Edn. which is reproduced below: in other words, for the purpose of determining the quantum of 'tax holiday' profits Under Section 80IA the taxable income of the eligible business of the industrial ;undertaking is to be ascertained as if such undertaking were an independent unit owned by the assessee concerned and the assessee had no other source of income. Consequently, the unabsorbed losses, unabsorbed depreciation et. Relating to the eligible industrial undertaking etc., are to be taken into account in determining the quantum of deduction Under Section 80IA even tough these may actually have been set off against the profits of the assessee from other sources.
7. We have considered the matter in the light of submission made by both the parties and material placed on record. Section 80-I(6) contains non obstante clause which have overriding effect on other provisions of the Act. According to Section 80-I(6), the profits and gains of an eligible assessee for the purpose of determining the quantum of deduction under Section 80-I(1) for the assessment year immediately succeeding the initial assessment year or any assessment year are to be computed as if such eligible industrial undertaking or eligible ship or eligible business of the hotel or eligible business of repairs to ocean going vessels or other powered craft were the only source of income of the assessee during the previous year relevant to that initial assessment year and to every subsequent assessment year upto and including the assessment year for which the determination is to be made. At page 3638 of Vol. II, Fifth Edn. of Chaturvedi and Pithisaria the authors have interpreted similar provisions of Section 80IA(5) as under: In other words, for the purposes of determining the quantum of tax holiday profit Under Section 80IA the taxable income of the eligible business of the industrial undertaking is to be ascertained had if such undertaking were an independent unit owned by the assessee concerned and the assessee has no other source of income.
Consequently, the unabsorbed losses, unabsorbed depreciation, etc.
relating to the eligible industrial undertaking etc., are to be taken into account in determining the quantum of deduction Under Section 80IA even though these may actually have been set off against the profits of assessee from other sources.
8. In the case of Rajapalayam Mills Ltd. v. CIT, 115 ITR 777 Hon'ble Supreme Court held that Section 15C(3) does not enact any legal fiction providing that the profits or gains of new industrial undertaking shall be computed as if the new industrial undertaking were the only business of the assessee from the date of its establishment There was nothing in Section 15C(3) or any other provisions of the Act which required that in computing the profits or of a new industrial undertaking Under Section 10, depreciation allowance or development rebate in respect of the new industrial undertaking for the past assessment years should be taken into account, even if it has been set off fully against the profits or gains of any other business carried on by the assessee or against income under any other head and there was no unabsorbed depreciation allowance or development rebate to be carried forward.
However, Under Section 80-I(6) a legal fiction has been provided for the computation of profits and gains of new industrial undertaking according to which profits and gains shall be computed as if the new industrial undertaking were the only business of the assessee from the date of its establishment and the past years' depreciation and losses are to be set off against the income of assessee from the undertaking.
Therefore, the new industrial undertaking is quarantined or isolated from other income producing activity of the assessee for determining its profit and gains for the purpose of deduction Under Section 80-I of the Act.
9. In the case of T.T.K. Pharma Ltd. (supra) this Tribunal has not discussed the provisions of Section 80-I(6) and therefore, decision delivered in the said case is per incuriam. The decision in the case of Ramakrishna Mills (supra) has been delivered after considering the provisions of Section 80-I(6) and hence the decision in the case of Ramakrishna Mills (Supra) has to be followed.
10. On a careful consideration of facts and circumstances of the case we are of the view that the issue is not debatable in nature. Because of non obstante clause contained in Section 80-I(6) the provisions will have overriding effect over other provisions of the Act. Section 80-I(6) does enact a legal fiction providing that the profits and gains of new industrial undertaking shall be computed as if the new industrial undertaking were the only business of the assessee from the date of its establishment and the past years depreciation and losses are to be set off against the income of assessee from the undertaking.
Therefore, the new industrial undertaking is retrospectively quarantined or isolated from the other income producing activity for determining the profits and gains for the purpose of eligibility Under Section 80-I. Hence, the order passed by the assessing officer giving effect to the order of CIT(A) allowing deduction Under Section 80I without setting off unabsorbed losses from A.Y 1991-92 against the income for A.Y 1992-93 and 1993-94 was erroneous as well as prejudicial to the interests of Revenue. The ld CIT was therefore, justified in setting aside the assessment.