Madras High Court
Commissioner Of Income-Tax vs Yenpeyes Rubber (P) Ltd. on 19 November, 1997
Equivalent citations: [1999]239ITR734(MAD)
JUDGMENT N.V. Balasubramanian, J.
1. At the instance of the Revenue, the Tribunal has stated a case and referred the following common question of law for the asst. yrs. 1979-80 and 1980-81 under s. 256(1) of the IT Act, 1961 (hereinafter to be referred to as 'the Act') for our consideration :
"Whether, on the facts and circumstances of the case, the deduction under s. 80HH has to be computed by taking a proportion of a gross profit from the new industrial undertaking in the backward area and should be given as a deduction from such gross income of the assessee similar to the deductions under other sections viz., 30 to 43A in computing the income from business under s. 29 of the IT Act ?"
2. The assessee is a company engaged in the manufacture and sale of industrial belts. The assessee, admittedly, is a newly established industrial undertaking set up in a backward area. The assessee, in the course of assessment proceedings for the asst. yr. 1979-80 disclosed the income from the business of manufacture and sale of industrial belts was Rs. 8,91,590 and claimed the deduction under s. 80HH of the Act at 20 per cent thereof amounting to Rs. 1,01,582. The ITO however, held that the business loss, unabsorbed investment allowance and the depreciation carried forward from the earlier years should first be deducted and the deduction under s. 80HH of the Act should be allowable only on the net income of the business. Consequently, the net income was arrived at Rs. 14,284 and the result of the computation was that for the asst. yr. 1979-80, there was a net taxable income of Rs. 18,650 as against net loss of Rs. 72,662, and granted deduction under s. 80HH of the Act on the net income. The ITO also disallowed the carried forward loss of Rs. 72,670 as claimed by the assessee.
3. The assessee preferred an appeal to the CIT(A) and the CIT(A) held that the set off of earlier losses has necessarily to be made in the computation of income for the purpose of determining the relief under s. 80HH of the Act and therefore, the order of the ITO was legally correct. The assessee preferred a further appeal before the Tribunal and the Tribunal, following its earlier order in the case of Veeraraghava Textiles in ITA Nos. 67 to 70 (Mds)/81, dt. 30th November, 1981, held that the priority according to which the allowance will be allowed is an under :
1. First allow current depreciation and compute profit from business.
2. Set off current losses.
3. 80H, 80HH, 80HHA deductions, if any, if there is profit.
4. Current 80J if there is profit/80-I deduction whichever lapses first.
5. Carried forward 80J from profit, if any, for successive years.
6. Carry forward development rebate under s. 33(2)(ii) for successive years.
7. Current development rebate under s. 33(2)(i).
8. Carried forward development allowance under s. 33A(2)(ii) for successive years.
9. Current development allowance under s. 33A(2)(i).
10. Carried forward investment allowance under s. 32A(3)(i) for successive years.
11. Current investment allowance under s. 32A(3)(i).
12. Carried forward business loss under ss. 72 and 73.
13. Unabsorbed depreciation under s. 32(2).
14. Other deductions under Chapter VI-A. The Tribunal further found that the object behind s. 80HH of the Act is to encourage establishment of industries in backward areas and the object would be completely lost if the past losses were set off, because in a nascent industry, such a net result would be negative figure and it would lead to a situation that the assessee may not get any encouragement by way of tax deduction. The Tribunal after noticing the budget speech of the Finance Minister and also the fact that the deduction under s. 80HH of the Act will be given only for a period of 10 years, held that the deduction under s. 80HH of the Act should be given on the gross profit of the newly established industrial undertaking without setting off the earlier losses provided in the Act for the computation of business income. Insofar as the asst. yr. 1980-81 is concerned, the Tribunal directed the ITO to recompute the relief depending upon the computation of income for the earlier asst. yr. 1979-80. It is this order of the Tribunal which is the subject-matter of the present tax case reference.
4. Mr. C. V. Rajan, learned counsel for the Revenue brought to our notice an earlier decision of this Court in the case of CIT vs. Rockweld Electrodes India Ltd. and an unreported decision of this Court in T.C. Nos. 2121 to 2124 of 1984, dt. 17th February, 1997, between the CIT vs. M/s Veeraraghava Textiles (P) Ltd. wherein this Court has held that the assessee would be entitled to deduction under s. 80J of the Act only after setting off the earlier losses carried forward or unabsorbed depreciation of the earlier years. This Court also held that the Tribunal was not correct in holding that the deduction under Chapter VI-A has to be allowed before deducting carried forward business losses or unabsorbed depreciation of the earlier years.
5. Mr. Janarthana Raja, learned counsel for the assessee, however, submitted that other High Courts have diamertrically taken an opposite view. For that, he placed reliance on the decision of Orissa High Court in CIT vs. Tarun Udyog (1991) 191 ITR 688 (Ori) : TC 25R.223, the decision of Karnataka High Court in CIT vs. Siddaganga Oil Extractions (P) Ltd. (1993) 201 ITR 968 (Kar) : TC 25R.213, the decision of Madhya Pradesh High Court in CIT vs. K. N. Oil Industries and the decision of Rajasthan High Court in CIT vs. Loonkar Tools Ltd. (1995) 213 ITR 721 (Raj). On the other hand, he fairly brought to our notice the decision of Rajasthan High Court in CIT vs. Vishnu Oil & Dal Mills , the decision of Andhra Pradesh High Court in CIT vs. Venkateswara Transmission Ltd. , the decision of Kerala High Court in CIT vs. Kerala Solvent Extractions Ltd. (1987) 165 ITR 174 (Ker) : TC 25R.871 and the decision of Gujarat High Court in Paushak Ltd. vs. CIT where-in the other High Courts have taken a view similar to one that was taken by this Court in Rockweld Electrodes India Ltd. case, cited supra. Since this Court has taken a view that under s. 80B(5) of the Act, the gross total income should be computed in accordance with the provision of the Act before granting deduction under Chapter VI-A of the Act, we are of the view that the earlier decision of this Court would apply to the grant of deduction under s. 80HH of the Act as well. Accordingly, we hold that the Tribunal was not correct in holding that the deduction under s. 80HH of the Act should be granted on the gross profit of the newly established industrial undertaking set up in a backward area without following the procedures indicated in s. 80B(5) of the Act. Accordingly, we answer the common question of law referred to us in the negative and in favour of the Revenue. There will be no order as to costs.