Income Tax Appellate Tribunal - Bangalore
Deputy Commissioner Of Income Tax vs I.T.C. Hotels Ltd. on 25 April, 2003
Equivalent citations: (2004)82TTJ(BANG)652
ORDER
G.S. Pannu, A.M.
1. These are three appeals by the Revenue against the respective orders of the CIT(A), dt. 12th June, 1989, dt. 28th April, 1989 and 5th Oct., 1995, pertaining to the asst. yrs. 1984-85, 1985-86 and 1991-92 respectively. Since common issues are involved, theses appeals are clubbed together and a consolidated order is being passed for the sake of convenience and brevity.
2. At the time of hearing before us, Shri Ajay Vohra, C.A. and Shri Amitabh Kumar, Departmental Representative, represented the assessee and the Revenue respectively. Their submissions have been considered while disposing the present appeal.
ITA No. 4695/Del/1989-Asst yr. 1984-85:3. In this appeal, the revenue has taken the following grounds, which we shall deal in seriatim :
"(i) On the facts and in the circumstances of the case the learned CIT(A) has the writing off stock valued at Rs. 13,44,777 claimed by the assessee on account of change in the method of account and valuation :
(ii) Allowing deduction of legal expenses of Rs. 1,16,572 as revenue expenditure."
4. Briefly the facts are that the respondent assessee is a wholly owned subsidiary of ITC Ltd., Calcutta, engaged in the business of running hotels. For the year under consideration, it had filed a return declaring loss of Rs. 1,34,08,012, which was subjected to assessment under Section 143(3) by the AO vide his order dt. 30th Sept., 1983. The assessment resulted in a reduced loss of Rs. 32,12,851. The assessee challenged the various additions and disallowances made, before the first appellate authority. The decision of the CIT(A) in relation to the two aforesaid grounds are now presently assailed by the Department before us.
5. In relation to the addition of Rs. 13,35,777 on account of closing stock, the facts are as follows. The AO noticed that the assessee had changed its method in relation to closing stock as a result of which stock valued at Rs. 13,34,777 was written off in the current year. The difference arose on account of the assessee's action in adopting the practice of writing off the stocks relating to crockery, cutlery, linen etc. on the date of issue from its stores. The assessee contended that the aforesaid items are being regularly put out of use as and when they are chipped, broken, stained, worn-out etc., and they are written off in terms of the business practices existing in the hotel industry. Hitherto in the preceding previous year which was the first year of operation, the assessee included the value of such issued consumables in its closing stock. The change in the method has resulted in the write off of the value of consumable stores in the revenue account as and when the same were issued from the stores. The AO rejected the contention of the assessee and added back the same to the income. The matter was carried in appeal successfully before the CIT(A) who has held that the assessee was entitled to the impugned change in the method of accounting followed by it. According to him the change being bona fide and as the same was followed regularly, the consequential effect of the same has to be accepted by the Department.
6. Against the aforesaid background, the rival counsels have advanced their arguments. According to the learned Departmental Representative, the stand of the AO is required to be upheld insomuch as that the CIT(A) has failed to appreciate that the AO was justified in disturbing the method of accounting adopted by the assessee in view of the decision of the Supreme Court in the case of CIT v. British Paints India Ltd. (1991) 188 ITR 44 (SC). On the other hand, the counsel for the assessee, defended the orders of the first appellate authority. According to him, the operations of the hotel were started in the immediately preceding assessment year and if being the first year of operations, the treatment given to the consumable stores was not proper. In fact, it is pointed out that in the hotel industry, it is a generally accepted practice that the consumables on account of linen, crockery etc., are charged off to the revenue in the year it is issued from the stores. Therefore, the change in the method made by the assessee is to fall in line with the business practices in the industry, in which it operates. It was also argued that the Department has not, in any manner, doubted the bona fide or the rationality of the change and, therefore, the changed method is required to be permitted. Reliance was placed on Reform Flour Mills (P) Ltd. v. CIT (1978) 114 ITR 227 (Cal). Our attention was also drawn to the decision of the Delhi Bench of the Tribunal in the case of Delhi Cold Storage (P) Ltd., in ITA 6653/Del/92, dt. 1st July, 1996, in this regard.
7. We have heard the rival submissions and have perused the material on record and proceed to dispose of the issue in the following manner. The business of the assessee is of running hotels. The stand of the assessee is that in view of the nature of the business and generally accepted business practices, the assessee decided to charge the consumables issued straightaway to the revenue account, as against the method in the earlier assessment year, according to which the consumables were taken as a part of the closing inventory at the end of the year. In our view, there is ample force and merit in the stand of the assessee. It is an accepted legal proposition that the choice of accounting policies and method of determination of income essentially lie with an assessee. However, a method chosen by the assessee should have relevance to the nature of business carried on by the assessee and is expected to be regularly employed. To that extent, we do not find any absurdity or irrelevance in the method adopted by the assessee with regard to the treatment of issuance of consumables from its stores.
8. The other leg of dispute pertains to the change in the method made by the assessee during the year under consideration as against the method adopted in the immediately preceding year. Once we come to the conclusion that the method of accounting adopted by the assessee is in consonance with the well accepted business practices and is rational and scientific, it cannot deviate us from concluding that the same can be said to be bona fide. We also notice that the same method has been applied by the assessee consistently. In this view of the matter, we approve of the conclusions drawn by the CIT(A) and the Revenue has to fail on this ground.
9. Before we part on the issue, we would like to discuss, at this stage, the reference made by the learned Departmental Representative to the decision of the Hon'ble Supreme Court in the case of British Paints (supra). A perusal of the decision of the Hon'ble Supreme Court in the case of British Paints (supra) does not, in our view, help the case of the Revenue having regard to the facts of the present case. The decision of the apex Court is to the effect that the method of valuing the work-in-progress by not including therein the overheads was not an accepted method of accounting at all and, therefore, in this background, the apex Court upheld the discretion of the Revenue in deviating from the same notwithstanding the fact that the said method was being consistently followed for several years by the assessee i.e., British Paints. Further, it cannot be inferred from the decision of the apex Court that even a recognised method of accounting which is followed by the assessee can be rejected by the Department. The explicit decision of the Supreme Court is that the Department is not prevented from rejecting a particular method of valuation of stocks or accounting merely because it was being regularly followed and also accepted by the Department hitherto. The Department, in the aforesaid circumstances, is fully entitled to reject the method, if such a method does not lead to proper deduction of income. It is noteworthy that the aforesaid parity of reasoning cannot be extended to sustain that the Department is also empowered to rejected even a recognised method of valuation or accounting. In fact, the case of the Revenue in British Paints (supra) was that the method of valuation adopted by the company was not one of the recognised methods.
10. Now coming back to the instant case, it is not the case of the Revenue that the changed method of accounting resulting in the lower closing stock is a method not recognised or is inconsistent with the practices of the business in which the assessee operates. Therefore, the ratio of the decision of the apex Court in British Paints (supra) cannot be made applicable to the facts of the instant case. Hence, the Revenue has to fail on this ground.
11. The second ground taken by the Revenue is against the decision of the CIT(A) in holding that the legal expenses of Rs. 1,16,572 were allowable as Revenue expenditure. In brief, the facts giving rise to the present dispute are that the assessee had taken on lease land from one M/s Monarch Corporation who in turn had taken it an lease from Aga Ali Asker Wakf. It appears that some time in 1978-79, an injunction was obtained against the assessee from City Civil Judge, Bangalore, refraining the assessee from selling pork and wine in the hotel. The assessee, which was holding a valid lease and was in the process of building its hotel, defended itself against the aforesaid litigation. The AO took the view that the assessee has incurred legal expenses in defending its title in respect of leasehold land on which its hotel was situated. The AO held that as the impugned expenditure was incurred to protect the capital asset, the impugned legal expenses were to be treated as capital expenditure. On the other hand, the first appellate authority, against the aforesaid facts held that the impugned legal expenses were incurred by the assessee for defending its right of carrying on the business of hotel and, therefore, allowed the same as business expenditure following the decision of the apex Court in Dalmia Jain & Co. Ltd. v. CIT (1971) 81 ITR 754 (SC).
12. The rival counsel fairly agreed at the time of hearing that the impugned issue has already been adjudicated upon by the Tribunal in the assessee's own case in ITA 5241/Del/89, dt. 17th June, 1996, for the asst. yr. 1985-86, wherein it is held that the impugned litigation expenses were of revenue nature. However, the learned Departmental Representative made a plea that the impugned expenditure, having regard to the aforesaid facts was to be viewed as having been incurred for curing a defect in the title on the leasehold land and could not be viewed as for protecting the right of the assessee for carrying on its business. In reply, the learned authorised representative submitted that the assessee was holding a valid lease and that the litigation was raised by a religious group, which threatened the assessee's right to carry on the business of hotel. In this view of the matter, according to him, the conclusions drawn by the Tribunal in the asst. yr. 1985-86 were fair and proper.
13. After hearing the rival counsel and perusing the material on record, at the outset, we may state that the Revenue has to fail on this ground. We have perused the order of the Tribunal in ITA 5241/Del/89 (supra) and observe that the stand of the assessee has been approved. Apart from this, we are of the opinion that the impugned expenditures have been incurred by the assessee in order to safeguard its right to carry on the hotel business and no further. In this view of "the matter, the issue is decided in favour of the assessee and against the Revenue, keeping in view the earlier decision of the Tribunal in assessee's own case.
14. This appeal is accordingly disposed of.
ITA No. 4925/Del/1989--Asst. yr. 1985-86:15. In this appeal the Revenue has raised the following three grounds, which we shall deal in seriatim :
On the facts and in the circumstances of the case the learned CIT(A) has erred in :
"(i) allowing deduction of legal expenses of Rs. 2,69,967 as revenue expenditure;
(ii) directing the AO to exclude amount paid for car insurance, while working out disallowance under Section 37(3A) of the IT Act, 1961 :
(iii) directing the DC (Asst) to allow depreciation for 18 months."
16. The first issue, with regard to the treatment of the legal expenses has been adjudicated upon by us is paras 11 to 13 above, while dealing with Revenue's appeal in ITA 4695/Del/1989, for the asst. yr. 1984-85. Our decision therein holds good in the present appeal as well.
17. The second ground preferred by the Revenue is with respect to the directions of the CIT(A) in excluding the amount of car insurance expenditure while working out the disallowance under Section 37(3A) of the Act. The AO had made a disallowance of Rs. 4,02,407 under Section 37(3A) of the Act, which, inter alia, included a sum of Rs. 5,300 representing expenditure incurred on car insurance. Accordingly to the AO, it was includible in terms of Section 37(3B)(ii) of the Act. The first appellate authority has held that the expenditure incurred for insurance on car was a statutory expenditure and cannot be considered under running and maintenance of cars and hence, could not be clubbed under Section 37(3B). The Revenue is aggrieved by the aforesaid view of the CIT(A).
18. After hearing the rival counsel, we deem it fit and proper to approve of the conclusions drawn by the first appellate authority. The CIT(A), in our view, has correctly held that the provisions of Section 37(3A) has no application in relation to the expenditure incurred on payment of premium for car insurance. Our aforesaid view is fortified by various decisions of High Courts, namely, CIT v. A.V. Thomas & Co. Ltd. (1997) 225 ITR 29 (Ker), CIT v. Tungabhadra Industries Ltd. (1994) 207 ITR 553 (Cal) and CIT v. Orient Paper and Industries Ltd. (1995) 214 ITR 473 (Cal) as also the decision of the Calcutta High Court in CIT v. Price Waterhouse (1994) 207 ITR 564 (Cal). On this ground, the Revenue has to fail.
19. The third ground taken by the Revenue is with regard to the direction of the CIT(A) to allow depreciation for a period of 18 months. The dispute pertains to the action of the AO in allowing depreciation only for a period of 12 months in spite of permitting the assessee to extend its accounting period from 12 to 18 months. The background of the dispute is that till the preceding year, the previous year of the assessee was ending on 30th September and on an application made by the assessee, it was permitted to change the same to 31st March. The said permission was granted subject to the condition that the depreciation for the asst. yr. 1985-86 shall be allowed only for a period of 12 months. Hence, the AO restricted the claim of depreciation for a period of 12 months as against the assessee's claim for 18 months. Aggrieved by the order of the AO, the matter was carried in appeal before the CIT(A) successfully. The CIT(A) came to the conclusion that the condition imposed by the AO while permitting the assessee to change its previous year was contrary to the statutory provisions contained in proviso to Rule 5(i) of the IT Rules, 1962 and, therefore, the imposition of such a condition was impermissible. In this manner, he allowed the claim of the assessee for depreciation for a complete period of 18 months. Hence, the present appeal of the Revenue.
20. The rival counsel have made submissions in support of the contrary stands. After hearing the rival counsel and perusing the material on record, we find ample force in the stand of the assessee. While we do not dispute the fact that the AO is competent to impose such conditions as he may deem fit at the time of giving permission to the assessee to vary its previous year, however, it would also be fair to conclude that the conditions imposed must not only be valid and legal but should also stand the tests of reasonableness also. The High Court of Allahabad in the case of J.K. Synthetics Ltd. v. ITO (1976) 105 ITR 864 (M) has clearly opined that the conditions which the AO may impose cannot run contrary to the provisions of the IT Act. In the present case, the condition imposed was that the depreciation claim of the assessee shall correspond to a previous year of 12 months alone while the actual previous year was to be reckoned with a period of 18 months. Undisputably, the said condition is contrary to the proviso to Rule 5 (i) of the IT Rules, 1962, as it stood for the year under consideration. It would be appropriate to reproduce the said proviso to facilitate easy reference :
Provided that in a case where the assessee has been allowed to vary the meaning of the expression "previous year" in respect of any business or profession under Sub-section (4) of Section 3 and, thereby, his income from such business or profession for a period of thirteen months or more is included in his total income of any previous year, the allowance referred to in this sub-rule, calculated in the manner stated hereinabove, shall be increased by multiplying it by a fraction of which the numerator is the number of complete months in such previous year and the denominator is twelve.
In view of the aforesaid discussion and in view of the decision of the Allahabad High Court in J.K. Syntrhetics (supra), in our view, the conclusions drawn by the CIT(A) in holding that the assessee was entitled for the depreciation for the complete period of the previous year was well founded. The Revenue has to fail on this ground.
21. This appeal of the Revenue is accordingly disposed of.
ITA No. 141/Bang/1996-Asst. yr. 1991-92 :22. In this appeal by the Revenue the only issue is as to whether the unabsorbed depreciation is required to be reduced for arriving' at profits of the business for the purpose of computing the quantum of deduction under Section 80HHD. Briefly the facts are that the assessee computed the deduction under Section 80HHD at Rs. 94,36,923 while the actual relief on this count was restricted to Rs. 71,99,917, so as to make the total income. NIL. The AO, while allowing the claim of deduction under Section 80HHD found fault with the action of the assessee in not reducing the quantum of brought forward unabsorbed depreciation of Rs. 1,54,25,400 while arriving at the 'profits of business' for the purpose of computing the quantum of deduction under Section 80HHD. As per the AO, the deduction allowable under Section 80HHD was Rs. 20,11,471. The AO drew support from the decision of the apex Court in the case of Cambay Electric Supply Industrial Co. v. CIT (1978) 113 ITR 84 (SC), in rejecting the stand of the assessee. On the other hand, the first appellate authority has upheld the stand of the assessee. Hence, the present appeal of the Revenue before us.
23. At the time of hearing, the learned Departmental Representative reiterated the stand canvassed by the AO in the assessment order. According to him, the observations of the apex Court in the case of Cambay Electric Supply (supra) have a direct bearing on the dispute and, therefore, in terms of the same, the unabsorbed depreciation is required to be deducted for the purposes of computing the profits of business for the purposes of Section 80HHD. It is also canvassed by the learned Departmental Representative that the provisions of Section 80AB was required to be taken into consideration before computing the deduction allowable under Section 80HHD of the Act. Reference was made to the decision of the apex Court in Motilal Pesticides (I) (P) Ltd. v. CIT (2000) 243 ITR 26 (SC) in this regard. According to the learned Departmental Representative, the provisions of Section 80HHD are akin to these of Section 80HHC. The learned Departmental Representative placed reliance on the decision of the High Court of Kerala in the case of CIT v. V.T. Joseph (1997) 225 ITR 731 (Ker), wherein it has been opined that the claim of deduction under Section 80HHC was restricted by the provisions of Section 80AB and, therefore, it was held that the deduction allowable under Section 80HHC was only to the extent of income from export business included in the gross total income. Therefore, the aforesaid parity of reasoning should prevail in relation to the claims for deduction under Section 80HHD. Reliance, on behalf of the Revenue, was also placed on the Bangalore Bench decision in Asstt. CIT v. Mysore Exports Ltd. (1995) 55 ITD 263 (Bang), Arco Spun Silk Mills (P) Ltd. v. ITO (1998) 61 TTJ (Bang) 74 : (1998) 66 JTD 19 (Bang) and Scottish Assam (India) Ltd. v. ITO (1989) 33 TTJ (Cal) 494, in support of their stand.
24. On the other hand, the counsel Shri Ajay Vohra, CA, appearing for the respondent assessee has defended the orders of the first appellate authority. According to the assessee, the deduction under Section 80HHD is to be computed with reference to the proportionate profits attributable to the receipt of amounts convertible in foreign exchange by the assessee while carrying out its hotel business. It is submitted that the proportion provided as per the formula enunciated in Sub-section (3) of Section 80HHD is alone to be viewed as the basis for working out the deduction. According to Mr. Ajay Vohra, the dispute essentially pertains to the manner of computation of the deduction under Section 80HHD and, therefore, the provisions of Sub-section (3) of Section 80HHD alone are required to be invoked. The counsel rebutted the argument of the Departmental Representative that Section 80AB controlled the provisions of Section 80HHD. Reliance was placed on the decision in CIT v. Shirke Construction Equipments Ltd. (2000) 246 ITR 429 (Bom) as also CIT v. A.V. Thamas & Co. Ltd. (supra) besides the Tribunal decisions in International Research Park Laboratories Ltd. v. Asstt. CIT (1994) 50 TTJ (Del)(SB) 650 : (1994) 50 ITD 37 (Del)(SB) and Wings Wear (P) Ltd. v. ITO (1990) 33 ITD 41 (Del).
25. We have heard the rival submissions, perused the material on record and proceed to dispose of the issue on the following lines. The present controversy essentially revolved around the provisions of Sub-section (3) of Section 80HHD. Sec. 80HHD has been inserted to provide tax concession to the three segments of the tourism industry, namely, hotels, tour operators and travel agents in respect of their earnings in convertible foreign exchange. Sub-section (1) of Section 80HHD provides that an assessee engaged in the business of an approved hotel, or as an approved tour operator or as an approved travel agent is allowed a deduction, in computing its total income, of an amount equal to (i) 50 per cent of the profits derived from services provided to foreign tourists, payments for which are received in convertible foreign exchange and, (ii) so much of the remaining profits referred to above as are credited to a reserve fund to be utilised for the purpose of assessee's business in the prescribed manner. Sub-section (3) to Section 80HHD prescribes the formula or method for determination of the profit derived from services provided to foreign tourists referred to in Sub-section (1). The relevant portion of Sub-section (3) as is applicable for the year under consideration is reproduced hereinafter :
"Section 80HHD(3) : For the purposes of Sub-section (1), profits derived from services provided to foreign tourists 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 receipts specified in Sub-section (2) bear to the total receipts of the business carried on by the assessee."
In other words, according to Section 80HHD(3), for the purposes of Section 80HHD(1), profits derived by the assessee from services provided to foreign tourists shall be the amount which bears to the profit of the business (as computed under the head Profits and gains of business or profession"), the same proportion as the receipts in convertible foreign exchange received in, or brought into India bear to the total receipts of the business carried on by the assessee. The assessee claims that the term "profits of business' as referred to above is to be computed without reducing the brought forward unabsorbed depreciation. The stand of the Revenue, on the other hand, is to the contrary. In our view, the dispute revolves around two issues. Firstly, as to whether Section 80AB controls Section 80HHD and secondly, whether while computing the 'profits of the business', of the current year the unabsorbed depreciation of the earlier years should be reduced or not.
26. As far as the first issue is concerned, a gainful reference can be made to the decision of the Bombay High Court in Shirke Construction (supra). The issues before the High Court were similar insomuch as that the Hon'ble Court was dealing with the provisions of Section 80HHC as it stood at the relevant point of time. Section 80HHC(3) is similarly worded to Section 80HHD(3). The formula laid down in Section 80HHC(3) to arrive at the export profits was as under:
Business profits x Export turnover/Total turnover The dispute in the case of Shirke Construction (supra) was as to whether the business profit for the purposes of Section 80HHC(3) were to be reckoned with after setting off the unabsorbed business losses of the earlier years or not. The Hon'ble Court opined that the business profits were to be understood as pertaining to the current year alone. Therefore, according to the Bombay High Court, only the profits of the current year alone were to be taken into consideration and, therefore; the brought forward unabsorbed business losses were not required to be set off. The gist of the decision is that since the legislature has prescribed an artificial formula by way of Section 80HHC(3), in terms of which, the profits of the business were required to be computed only on the basis of Section 28 to 44D. The High Court further held that Section 80HHC was a complete code by itself and, therefore, was not controlled by Section 80AB. The following observations of this Court are worthy of notice :
"Moreover, a reading of Section 80HHC with the Explanations show that the profits of the current year were required to be taken into account and hence Section 72 of the IT Act did not apply. The position is, therefore, clean. Section 80HHC(3) refers to the above formula. It says that export profits shall be equal to Business profits x Export turnover/Total turnover In the case of Section 80P, Section 80M as it then stood, and other set of sections under Chapter VI-A, the business profits in the above formula is required to be worked out by computing the same as per the provisions of the Act. This could include Section 72 also. However, when it comes to Section 80HHC(3), the special definition of the words "profits of the business" as mentioned in Clause (baa) of the Explanation is required to be kept in mind. This clause expressly refers to profits of the business under the head 'Profits and gains of business". It refers to Sections 28 and 29. Therefore, the legislature has provided for an artificial formula only in Section 80HHC(3) under which the profits of the business are required to be computed on the basis of Sections 28 to 44D. It excludes Section 72. This is because the legislature wanted the profits of the current year to be taken into account. Hence, the legislature intended Section 72 to be kept out. The object appears to be to give maximum benefit to the exporter who earns foreign exchange for the country. Therefore, even though Section 80AB contemplates a non obstante clause, the said Section 80AB will be subject to Section 80HHC to the extent of export profits being worked out from the business profits. This view is also supported by the language of Section 80AB. In the case of Section 80P, etc., the same formula would work. However, in these cases, the business profits are required to be computed on the basis of the provisions of the Act in their entirety including Section 71 and Section 72 of the Act. However, when it comes to the artificial formula for computing the export profits for the purposes of deduction from the gross total income in Section 80HHC(3) the business profits shall be computed under the head "Profits and gains of business" which, in turn, refers to Section 28 to Section 44D and which will exclude Section 71 and Section 72 of the Act. Therefore, Section 80AB does not control Section 80HHC(3). Therefore, Section 80HHC is a complete code by itself."
It is further held that the decision in Motilal Pesticides (I) (P) Ltd. (supra) would not have an effect on the quantification of deduction under Section 80HHC. The following observations are apt of notice :
"Before concluding this judgment, we may refer to the judgments cited on behalf of the Department. In the case of Motilal Pesticides (I) (P) Ltd. (supra), the question was regarding computation of special deduction under Section 80P of the Act (sic). We have already discussed the above judgment in a different context to show the difference in language between Section 80AB and Section 80P, on the one hand, and Section 80HHC, on the other hand."
27. Now coming back to the facts of the present case. In the instant case, as can be seen from the reading of Sub-section (3) of 80HHD, it provides for an artificial formula to work out the eligible profits of the business as computed under the head "profits and gains of business or profession", i.e., in terms of Sections 28 to 44D. Therefore, 'profits of business' of the current year, in terms of Sections 28 to 44D can be understood as profits after allowing deduction for the current year's depreciation alone and before reducing the brought forward unabsorbed depreciation of earlier years. At this stage, it would be relevant to discuss the stand of the Revenue that in terms of the provisions of Section 32(2), the brought forward depreciation is deemed to be the current year's depreciation and hence, needs to be deducted from the profits and gains of business. In this regard, reference can be made to the decision of the apex Court in CIT v. Mother India Refrigeration Industries (P) Ltd. (1985) 155 ITR 711 (SC). According to the apex Court, the legal fiction envisaged under Section 32(2) for deeming the unabsorbed depreciation as a part of the current year's depreciation is only to achieve for the limited purpose of carry forward and adjustment of the same against other heads of income, in the absence of which, the aforesaid set off against other incomes would not have been available. The following extract of the decision in CIT v. Mother India Refrigeration Industries (P) Ltd. (supra) throws ample light on the issue :
"In other words, it clearly provides that in the matter of set off, the unabsorbed business losses of the earlier years will have preference over unabsorbed depreciation that is required to be carried forward under proviso (b) to Section 10(2)(vi) and no preference over the current depreciation is intended.
It is true that proviso (b) to Section 10(2)(vi) creates a legal fiction and under that fiction, unabsorbed depreciation either with or without current year's depreciation is deemed to be the current year's depreciation but it is well settled, as has been observed by this Court in Bengal Immunity Company Ltd. v. State of Bihar (1955) 2 SCR 603, 606 : 6 STC 446, that the legal fictions are created only for some definite purpose and these must be limited to that purpose and should not be extended beyond that legitimate field. Clearly, the avowed purpose of the legal fiction created by the deeming provision contained in proviso (b) to Section 10(2)(vi) is to make the unabsorbed carried forward depreciation partake of the same character as the current depreciation in the following year, so that it is available, unlike unabsorbed carried forward business loss, for being set off against other heads of income of that year."
We may mention here that the apex Court was dealing with the provisions of Section 10(2)(vi) of the IT Act, 1922 which are akin to the provisions of Section 32(2) of the IT Act, 1961, with which we are presently dealing. The aforesaid view is also in consonance with the decision of the Andhra Pradesh High Court in CIT v. Gogineni Tabacco Ltd (1999) 238 ITR 970 (AP).
28. Now, we would like to discuss the reliance placed by the learned Departmental Representative on certain decisions. The controversy before the Tribunal in Mysore Exports Ltd. (supra), was on a different footing. In the case before the Tribunal, the gross total income of the assessee after deducting the brought forward losses of earlier years fell below the quantum of deduction under Section 80HHC, and hence, the Tribunal held that the deduction is to be limited to the extent of available gross total income. The present issue is on a totally different footing. We are presently concerned only with the manner of quantifying the amount of deduction under Section 80HHD. In our view, the said decision does not help the stand of the Revenue in the context of the controversy before us.
29. Similarly, the decision of the Bangalore Bench in Arco Spun Silk Mills (P) Ltd. (supra) is also on a different footing. The decision of the Kerala High Court, relied upon by the Revenue in the case of V.T. Joseph (supra) indeed supports the case of the Revenue. However, in the same volume, at p. 29, another decision of the Hon'ble High Court of Kerala in the case of A.B. Thomas & Co. (supra) supports the stand of the assessee. While we do not attempt to judge the efficacy of the two contrary judgments of the Hon'ble High Court, we are inclined to follow the parity of reasoning old down in the case of A.B. Thomas & Co. (supra). The Hon'ble Mumbai High Court in Shirks Construction (supra) had also noticed the cleavage of judicial opinion in the two contrary decisions of the High Court of Kerala, but it chose to adopt the ratio of A.B. Thomas & Co. (supra) for the reasons discussed therein. It would be appropriate for us to refer to the well-known rule of construction that is, if two interpretations of a taxing statute are possible, the interpretation which is favourable to the assessee must be adopted, especially in cases involving interpretation of benefit giving legislation. Section 80HHD is indeed a piece of beneficial legislation intended to provide fillip and encouragement to the Indian tourism industry to earn the much needed foreign exchange. Hence, the reasons for us, to follow the decision of the Hon'ble High Court of Kerala in A.B. Thomas & Co. (supra).
30. The reliance placed by the learned Departmental Representative in the case of Cambay Electric (supra) also, in our view, does not help the case of the Revenue. In Combay Electric (supra), the apex Court was dealing with the term "Total Income" and "as computed in accordance with the other provisions of the Act". A perusal of the decision leads to be emphasis placed by the apex Court on the wordings "as computed in accordance with the other provisions of the Act" as computed in accordance with the other provisions of the Act" as appearing in Section 80E which was being dealt with by the apex Court. The relevant portion of Section 80E which was in dispute before the apex Court reads as under:
"from specified industries in the case of certain companies :
(1) In the case of a company to which this section applies, where the total income (as computed in accordance with the other provision of this Act)...."
According to the apex Court, for applying the provisions of Section 80E, the first step was to compute the total income of the assessee in accordance with the provisions of the Act excepting Section 80E itself. The aforesaid is in clear contrast to the provisions with which we are presently dealing with. While in Section 80E, the emphasis was on "total income" and "as computed in accordance with the other provisions of the Act", whereas, we are presently dealing with the term "profits of business" and "as computed under the head profits and gains of business or profession" alone. Therefore, it would not be out of place to conclude that the apex Court took the view having regard to the language of Section 80E(1), that, while computing the profits for the purposes of the section, the assessee was required to take into consideration the carried forward depreciation, carried forward development rebate as also the brought forward losses of the earlier years etc. The proposition laid down by the apex Court in Cambay Electric (supra) still holds good, albeit only having regard to the language used in the said section. In contradistinction, when we look at the provisions of Section 80HHD, the said section lays down an artificial formula in Sub-section (3) to arrive at the profits of the business for the current year. Needless to say, to arrive at "profits of business" "as computed under the head profits and gains of business" is to be appreciated in a totally different perspective than computing the "total income" "as computed in accordance with the other provisions of the Act". This subtle distinction requires to be kept in mind while appreciating the true import of he decision of Combay Electric (supra) vis-a-vis the impugned issue before us. Therefore, the provision laid down by the apex Court in Canbay Electric (supra) does not help the case of the Revenue in the controversy before us.
31. In the end, on the basis of the aforesaid discussions, we are of the view that the conclusions drawn by the CIT(A) are apt and do not require any inference from our side.
32. In the result, all the three appeals by the Revenue are accordingly disposed of.