Income Tax Appellate Tribunal - Mumbai
Tushako Pumps Ltd. vs Asstt. Cit on 31 January, 2005
Equivalent citations: [2005]2SOT556(MUM)
ORDER
K.K. Boliya, A.M. This appeal has been filed by the assessee against the order dated 18-2-2002 of Commissioner (Appeal)-II, Mumbai. The ground Nos. 1 and 2, which pertain to same issue are as under:
(i) On the facts and circumstances of the case and in law, the learned Commissioner (Appeal) erred in not accepting the contention of the appellant that what is required to be deducted in computation of book profit in terms of clause (v) of the Explanation to section 115JA is book profit of section 80-IA(b)(iv)(c) qualifying industrial undertaking as per its profit & loss account and not the amount of profit computed in terms of provisions of Chapter IV-D of the Income Tax Act.
(ii) The learned Commissioner (Appeal) erred in not referring to and accepting the contention of the appellant that its claim was squarely covered by the decision of Kerala High Court in CIT v. GTN Textiles Ltd. (2001) 248 ITR 372 (Ker). The learned Commissioner (Appeal) ought to have followed the impugned judgment of the High Court as the only Judgment dealing directly with the issue on hand.
2. The relevant facts are that the appellant company is engaged in the manufacturing of positive displacement pumps. The manufacturing unit is located at Daman and the assessee is entitled to 100% exemption under section 80-IA of the Income Tax Act. In the return of income filed by the assessee, profits and gains arising from manufacturing activity were calculated as per the provisions of the Income Tax Act at Rs. 16,58,865. The aforesaid entire business income was claimed exempt under section 80-IA and the income from other sources of Rs. 2,15,615 was offered for tax. Similarly, the assessee company computed its book profits for the purpose of section 115JA. The total book profits amounted to Rs. 73,73,691, which included profits derived from the manufacturing activity at Rs. 71,32,210, which was claimed exempt under section 80-IA. Accordingly, the balance income of Rs. 2,41,481 being the book profits were considered by the assessee for the purpose of section 115JA. The assessing officer, while computing the profits for the purposes of section 115JA, recomputed the exemption admissible under section 80-IA as per the provisions of the Income Tax Act, with the result that the quantum of deduction available under section 80-IA was calculated by the assessing officer at Rs. 16.19 lakhs as against Rs. 71.32 lakhs calculated by the assessee. This variation was mainly on account of the fact that the assessee has considered depreciation as per the books of account at Rs. 27,27,801 whereas the assessing officer deducted depreciation at Rs. 81,86,700 as per the provisions of the Income Tax Act. The assessing officer's action has been confirmed by the learned Commissioner (Appeal) and that is how the dispute has come up before us for adjudication.
3. The learned counsel appearing on behalf of the assessee forcefully contended that provisions of section 115JA do not visualize or permit adjustment made by the assessing officer in the quantum of income exempt under section 80-IA. It is submitted that depreciation as provided in the books of account cannot be varied by the assessing officer while computing book profits tinder section 80-IA. The learned counsel strongly relied on the Kerala High Court judgment in the case of GTN Textiles Ltd. (2001) 248 ITR 372 (supra) and invited our attention to the ratio of this judgment, which is reproduced below from the head note:
"According to section 115J of the Income Tax Act, which begins with a non obstante clause, book profits are to be treated as net profit. Section 80HH(3) and (3A) give concessions to exporters and section 80HHD gives concessions to those people who earn in convertible foreign exchange. Originally, section 115J did not take into account the deductions under sections 80HHC and section 80HHD but this was included subsequently. If the profit was to be computed on the basis of the profits and gains of business or profession that would go against the very object of section 115J of the Act. In clause (iv) of the Explanation to section 115J the provisions of clause (b) of the first proviso to sub-section (1) of section 205 of the Companies Act, 1956 are entirely made applicable. Such an intention is not there is clause (iii). Hence, under clause (iii), Explanation, it is not the profit as computed under the head 'profits and gains of business or profession' that is to be applied. Instead of the words 'profits and gains of business or profession' occurring in sub-sections (3) and (3A) of section 80HHC or sub-section 30 of section 80HHD, the word 'profit' that is mentioned in section 115J has to be applied. Clause (iii) does not say that section 80HHC of the Act is applicable as such. It only say that the profit shall be determined in the manner provided in that section. Section 80HHC of the Act is made applicable to the extent only for calculating the deduction."
In the above case, the High Court held that the Tribunal was correct in holding that under section 115J, Explanation, clause (iii) of the Act, profit to be taken into consideration was profit as per the books of account and not as calculated under the Act.
4. The learned counsel also drew support from the ITAT, Hyderabad Bench decision in the case of Starchik Speciality Ltd. v. Dy. CIT (2004) 90 ITD 34 (Hyd). The ratio of this case may be reproduced below from the headnote :
"The invocation of section 115J and section 115JA implies two distinct procedures, (1) determination of income under the normal provisions of the Act, which include section 80A(2) and section 80B(5), relied on by the revenue and (2) determination of the book profit subject to the specified adjustments, and a comparison of the two results obtained by the two procedures. So, section 80A(2) and section 80B(5) which are applicable only in the first procedure, have no role to play in working out the deduction under section 80HHC eligible for being reduced for arriving at the book profit in terms of clause (iii) of Explanation of section 115J or clause (viii) of Explanation to section 115JA. There was no force in the contention on behalf of revenue that in terms of section 115JA(4), all other provisions of the Act shall apply to every assessee in respect of whom provisions of section 115JA are invoked, and so, section 80A(2) and section 80B(5) are also applicable for the purpose of determining the book profit under section 115J. Section 115JA(4) itself makes it clear that other provisions apply only when it is not otherwise provided in the section. Thus, the language of section 115JA(1) and Explanation thereto rules out the applicability of section 80A(3) and section 80B(5). Accordingly, that aspect of the matter was to be decided in favour of the assessee."
The learned counsel for the assessee submitted that the revenue authorities were wholly unjustified in making adjustment, which is not permissible under the law.
5. The learned Departmental Representative strongly supported the orders of the revenue authorities and submitted that profits and gains derived from the eligible industrial undertaking have to be excluded while computing book profits under section 115JA. The book profits are to be calculated after making adjustment permissible under the section. However, the profits and gains derived from the industrial undertaking have to be calculated in accordance with the provisions of the income tax Act. It is, therefore, argued that the depreciation as admissible in the Income Tax Act has to be considered while computing the income eligible for exemption.
6. We have given careful consideration to the rival submissions in the light of the provisions of the law, and the precedents cited before us. The mandatory requirement of section 115JA is that, for the purpose of section, the profit & loss account has to be prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. In the present case, there is no dispute that the profit & loss account has been prepared by the assessee in consonance with the above mentioned statutory requirement. To the above mentioned profit, certain amounts can be added as permitted under the Explanation, which is reproduced below:
"Explanation For the purposes of this section, 'book profit' means the net profit as shown in the profit & loss account for the relevant previous year prepared under sub-section (2), as increased by
(a) the amount of income-tax paid or payable, and the provision therefor; or
(b) the amounts carried to any reserves by whatever name called; or
(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or
(d) the amount by way of provision for losses of subsidiary companies; or
(e) the amount or amounts of dividends paid or proposed; or
(f) the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies."
The aforesaid Explanation further stipulates that certain income have to be excluded from the book profits and for the purpose of the present case, clause (v) is relevant, which is reproduced below:
"(v) the amount of profits derived by an industrial undertaking located in an industrially backward State or district as referred to in sub-clause (b) or sub-clause (c) of clause (iv) of sub-section (2) of section 80-IA, for the assessment years such industrial undertaking is eligible to claim a deduction of hundred per cent of the profits and gains under sub-section (5) of section 80IA."
From the above provisions, it is notable that under the Explanation, the book profits cannot be increased by making any adjustment on account of depreciation. Further, the book profits are required to be reduced by the amount of profit derived by the industrial undertaking which is eligible for exemption under section 80-IA. Under clause (v), there is no mention that the profit derived by the industrial undertaking must be calculated as per the provisions of the Income Tax Act. Therefore, in our view, the logical interpretation would be that the profits derived by the industrial undertaking as per the books of account have to be reduced from the book profits. In the present case, while computing book profits, which is in consonance with the profit & loss account prepared in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act, the depreciation as provided in the books of account has been considered. If while computing the profits derived by the industrial undertaking, which is required to be reduced from the book profits as per clause (v), the provisions of the Income Tax Act are applied and depreciation as admissible under Income Tax Act is deducted, it would result into an anomalous situation. While the profit derived from the industrial undertaking, which is included in the book profits has been computed as per the books and no adjustment for depreciation has been made, while computing the income eligible for exemption under section. 80IA, the quantum of depreciation as per the provisions of the Income Tax Act would be substantially enhanced. This would violate the very purpose of section 115J. The cases which have been relied upon by the learned counsel for the assessee support this view. We, therefore, hold that the profit of the industrial undertaking eligible for exemption under section 80-IA must be computed as per the books of account and the provisions of Income Tax Act cannot be applied and no adjustment can be made which is not permissible under the section. We, therefore, reverse the order of the revenue authorities on this point and direct the assessing officer to re-compute the book profits in the light of the observations made above.
7. The ground No. 3(a) is as under :
"The learned Commissioner (Appeal) erred in diluting relief admissible under section 80-IA by reducing from the qualifying profit base sum of Rs. 17,076 admissible as deduction under section 80HHC of the Act."
Both the parties agreed that this issue is covered in assessee's favour by the Bombay High Court decision in the case of CIT v. Nima Specific Family Trust (2001) 248 ITR 29 (Bom). Accordingly, the order of the learned Commissioner (Appeal) on this issue is reversed and the assessing officer is directed to recalculate the exemption admissible under section 80-IA without reducing from the qualifying book profits the deduction under section 80HHC.
8. The ground No. 3(b) pertaining to the finding of the learned Commissioner (Appeal) that service charges of Rs. 21,888 did not represent income derived from industrial undertaking is not pressed by the learned counsel for the assessee and accordingly on this issue, the finding of the learned Commissioner (Appeal) stands confirmed.
9. The ground No. 3(c) pertaining to charging of interest under sections 234B and 234C is admitted to be consequential and therefore, the assessing officer is directed to recalculate the interest while giving effect to this order.
10. In the result, the assessee's appeal stands partly allowed.