Income Tax Appellate Tribunal - Cochin
G. T. N. Textiles Ltd. vs Deputy Commissioner Of Income Tax. on 29 January, 1993
Equivalent citations: (1993)47TTJ(COCH)137
ORDER
G. SANTHANAM, A. M. :
These appeals are by the assessee and the Revenue. The cross-objection is by the assessee. They relate to the asst. yrs. 1989-90 and 1990-91.
2. For the asst. yr. 1989-90 the assessee claimed deduction under S. 80HHC in a sum of Rs. 1,62,25,281 on the basis of book profits of Rs. 1,95,05,500 computed by it under S. 115J. The computation per appellant and per Assessing Officer was as follows :
Asst. yr. 1989-90 As pet GTN As per DC(A) Order Turnover 37,67,83,203 37,67,84,000 Add : Total Freight debited to the sales account 1,04,76,196 Foreign Agents Commission debited to sales account 15,65,000 37,67,83,203 38,88,25,196 Export turnover 31,67,93,586 31,67,93,586 Profit 1,95,14,364 86,11,729 (Separate sheet attached for reconciliation) Percentage of Export turnover 31,67,93,586 37,67,83,203 = 84.08% 31,67,93,586 38,88,25,196 = 81.47 % Deduction under S. 80HHC % 84.08% 81.47% 1,64,25,281 70,15,952 The ITO was of the view that the deduction can be allowed only on the amount of profits and gains from business as determined under the provisions other than the provisions of S. 115J and accordingly arrived at the profit under the head "profits and gains of business" as follows :
Asst. yr. 1989-90 Profits as per P&L Account 1,95,14,364 Add :
Disallowance vide asst. order dt. 9-8-1991:
Asst. yr. 1989-90 1,95,14,364 Error in the figure taken by DC(A) in provision 7,10,000 for taxation 7,00,000 10,000 Donations 1,68,917 Agrl. IT 1,463 Prior period expenses 6,83,917 Provision or gratuity under S. 40A(M) 11,34,391 Under r. 6B 55,305 Under S. 40A(12) 46,450 Under S. 43B 1,46,651 Under r. 6D 3,76,732 Entertainment under S. 37(2A) 47,692 26,71,518 2,21,85,882 Less :
Difference in depreciation between charged in books and as per IT Act IT depreciation 3,83,26,480 As per books 2,91,61,000 91,65,480 Investment allowance 44,08,673 1,35,74,153 Business profit as derived by DC(A) 86,11,729 On this basis the Assessing officer granted deduction under S. 80HHC at Rs. 70,15,952 in the original assessment. The assessee carried the matter in appeal. It was contended that the deduction under S. 80HHC must be allowed on the basis of the book profit as explained in S. 115J and not in the manner computed by the Assessing Officer. Disallowances not envisaged under S. 115J but envisaged in other provisions of the IT Act in computing the profits and gains of business cannot be imported when notional profits are taxed under the special provisions of S. 115J. Inadvertently, the CIT(A) adopted the reasoning of the Assessing Officer as those of the assessee and in that process allowed the ground in favour of the assessee. This was by his order dt. 24th Oct., 1991. There is no appeal by the assessee against this decision of the CIT(A) as it was to its advantage.
3. The Assessing Officer disallowed a sum of Rs. 55,305 under r. 6B of the IT Rules. It was the assessees contention that it had incurred expenditure in respect of presentation articles though costing more than Rs. 50 per item and that they did not have any advertisement value and, therefore, r. 6B cannot be invoked. The CIT(A) on going through the details of the expenditure noticed that the articles presented were wall clocks and silver discs and though they may not carry any advertisement value they cannot be considered as incurred wholly and exclusively for the purpose of business.
4. Sri K. R. Ramamani, the learned counsel for the assessee contended that out of the sum of Rs. 55,305, about Rs. 47,188 was incurred in the Bombay branch by way of sales promotion expenses. He also contended that the tax auditors merely mentioned the cost of articles for presentation in excess of Rs. 50 per article at Rs. 4,55,306 but that included articles for both advertisement and sales promotion and, therefore, the disallowance should have been restricted to advertisement expenses only.
5. We have heared rival submissions. There is no material for us to hold that a sum of Rs. 47,188 was incurred for sales promotion. The disallowance is sustained. This disposes of ITA No. 1018/Coch/1991.
6. ITA No. 265/Coch/1992 is again an appeal by the assessee in relation to the asst. yr. 1989-90 arising out of the order of rectification dt. 9th March, 1992 passed by the CIT(A). The CIT(A) in the impugned order accepted the contention of the Assessing Officer that his order dt. 24th Oct., 1991 allowing the claim of the assessee for deduction under S. 80HHC in the manner computed by the assessee was erroneous in that while adopting the reasoning of the Assessing Officer he had inadvertently allowed the assessees ground in relation to the deduction under S. 80HHC. After considering the letter of the assessee dt. 9th Jan., 1992, the CIT(A) upheld the order of the Assessing Officer in restricting the deduction under S. 80HHC to Rs. 70,15,952 as against the claim of Rs. 1,64,25,281. In this process, he referred to cl. (iii) of the Expln. to S. 115J(1A) and also S. 80HHC. In construing the deduction envisaged from the book profit, he held that such deduction should be computed not by taking the book profit as such, but by taking the profit of the business as computed under the head "profits and gains of business or profession". Therefore, he held that the Assessing Officer was justified in making disallowances to the book profit and by adopting the higher figure of depreciation and investment allowance as against the book figure of depreciation and investment allowance. Being aggrieved, the assessee is on appeal.
7. We have heard rival submissions. Sec. 115J is a special provision relating to certain companies. There is no dispute that the section is applicable to the assessee. According to S. 115J in the case of a company, if the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st April, 1988, is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to 30% of such book profit. Sec. 115J(1A) is as follows :
"(1A) Every assessee, being a company, shall, for the purpose of this section, prepare its P&L account for the relevant previous year in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act, 1956 (1 of 1956).
Explanation. - For the purposes of this section, "book profit" means the net profit as shown in the P&L account for the relevant previous year prepared under sub-s. (1A), as increased by -
(a) ..... .. ..... ..... (b) ............. .. (c) ..... ........ .. (d) ............. .. (e) ............. .. (f) ............ . (g) ................ . (h) ............ . (ha) ............ . and as reduced by, - (i) ............... . (ii) ............ .
(iii) The amounts as arrived at after increasing the net profit by the amounts referred to in cls. (a) to (f) and reducing the net profit by the amounts referred to in cls. (i) and (ii) attributable to the business, the profits from which are eligible for deduction under S. 80HHC or S. 80HHD, so however, that such amounts are computed in the manner specified in sub-s. (3) or sub-s. (3A) of S. 80HHC or sub-s. (3) of S. 80HHD, as the case may be; or
(iv) .. ....... ....."
The controversy is with regard to the manner in which the deduction under S. 80HHC should be computed for purpose of S. 115J. The Revenue contends that the profit as per the P&L account of the company should suffer all disallowances envisaged under the provisions of the IT Act and depreciation and investment allowance should be taken at the figures at which they are normally taken under the provisions of Ss. 32 and 32A of the IT Act in computing the profits and gains of business. It is after these disallowances and deductions, the balance figure should be taken to work out the eligible relief under S. 80HHC. Thus, according to the Revenue, the profits and gains of business would be taken in the following manner :
Profit as per P&L account Rs. ......
Add : Disallowances under other provisions of the Act Rs. ......
Total Rs. ......
Less : Deduct
(a) Depreciation as per IT Rules Rs. ......
(b) Investment allowance as per IT Rules Rs. ......
Rs. .......
Profits and gains of business Rs. ..
Relief under S. 80HHC will be = Export turnover Total turnover X Profits and gains Total turnover of business On the other hand, the assessees contention is that no addition could be made by way of disallowance under other provisions of the IT Act to the profit as per the P&L account except in respect of those items specifically mentioned in cls. (a) to (ha) to Expln. S. 115J(1A).
8. We uphold the assessees contention. A bare reading of the Expln. to S. 115J(1A) would show what additions could be made to the book profit. No other addition or disallowance as done by the Assessing Officer is permissible especially when S. 115J prescribes a fictional mode of computation of income. Similarly, it is the book profit as disclosed in the P&L Account of the company that is relevant for purpose of S. 115J. For all purposes subject to certain adjustments, it is 30% of such book profit which is taken as the income of the assessee. Sec. 115J opens with a non obstante clause and it excludes the operation of any other provisions of the IT Act. Normally, this should have excluded deduction under S. 80HHC also, but under cl. (iii) of Expln. to S. 115J(1A) deduction under S. 80HHC has been specifically provided for in order to arrive at the total income of the assessee for the purpose of S. 115J. Sub-s. (3) of S. 80HHC is as follows :
"(3) For the purposes of sub-s. (1), profits derived from the export of goods or merchandise out of India shall be the amount which bears to the profits of the business (as computed under the head "profits and gains of business or profession"), the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee."
While dealing with the amount of deduction under S. 8OHHC what cl. (iii) of Expln. to S. 115J(1A) indicates is the manner in which such amounts are computed under the provisions of cl. (3) of S. 80HHC. In order to appreciate the controversy before us, it is necessary to note that cl. (iii) of Expln. to S. 115J(1A) has not used the words "in the like manner and to the same extent". If such an expression had found its place in cl. (iii) of Expln. to S. 115J(1A) the Department would be well supported in making disallowances and additions under the other provisions of IT Act and also in adopting the amount of depreciation and investment allowance as per IT Rules to the book profit for the limited purpose of computing the deduction available under S. 80HHC. However, in the absence of the expression "in the like manner and to the same extent", such a construction is not permissible. Therefore, even though S. 80HHC(3) by itself speaks of the profit of the business as computed under the head "profits and gains of business or profession", in view of the non obstante clause in S. 115J and in the absence of the words "in the like manner and to the same extent", it has to be held that this part of the provision which is found within the brackets in S. 80HHC must yield to the non obstante clause. In other words, the book profit of the company should be treated as profits and gains of business for the limited purpose of giving deduction under S. 80HHC vis-a-vis cl. (iii) of Expln. to S. 115J(1A). Therefore, we uphold the computation as given by the assessee. Sec. 80HHC is intended to boost our export earnings and, therefore, a liberal interpretation is required and in this connection it may be useful to refer to paragraphs 2 and 3 of the Circular of CBDT No. 599, dt. 4th May, 1990:
"2. It was pointed out that the provisions of S. 115J took away the 100% exemption which was to be allowed in respect of export profits earned by the exporters and tourism related industry and thus watered down the encouragement which was to be provided to such foreign exchange earning activities. Since the intention was that 100% of such profit should be exempt, it was decided that the profits which are exempt under Ss. 80HHC and 80HHD should be excluded from the purview of S. 115J. It was also decided that S. 115J should not apply to companies engaged in the business of generation or distribution of electricity.
3. Amendments to S. 115J. To achieve the objectives outlined in para 2 above, the Amending Act, 1989 has carried out the following amendments in S. 115J :
(i) sub-s. (1) of the section has been amended to provide that the provisions of the sub-section relating to the taxability of 30% of the "book profits" of companies shall apply in the case of a company engaged in the business of generation or distribution of electricity.
(ii) An Explanation in the section provides for the manner of computation of "book profits" for the purpose of section. The Amending Act, 1989 has carried out the following amendments in the said Explanation :
(a) A new cl. (iii) has been inserted in the Explanation to provide for the purposes of computation of "book profits", the net profit shall be reduced by the amount of net profits derived from the business of exports or the services provided to foreign tourists by approved hotels or tour operators or by travel agents, which are eligible for deduction under Ss. 80HHC and 80HHD. For this purpose the net profit to be excluded shall be computed in the same manner as provided for in sub-ss. (3) and (3A) of S. 80HHC or sub-s. (3) of S. 80HHD, as the case may be.
Thus the profits exempt under Ss. 80HHC and 80HHD have been excluded from the purview of S. 115J."
9. Before parting with the order we hold that the percentage of net profit to be taken is not 84.08% as claimed by the assessee, but only 81.47% as worked out by the Assessing Officer. This point is conceded before us.
10. In the result, assessees appeal in ITA No. 265/Coch/92 is allowed.
11. ITA No. 644/Coch/1992: This again involves the computation of the amount to be deducted under S. 80HHC for purpose of computation of total income under S. 115J. A few more facts are relevant. In the original assessment for the asst. yr. 1989-90, the Assessing Officer allowed deduction under S. 80HHC at a figure of Rs. 70,15,952 taking the book profit at a figure of Rs. 86,11,729 as against the admitted book profit of Rs. 1,95,05,500. On appeal, the CIT(A) while adopting the reasonings of the Assessing Officer inadvertently allowed the appeal of the assessee. Later on, the CIT(A) rectified his order under S. 154 of the IT Act, against which the assessee has come on appeal in ITA No. 265/Coch/1992. In the meanwhile, while giving effect to the order of rectification passed by the CIT(A) under S. 154, in relation to his appellate order dt. 24th Oct., 1991, the Assessing Officer in addition to adopting the higher amount of depreciation and investment allowance as originally adopted by him and also making disallowances under other provisions of the Act as before made two more adjustments in that he set off the carried forward unabsorbed depreciation and investment allowance of earlier years against the book profit and thereby withdrew the entire relief under S. 80HHC that was originally granted by him. On appeal, the CIT(A) upheld the computation. He felt that the Assessing Officer was right in setting off the unabsorbed depreciation and investment allowance against the book profit. The assessee is on second appeal before us in ITA No. 644/Coch/1992.
12. In ITA No. 265/Coch/1992 we have held that only the adjustments envisaged in S. 115J read with the Explanation thereof are permissible adjustments. The purpose of S. 115J is to treat 30% of the book profit subject to certain specified adjustments as the total income of the assessee. The adjustments are specified in the Explanation. No other adjustment is permissible. We have also explained that for purpose of S. 80HHC also it is the book profit that is to be considered as profit of the business but not the profit as computed under the head "profits and gains of business or profession". In this view of the matter, the setting off of unabsorbed depreciation and investment allowance cannot be made while arriving at the notional profit for purpose of S. 115J. It may be alright for the Assessing Officer to make such adjustments in arriving at the total income of the assessee in accordance with the provisions of the IT Act as a basis for comparison with 39% of the book profit in order to take the higher of the two for purpose of taxation. That does not mean that unabsorbed depreciation and investment allowance can be set off against the book profit itself. This would be amply clear if regard is had to the provisions of S. 115J(2).
13. In the result, the assessees appeal in ITA 644/Coch/92 is allowed.
14. ITA No. 25/Coch/1992 is a Departmental appeal for the asst. yr. 1989-90. This again is an appeal against the first order of the CIT(A) dt. 24th Oct., 1991. We have already indicated that in the impugned order the CIT(A) while adopting the reasonings of the Assessing Officer had inadvertently upheld the claim of the assessee as respects quantification of deduction under S. 80HHC. By way of abundant caution the Revenue has filed this appeal. In view of the subsequent rectification order passed by the CIT(A) which has become a subject-matter of appeal before us in ITA No. 265/Coch/1992 this ground becomes infructuous.
15. The second ground in the appeal of the Revenue is whether the Central Investment subsidy should go to reduce the cost of assets for purpose of depreciation. The issue is decided against the Revenue following the ratio laid down by the jurisdictional High Court in the case of CIT vs. Relish Foods (1989) 180 ITR 454 (Ker).
16. The appeal is dismissed.
17. C. O. No. 3/Coch/1992 is by the assessee and is against the order of the CIT(A) in holding that the deduction under S. 80HHC envisaged in cl. (iii) of Expln. to S. 115J(1A) should be computed in accordance with the profits as computed under the profits and gains of business but not in relation to the book profit. In ITA No. 265/Coch/1992 the same issue came before us and we have upheld the contention of the assessee. In this view of the matter, the cross-objection is also allowed.
18. ITA No. 266/Coch/1992 by the assessee relates to the asst. yr. 1990-91. The issue is whether the deduction envisaged in cl. (iii) of Expln. to S. 115J(1A) of the IT Act in respect of S. 80HHC should be computed with reference to the book profit only or with reference to the profits and gains of business as computed under the other provisions of the Act. This issue has come up for consideration for the immediately preceding year in the assessees appeals and we have upheld the contention of the assessee that it is the book profit that is relevant and not the assessable profit as understood by the Assessing Officer. This ground of the assessee is allowed.
19. The second ground against the disallowance of club fees is not pressed and as such dismissed.
20. The third ground is against the levy of additional tax of Rs. 3,55,120. The CIT(A) held that as he has sustained the computation made by the Assessing Officer under S. 80HHC and the consequent levy of additional tax in the assessment made under S. 143(1)(a) of the IT Act, he would hold that the levy was justified in an assessment under S. 143(3). The assessee is on second appeal.
21. We have in para 24 vacated the levy of additional tax arising out of the order of assessment made under S. 143(1)(a) in ITA No. 267/Coch/1992. We delete the levy of additional tax accordingly.
22. In the result, the appeal is partly allowed.
23. ITA No. 267/Coch/1992 is again an appeal by the assessee for the asst. yr. 1990/91. In this case, the assessee filed a return of income showing the book profit at Rs. 8,55,390 and the business profit at Rs. 56,19,077. The case was processed under S. 143(1)(a) and an intimation was sent to the assessee determining the book profit at Rs. 1,28,15,457 and the taxable income under S. 115J at Rs. 38,44,620. In the said intimation, the Assessing Officer allowed deduction under S. 80HHC on the basis of the income computed by him as against the claim of the assessee on the basis of the book profit. The assessee vide its letter dt. 15th July, 1991 sought a rectification regarding the deduction under S. 80HHC(3). According to the assessee, deduction claimed is as per the provisions of S. 80HHC(3) of the Act, and therefore, the order under S. 143(1)(a) required rectification. However, the Assessing Officer rejected the said rectification application by an order under S. 154 dt. 29th July, 1991 on the ground that deduction under S. 80HHC of Rs. 47,19,960 has been worked out after strictly following the provisions of the Act. The assessee carried the matter in appeal and it was contended that only adjustment of a prima facie nature could be made under S. 143(1)(a) of the Act and matters involving serious interpretation of the provisions of the law or issues of debatable nature should not be brought within the ambit of S. 143(1)(a) of the Act. The learned first appellate authority held that the adjustments that were made by the Assessing Officer by having a different computation of deduction under S. 80HHC were prima facie adjustments that could be made under S. 143(1)(a). In this view of the matter, he dismissed the appeal of the assessee. The assessee is on second appeal.
24. In our considered opinion the interpretation of book profit, the deductions envisaged under cl. (iii) of Expln. to S. 115J(1A) and the manner in which deduction under S. 80HHC should be computed for purpose of S. 115J would certainly assume interpretation of the relevant provisions of the Act. It cannot be said that the computation as done by the Assessing Officer was the only mode of computation. The adjustment made by him on that score, therefore, could not be held as a prima facie adjustment. Further, the assessee succeeds on the substantial ground as respects computation of deduction under S. 80HHC for purpose of S. 115J. In this view of the matter, the appeal of the assessee is allowed.
25. In the result, ITA No. 1018/Coch/91 is dismissed. ITA Nos. 265/Coch/92, 267/Coch/92 and 644/Coch/92 are allowed. ITA No. 266/Coch/92 is partly allowed. ITA No. 25/Coch/92 is dismissed and C. O. No. 3/Coch/1992 is allowed.