Income Tax Appellate Tribunal - Mumbai
Century Spg. And Mfg. Co. Ltd. vs Income-Tax Officer on 7 September, 1990
Equivalent citations: [1990]35ITD579(MUM)
ORDER
U.T. Shah, Vice President
1. In this appeal the assessee is challenging the action of the Income-tax authorities withdrawing deduction of Rs. 24,21,501 allowed under Section 80HH of the Income-tax Act, 1961 (the Act) in the assessment originally framed.
2. The assessee is a company and is engaged in manufacturing of cotton textiles, rayon yarn, tyrecord, industrial chemicals and cement. The assessment year is 1977-78 and the relevant previous year is the calendar year 1976.
3. We narrate certain facts in detail to show that this litigation could have been avoided if the assessee had pointed out to the ITO that there is no provision in Section 80HH of the Act for the carry forward of unabsorbed deduction (hereinafter referred to as "deficiency") similar to the one contained in Section 80J of the Act.
(a) The assessee had set up a cement unit in a backward area for which it was entitled to deduction both under Sections 80HH and 80J of the Act, in respect of the assessment year 1976-77. As there was no taxable profit from this unit, deduction was not allowable under either of these two sections. In the Return filed on 30-6-1976, the assessee did not claim deduction under Section 80HH of the Act. However, vide its letter dated 11-5-1978 the assessee claimed deduction of Rs. 24,21,501 under that section in the following manner:
This has reference to our letter No. Socy/356/76 dated 26-6-1976. In the above assessment year, the profit of Century Cement before charging Depreciation and Development Rebate Reserve comes to Rs. 1,22,93,949. Now, we are claiming 80HH relief as per statement enclosed, as provided under Section 32 and in view of the Judgment of the Kerala High Court in the case of M/s. Indian Transformers Ltd., reported in 86 ITR page 192 and another case reported in 93 ITR page 115. Hence our total taxable income will be reduced from Rs. 12,99,88,643 to Rs. 12,75,67,142. This may kindly be considered while computing the taxable income at the time of assessment. It is just for your information that since there is no taxable income in the said Unit for this year, the said relief under Section 80HH will be carried forward.
(emphasis supplied by us) Along with the said letter the assessee had sent computation of deduction of Rs. 24,21,501 which was not in accordance with law, as the assessee had not deducted depreciation and development rebate due to the unit. If this was done, then there would not have been any profits left and consequently no deduction would have been available under Section 80HH of the Act, as the deduction under that Section has to be worked out with reference to the profits only.
(b) The assessee wrote yet another letter on 25-7-1979 as under:
In continuation of our letter No. Socy/268/78 dt. 15-7-1978 and as per the discussion our Tax Consultant Shri M.L. Sharma had with your goodself, we submit that the deduction under Section 80HH Rs. 24,21,501 should have been deducted from taxable income of the assessment year 1976-77 instead of carrying forward to the subsequent year as under the provisions of Section 80HH, this is to be allowed as a deduction in the said year as the company has taxable income for this year.
(c) The relevant portion of the assessment order dated 24-9-1979 reads as under, for the assessment year 1976-77:
Deduction Under Section 80 HH:
The company has claimed relief under Section 80HH on account of the situation of the Century Cement in backward area. As provided under Section 80HH the claim of the assessee is found to be correct as the Unit is situated in a declared backward area. The total capital works out to Rs. 1,21,07,504 and the claim of the company at 20% will work out to Rs. 24,21,501 as shown below:
Rs.
Depreciation 95,66,663
Development rebate 91,00,000
-----------
1,86,66,663 Rs.
Less: Net loss 63,72,714 1,22,93,919
-----------
Add:l. Salary & perquisites of
employees to the extent not
admissible 12,000
2. Excess Travelling Exp. 3,216 15,216
Under Rule 6D -------- -------
Less: 1. Quarry & Prospecting 1,23,09,165
Development exp. 1,83,064
2. Gratuity 18,597 2,01,661
-------- ------------
20% of Rs. 1,21,07,504 1,21,07,504
24,21,501
-----------
The above amount of Rs. 24,21,501 cannot be allowed as
further deduction this year as there are no taxable profits during the year. However, this will be carried forward and adjusted in the subsequent year, when this Division goes into profit.
It may be mentioned that the ITO had simply lifted the deduction of Rs. 24,21,501 from the computation sent by the assessee along with its letter dated 11-5-1978 without applying his mind to the relevant provisions of Section 80HH of the Act:
Deduction under Section 80J:
The company has claimed deduction under Section 80J on gross assets without deducting current liabilities in respect of its two units viz. (i) Gas plant and (if) Cement Plant. In view of the detailed discussion and finding given in respect of the Gas Plant in earlier years deduction in respect of 80J on account of this Unit cannot be allowed. As far as Cement Plant is concerned, the claim of the company appears to be correct and therefore the 80J allowable is worked as under.
This amount of Rs. 85,86,937 is allowed to be carried forward for adjustment in future, since there are no taxable profits in this year for this unit.
(d) For the assessment year 1977-78 framed on 28-8-1988, the ITO worked out deduction under Section 80HH and 80J of the Act of Rs. 54,95,585 and Rs. 96,15,287 respectively. For our purpose we reproduce below the computation made under Section 80HH of the Act and the observations made thereafter:
Deduction Under Section 80HH:
The company has claimed relief under Section 80HH on account of the situation of the Century Cements in backward area. As provided under Section 80HH the claim of the assessee is found to be correct as the unit is situated in a declared backward area. The total profits works out to Rs. 2,74,77,924 and the claim of the company at 20% will work out to Rs. 54,95,585 as shown below:-
Rs.
Gross profit 4,85,50,654 Add: 1. Salary & Perq. of employees to the extent not Rs. admissible 17,613 2. Excess Travelling expenses under Rule 6D 3,159 3. Int. disallowable under Section 40A(8) 9 20,781 ------ ------- 4,85,71,435 Less: 1. Deprn, 2,07,25,997 2. Initial Depm. 17,631 3. Weighted deduction on Scientific Research Contr- ibution under Section 35(2A) 95,818 4. Quarry & Prospecting Development exp. 1,83,064 5. Gratuity 71,001 2,10,93,511 ------- ----------- 2,74,77,924 ----------- 20% of Rs. 2,74,77,924 54,95,585 -----------
The above amount of Rs. 54,95,585 is allowed as deduction Under Section 80HH along with carried forward relief of Rs. 24,21,501 for assessment year 1976-77.
(e) Here it is pertinent to note that the assessee as well as the ITO have taken into account depreciation of Rs. 2,07,25,997 in working out the deduction available under Section 80HH of the Act.
(f) From the gross total income of Rs. 12,60,64,155, the ITO allowed deduction of Rs. 2,65,84,111 under Chapter VIA. The break up of Rs. 2,65,43,111 is as under-
Less: Deduction under Chapter VIA: Rs. Rs. Under Section 80G. 1,00,000 Under Section 80K. 312 Under Section 80M. 3,23,489 Under Section 80HH. 54,95,585 Under Section 80HH. 24,21,501 79,17,086 for 1976-770 ---------- Under Section 80J. 96,15,287 Under Section 80J(3) 85,86,937 ---------- 2,65,43,111 ----------
4. Thereafter, the ITO realised that there is no provision for carry forward and set off of earlier year's "deficiency" Under Section 80HH of the Act. In the assessment framed on 28-8-1988, there was a mistake apparent from the record, inasmuch as, "deficiency" of Rs. 24,21,501 was not only carried forward but also set off which should be corrected. He, therefore, took action Under Section 154 of the Act with a view to withdraw deduction of Rs. 24,21,501 for the assessment year 1976-77 allowed in the assessment year under consideration. The relevant portion of the order passed Under Section 154 of the Act reads as under:-
In this case, regular assessment was completed on 28-8-1980 on a total income of Rs. 9,95,11,040. On going through the record it was seen that while allowing deduction under Chapter VIA, a sum of Rs. 24,21,501 under Section 80HH for A.Y. 1976-77 was also allowed. Under the scheme of the Income-tax Act, deduction under Section 80HH is not allowed to be carried forward to be set off against the income of the subsequent year. Mistake being apparent from record, the same was discussed with Shri M.L. Sharma, C.A. authorised representative of the assessee company. Notice Under Section 154 of the IT Act is waived. He objected to the proposed rectification. However, as mentioned above and the mistake being apparent from record the same is being rectified by this order.
5. In appeal before the Commissioner of Income-tax (Appeals) the assessee had disputed the action of the ITO. In order to appreciate the stand taken on behalf of the assessee, it would be worthwhile to reproduce below the submissions made before the CIT(A):-
The assessee however, it was stated, could not be allowed deduction under Section 80HH in the assessment for the assessment year 1976-77 and, therefore, the assessee had requested the ITO to carry forward the amount deductible (Under Section 80HH) to the following year. It was stated that the ITO completing the assessment for A.Y. 1976-77 had accepted to the request of the assessee and had made an order carrying forward the amount deductible Under Section 80HH in respect of A.Y. 1976-77. It was stated that in view of the order for A.Yr. 1976-77, the ITO had allowed deduction of an amount of Rs. 24,21,501 in the assessment for A.Yr. 1977-78. It was stated that the ITO could not have withdrawn the deduction allowed in the assessment for A.Yr. 1977-78 without rectifying the order for A.Yr. 1976-77. It was stated that the ITO had passed the order under appeal without rectifying the order for A.Yr. 1976-77 and that, therefore, the same was unsustainable in law.
6. The CIT(A) upheld the action of the ITO in the following manner:-
Having regard to the provisions of Section 80HH it is very clear that the amount deductible under the said section cannot be carried forward like the deficiency Under Section 80J or unabsorbed investment allowance Under Section 32A etc. Therefore, the ITO making the assessment for A.Yr. 1976-77 had committed a mistake in carrying forward the amount deductible under Section 80HH (in the assessment for A.Yr. 1976-77) for being set off in the assessment for a subsequent year. It is not the case of Shri M.L. Sharma, C.A. that the provisions regarding carry forward of deficiency under Section 80J are applicable for carry forward of the amount deductible under Section 80HH. All that is contended by him is that the ITO could not have passed the order under appeal without first rectifying the mistake in the order of A.Yr. 1976-77. This contention of the assessee deserves to be rejected in view of the decision of the S.C. in the case of CIT v. Manmohan Das (Deceased) [1966] 59 ITR 699. The SC in the case of CIT v. Manmohan Das (Deceased) [1966] 59 ITR 699 has observed as under:-
Whether the loss in any year may be carried forward to the following year and set off againt the profits and gains of the subsequent year under Section 24(2) has to be determined by the Income-tax Officer who deals with the assessment of the subsequent year.
In view of the above-noted observations of the S.C. the contention of Shri M.L. Sharma, C.A. is rejected.
7. Being aggrieved by the order of the CIT(A) the assessee has come up in appeal before the Tribunal. The learned Counsel for the assessee reiterated the submissions, which were made before the first appellate authority and strongly urged that the CIT(A) ought to have set aside the order of the ITO passed under Section 154 of the Act. According to him, there was no mistake in the assessment order for the assessment year under consideration, as in the said order the ITO had simply implemented the finding given by his predecessor in the assessment year 1976-77. This finding in the assessment year 1976-77 would show that in interpreting the provisions of Section 80HH of the Act, the ITO was of the view that deduction of Rs. 24,21,501 would have to be carried forward and adjusted in the subsequent year. In this connection, he further submitted that the mistake, if at all, had crept in in the assessment order for A.Y. 1976-77, for in that year the ITO had accepted the assessee's request for deduction of Rs. 24,21,501. It was, therefore, strongly contended that unless the order for the A.Y. 1976-77 is rectified first, the order for the A.Y. 1977-78 could not be rectified in the manner it was done by the IT authorities. The learned Counsel for the assessee further submitted that although there is no express provision for working out and carry forward of the "deficiency" under Section 80HH of the Act the said section was amenable to such a construction. The construction of a section or interpretation of a provision raises a question of law and, therefore, such an issue cannot be disposed of by an order of rectification. In this connection, he relied on the decision of the Hon'ble Supreme Court in the case of Oriental Investment Co. (P.) Ltd. v. CIT [1969] 72 ITR 408 at Counsel for the assessee further submitted that in rejecting the assessee's contention, the CIT(A) had to refer to Section 80J of the Act, which shows that the issue involved in this case cannot be decided without debate or argument. In this connection, he further submitted that in the absence of any express provision for carry forward of the "deficiency", whether the "deficiency" could be carried forward or not is a question of law which could not be brought within the ambit of Section 154 of the Act. Referring to the decision of the Hon'ble Calcutta High Court in the case of East India Hotels Ltd. v. CBDT [1986] 161 ITR 227/29 Taxman 546, he submitted that the Hon'ble High Court was pleased to accept the Writ Petition filed by the assessee in that case where it was contended that the CBDT ought to have considered the application made under Section 84(3) of the Act, which was subsequently replaced by Section 80J(6) of the Act. According to the learned Counsel for the assessee, this decision would clearly show that even where a specific provision for carry forward is not there in a section, the assessee cannot be prevented from claiming carry forward of "deficiency". In any event, the issue of carry forward of the "deficiency" is highly debatable which cannot be decided in Section 154 proceedings. The learned Counsel for the assessee further submitted that the CIT(A) was not justified in rejecting the assessee's appeal by referring to the provisions of Section 80J of the Act and relying on the decision of the Hon'ble Supreme Court in the case of CIT v. Manmohan Das [1966] 59 ITR 699, which, according to him, has no relevance to the facts and circumstances obtaining in the instant case. In this connection, he pointed out that in the case of Manmohan Das (supra) the Hon'ble Supreme Court was dealing with the provisions of carry forward of loss under Section 24(2) of the Indian Income-tax Act, 1922. According to him, since the scheme of that section is entirely different from the scheme of Section 80HH of the Act, with which we are concerned in the present case, the ratio laid down by the Hon'ble Supreme Court in that case cannot be applied in the present case. He further submitted that whether a decision of a court is applicable or not is itself a debatable issue which cannot, be brought within the purview of Section 154 of the Act. In this connection, he invited the attention of the Tribunal to the observations appearing at page 4509 of Vol. V of Sampath Iyengar's Law of Income-tax. Finally, he submitted that in order to withdraw the deduction of Rs. 24,21,501, whether the order under Section 154 should have been passed in respect of the assessment year 1976-77 or 1977-78 or in both the years is highly controversial issue and, therefore, the order passed under Section 154 of the Act for the year under consideration is clearly bad in law which deserves to be set aside.
8. The learned representative for the department, on the other hand, strongly supported the action of the IT authorities. He submitted that in the absence of any specific provisions similar to Sub-section (3)of Section 80J in Section 80HH of the Act, there is no question of carry forward of "deficiency" determined in the assessment year 1976-77, in the year under consideration. Therefore, the fact that the ITO had made certain observations in this regard in his order for the assessment year 1976-77 or the fact that he had acted upon such remarks in the assessment year 1977-78 had no consequence and would not debar him to take action Under Section 154 of the Act, in the manner he did. According to him, if at all any provision has to be looked into, it would be that of Section 72 of the Act, which contains provisions for "carry forward and set off of business losses", in the absence of any provision contained in a specific section of the Act. Referring to the aforesaid decision of the Hon'ble Supreme Court in the case of Oriental Investment Co. (P.) Ltd. (supra), the learned representative for the department submitted that since the same deals with an issue arising Under Section 256(1) or (2) of the Act, it has no relevance to the issue with which we are concerned in the present appeal. As regards the decision in the case of East India Hotels Ltd. (supra), he pointed out that the said decision was rendered in a Writ Petition filed by the assessee in that case, wherein the assessee was challenging the action of the CBDT in not granting approval as contemplated Under Section 84(3)/80J(6)(d) of the Act. He also pointed out that the schemes of Section 84 and 80J of the Act are entirely different. The former is contained in Chapter VII of the Act, which deals with "income forming part of total income on which no income-tax is payable" while the latter is contained in chapter VIA, which deals with "deductions to be made in computing total income". It is in this context that the Hon'ble High Court held that the CBDT cannot reject the application made by the assessee for approval Under Section 84(3) which is similar to Section 80J(6)(d) of the Act. According to him, in that case the Hon'ble High Court never held that even though there was no provision of carry forward of deficiency" under Section 84 of the Act, the assessee was still entitled to carry forward "deficiency". On the contrary the ratio laid down by the Hon'ble Supreme Court in the case of Manmohan Das (supra) is clearly applicable in the instant case, which was rightly applied by the CIT(A). He further submitted that the fact that the ITO had not attempted to rectify first the assessment for the assessment year 1976-77 is not at all fatal, as no deduction was allowed Under Section 80HH of the Act. He emphasised the fact that the tax payable by the assessee would remain the same, whether the rectification was made or not. However, for the year under consideration, action Under Section 154 was not only necessary but imperative, as the assessee was granted deduction which it was not only not entitled to but was against the provision of the Act. He, therefore, strongly urged that the order of the CIT(A) should be upheld.
9. We have carefully considered the rival submissions of the parties. At the outset, we would like to mention that during the course of hearing, we had asked the learned Counsel for the assessee as to whether there is any specific provision contained in Section 80-HH of the Act for determination of "deficiency" and carry forward the same in the next year similar to the one contained in Sub-section (3) of Section 80-J of the Act. Instead of replying to this question, the learned Counsel for the assessee read out a portion of Section 80HH of the Act and immediately switched over to certain reported cases mentioned above with a view to impress upon us that inspite of the absence of such specific provision, the assessee could still urge that action Under Section 154 of the Act was bad in law. In other words, the answer which could have clinched the issue, was conveniently avoided.
10. On carefully going through the provisions of Sections 80-HH and 80-J of the Act, the following distinguishing features are easily discernible :
(i) The measure of deduction Under Section 80-HH is with reference to the profit made by the unit, while Under Section 80-J is with reference to capital employed in the unit.
(ii) The deduction Under Section 80-HH is granted in computing the total income in respect of each of the 10 assessment years beginning with the assessment year relevant to the previous year in which the unit begins to manufacture or produce article, while Under Section 80-J, the deduction is allowed in the year of production and each of the four assessment years immediately succeeding the year of production.
(iii) If the unit does not make any profit, no deduction is granted Under Section 80-HH of the Act, while Under Section 80-J an elaborate procedure is laid down to work out the "deficiency" for that year.
(iv) Since no deduction is granted if there is no profit, Section 80-HH does not provide for carry forward of "deficiency" in the next year, while Sub-section (3) of Section 80J provides for carry forward of such "deficiency" in the next year.
11. It would appear from the above that the provisions of Section 80-HH assumes existence of profits derived from an unit and provides for deduction of 20% of such profits. Thus, the quantification of deduction under this section is with reference to the profits of the unit. This would mean that no deduction under this section can be quantified unless there are profits. It cannot, therefore, happen that deduction under this section is worked out (with reference to 20% of the profits) and there are no profits available against which such deduction can be allowed. Thus, by the very nature of deduction provided in this section, one cannot visualise "deficiency" of the type contemplated in Sub-section (3) of Section 80-J, arising under this section. Therefore, in our opinion, the ITO had grieviously erred in quantifying deduction at 20% of the profit for the assessment year 1976-77, when there were no profits at all for that year against which it could be allowed. In other words, the "deficiency" of Rs. 24,21,501 worked out by the assessee and accepted by the ITO in respect of Section 80-HH for the assessment year 1976-77 was without authority of law and has no consequence in determining the taxable income for that year or any subsequent year. The ITO further compounded his error in carrying such "deficiency" to the assessment year 1977-78 and allowing it against the profit of that year. For the assessment year 1977-78, deduction Under Section 80-HH of the Act could only be confined to 20% of the profits of that year from the unit concerned. If any additional deduction was given for the assessment year 1977-78, it was clearly given by mistake, as the provisions of Section 80-HH of the Act do not provide for such additional deduction. The legislature has not provided for cany forward of "deficiency", because it did not visualise a situation where such deduction after being quantified could not be allowed against profits. In this sense also, there is a glaring mistake on the part of the ITO when he framed the assessment for the assessment year 1977-78 and allowed deduction of Rs. 24,21,501.
12. We do not agree with the stand taken on behalf of the assessee that rectification Under Section 154 of the Act cannot be taken in respect of the assessment year 1977-78 without first rectifying the assessment for the assessment year 1976-77. The deduction of Rs. 24,21,501 granted in the assessment year 1977-78 was a mistake of law which could be rectified Under Section 154 of the Act without rectifying the assessment for the assessment year 1976-77, as it is a trite law that the "records" for the purposes of Section 154 of the Act means the entire record and not necessarily the record of a particular year, where the mistake has crept in and subsequently continued in the following assessment year(s). In this view of the matter, we are of the considered opinion that it was not necessary for the ITO to amend the assessment for the assessment year 1976-77 first before rectifying the assessment for the assessment year under consideration. By way of an illustration, we may take the case of depreciation. If there is a mistake in working out the depreciation on the assets right from the day they were put to use, the ITO is empowered to re-work the written down value of such assets of a particular year Under Section 154 of the Act, even though in the original assessment he had granted depreciation on the basis of the written down value worked out in the immediately preceding year(s) and that too, without amending the written down value of the earlier year(s). (See Maharana Mills (P.) Ltd. v. ITO [1959] 36 ITR 350 SC).
13. It is quite apparent from the record that a mistake has crept in both in the assessment years 1976-77 and 1977-78. However, the mistake, which crept in in the assessment year 1976-77, has neither any consequence in the computation of total income nor determination of tax payable by the assessee for that year. Therefore, the observation made by the ITO (which as noticed above is without authority of law) has no consequence either for that year or for the assessment year with which we are concerned in the present appeal. It is only in the assessment year 1977-78 that an additional deduction of Rs. 24,21,501 was granted by the ITO without authority of law which resulted in reduction of the total income chargeable to tax. We entirely agree with the stand taken on behalf of the Revenue that the reported decisions relied on the assessee have no application to the issue involved in the instant case. The decision in the case of East India Hotels Ltd. (supra) went in favour of the assessee, as the provisions of Section 80J (6) of the Act were made applicable with effect from 1-4-1968. On the contrary the ratio laid down by the Hon'ble Supreme Court in the case of Manmohan Das (supra) is clearly applicable in the instant case and has rightly been applied by the CIT(A). In the case of Bombay Dyeing and Mfg. Co. Ltd. v. M.K. Venkatachalam [1954] 26 ITR 298 (Bom.), the Hon'ble Supreme Court has held that a mistake of law could be rectified Under Section 154 of the Act. Again it is a trite law that in a case where two views are not possible, if by misreading the section or miscalculation a mistake is committed, such mistake would come within the purview of Section 154 of the Act. At this stage we may mention that the learned Counsel for the assessee was fair enough to state that there was mistake in granting deduction of Rs. 24,21,501 in the year under consideration. However, the main thrust of Shri Desai's argument was that unless the observations made by the ITO in respect of the assessment year 1976-77 are rectified, no order could be passed Under Section 154 of the Act in respect of the year under consideration, in the manner passed by the ITO. Again, after some discussion in the court it was not disputed that the computation of Rs. 24,21,501 itself was bad in law, as after considering the depreciation/development rebate there would not have been any profits in the cement unit. In this view of the matter, the ITO had rightly taken action Under Section 154 of the Act for the assessment year 1977-78, as it was only in that year that the mistake committed by him in granting additional deduction under Section 80-HH of the Act has resulted in collecting less tax than that was due from the assessee. We have, therefore, no hesitation in upholding the action of the Income-tax authorities.
14. In the result, the appeal is dismissed.