Income Tax Appellate Tribunal - Bangalore
Jt. Cit vs Infocon International Ltd. on 28 July, 2004
Equivalent citations: [2005]2SOT444(BANG)
ORDER
Deepak R. Shah, A.M. This appeal by the revenue is arising out of the order of CIT(A)-III, Bangalore dated 10-10-2000 pertaining to assessment year 1996-97.
2. The revenue has raised the following grounds before us :
The CIT(A) erred in directing the assessing officer to compute the eligible deduction under section 80HHE without deducting the losses and unabsorbed depreciation of earlier years.
The CIT(A) failed to consider the fact that deduction under section 80HHE is allowable only with reference to the amount of that nature which is included in the gross total income of the assessee.
The CIT(A) therefore failed to consider the fact that the eligible deduction under section 80HHE has to be restructured to such an amount which is arrived at after setting off the carry forward of losses and unabsorbed depreciation of earlier years.
The CIT(A) ought to have appreciated that Hon'ble Kerala High Court in the case of CIT v. V.T. Joseph (1997) 225 ITR 731 (Ker) also held likewise.
The CIT(A) has erred in directing the assessing officer to consider the profit of Rs. 36,230 under section 41(1) as profits from eligible business for the purpose of computation of deduction under section 80HHE.
The CIT(A) failed to consider the fact that profit under section 41(1) arose on cessation of liability or provision written back and it is necessary to examine whether such liability was in relation to the eligible business of the assessee.
3. The assessee is engaged in the business of export of software. For the relevant assessment year, he filed return of income declaring total income of 'Nil' which was computed as under:
Profits and gains from business 1,02,22,893 Income from other sources :
Interest on FD and Income Tax Refunds:
1,73,321 Total :
1,03,96,214 Brought forward business losses 32,29,435 Unabsorbed depreciation:
24,08,033 56,37,468 Gross total income 47,58,746 Less: Deduction under section 80HHE 47,58,746 Net Income:
Nil The deduction under section 80HHE was computed as under:
Profits and gains from business 1,02,22,893 Less: 90% of interest income (i.e., 90% Rs. 5,96,134) 5,36,521 Profits of business for the purpose of section 80HHE 96,86,372 Export Turnover 2,28,48,225 Total Turnover 3,49,00,259 Deduction admissible:
63,41,397 Restricted to gross total income of :
Rs. 47,58,746 The assessing officer computed the income as under:
Total Income after adjustment of brought forward loss and depreciation 47,58,746 Less :Other income (Interest, bill discounting charges and profit on sale of assets) 12,43,646 Qualifying amount:
35,15,100 Deduction under section 80HHC in the proportion of export turnover to total turnover of the qualifying profit of Rs. 35,15,070 = Rs. 23,01,240. He, accordingly, computed the total income at Rs. 24.70 lakhs.
4. Learned CIT(A) relying upon the decision of Hon'ble Andhra Pradesh High Court in CIT v. Gogineni Tobacco Ltd. (1999) 238 ITR 970 (AP) held that deduction under section 80HHC has to be computed without deducting the losses and unabsorbed depreciation of earlier years from the current years business income. He held that provision of section 80HHE and section 80HHC are identical and accordingly the decision of Hon'ble AP High Court is squarely applicable. The revenue is in further appeal before us against the said direction.
5. Learned Departmental Representative Sri B. Datta, CIT, took us through the order of assessing officer as well as learned CIT(A). He submitted that learned CIT(A) has entirely relied upon the decision of Hon'ble AP High Court in Gogineni Tobacco Ltd.'s case (supra). The said decision of Hon'ble AP High Court has been followed by Hon'ble Bombay High Court in CIT v. Shirke Construction Equipments Ltd. (2000) 246 ITR 429 (Bom). In the said case, the Hon'ble Bombay High Court following the decision of Gogineni Tobacco Ltd.'s case (supra) has held that section 80HHC is a complete code in itself and is not controlled by section 80AB, The ratio laid down by Hon'ble Bombay High Court has not been approved by Hon'ble Supreme Court in IPCA Laboratory Ltd. v. Dy. CIT (2004) 266 ITR 521 (SC). In the said case, it is specifically mentioned that section 80AB has been given overriding effect over all other sections. Section 80HHC does not provide that its provision have to prevail over section 80AB or any other provisions of the Act. Thus reliance upon the decision of Gogineni Tobacco Ltd.'s case (supra) by the learned CIT(A) is not in accordance with law. Since section 80AB overrides the provision of section 80HHC which is in pari materia with section 80HHE, the amount eligible for deduction under section 80HHE can be only after reducing the unabsorbed depreciation and brought forward losses. To this extent the order of learned CIT(A) needs to be reversed. Sri Datta also relied upon the decision of Hon'ble Kerala High Court in the case of CIT v. V. T. Joseph (supra), wherein also deduction under section 80HHC was computed after setting off brought forward losses and depreciation.
6. Learned counsel for the assessee Mr. Ramasubramanian fairly submitted that for the purpose of computing deduction under section 80HHC unabsorbed depreciation is to be reduced as the unabsorbed depreciation is set off under section 32(2). Thus the business profit can be computed only after setting off unabsorbed depreciation. However as regards unabsorbed losses, he submitted that the losses are set off under section 72 of the Income Tax Act. The setting off of losses under section 72 do not effect the profits of business as defined in Explanation below section 80HI4E. Since the words 'profits of business' is defined in section 80HHE itself, there is no need to give any artificial definition for computation of such profit. The decision of Hon'ble Supreme Court in IPCA Laboratory Ltd.'s case (supra) is on a issue as to whether deduction under section 80HHC should be computed after setting off losses of current year or not. Hon'ble Supreme Court was not considering issue relating to set off of unabsorbed losses for the purpose of computation of profits of business. Hon'ble Supreme Court has disapproved the decision in Shirke Construction Equipments Ltd.'s case (supra) to the limited extent of holding that section 80AB governs section 80HHC also and nothing more. Thus the balance part of the decision in Shirke Construction Equipments Ltd.'s case (supra) still holds good. He invited our attention to the decision of ITAT Bangalore in Asst. CIT v. Mysore Exports Ltd. (1995) 55 ITD 263. In the said case, it was held that the assessing officer shall first compute the gross total income and thereafter to limit the amount of deduction under section 80HHC calculable with reference to the total amount of export profits to that amount of gross total income only. Thus while computing profit of eligible business unabsorbed losses are not to be reduced. He further submitted that Hon'ble Kerala High Court in V.T. Joseph's case (supra) was not called upon to decide whether unabsorbed losses should be set off while computing profits of business for the purpose of section 80HHC. Thus the said section is not helpful to the case of revenue before us.
7. We have carefully considered rival submissions and relevant facts of the case. We have also perused the decisions cited on either side. The controversy before us is limited to the extent as to while computing deduction under section 80HHE, whether the unabsorbed depreciation and brought forward losses should be deducted first and thereafter deduction under section 80HHE is to be computed. However, it is trite law that the actual amount of deduction under section 80HHE cannot exceed the gross total income. It is also seen that the provision of section 80HHC and section 80HHE are in pari materia.
8. It is seen that while allowing the appeal, learned CIT(A) has relied heavily on the decision of AP High Court in Gogineni Tobacco Ltd.'s case (supra) wherein it was held that :
"From a reading of the section, it is clear that the total income is to be computed in accordance with the provisions of the Act first. Thereafter, the deduction under section 80E is to be allowed. Whereas, under section 80HHC which we have already extracted in the earlier paragraphs, the deduction under that section is to be allowed before working out the income under the other provisions of the Act. Section 80HHC does not use the words 'as computed in accordance with the other provisions of this Act.'The section itself says there shall, in accordance with and subject to the provision of this section, be allowed a deduction of the profits derived by the assessee in computing the total income of the assessee.
Since the language used in section 80HHC is different from the language used in section 80-I, the principle laid down by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT (1978) 113 ITR 84 (SC), is not applicable to the interpretation of the section 80HHC of the Act."
With due respect to the Hon'ble Andhra Pradesh High Court, the said decision cannot be applied for the reason that :
"(i) Hon'ble Supreme Court in the case of CIT v. Gogineni Tobacco Ltd. (253 ITR 800) has reversed the decision of Hon'ble AP High Court. In the said case, Hon'ble Supreme Court held that whether the unabsorbed losses and unabsorbed depreciation should be deducted or not for the purpose of section 80HHC is a question of law and accordingly directed the Tribunal to refer the question of law to the High Court who on earlier occasion has refused to refer as in Gogineni Tobacco Ltd. case (238 ITR 970).
(ii) Hon'ble AP High Court has observed on pages 975 and 976 that section 80HHC does not use the words 'as computed in accordance with other provisions of this Act'. It is seen that section 80AB was not noticed by Hon'ble AP High Court. Section 80AB clearly provides that for the purpose of computing deduction under the section the amount of income of that nature as computed in accordance with the provisions of this Act shall alone be deemed to be the amount of income of that nature. Since section 80AB governs the provision of section 80HHC and also section 80HHE, the aforesaid observations of Hon'ble AP High Court, with due respect, is not appropriate.
Having held that decision of Hon'ble AP High Court in Gogineni Tobacco Ltd. case (supra) is not to be relied, and in view of the observation of Hon'ble Supreme Court in IPCA Laboratory Ltd, (supra) held that section 80AB also governs the provision of section 80HHC/80HHE."
We shall examine whether the unabsorbed depreciation and unabsorbed losses are to be set off for computing profits of business for the purpose of computing deduction under section 80HHE of the Act.
9. Section 80AB reads as under:
"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 Provision 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. (Emphasis here italicised in print supplied) Section 80HHE(1) provides that where the assessee is engaged in the business of export out of India of computer software, he is allowed deduction of the profits derived from such business computed in accordance with the provision of sub-section (3). Sub-section (3) of section 80HHE provides that deduction is admissible to the extent of profit derived from business in the proportion to export turnover bears to the total turnover. Clause (d) of Explanation below section 80HHE defines the words "profits of the business". As per this definition the "profits of business" means the profits as computed under the head' Profits and gains of business or profession' under the Act. Such profit has to be further reduced by 90% of the income by way of brokerage, commission, etc. Thus, we are required to compute the profits of business. The profits of business is computed under Chapter IV-D as per sections 28 to 44D of the Act. The unabsorbed depreciation is to be treated as current year's depreciation as per section 32(2). Thus the unabsorbed depreciation will be deducted while computing profits of business under Chapter IV-D. We accordingly hold that the word 'profits of business' as defined in Explanation to section 80HHE is always after reducing the unabsorbed depreciation. Without reducing such unabsorbed depreciation the profits of business is not computed. We accordingly hold that learned CIT(A) was in error in observing that while computing profits of business, unabsorbed depreciation is not to be reduced. The income of the nature which is eligible for deduction under section 80HHE i.e. profits of business which enters the computation of gross total income will always be after setting off the unabsorbed depreciation. Thus even as per section 80AB, the unabsorbed depreciation is to be reduced while computing profits of business.
10. Unabsorbed business loss is set off as per the provision of section 72. Section 80AB also prescribes that the amount of income of the nature which is eligible for deduction under section 80HHE as computed in accordance with provisions of this Act has to be considered for the purpose of deduction. This means that what enters the gross total income by way of profits of business referred under section 80HHE, will be considered as eligible for deduction. The brought forward losses do not reduce the profits of business as computed in accordance with provisions of this Act. The unabsorbed business losses do not affect the profit of the current year. Thus while computing deduction under section 80HHE, the profits of business is not to be reduced by the unabsorbed business losses set off in accordance with the provision of section 72. What enters the gross total income is the entire profit and not the amount reduced by the brought forward losses. It is a separate issue that the total deduction under the Chapter VI-A is not to exceed gross total income which is defined in section 80B(5). Thus while computing deduction under section 80HHE the eligible profit is not to be reduced by brought forward losses. While computing the total income deduction eligible under section 80HHE cannot exceed gross total income. In other words, the deduction under Chapter VI-A is not to be allowed first and thereafter set off the brought forward losses but for the limited purpose of computing deduction under section 80HHE brought forward losses are not to be reduced. Thus, though section 80AB governs section 80HHE, the effect of section 80AB does not provide that the brought forward losses will first be set off even to compute the profit eligible for deduction. We accordingly hold that brought forward business losses is not to be reduced for computing profits of business eligible for deduction under section 80HHE. In the present example, the eligible profit will be Rs. 72,78,339 and not Rs. 35,15,070 as computed by the assessing officer. At the same time, the deduction under section 80HHE will be restricted to the extent of gross total income even though the amount allowable for deduction under section 80HHE is higher than such sum.
11. As regards the ground relating to profit of Rs. 36,230, the profit of eligible business is to be computed as per Explanation to section 80HHE. Since such sum is forming part of profits of business as computed under the head 'Profits and gains of business', the same is not to be excluded from the profits of eligible business.
In the result, the appeal is partly allowed.