Commissioner of Income-tax Vs. Albright Morarji and Pandit Ltd. - Court Judgment

B.P. Saraf, J.

1. By this reference under Section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal has referred the following two questions of law to this court for opinion :

At the instance of the Revenue :

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that while computing 'profits and gains' derived from industrial undertaking for the purposes of granting relief at 20 per cent. thereof under Section 80HH of the Income-tax Act, 1961, the provisions of Section 32A have to be ignored and the relief is to be allowed with reference to the profits and gains, without deducting the investment allowance allowed, in respect of that industrial undertaking?' At the instance of the assessee : '2. Whether the Tribunal erred in holding that the applicant was not entitled to a deduction under Section 80V of the Income-tax Act, 1961, in respect of interest paid by it on public deposits utilised for the payment of income-tax ?'

So far as question No. 2 is concerned, the controversy therein is covered in favour of the Revenue by the decision of this court dated November 24, 1998, in Income-tax Reference No. 8 of 1992, dated September 28, 1993, Hindustan Cocoa Products Ltd. v. CIT : [1999]236ITR140(Bom) . Following the same, question No. 2 is answered in the affirmative, i.e., in favour of the Revenue and against the assessee.

2. The only question that requires our consideration is question No. 1, which has been referred at the instance of the Revenue. The material facts giving rise to this question are as follows :

The assessee is a company. In its assessment for the assessment year 1980-81, it claimed relief under Section 80HH of the Income-tax Act, 1961, (the 'Act'), in respect of the profit of a new industrial undertaking in backward areas. The Income-tax Officer held that profits and gains derived from the said industrial undertaking being negative after taking into account the investment allowance, no relief was allowable to the assessee under Section 80HH of the Act. The assessee appealed to the Commissioner of Income-tax (Appeals) against the above order of the Income-tax Officer.

The case of the assessee before the Commissioner (Appeals) was that the investment allowance should have been allowed against profits of the assessee from other units, and there being overall profits in this case, the claim under Section 80HH should not be denied. There was, however, no dispute about the fact that if the investment allowance is adjusted against the profits of the new industrial undertaking, there would be a loss from this undertaking and the assessee would not be entitled to relief under Section 80HH of the Act, The Commissioner (Appeals) accepted this contention of the assessee and directed the Income-tax Officer to adjust the investment allowance against the profits of the other units and to allow the claim of the assessee under Section 80HH from the profits without reducing therefrom investment allowance under Section 32A of the Act. The Revenue appealed to the Income-tax Appellate Tribunal (the 'Tribu-nal'). The Tribunal affirmed the order of the Commissioner of Income-tax (Appeals) and dismissed the appeal of the Revenue. While doing so, the Tribunal followed the decision of the Punjab and Haryana High Court in the case of CIT v. Patiala Flour Mills Co. Pvt. Ltd. . Aggrieved by the order of the Tribunal, the Revenue is before us, by way of reference of question No. 1 for our opinion.

3. Mr R. V. Desai, learned counsel for the Revenue, submits that the controversy in this case now stands concluded in favour of the Revenue by the decisions of the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT : [1978]113ITR84(SC) ; Distributors (Baroda) P. Ltd. v. Union of India : [1985]155ITR120(SC) ; H. H. Sir Rama Varma v. CIT : [1994]205ITR433(SC) ; CIT v. Kotagiri Industrial Co-operative Tea Factory Ltd. : [1997]224ITR604(SC) and the decision of this court in CIT v. Cannon Dunkerley and Co. Ltd. : [1995]216ITR708(Bom) , and the decision of the Karnataka High Court in CIT v. H. M. T. Ltd. (No. 1) : [1993]203ITR811(KAR) . Our attention was also drawn by Mr. R. V. Desai to the decision of the Gujarat High Court in Paushak Ltd. v. CIT : [1994]210ITR535(Guj) , wherein, following the decision of the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT : [1978]113ITR84(SC) , it was held that unabsorbed losses and unabsorbed depreciation have to be deducted before arriving at a figure that would be eligible for the purpose of deduction under Section 80HH of the Income-tax Act, 1961.

4. We have carefully considered the above submissions. Sub-section (1) of section 80HH, so far as relevant, at the material time, read as under :

'80HH. Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas.--(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this section applies, there shall in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent. thereof.'

It is clear from the above provision that deduction at the rate of twenty per cent. has to be calculated with reference to the amount of profits and gains derived from an industrial undertaking, forming part of the gross total income of the assessee. Section 80HH appears in Chapter VI-A of the Act, which provides for certain deductions to be made in computing total income. Sub-section (1) of Section 80A provides that in computing the total income of the assessee, there shall be allowed from his gross total income, subject to the provisions of that Chapter, the deductions specified in Sections 80C to 80VV. By the Finance (No. 2) Act, 1980, a new section, viz., Section 80AB was inserted in the Act with effect from April 1, 1981. The said section reads as follows :

'80AB. Where any deduction is required to be made or allowed under any Section (except Section 80M) included in this Chapter under the heading 'C-Deductions in respect of certain incomes' in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income'.

Sub-section (1) of Section 80HH opens with the words, 'where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking . . .' and proceeds to say that 'there shall beallowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent. thereof'. Thus, the condition precedent for deduction under Section 80HH is that the gross total income of the assessee must include profits and gains derived from an industrial undertaking. 'Gross total income' is defined in Clause (5) of Section 80B of the Act, to mean 'total income computed in accordance with the provisions of the Act, before making any deduction under Chapter VI-A or under Section 280-O'. The profits and gains derived from an industrial undertaking included in the gross total income, would, therefore, obviously be the profits and gains computed in accordance with the provisions of the Act.

5.Section 29 of the Act which deals with the manner of computation of income from profits and gains of business or profession says that such income shall be computed in accordance with the provisions contained in Sections 30 to 43A of the Act, which obviously includes Section 32A of the Act. It is, therefore, clear that for computing income from profits and gains derived by an assessee from an industrial undertaking, the provisions of Section 32A have to be taken into account, and the investment allowance allowable thereunder has to be deducted from the profits and gains derived from such business. This is so, because what is included in the gross total income in such a case, is the particular quantum of income from the profits and gains of a new industrial undertaking. Therefore, such profits and gains must have reference to the income by way of profits and gains derived from an industrial undertaking, computed in accordance with the provisions of the Act, meaning thereby, computed under Section 29 of the Act. It is, thus, clear that the deduction required to be allowed under the provisions of Section 80HH(1) is to be calculated with reference to the amount of profits and gains derived from an industrial undertaking, computed in accordance with the provisions of the Act and forming part of the gross total income, and not with reference to the gross profits and gains derived by the assessee from such business.

6. The Supreme Court in Cambay Electric Supply Industrial Co. Ltd. : [1978]113ITR84(SC) , dealing with deduction under Section 80E of the Act, held that, in computing the profits of the assessee for the purpose of specific deduction provided under that section, items of unabsorbed depreciation and unabsorbed development rebate carried forward from earlier years, will have to be deducted before arriving at a figure, from which deduction of eight per cent, contemplated by that section, can be deducted. The Supreme Court also held that since the income referred to in that section is income from business, in view of Section 29 of the Act, it has to be computed in accordance with Sections 30 to 43A of the Act, which includes Section 32(2) providing for carry forward of depreciation, and Section 32(2) providing for carry forward of development rebate. TheSupreme Court also held that Section 72(1) has a direct impact upon the computation under the head 'Profits and gains of business or profession'.

7. The above decision was relied upon by the Supreme Court in Distributors (Baroda) P. Ltd.'s case : [1985]155ITR120(SC) . In that case, the controversy was whether the deduction required to be allowed under Section 80M(1) of the Act has to be calculated with reference to the amount of dividend computed in accordance with the provisions of the Act forming part of the gross total income, and not with reference to the full amount of dividend received by the assessee. The Supreme Court held that what is included in the gross total income in such a case, is a particular quantum of income belonging to the specified category and, therefore, the words, 'such income by way of dividends', in Section 80M(1) should be referable not only to the category of income included in the gross total income, but also, to the quantum of income so included. The Supreme Court, therefore, held that the words 'such income by way of dividend' would be income by way of dividend arrived at in accordance with the provisions of the Act. The Supreme Court overruled its earlier decision in Cloth Traders P. Ltd. v. Addl. CIT : [1979]118ITR243(SC) , wherein a contrary view had been taken. The Supreme Court also noticed Section 80M of the Act, inserted by the Finance (No. 2) Act, 1980, with retrospective effect from April 1, 1968, which provides that where any deduction is required to be allowed under Section 80M in respect of any income by way of dividends from a domestic company which is included in the gross total income of the assessee, then, notwithstanding anything contained in that Section, the deduction will be computed with reference to the income by way of such dividends as computed in accordance with the provisions of this Act (before making any deduction under this Chapter), and not with reference to the gross amount of such dividends, and observed that the said provision was merely declaratory of the law, as it always was, since April 1, 1968.

8. The ratio of the above two decisions squarely applies to the present case. The profits and gains derived from an industrial undertaking referred to in Section 80HH has to be computed in accordance with the provisions contained in Sections 30 to 43A of the Act. That being so, investment allowance allowable under Section 32A has to be deducted from the profits and gains and only such profits would be included in the gross total income of the assessee. In other words, the quantum of the profits and gains derived from an industrial undertaking, from which deduction of an amount equal to twenty per cent, is allowable under Section 80HH, would be the quantum of income arrived at after making all deductions under Sections 30 to 43A. This position has been made clear by the Legislature by insertion of Section 80AB of the Act. Though Section 80AB has been inserted by the Finance (No. 2) Act, 1980, with effect from April 1, 1981, it is merely declaratory and supports the view taken by us.

9. In H. H. Rama Varma v. CIT : [1994]205ITR433(SC) , the Supreme Court had occasion to consider the nature of the provisions contained in Section 80AB of the Act. The Supreme Court held that 'section 80AB was enacted to declare the law as it always stood in relation to the deductions to be made in respect of the income specified under the head 'C' of Chapter VI-A'. In the above decision, the controversy before the Supreme Court was whether long-term capital loss brought forward from earlier assessment years have to be first set-off against the long-term capital gains of the current assessment year before the deduction contemplated by Section 80T of the Income-tax Act, 1961, is allowed. In other words, the controversy was whether the relief under Section 80T was to be given on the amount of long-term capital gains of the current assessment year after the long-term capital loss of the earlier assessment years brought forward was set off, or on the capital gains of the current year without such set-off. The Supreme Court held (page 438) :

'Section 80T opens with the words 'where the gross total income of an assessee .... includes any income chargeable under the head 'Capital gains'. . . This clearly indicates that the gross total income of an assessee has to be determined before the provisions of Section 80T can be applied. This is clear also from the provisions of Section 80A which says that in computing the total income of an assessee, there shall be allowed from his gross total income, the deductions specified in, inter alia, Section 80T. Where the gross total income of an assessee, determined in accordance with the provisions of the said Act, includes any income by way of long-term capital gains a deduction is permissible therefrom under the provisions of Section 80T in computing his total income. The deduction is from 'such income'. As aforementioned, 'such income' has been held by this court to be the assessee's long-term capital gains and there can be no doubt, having regard to the context, of the correctness of this interpretation.'

From the above discussion, it is clear that the deduction under Section 80HH has to be computed with reference to the assessee's income from the profits and gains derived from the new industrial undertaking after making all the deductions under Sections 30 to 43A of the Act including the investment allowance under Section 32A of the Act. Question No. 1 is, therefore, answered in the negative, i.e., in favour of the Revenue and against the assessee.

10. Reference disposed of accordingly with no order as to costs.