Andhra HC (Pre-Telangana)
Commissioner Of Income-Tax vs Venkateswara Transmission Ltd. on 19 October, 1994
Equivalent citations: [1995]216ITR510(AP)
Author: Syed Shah Mohammed Quadri
Bench: S.S. Mohammed Quadri
JUDGMENT Syed Shah Mohammed Quadri, J.
1. Pursuant to the direction of this court in I.T.C. No. 6 of 1984, the Income-tax Appellate Tribunal, Hyderabad, referred for the opinion of this court the following question of law under section 256(2) of the Income-tax Act, 1961 :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law in allowing relief under section 80HH ?"
2. For answering the reference, it would be useful to refer to the facts which gave rise to this question. The assessee-company is engaged in the business of manufacture of various diesel locomotives. For the assessment year 1978-79, the assessee-company claimed deduction under section 80HH of the Income-tax Act, 1961 (for short, "the Act"). The income of the assessee for that year was computed at Rs. 57,882 before setting off the past business loss and unabsorbed depreciation; if these items are set off, the income of the assessee in that year would become "nil". The Income-tax Officer, however, did not grant any relief under section 80HH of the Act. On appeal, the Appellate Commissioner of Income-tax confirmed the assessment. The assessee then carried the matter to the Income-tax Appellate Tribunal. On October 14, 1982, the Tribunal allowed the appeal taking the view that having regard to the judgment of the Supreme Court in Cloth Traders (P.) Ltd. v. Addl. CIT , relief should be given under section 80HH of the Act; it further held that, since section 80AB has come into force with effect from April 1, 1981, it would not come in the way of the assessee getting the relief as that section was applicable from the assessment year 1981-82. Out of the said order of the Tribunal, the above question of law arises.
3. Sri S. R. Ashok, learned standing counsel for the Revenue, contends that on a proper construction of section 80HH of the Act, the irresistible conclusion is that the relief granted thereunder has to be calculated on the net income of the assessee from the industrial undertaking. Sri M. J. Swamy, learned counsel for the assessee, on the other hand, contends that the expression used in section 80HH is "profits and gains" and not "income", therefore, deduction has to be given on the gross profits and gains of the assessee from the industrial undertaking.
4. With effect from April 1, 1974, the assessees are allowed deductions in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas under section 80HH. There is no dispute as to the entitlement of the assessee to the deduction allowed under this section. The controversy centres round the method of calculation. For arriving at the quantum of the amount which could be allowed as "deduction" under this section, it would be useful to note here sub-section (1) of section 80HH of the Act in so far as it is relevant for our purpose :
"(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...."
5. From a careful reading and analysis of the section extracted above, the position that emerges is : in computing the total income of the assessee, where section 80HH applies, from out of the gross total income of the assessee which includes profits and gains derived from an industrial undertaking or business of a hotel, a deduction equal to twenty per cent. of the profits and gains of an industrial undertaking or business of a hotel is allowed and the deduction is in accordance with and subject to the provisions of this section. Thus, it is clear that the allowable deduction is twenty per cent. of the profits and gains derived from an industrial undertaking or the business of a hotel. The question is at what stage should the permissible deduction be made. Whereas the assessee contends that the gross profits and gains derived from an industrial undertaking should form the basis for deduction, the Revenue's contention is that the allowable deduction should be worked out on the net income of the assessee. Strictly speaking the question as referred is not in these terms though that has been the bone of contention before the Tribunal.
6. The expression "gross total income" is defined in clause (5) of section 80B of the Act, to mean, the total income computed in accordance with the provisions of the Act before making any deduction under this Chapter. It may be pointed out that section 14 of the Act classifies all income, for purposes of charge of income-tax and computation of total income into six heads of income. Head "D" relates to "Profits and gains of business or profession". The "profits and gains of business or profession", as computed in accordance with the provisions of the Act, form part of income both for charge of income-tax as well as for computation of total income. Learned counsel for the assessee argues that on the language of section 80HH, what is relevant is "the profits and gains" but not the income from the profits and gains of business or profession. In our view, the distinction sought to be made by the learned conceal lacks substance. The expression "profits and gains" connotes income from business or profession computed in accordance with the provisions of the Act. For purposes of arriving at the income under the said head, permissible deductions are provided in sections 30 to 43D of the Act. Chapter VI-A, which was substituted with effect from April 1, 1968, allows certain further deductions; we shall refer to them as "special deductions". Section 80HH falls in this Chapter. Section 80HH provides for deduction of twenty per cent. of the profits and gains derived from an industrial undertaking or the business of a hotel, which would mean twenty per cent. of the profits and gains arrived at de hors the deductions allowed by Chapter VI-A.
7. It may be relevant to note here that similar deductions were allowed under sections 80E (now section 80-I) and section 80M (as it stood on April 1, 1968) of the Act, which were included in the same Chapter. Section 80M provides for special deduction in respect of certain intercorporate dividends. The Supreme Court was called upon to consider whether the deductions required to be allowed under that provision had to be calculated with reference to the net amount of dividend computed in accordance with the provisions of the Act which formed part of the gross total income or with reference to the full amount of dividend received by the assessee, in Cloth Traders (P.) Ltd. v. Addl. CIT . It was laid down that the deduction permissible under section 80M should be calculated with reference to the full amount of dividends received from a domestic company and not with reference to the net dividend after making the deductions provided in the Act, in other words, not as computed in accordance with the provisions of the Act.
8. The judgment in that case led to the insertion of section 80AA (by the Finance (No. 2) Act, 1980) retrospectively with effect from April 1, 1968. That section prescribes the mode for computation of deduction under section 80M. In respect of the deduction allowed under other provisions of Chapter VI-A by the said Act, section 80AB was inserted. We shall refer to this provision presently.
9. In Cambay Electric Supply Industrial Co. Ltd. v. CIT , the question which fell for consideration of the Supreme Court, was whether in granting relief under section 80E of the Act, the development rebate, depreciation, unabsorbed development rebate and depreciation carried forward from the earlier years had to be deducted to arrive at the profits for the purpose of exemption. The Supreme Court analysed section 80E and pointed out the steps that must be kept in mind before the special deduction, permissible under section 80E, was allowed. They are as follows (at page 91) :
"On reading sub-section (1), it will become clear that three important steps are required to be taken before the special deduction permissible thereunder is allowed and the net total income exigible to tax is determined. First, compute the total income of the concerned assessee in accordance with the other provisions of the Act, i.e., in accordance with all the provisions except section 80E; secondly, ascertain what part of the total income so computed represents the profits and gains attributable to the business of the specified industry (here generation and distribution of electricity); and thirdly, if there be profits and gains so attributable, deduct eight per cent. thereof from such profits and gains and then arrive at the net total income exigible to tax."
10. From the pronouncement of the Supreme Court in the said case, it follows that in arriving at the profits and gains attributable to business, income has to be calculated in accordance with the provisions of the Act.
11. That judgment was approved by the Constitution Bench of the Supreme Court in Distributors (Baroda) P. Ltd. v. Union of India , wherein the special deduction allowed by section 80M fell for the consideration of the Supreme Court.
12. It may also be pointed out that the newly added section 80AA was questioned before the Supreme Court in Distributors (Baroda) P. Ltd. v. Union of India . In that case, the Supreme Court overruled the decision Cloth Traders (P.) Ltd. v. Addl. CIT and ruled that in enacting section 80M, the Legislature intended to grant relief with reference to the amount of dividend computed in accordance with the provisions of the Act and not with reference to the full amount of dividend received from the paying company. It is observed that it is difficult to imagine any reason why the Legislature should have intended to give relief with reference to the full amount of dividend received from the paying company when that is not the amount which is liable to suffer tax once again in the hands of the assessee and that the Legislature can be certainly attributed the intention to prevent double taxation but not to provide an additional benefit which would go beyond what is required for saving the amount of dividend from taxation once again in the hands of the assessee. It was explained that as the dividend received by the assessee would not be included in the gross total income and that only the net dividend, as computed in accordance with the provisions of the Act, will form part of the gross total income, the deduction required to be made for computing the gross total income could only be on the net dividend.
13. Having thus interpreted section 80M, their Lordships felt it unnecessary to consider the question of the constitutional validity of the retrospective operation of section 80AA, as in their Lordships' view, the retrospective operation is only declaratory of the law as it always had been since April 1, 1968, and concluded that no complaint could validly be made against it.
14. We may refer to a recent judgment of the Supreme Court in H. H. Sir Rama Varma v. CIT , which further clarifies the position. In that case, the deduction allowed under section 80T fell for consideration of the Supreme Court. It was held that long-term capital losses brought forward from the earlier assessment years had to be first set-off against the long-term capital gains of the current assessment year before the deduction contemplated under section 80T of the Act could be allowed. With reference to section 80AB, it was held that on a parity of reasoning, it must be 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 and the manner of deduction as specified under that section was in accordance with the interpretation that was placed on section 80T, read independently.
15. The decisions of the Supreme Court, referred to above, would conclude the issue before us. However, learned counsel for the assessee relied on the following judgments to persuade us to come to the conclusion that the basis of allowing deduction is not the net income but the gross income from profits and gains of business.
16. In CIT v. Canara Workshops P. Ltd. , the assessee was carrying on two industries - one in respect of which special deduction under section 80E was allowed and another to which that provision had no application. The question that fell for consideration of the Supreme Court was whether the profits and gains earned by the assessee in respect of the industry to which section 80E applied, could be reduced by the loss suffered by the other industry or industries owned by the same assessee to which section 80E had no application. It was held that a distinction must be drawn between a case where the loss or unabsorbed depreciation pertains to the same industry whose profits and gains were the subject of relief under section 80E and a case where the loss or unabsorbed depreciation related to industries other than the one whose profits and gains constituted the subject of relief and it was laid down that the assessee was entitled to a deduction of eight per cent. on the entire profits of the industry without deducting the losses in another industry run by the same assessee.
17. Relying on the ratio of that judgment of the Supreme Court, Sri M. J. Swamy, argues that if the losses of the entire industry cannot be set-off against the income of the industry to which the special provision is applicable, so also the loss in respect of the earlier year should not be allowed to be set off. We find no substance in this contention. The submission loses sight of the fact that the loss that was brought forward is of the same industry and could be set off under the provisions of the Act in the subsequent year. Further in view of the clear pronouncement of the Supreme Court in the cases referred to above, namely, Distributors (Baroda) P. Ltd. v. Union of India and Cambay Electric Supply Industrial Co. Ltd. v. CIT , this submission cannot be accepted.
18. Next, learned counsel relied on the judgment of the Madras High Court in CIT v. Madras Motor and General Insurance Co. Ltd. [1986] 159 ITR 601. The scope of special deduction, allowed under section 80K, was the subject-matter of a decision of the Madras High Court. The Revenue contended that the addition of the amount representing the appreciation in the value of share investments held by the assessee, was wrongly deleted by the Tribunal. The High Court took the view that in view of the decision of the Supreme Court in Distributors (Baroda) P. Ltd. v. Union of India , the Tribunal was not correct in holding that the benefit under section 80M should be granted on the gross dividend income without deducting the proportionate management expenses. The judgment in this case, in our view, does not help the assessee.
19. In CIT v. Tarun Udyog , the Income-tax Officer first determined the profits of the industrial undertaking before deducting investment allowance; he then deducted investment allowance and thus reduced the income and on the income so determined granted relief under section 80HH. The Tribunal held that for granting relief under section 80HH, investment allowance ought not to have been deducted. On a reference, the Division Bench of the Orissa High Court held that the relief under section 80HH was to be allowed on the profits of the industrial undertakings before deducting the investment allowance under section 32A and that according to the provisions of the Income-tax Act, income was different from profits though the former included the latter and though an industrial undertaking might earn profit, its gross total income might be substantially less than the profit and the taxable income might, in some cases, become nil. Therefore, the gross total income computed in accordance with the provisions contained in sections 30 to 43A, would not be relevant for the purpose of the deduction under section 80HH.
20. Though the judgment in Cambay Electric Supply Industrial Co. Ltd. v. CIT was referred to, it appears, the judgment of the Supreme Court in Distributors (Baroda) P. Ltd. v. Union of India was not brought to the notice of the Division Bench. In view of the pronouncement of the Supreme Court referred to above, we are unable to agree with the view expressed by the learned judges. In our view, the said judgment does not correctly represent the law, having regard to the pronouncement of the Supreme Court in Distributors (Baroda) P. Ltd. v. Union of India .
21. From the above discussion, it follows that deduction allowed under section 80HH has to be calculated at 20 per cent. of the net profits and gains from the industrial undertaking arrived at after deductions in accordance with the provisions of the Income-tax Act, but not at 20 per cent. of the gross profits and gains of the industrial undertaking.
22. We would like to clarify that the question referred to us was so worded because there was no income but the Tribunal directed allowing of relief under section 80HH. Indeed, the question, if understood in the light of the facts and circumstances of the case, only deals with the controversy as to whether the relief under section 80HH has to be granted on the profits and gains of the industrial undertaking before allowing deduction under sections 30 to 43A of the Act or after allowing such deductions.
23. For the aforesaid reasons, we answer the question in the negative, i.e., in favour of the Revenue and against the assessee.