1. These cross appeals of the assessee and the revenue arise out of the order of CIT(A)-III, passed on 10.01.2002. The corresponding order of assessment was made by the JCIT, SR-5, Pune, (hereinafter called the AO), on 31.01.2001, under the provisions of Section 143(3) of the IT Act 1961. The assessee has taken three substantive grounds of appeal.
In the course of hearing before us, ground No. 3 regarding reallocation of expenses for AY 1997-98 and carry forward loss, was not pressed by the learned Counsel. The other two grounds, which were argued before us, are reproduced below for the sake of ready reference: 1. For calculating the eligible profits for deduction Under Section 801A the lower authorities erred in deducting set-off of loss of Rs. 28.53,324/- incurred in AY 1997-98 by Chakan Unit against the profits of Chakan unit for AY 1998-99. In fact the said losses were already adjusted against the profits of the other plant in AY 1997-98 itself and for all practical purpose there remained no unabsorbed loss of earlier years. In view of the fact that there were no carried forward losses, the order passed by lower authorities for adjustment of deemed losses against profit of AY 1998-99, be cancelled.
2. For calculating the eligible profits Under Section 80-IA of Chanak plant, the Hon'ble CIT(A) III erred in partly accepting the AO's view of reallocating certain expenses amounting to Rs. 600123/- from Pimpri plant to Chakan plant. Considering that separate books of account are maintained for both the plants and that expenses were already allocated on accepted accounting principles. The Hon'ble CIT(A) erred in accepting the reallocation of certain expenses incurred on salary, director's remuneration, printing & stationery, telephone expenses, vehicle expenses on turnover basis. The assessee company had already allocated expenses wherever called for. Hence, in view of facts and circumstances the reallocation and shifting of expenses from Pimpri plant to Chakan plant as made by the AO, be cancelled.
1.2 The revenue has taken up only one substantive ground of appeal to the effect that the learned CIT(A) was not right in allowing the deduction of bad debts written-off from the books of account, amounting to Rs. 5,50,295/-.
2.1 In regard to the first ground of appeal of the assessee, the learned CIT(A) referred to provisions contained in Section 80-IA(5).
which for the sake of convenience are reproduced below: (5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of Sub-section (1) apply shall, for the purposes of determining the quantum of deduction under that Sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the provious year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.
On the basis of this provision, the learned CIT(A) pointed out that for the purpose of computing deduction Under Section 80-IA, it has to be presumed that the assessee was running only the Chakan unit, being the eligible unit and no other unit. That unit had incurred loss of Rs. 29,59,324/- in the previous year relevant to AY 1997-98. Therefore, for computation of profits of this unit for the purpose of deduction Under Section 80-IA, the losses carried forward from earlier year, namely, AY 1997-98, will have to be reduced from the profits of assessment year 1998-99. In view thereof, the issue was decided in favour of the revenue and against the assessee.
2.2 Before us, the learned Counsel of the assessee pointed out that assessment year 1997-98 was the first year of operation of the eligible unit. In that year, loss of about Rs. 28.00 lakh was incurred comprising of business loss of Rs. 20.00 lakh and unabsorbed depreciation of Rs. 8.00 lakh. This loss was completely absorbed in that very year in the profits of Pimpri unit owned by the assessee.
Thereafter, he referred to the decision of Hon'ble ITAT Chennai Bench "B", in the case of Prasad Productions (P.) Ltd. v. DCIT, Media Cir. 1 (2006) 98 ITD 212. That case dealt with deduction Under Section 80-1(6). The Hon'ble Tribunal pointed out that in view of non-abstante clause contained in that section, the provisions of that section will have overriding effect over all other provisions of the Act. The legal fiction is created in that section to the effect that the profits and gains of eligible undertaking shall be computed as if such undertaking was the only business of the assessee from the date of its establishment till the date of admissibility of the deduction.
Therefore, the income eligible was isolated from all other incomes of the assessee for the purpose of computing deduction Under Section 80-1.
The learned Counsel also referred to the decision of Hon'ble ITAT Mumbai Bench "I", in the case of Additional CIT, SR-15, v. Ashok Alco Chem Ltd. (2005) 96 ITD 160. The question before the Hon'ble Tribunal in that case was whether carry forward losses and unabsorbed depreciation of the eligible unit are to be considered or not while determining the deduction Under Section 80-IA even though such losses and depreciation have been actually set-off against profits of the assessee from other sources. The Hon'ble Tribunal pointed out that in terms of Section 80-IA, the profits of the eligible units have to be ascertained as if it was only unit owned by the assessee and it had no other source of income. The learned Counsel fairly conceded that both these decisions are against the assessee and the languages of Section 80-I and Section 80-IA are in parimateria in so far as the issue at hand is concerned. Nonetheless, he was of the view that brought forward losses are not to be taken into consideration while the unabsorbed depreciation has to be set-off against the profits of the year under consideration. In this connection, he referred the definition of the term "gross total income", which means the total income computed in accordance with the provisions of this Act before making any deduction under Chapter VI-A. Thereafter, he referred to the provisions of Section 80-IA(1), which states that where the gross total income of an assessee includes any profits and gains derived by an undertaking, there shall in accordance with and subject to the provisions of this section, be allowed....The case of the learned Counsel, put in figurative terms, was that profits and gains, referred to in Section 80-IA was a Sub-set of gross total income. This sub set used the same terminology as used in Section 28. Therefore, it was agitated that profits and gains for the purpose of Section 80-IA have to be worked out in accordance with the provisions contained in Chapter IV-D.Chapter VI, dealing with the aggregation of income and set-off or carry forward of losses, contains in Section 72 but not Section 32.
Therefore, while unabsorbed depreciation may have to be considered for finding out profits and gains of business, such concept cannot be carried forward to Section 72 which forms part of Chapter VI, Thus, there was distinction between gross total income and the profits and gains of business. In this connection, reliance was placed on the decision of Hon'ble Bombay High Court in the case of Synco Industries Ltd. v. Assessing Officer of Income-tax and Ors. . The Hon'ble Court pointed out that provisions contained in Section 80A(2) and Section 80B(5) are declaratory in nature. These provisions will be applicable while interpreting the provisions of any of the sections contained in Chapter VI-A. While read together, these provisions impose a ceiling on the amount of deduction to be allowed to an assessee under any section contained in Chapter VI-A. The non-abstante clause of Section 80-1(6) cannot restrict the operation of the aforesaid sections because they operate totally in two different spheres. Section 80-1(6) deals with the computation of deduction and Section 80-1(1) deals with the treatment given to such deduction for the purpose of arriving at the total income. In view thereof, it was held that while interpreting Section 80-1(1), which refers the gross total income, one has to read the expression "gross total income" in Section 80-1(1) to mean that income which is defined in Section 80B(5). If deductions under Chapter VI-A are required to be claimed, then, the gross total income has to be sufficient to absorb such deduction. This, if gross total income is nil, then, deduction Under Section 80-I cannot be allowed. Section 80-1(1) lays down the circumstances under which deduction can be claimed and Section 80-1(6) lays down the method of determining the deduction. After calculating deduction Under Section 80-1(6), one has to go back to Section 80-1(1), which enacts that the gross total income includes profits and gains derived from the eligible undertaking. The words "includes any profits" in Section 80-1(1) are important and indicate that the gross total income should include profits from the eligible units. Coming to the facts, it was pointed out that the assessee was owning oil division and a chemical division at two different places. Deductions were claimed under Sections 80 HH and 80-I. The AO rejected the claim on the ground that its gross total income was nil. The claim was rejected by the Tribunal also. In appeal, it was urged that the assessee earned profits from chemical division during the year under consideration. In respect of oil division, the assessee had carried forward losses and to that extent he did not claim the deductions. The deductions are to be worked out on the footing that the eligible unit was only unit operated by the assessee from its inception and it had no other income. The Hon'ble Court dismissed the appeal and pointed out that while working out the gross total income, loss of oil division has to be set-off against profits of chemical division. Though on the facts of that case, the decision was against the assessee, yet. the case of the learned Counsel was that profits and gains of eligible unit is a sub-set of gross total income. Therefore, deduction Under Section 80-1(1) has to be computed in accordance with the provisions contained in Chapter IV-D and thereafter it has to be seen whether the deduction is less than the gross total income of the assessee.
2.3 As against the aforesaid, the case of the learned DR was that there is distinction between unabsorbed depreciation and carried forward losses as pointed out in Board's Circular No. 281-dated 22.09.1980, extracted by the learned CIT(A) on page 3 of his order. For the sake of ready reference, this Circular is reproduced below: In computing the quantum of 'tax holiday' profits in ail cases, taxable income derived from the new industrial units, etc. will be determined as if such unit were an independent unit owned by an assessee who does not have any other source of income. In the result, the losses, depreciation and investment allowance of earlier years in respect of the new industrial undertaking, ship or approved hotel will be taken into account in determining the quantum of deduction admissible under the new Section 80-1 even though they may actually have been set off against the profits of the assessee from other sources.
3. We have considered the facts of the case and rival submissions.
Notwithstanding the fact that the Hon'ble Chennai Bench and Mumbai Bench of Hon'ble ITAT for deciding the matter against the assessee yet we think it fit to deal with the submissions of the assessee regarding the issue of profits and gains of business and the gross total income.
We are of the view that the confusion in the line of argument of the learned Counsel arises out of insufficient appreciation of the import of the provisions contained in Sub-sections (5) and Sub-section (1) of Section 80-IA. Sub-section (5) creates a fiction that for the purpose of computing deduction Under Section 80-IA. the eligible unit was the only unit operated by the assessee in the initial assessment year and in subsequent years for which the deduction is available. Therefore, its carried forward losses and unabsorbed depreciation have to be kept separately from other units operated by the assessee, if any, as also its profits. Coming to Sub-section (1), profits and gains constitute a sub-set of the gross total income. It is also clear from the language of this sub-section, which starts with the words "where the gross total income of an assessee includes any profits and gains derived from eligible business". Looking to the language it is clear that profits and gains is a sub-set of the gross total income and, therefore, a sub-set cannot be larger than the main set as inherently it has to be smaller than the main set. In view thereof, the provisions contained in Section 80B(5) will have to be taken into consideration for finding out the gross total income as if eligible unit was the only unit operated by the assessee. It will also have to be held that profits and gains mentioned in Sub-section (1) of section 80-I cannot exceed in quantum terms the gross total income defined in Section 80B. We are also of the view that the decision of Hon'ble Supreme Court in the case of IPCA Laboratories Ltd. v. DCIT supports our view for the reason that Section 80-HHC also uses the words "profits derived by the assessee form the export of such goods or merchandize", which are similar to the words "profits and gains derived by any eligible undertaking" used in section. We may also mention that the decisions of Hon'ble Chennai and Mumbai Benches of the Tribunal are also the same and we do not find any reason to differ from those decisions even on account of further arguments made by the learned Counsel of the assessee. Thus, ground No. 1 of the appeal of the assessee is dismissed.
4.1 Ground No. 2 of the appeal of the assessee is regarding reallocation of expenses from Pimpri unit to Chakan unit for the purpose of deducting Under Section 80-IA. The assessee had taken the expenses of Chakan unit, being the eligible unit at Rs. 40,11,896. The details are given on page 5 in Table - 1 of the appellate order. The AO computed the expenses of Chakan unit at Rs. 59,47,398/-. given in Table - 2 on page 6 of the appellate order. The case of the AO was that the assessee inflated expenses of Pimpri unit with a view to claim higher deduction in respect of eligible unit. It was submitted to him that all indirect expenses had been allocated on turnover basis. The directors' remuneration was allocated on time basis, which was equal for both the units. The direct expenses had been debited on actual basis. However, the AO reallocated all the expenses on turnover basis, leading to decrease in profits of the eligible unit by an amount of Rs. 19,35,502/-. It was represented before the learned CIT(A) that certain expenses, namely, wages, incentives, consumables, octroi, packing and forwarding, transport and freight. ESI. PF. bonus, and staff welfare expenses were direct expenses and the work related to one or the other unit. Therefore, in respect of such expenses, there was no question of reallocation as they had been debited on actual basis. It was also represented that separate books of account have been maintained for the units and in view thereof reallocation made by the AO was not sustainable at all. The learned CIT(A) considered the submissions. He agreed with the assessee that there was no need to reallocate direct expenses as such expenses were identifiable with one or the other unit and had been debited in the respective units on actual basis. There were certain expenses of the head office such as salary, printing and stationery, telephone expenses, vehicle expenses, which were common to both the units. Therefore, he came to the conclusion that such expenses should be allocated on turnover oasis between the two units. He was also of the view that it will be fair to allocate the directors' remuneration on the basis of turnover as higher turnover would require more attention of the management. The assessee furnished the working of reallocation of all the expenses as per the aforesaid directions of the learned CIT(A). The expenses have been tabulated by the learned CIT(A) in Table - 3 on page 6 of the order. The expenses aggregating to Rs. 46,12,019/- were allocated to Chakan unit. The AO was directed to compute deduction Under Section 80-IA on this basis, which came to Rs. 4,23,224/-.
4.2 The learned Counsel merely stated the basis of allocation adopted by the AO and the learned CIT(A). On the other hand, the learned DR merely relied on the order of the AO.4.3 We have considered the facts of the case and the submissions available before us. We are of the view that the learned CIT(A) has rightly come to the conclusion that the expenses which are properly relatable to one or the other unit should be allocated to that unit only. We are also in agreement with him that head office expenses and directors' remuneration should be allocated on the basis of turnover of the two units as that seems to be only the rational way to allocate these expenses. Thus, we do not find any reason to interfere with the order of the learned CIT(A). Thus, ground No. 2 of the appeal of the assessee is dismissed.
6.1 The only ground taken by the revenue is that the learned CIT(A) erred in allowing deduction of bad debts written-off, amounting to Rs. 5,50,295/-. The case of the AO was that the assessee had made merely a provision in respect of these debts and the debts had not been written-off in the books of account. It was also his case that the assessee did not take any step for recovery of the debts.
6.2 It was represented before the learned CIT(A) that details of bad debts, amounting to Rs. 5,50.295/- were furnished to the AO Such details have been reproduced in paragraph 4.3 of the appellate order.
It was further represented that these debts have been written-off in the books of account and the finding of the AO that only a provision was made in respect of these debts was incorrect. Coming to the issue of recovery of debts, it was pointed out that amounts from Anand Agro Pvt. Ltd., English Rubbers Co. Ltd., Arihant Yarn Processors Pvt. Ltd., Filtron Engineers Pvt. Ltd., and Telco Ltd. were more than three years old and, therefore, the claim of the assessee was that recovery of these amounts are barred by limitation. In view thereof, no legal proceedings could have been taken against these parties. These parties had withheld certain amounts on account of disputes raised by them and institution of legal proceedings would not have resulted into any recovery, it was also pointed out that debt of Rs. 1,853/- from Cipla Ltd. was recovered in FY 1999-00, which was credited to profit & loss account of that year. It was also pointed out that debts earlier written-off, amounting to Rs 7,30.591/-, were credited to profit & loss account of this year, which were received in this year. Thus, the claim of the assessee was that the assessee was following prudent policy for writing off bad debts after a period of about 3 to 4 years and in case of any future recovery, the amounts were credited to the profit & loss account in the year of recovery.
6.3 The learned CIT(A) considered various submissions made before him.
It was pointed out that the debts had been shown under the head "Operation and Other Expenses", which shows that the debts had been written-off and it was not a case of making provision of an equivalent amount. These debts were in respect of the sales effected in the past and. therefore, they had been taken into account in arriving at profits of past years. All the debts were quite old and some of the pertained to AYs. 1994-95 and 1995-96. In view thereof, it was held that all the conditions mentioned in Section 36(1)(vii) regarding deduction of bad debts have been satisfied in this case, Therefore, the aforesaid amount was allowed to be deducted in computing the income.
6.4 Before us, the learned DR pointed out that the assessee had not taken any step to recover these amounts. As against this, the case of the learned Counsel was that specific items, which were thought to be unrecoverable, were written-off from the books of account. Thus, it was a case of actual write-off of bad debts, which were otherwise not recoverable. The debts were in relation to sales made in the earlier years. In view of these facts, the learned Counsel supported the order of the learned CIT(A).
6.5 We have considered the facts of the case and rival submissions. A debt, which is otherwise a proper bad debt and the recovery of which has been pending for quite sometime, does not become a good debt merely on the reasoning that no step has been taken to recover the debt In some cases, such a legal pursuit may amount to throwing good money in litigation for recovery of an amount whose recovery was doubtful on account of counter claims of the debtors. Therefore, we are of the view that the argument of the learned DR does not lead to a conclusion that the debts were not bad. Further, the debts have been written-off from the books of account, they pertained to the trading transactions of the assessee and in most of the cases legal proceedings were barred by limitation. Thus, we are of the view that it is a case where bad debts have been written-off from the books of account, which have been considered earlier in computation of income of the assessee. In view thereof, we do not find any reason to interfere with the order of the learned CIT(A) on this issue.