Income Tax Appellate Tribunal - Ahmedabad
Arsh Industrials And Investment (P.) ... vs Income-Tax Officer on 9 September, 1988
Equivalent citations: [1990]32ITD58(AHD)
ORDER
R.M. Mehta, Accountant Member
1. This appeal is directed against the order passed by the Commissioner of Income-tax under Section 263 of the Income-tax Act, 1961.
2. The assessee in this case is a Private Limited Company and engaged in the business of manufacturing detergent powder. The assessment was completed by the I.T.O. vide order dt. 19-11-1983 computing the total income at a figure of Rs.1,72,880. On going through the assessment records the Commissioner of Income-tax found that a deduction of Rs. 79,675 had been allowed to the assessee under Section 80J of the Act. The C.I..T. further found that the profit and loss account of the new manufacturing division reflected a loss of Rs. 2,72,633. According to him the deduction under Section 80J could be allowed only if there was a profit in the new industrial undertaking. Being of the opinion that the order passed by the ITO was erroneous and prejudicial to the interests of Revenue, he issued a show-cause notice to the assessee. There were no written submissions made in response thereto but the proceedings were attended by the assessee's counsel. The C.I.T. after hearing the assessee opined that the deduction under Section 80J was not allowable. The C.I.T also directed the ITO to work out the "capital employed" by taking into account the funds borrowed by the assessee and invested in the new industrial undertaking, although not shown in the balance sheet of the new unit. It is in the aforesaid circumstances that the assessee has come up in appeal before us.
3. At the outset the learned counsel for the assessee stated that the directions issued by the C.I.T. in so far as they pertained to the computation of "capital employed" were outside the show-cause notice. According to him the only ground on which the show-cause notice had been issued was the claim for deduction under Section 80J on the ground that this was not allowable since the new unit reflected a loss. It was accordingly submitted that the order of the C.I.T. in this respect be modified.
4. As regards the claim under Section 80J the learned counsel for the assessee submitted that although the new unit reflected loss the claim under Section 80J was allowable since there was an overall profit. In this connection he placed reliance on the decision of the Bombay Bench of the Tribunal in the case of Indo French Time Industries (P.) Ltd. v. ITO [IT Appeal No. 4829 (Bom.) of 1983, dated 25-7-1985].
5. The learned DR on the other hand strongly supported the order of the CIT on both aspects. According to him the second direction issued by the C.I.T. was in fact an extension of the first direction and no specific show-cause notice was required. In respect of the claim pertaining to Section 80J it was submitted that the language of the section itself was very clear since it referred to the "profits and gains derived from an Industrial Undertaking" and not profits of the entire business. In respect of the decision of the Tribunal relied upon by the assessee, the learned DR submitted that the decisions of the Supreme Court referred to in that order, namely, Rajapalayam Mills Ltd. v. CIT [1978] 115 ITR 777 and CIT v. Patiala Flour Mills Co. (P.) Ltd. [1978] 115 ITR 640 were distinguishable and did not apply to the facts of the present case. He accordingly made an impassioned plea for the confirmation of the order of the C.I.T.
6. We have examined the rival submissions and have also perused the order of the C.I.T. which is presently in appeal before us. The paper book furnished by the assessee's counsel has also been taken into consideration while disposing of the appeal. At the outset we may reproduce the relevant portion of the show-cause notice issued by the C.I.T. insofar it relates to the deduction under Section 80J. This reads as under:
On going through your income-tax records, it is noticed that the assessment for the asst. year 1981-82 was made on 19-11-1983 determining the total income at Rs.1,72,880. While determining the total income, a deduction Under Section 80J of Rs.79,675 was given. This deduction was computed on the capital employed in the new manufacturing division. The deduction Under Section 80J can be given only if there is any profit from the new industrial undertaking. The profit and loss account of the manufacturing division shows a loss of Rs.2,72,636. Since there is no profit in the manufacturing division, no deduction Under Section 80J can be given while computing the total income for the A.Y. 1981-82. The assessment order made by the ITO giving deduction Under Section 80J is, therefore, prejudicial to the interests of the revenue. I, therefore, intend to modify the assessment Under Section 263 of the I.T. Act, 1961.
7. It is apparent that the range of the show-cause notice was limited to the assessee's claim under Section 80J amounting to Rs.79,675. The figure was not disputed but the only dispute which was sought to be raised was that since there was a loss in the new unit the deduction could not be allowed. There is no mention in the show-cause notice of any working or re-working of the amount which the assessee had claimed and which in fact the ITO had allowed while completing the assessment. In the light of these facts we strike down the following observations in the order of the C.I.T. insofar as they constitute directions to the I.T.O. to re-compute the assessee's claim:
The computation of capital has to take into account funds borrowed by and debts contracted by the assessee and investments in the new undertaking, although not shown in the balance sheet of the new unit.
This shall not be implemented by the I.T.O. while giving effect to the order of the C.I.T. under Section 263. Before we part with this aspect of the matter we would like to mention that there was no reply to the show-cause notice by the assessee but the assessee's counsel attended personally in response to the same. Nothing has been shown to us by either side which could lead to the conclusion that the issue in question although not specifically mentioned in the show-cause notice was put across to the assessee's counsel at the time of the hearing. In the absence of any such evidence we are not inclined to assume otherwise.
8. As regards the main issue being the claim under Section 80J we have given our due consideration to the decision of the Tribunal relied upon by the assessee. We must point out with respect that the two decisions of the Supreme Court supra on which strong reliance has been placed while deciding the matter are not applicable. The issue which was being considered in those two cases was whether the unabsorbed claims and deficiencies for the earlier years such as losses, depreciation allowance and development rebate pertaining to the new unit but already adjusted against the profits from the other units could once again be set off against the profits of the new unit for a subsequent year for purposes of allowing the deduction Under Section 15 C of the 1922 Act / Under Section 80J of the 1961 Act. The issue before us is however different and that is whether the assessee is entitled for deduction under Section 80J in respect of the capital employed in a new industrial undertaking when there is a loss in that undertaking although the other units have earned profits. Before we proceed further it would be necessary to set out the relevant provisions of the section itself and which would assist in deciding the matter at hand. Section 80J(1) states as under:
80J(1) - Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship 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.
[Emphasis supplied by us] Section 80J(3) states as under:
80J(3) - Where the amount of the profits and gains derived from the industrial undertaking or ship or business of the hotel, as the case may be, included in the total income. [Emphasis supplied by us]
9. It is absolutely clear that it is the profits and gains of the new industrial undertaking which are the sole criterion for working out the deduction allowable to an assessee under Section 80J. Even the capital which has to be considered for quantifying the deduction is the one "employed" in that industrial undertaking and the overall capital of the assessee employed in the other units is not to be taken into account. The formula for working out the capital once again takes into consideration the assets of the new industrial undertaking as also the liabilities of the same undertaking. In the light of these, we are not in a position to appreciate as to how a stand can be taken that the deduction should be quantified on the basis of the new unit but the profits against which such deduction should be given, could be even that of the other units of the assessee.
10. In the order of the Tribunal supra on which reliance has been placed by the assessee a difference between Section 80J and Section 15C of the old Act has been brought out. This is the provision for carry forward of the "deficiency" which exists in Section 80J but not in Section 15C. According to us this distinction itself makes a vital difference since the assessee would not be deprived of its claim under Section 80J in case there are no profits in the new industrial undertaking in one year. It would be allowed to carry forward the same to the subsequent year and so on and so forth. This aspect of the matter has been made absolutely clear in Section 80J(3).
11. At this stage we may refer to a recent decision of the Supreme Court in the case of CIT v. Canara Workshops (P.) Ltd. [1986] 161 ITR 320. The issue being considered was the one pertaining to Section 80E of the I.T. Act, 1961. It was held that the profits and gains earned by one priority industry could not be reduced by the loss suffered by any other industry or industries owned by the assessee. It was held that each industry must be considered on its own working when adjudging its title to the deduction Under Section 80E. Their Lordships were of the view that it would make no difference even when the other industry was a priority industry. It would be worthwhile reproducing the following observations of their Lordships:
(i) The object in enacting Section 80E is properly served only by confirming the application of the provisions of that section to the profits and gains of a single industry. The deduction of 8 per cent is intended to be an index of recognition that a priority industry has been set up and is functioning efficiently. It was never intended that the merit earned by such industry should be lost or diminished because of a loss suffered by some other industry.
(ii) A distinction must be drawn between a case where the loss or unabsorbed depreciation pertains to the same industry whose profits and gains are the subject of relief under Section 80E and a case where the loss or unabsorbed depreciation relates to industries other than the one whose profits and gains constitute the subject of relief.
In computing the profits for the purpose of deduction under Section 80E of the I.T. Act, 1961, the loss incurred by the assessee in the manufacture of alloy steels (a priority industry) could not be set off against the profits of the manufacture of automobile ancillaries (another priority industry). The assessee was entitled to a deduction at 8 per cent on the entire profits of the automobile parts industry included in the total income without deducting therefrom the losses in the alloy steel manufacture.
12. That above decision went in favour of the assessee but applying its ratio the same would go against the present appellant before us. In other words the claim under Section 80J in its case would have to be examined in respect of the new unit independent and distinct from the other units. In this view of the matter the action taken by the Commissioner of Income-tax in withdrawing the deduction under Section 80J shall stand approved. In coming to this conclusion we respectfully follow the decision of the Supreme Court supra. We would however direct that the amount in question, namely, Rs.79,675 be carried forward and allowed to the assessee in accordance with the provisions of Section 80J(3) in the subsequent year or years.
13. In the result the appeal is partly allowed.