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  • Vimal Gandhi
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Smart Summary

Structured Summary of the Opinion

Factual and Procedural Background

These two appeals by the assessee relate to the assessment years 1986-87 and 1987-88 and challenge orders of the Commissioner of Income Tax (CIT) setting aside assessments under section 263 of the Income Tax Act as being erroneous and prejudicial to the interests of the Revenue.

For A.Y. 1986-87 the Assessing Officer (AO) made assessment by order dated 2 March 1988. From an income of Rs. 5,33,803 the AO allowed deductions for investment allowance and under sections 80HH and 80-I aggregating Rs. 2,32,884; the net income so computed was set off against carry forward losses of earlier years and total income was taken at nil.

For A.Y. 1987-88 the AO completed assessment by order dated 20 March 1988. From total income of Rs. 20,02,473 deductions under sections 80HH and 80-I aggregating Rs. 8,00,988 were allowed, and aggregate figures amounting to Rs. 9,92,635 representing unabsorbed depreciation and unabsorbed investment allowance of earlier years were deducted; the balance amount was charged to tax.

The CIT called for records of the above assessments, concluded that brought forward losses and unabsorbed amounts should have been set off prior to allowing the relevant deductions, initiated proceedings under section 263 and served notice on the assessee. The CIT set aside the assessments as erroneous and prejudicial and directed the AO to make fresh assessments. The assessee appealed.

Legal Issues Presented

  1. Whether the CIT validly exercised powers under section 263 to hold that the AO's assessment orders were erroneous and prejudicial to the interests of the Revenue for allowing deductions under sections 80HH, 80-I and investment allowance without first setting off brought forward losses and unabsorbed depreciation/allowances.
  2. What is the correct method of computing deductions under sections 80HH and 80-I — specifically whether such deductions are to be computed on "profits and gains derived from an industrial undertaking" (i.e., unit-specific profits) or on the assessee's "gross total income" as computed under the Act.
  3. Whether deductions under sections 80HH and 80-I (and investment allowance under section 32A) are available where, after taking into account brought forward losses and unabsorbed amounts, the gross total income is nil or negative.

Arguments of the Parties

Assessee's Arguments

  • The deductions under sections 80HH and 80-I were properly allowed by the AO and in line with the view of the Tribunal, New Delhi in ITA No. 2752/Del/86 in the case of Banmore Electricals (P) Ltd., Gwalior (as relied on by the assessee in the assessment proceedings).
  • The assessee relied upon the decision of the Hon'ble Supreme Court in Shri Shubh Laxmi Mills Ltd. vs. Addl. CIT (1989) 177 ITR 193 (SC) — though the court in this opinion noted that that Supreme Court decision had no application to the facts of the present case.
  • At the hearing before this court, the assessee's counsel relied on authorities (Tarun Udyog, ITO vs Hindustan Electrographides Ltd., Siddaganga Oil Extractions) that support computing s.80HH deductions on the "profits and gains" of the industrial undertaking, without setting off investment allowance or carried forward unabsorbed depreciation from other units or years.

CIT's / Revenue's Arguments

  • The CIT relied on the Kerala High Court decision in CIT vs. Kerala Solvent Extractions Ltd. (1987) 165 ITR 174 (Ker) and held that deduction under section 80HH should not be allowed without first setting off unabsorbed depreciation and unabsorbed development rebate of earlier years.
  • The CIT further observed that provisions of section 80VVA were attracted in the instant case and that the AO had not invoked those provisions, rendering the assessment erroneous and prejudicial; hence, the CIT invoked section 263 and set aside the assessment orders.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Banmore Electricals (P) Ltd., Gwalior — Tribunal, New Delhi (ITA No. 2752/Del/86) Assessee relied on this Tribunal view to support the allowance of deductions under sections 80HH and 80-I as done by the AO. The court records that the assessee relied on this Tribunal decision in defense of the AO's treatment; the court did not explicitly adopt or reject this specific decision when disposing of the appeals but treated it as part of the assessments' background.
Shri Shubh Laxmi Mills Ltd. vs. Addl. CIT (1989) 177 ITR 193 (SC) The assessee cited this Supreme Court decision in support of the AO's approach. The court expressly held that this Supreme Court decision had no application to the facts of the present case.
CIT vs. Kerala Solvent Extractions Ltd. (1987) 165 ITR 174 (Ker) Relied upon by the CIT for the proposition that deduction under s.80HH is not available without setting off unabsorbed depreciation and unabsorbed development rebate of earlier years. The court recognized this as the CIT's principal authority but contrasted it with other High Court and Tribunal decisions; it accepted that the Kerala decision supports the CIT's stance for non-allowance, and treated it as part of the conflicting authorities.
CIT vs. Tarun Udyog (1991) 191 ITR 688 (as referred in the opinion) Cited for the proposition that deduction under s.80HH is to be allowed on "profits and gains" of the industrial undertaking and not on gross total income; that deduction is to be allowed without taking into account investment allowance. The court relied on the passage from this decision to support the distinction between "gross total income" and "profits and gains" of an undertaking, and used it in its analysis of how s.80HH should be computed.
ITO vs. Hindustan Electrographides Ltd. (1992) 41 ITD 223 (Ind. — Tribunal, Indore Bench) Held that deduction under s.80HH was to be allowed without taking into account carried forward unabsorbed depreciation of earlier years. The court cited this Tribunal decision as one of the authorities supporting the view that s.80HH should be computed on unit-specific profits and not reduced by carried forward depreciation from other years.
CIT vs. Siddaganga Oil Extractions (P) Ltd. (1993) 201 ITR 968 (Kar) Held that deduction under s.80HH in respect of an industrial undertaking is to be computed without setting off loss of a separate unit. The court quoted this High Court decision at length and treated it as authority for the proposition that losses of a separate unit should not be fastened onto the profits and gains of the industrial undertaking for purposes of s.80HH.
Cambay Electric Supply (case referred in Tarun Udyog quotation) Referenced in the opinion excerpt quoted from Tarun Udyog regarding computation of gross total income under sections 30 to 43A and treatment of investment allowance under s.32A. The court acknowledged the reference to this case in the quoted passage, using the passage to underline that gross total income, as statutorily computed, takes investment allowance into account; the opinion does not provide further details about the Cambay case itself.

Court's Reasoning and Analysis

The court framed the core analytical task as giving proper meaning to two expressions used in the statute: (i) "total income" (or "gross total income") and (ii) "such profits and gains derived from an industrial undertaking" (the expression used in the provisions granting deductions).

The court explained that "gross total income" is defined and computed under the Act (reference to ss.30–43A and s.80B(5) in the opinion). Consequently, items such as depreciation (current and brought forward), investment allowance and brought forward losses are to be taken into account when computing gross total income. If gross total income so computed is nil or negative, deductions under Chapter VI-A (including s.80HH and s.80-I) cannot be allowed because the aggregate amount of such deductions cannot exceed gross total income.

By contrast, the deductions under sections 80HH and 80-I are to be computed on "such profits and gains" derived from the industrial undertaking and included in the gross total income. The court emphasized that "profits and gains" of the undertaking do not necessarily mean the same thing as gross total income; several High Courts and Tribunals had held that while gross total income must take into account items like investment allowance or losses of other units, the "profits and gains" of a particular industrial undertaking for s.80HH computation should not be artificially reduced by losses of other units or by certain prior-year deductions.

The court reviewed the conflicting authorities: some decisions (e.g., Kerala Solvent Extractions) held that deductions under s.80HH should not be allowed without setting off unabsorbed depreciation and unabsorbed development rebate, while others (Tarun Udyog, ITO vs Hindustan Electrographides Ltd., Siddaganga) held that s.80HH deductions are to be allowed on unit-specific profits and without taking into account investment allowance or carried forward depreciation or separate-unit losses.

On section 263: the court observed that the CIT's invocation of s.263 was valid to the extent the AO had failed to consider applicable statutory provisions (e.g., s.80VVA was applicable in the years under appeal but had not been invoked by the AO), making the assessments erroneous and prejudicial to the Revenue in that respect.

Application to the facts:

  • For A.Y. 1986-87 the court found that after taking into account brought forward losses the assessee's total income was nil; accordingly the assessee was not entitled to investment allowance under s.32A or deductions under ss.80HH and 80-I because Chapter VI-A deductions cannot exceed gross total income. Therefore the deductions allowed by the AO were wrongly allowed and the CIT was justified in invoking s.263 for that year.
  • For A.Y. 1987-88 the court observed that the total income before allowing s.80HH/80-I and before setting off brought forward depreciation and investment allowance was Rs. 20,02,473. It was unlikely that brought forward amounts would reduce the total income to nil, and prima facie the assessee appeared entitled to the deductions and investment allowance. The court noted that the AO's approach for this year was supported by various High Court and Tribunal decisions and could be regarded as a possible view. Because the exact computational position was not furnished to the court, the court would not hold the AO's order erroneous and prejudicial for this year.

Based on the foregoing, the court concluded that while the CIT's action under s.263 was valid in principle (and was correct for A.Y. 1986-87), the CIT's order overruling the AO's approach for A.Y. 1987-88 could not be sustained without appropriate recomputation; accordingly the matter was remitted for fresh computation and hearing.

Holding and Implications

Holding: The appeals were partly allowed.

The court's specific holdings were:

  • For A.Y. 1986-87: the deductions for investment allowance and under sections 80HH and 80-I were wrongly allowed by the AO because the assessee's gross total income (after setting off brought forward losses) was nil; the CIT was correct in invoking section 263 and setting aside the assessment to the extent noted.
  • For A.Y. 1987-88: prima facie the assessee appeared entitled to deductions under sections 80HH and 80-I and to investment allowance; the AO's view for this year was supported by several High Court and Tribunal decisions and could not be characterized as erroneous and prejudicial to the Revenue. The court therefore did not sustain the CIT's setting aside of the AO's order for this year to the extent inconsistent with the court's view.
  • The matter was remitted to the file of the AO to make fresh computations of deductions for both assessment years in the light of the court's observations and after providing the assessee a reasonable opportunity of being heard.

Implications:

  • The direct effect is that the assessments are to be reworked by the AO for both years in accordance with the court's reasoning: disallowance of the challenged deductions for 1986-87 (on the ground of nil total income) and fresh computation for 1987-88 (with the benefit of the authorities favoring the assessee taken into account where appropriate).
  • No novel legal principle or binding new precedent was declared by this opinion; the court applied and reconciled existing authorities and remitted the case for fresh computation rather than laying down a new rule of law.

Result recorded in the opinion: Assessee's appeals are partly allowed to the extent stated above; matter remitted to the Assessing Officer for fresh computation and opportunity to the assessee.

Show full summary ...

    Engineers Prestressed Structures P Ltd. v. Assistant Commissioner Of Income Tax.

    M. :

    These two appeals by the assessee for the asst. yrs. 1986-87 and 1987-88 are directed against orders of CIT setting aside assessments made in the case of the assessee under s. 263 of the it act by holding them to be erroneous and prejudicial to the interests of the Revenue.

    2. The assessment for the asst. yr. 1986-87 was made by the Assessing Officer (AO) vide order dt. 2nd March, 1988. Out of income of Rs. 5,33,803, the AO allowed deductions for investment allowance, under s. 80HH and 80-I aggregating to Rs. 2,32,884. The net income so computed was set off against carry forward losses of earlier years. The total income was taken at nil figure. The assessment for the asst. yr. 1987-88 was completed vide order dt. 20th March, 1988. From the total income computed at Rs. 20,02,473, the AO allowed deductions under s. 80HH and 80-I aggregating to Rs. 8,00,988. From the balance income, the AO deducted aggregate figure of Rs. 9,92,635 representing unabsorbed depreciation for 1983-84 and unabsorbed investment allowance for 1982-83 and 1983-84. The balance amount was charged to tax.

    3. The CIT called for record of above assessments and held the view that brought forward losses of earlier year were to be first set off before allowing deductions under s. 32a, 80hh and 80-i of the it act in the two years under appeal. He, therefore, initiated proceedings under s. 263 of the it act and served a notice on the assessee.

    4. In reply to the show-cause notice, the assessee contended that deductions under s. 80HH and 80-I were properly allowed and were in line with the view taken by the Tribunal, New Delhi in ITA No. 2752/Del/86 in the case of Banmore Electricals (P) Ltd., Gwalior. The assessee further relied upon decision of Honble Supreme Court in the case of Shri Shubh Laxmi Mills Ltd. vs. Addl. CIT (1989) 177 ITR 193 (SC). The learned CIT found no merit in objection raised on behalf of the assessee. Relying upon decision of Honble Kerala High Court in the case of CIT vs. Kerala Solvent Extractions Ltd. (1987) 165 ITR 174 (Ker), the CIT held that deduction under s. 80HH will not be available without setting off unabsorbed depreciation and unabsorbed development rebate of earlier years. The learned CIT further held that decision in the case of Shri Shubh Laxmi Mills Ltd. (supra) had no application. The learned CIT further observed that provisions of s. 80VVA were attracted in the instant case. He, therefore, held that order of assessment made by the AO was erroneous and prejudicial to the interests of Revenue. The assessment order was set aside with directions to the AO to make fresh assessment as per law after giving adequate opportunity of being heard to the assessee. The main order was passed for the asst. yr. 1986-87 and applied in asst. yr. 1987-88. The assessee has come up in appeal.

    5. We have heard both the parties at great length. There is no dispute that decision of Honble Supreme Court in the case of Shri Shubh Laxmi Mills Ltd. (supra) has no application to the facts of the present case. There is further no dispute that provisions of s. 80VVA were applicable in asst. yrs. 1986-87 and 1987-88 but were not invoked by the AO and to the above extent assessments were erroneous and prejudicial to the interests of the Revenue. Therefore, the action initiated by learned CIT under s. 263 of it act has to be held to be valid.

    6. During the course of hearing of appeal, learned counsel for assessee drew our attention to decision of Honble Orissa High Court in the case of CIT vs. Tarun Udyog (1991) 191 ITR 688 (SC), wherein their Lordships held that deduction under s. 80-HH is to be allowed on "profits and gains" and not on "gross total income" as computed in accordance with provisions of the Act. Their Lordships held that deduction is to be allowed without taking into account figures of investment allowance. The learned counsel further drew our attention to decision of Tribunal, Indore Bench in case of ITO vs. Hindustan Electrographides Ltd. (1992) 41 ITD 223 (Ind), wherein the Bench held that deduction under s. 80HH was to be allowed without taking into account carried forward unabsorbed depreciation of earlier years. Similarly, we find that Karnataka High Court in the case of CIT vs. Siddaganga Oil Extractions (P) Ltd. (1993) 201 ITR 968 (Kar), has held that deduction under s. 80HH in respect of an industrial undertaking is to be computed without setting off loss of a separate unit. On the other hand, the learned CIT has relied upon decision of Kerala High Court in the case of CIT vs. Kerala Solvent Extractions Ltd. (supra), wherein their Lordships held that deduction under s. 80HH is not to be allowed out of income of current year without setting off unabsorbed depreciation and unabsorbed development rebate of earlier years. The counsel appearing for the assessee had submitted that there was conflict of opinions among the High Courts as to how deduction was to be computed under s. 80HH. In above situation, a reasonable view which is in favor of the assessee has to be adopted. If in the assessment order, the Assessing Officer has taken a possible view, then the order cannot be termed as erroneous and prejudicial to the interests of Revenue for purposes of s. 263 of the Act.

    7. For resolving present controversy, we are to give proper meaning to two expressions - firstly "total income" and secondly "such profits and gains derived from an industrial undertaking" included in the gross total income. The two expressions do not connote same meaning and are understood differently. This distinction is well known and is accepted even in decisions quoted by the assessee. In the case of Tarun Udyog (supra), before adverting to the question as to how deduction under s. 80HH was to be computed, their Lordships observed as under :

    "Reference to s. 29 of the Act shows that the income referred to in s. 28 (this section being the same without profits and gains of business or profession), has to be computed in accordance with the provisions contained in ss. 30 to 43A. This clearly indicates that in coming to the figure of gross total income, investment allowance dealt with by s. 32A has to be taken note of. The ratio of Cambay Electric Supply case (supra) cannot, therefore, be ignored."

    8. In Siddaganga Oil Extractions (P) Ltd. (supra) their Lordships observed as under :

    "Sec. 80HH of the IT Act, 1961, provides for the deduction of 20 per cent from the "profits and gains" derived from the industrial undertaking. The gross total income of the assessee would include its income derived from several sources or units. The profits and gains of one unit is only one of the constituents of the gross total income. Every item of additions and deductions to be considered at the stage of computing the taxable income to be arrived at from the gross total income need not necessarily be considered while computing the profits and gains of one unit for purposes of s. 80HH. Under s. 80HH, the relevant question is whether there is profits and gains derived from an industrial undertaking, which was ultimately added to the gross income of the assessee. If there is any such profits and gains, the assessee is entitled to benefit of s. 80HH. If the loss sustained by another unit is set off against this profits and gains of an industrial undertaking, the resultant figure would not reflect the profits and gains of the said industrial undertaking in any sense, much less in a commercial sense; it will be an unnatural and artificial "profits and gains" of that industrial undertaking. Hence, loss sustained elsewhere cannot be fastened to the profits and gains of the said industrial undertaking for purposes of s. 80HH."

    The "gross total income" is defined under s. 80b(5) of the it act and is to be computed in accordance with provisions of IT Act. In other words, all provisions of the Act not specifically excluded are to be applied to arrive at above figure. The depreciation, current and brought forward, losses of every kind, investment allowance, etc., is to be taken into account. In case "gross total income" so computed is nil or negative figure, no deduction under s. 80HH or 80-I is to be allowed and, therefore, the question of computation of deductions under above provisions would not arise. In case "gross total income" is a positive figure, the question of computation of deductions under s. 80HH and 80-I would have to be considered. Here again the aggregate amount of deductions under Chapter VI-A cannot exceed "gross total income". The deductions under ss. 80HH and 80-I are to be computed on "such profits and gains" derived from the industrial undertaking and included in the gross total income. The profits and gains of undertaking will not include several deductions allowed while computing "gross total income". The High Courts as noted earlier have held that even investment allowance, loss of separate unit, etc. is not to be deducted while computing "such profits and gains". The Tribunal, Indore Bench has further held that carried forward depreciation is also not to be taken into account for purposes of computing deduction under s. 80HH. The question of deduction of investment allowance is dealt in sub-s. (3) of s. 32A of the Act. The said sub-section provides that where total income without making any deduction under s. 32A(1) and under Chapter VI-A is nil or less than full amount of investment allowance, then investment allowance is to be deducted and carried forward as provided in cls. (i) and (ii) of the sub-section. It is clear from the section that if total income is nil or loss, the investment allowance is to be carried forward.

    9. Having regard to the above legal position, we find that after taking into account brought forward losses, the assessee had "nil" total income in asst. yr. 1986-87. Therefore, assessee was not entitled to investment allowance under s. 32A or to deduction under s. 80HH and 80-I of the IT Act. The aforesaid deductions, as noted earlier, were to be computed and allowed only if the assessee had some positive total income. We, therefore, hold that above deductions were wrongly allowed to the assessee in asst. yr. 1986-87 and to that extent the assessment order was erroneous and prejudicial to the interests of the Revenue. The learned CIT, therefore, was right in invoking provisions of s. 263 of the it act.

    10. The position for the asst. yr. 1987-88 is different. There, the total income without allowing deductions under s. 80HH and 80-I and without setting off of brought forward depreciation and investment allowance, was Rs. 20,02,473. It is unlikely that brought forward depreciation and investment allowance would wipe off the total income and reduce it to nil or negative figure. It, therefore, appears prima facie that assessee was entitled to deduction under s. 80HH and 80-I of IT Act. The assessee was further entitled to investment allowance. However, the exact position is required to be computed and no working was furnished to us during the hearing of appeal. Be that as it may, it is not possible for us to agree with learned CIT that deductions under the above provisions were wrongly allowed to the assessee. The view taken by the AO in the assessment order is supported by decisions of various High Courts noted above and cannot be held to be erroneous and prejudicial to the interests of the Revenue. Accordingly, while agreeing in principle with the approach of learned CIT, in order for asst. yr. 1986-87 we set aside his order for asst. yr. 1987-88 to the extent it is inconsistent with our view expressed above. The matter is restored to the file of the AO to make fresh computation of deductions for both the assessment years under appeal in the light of our above observations and after providing reasonable opportunity of being heard to the assessee.

    11. In the result, assessees appeals are partly allowed to the extent state above.

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    Comments

    Engineers Prestressed Structures P Ltd. v. Assistant Commissioner Of Income Tax.
    (Apr 7, 1995)