1982-VIL-25-ITAT-

Equivalent Citation: ITD 005, 605,

Income Tax Appellate Tribunal MADRAS

Date: 30.12.1982

YERCAUD COFFEE CURING WORKS LIMITED.

Vs

FIRST INCOME-TAX OFFICER.

BENCH

Member(s)  : T. N. C. RANGARAJAN., T. V. K. NATARAJA CHANDRAN.

JUDGMENT

Per Shri T.N.C. Rangarajan, Judicial Member -- These appeals are directed against the orders of the Commissioner (Appeals) rejecting the claims of the assessee for relief under section 80HH of the Income-tax Act, 1961 ('the Act'), as a proportion of the profit of the business of the year before setting off of losses carried forward from the earlier years.

2. The assessee is a company in which the public are not substantially interested. The assessee is engaged in the business of manufacture and sale of industrial belts which is admittedly a newly established industrial undertaking in a backward area. For the assessment year 1979-80 corresponding to the previous year ending 31-3-1979, the income from this business was taken at Rs. 8,91,590. The assessee claimed that the deduction under section 80HH at 20 per cent thereof calculated at Rs. 1,01,582 should be allowed as a deduction therefrom. But the ITO was of the opinion that the business loss of the earlier years, unabsorbed investment allowance and also the depreciation carried forward from the earlier years should first be deducted, with a consequence that the deduction of section 80HH was allowable only on the net income from business and it worked out to Rs. 14,284 only. The result of the computation was that for the assessment year 1979-80 there was a net taxable income of Rs. 18,650 as against net loss of Rs. 72,662. Consequently, the ITO disallowed the carry forward of the loss of Rs. 72,670 claimed by the assessee.

3. The assessee appealed and relied on the decision of the Tribunal in the case of Bharat Foam Industries Ltd., where it had been held that the deduction under section 80HH should be allowed in the gross income of the business without deducting the carry forward loss of the earlier years. The Commissioner (Appeals) was of the opinion that in view of the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84, the set off of the prior losses was a necessary step in the computation of relief under section 80HH and, therefore, the order of the Tribunal could not be followed.

4. In the further appeal before us, it was contended on behalf of the assessee that in view of the later decision of the Supreme Court in the case of Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243, the claim of the assessee should have been accepted. On the other hand, the contention of the revenue was that the point at issue was not discussed in the case of Cloth Traders and, therefore, the earlier decision of the Supreme Court should be followed.

5. We have had occasion to deal with this question in other cases in which each of us was a party. In the case of Raju Consultants [IT Appeal No. 242 (Mad.) of 1982, dated October 1982] it was held that in computing the allowance under section 80-O of the Act the deduction should be on the gross receipts and not on the net receipts. In the case of ITO v. Veeraraghava Textiles (P.) Ltd. [IT Appeal Nos. 67 to 70 (Mad.) of 1981, dated 30-11-1981] the Tribunal read the provisions of the Act and listed the priority in respect of the allowance as follows :

"1. First allow current depreciation and compute profit from business.

2. Set off current losses.

3. Sections 80H, 80HH, 80HHA deductions, if any, if there is profit.

4. Current 80J if there is profit/section 80-I deduction whichever lapses first.

5. Carried forward 80J from profit if any for successive years.

6. Carry forward development rebate under section 33(2)(ii) for successive years.

7. Current development rebate under section 33(2)(i).

8. Carried forward development allowance under section 33A(2)(ii) for successive years.

9. Current development allowance under section 33A(2)(i).

10. Carried forward investment allowance under section 32A(3)(i) for successive years.

11. Current investment allowance under section 32A(3)(i).

12. Carried forward business loss under sections 72 and 73.

13. Unabsorbed depreciation under section 32(2).

14. Other deductions under Chapter VIA."

Recently in the case of ITO v. S. Viswanathan [IT Appeal No. 243 (Mad.) of 1982 dated 30-11-1982] [since reported in [1983] 5 ITD 20 (Mad.)] the Tribunal found that the deductions under section 80QQ had to be given on the gross income from the business of the year and not the net income. All these decisions have taken inspiration from the decision of the Supreme Court in the case of Cloth Traders. But the contention of the revenue is that the decision in the case of Cloth Traders was not concerned with the set off of past losses whereas that point was decided by the Supreme Court in the case of Cambay Electric and, therefore, the relief should be computed only after setting off of the past losses.

6. A look at the provisions of the section would make it clear that what we are concerned with is the measure from which a proportion has to be ascertained for the purpose of granting relief. In other words a percentage of the profits of the particular business is given as a deduction to encourage the setting up of a new industrial undertaking in a backward area. The revenue has not cared to reveal to us the background of the enactment so as to understand the real intention of the Government in granting this deduction which is not an exemption from income but a deduction designed as an economical tool for the purpose of dispersing the industries into backward areas. If this object is kept in mind, it may not be difficult to imagine that the Government really intended that the deduction should be only a percentage of the net income of the business computed for tax purposes after setting off of past losses because in a nascent industry more often than not such a net result would be a negative figure and there would rarely be a case where the assessee could get any encouragement by way of such a deduction. This aspect was very much under the consideration of the Government as the Finance Minister's budget speech of 1967-68 shows :

"(c) It has often been represented that our present tax-holiday concession does not benefit adequately those undertakings for which profitability is usually low in the initial years. In order to make the tax exemption more meaningful in such cases, I propose to allow a carry-forward of the unabsorbed benefit of the 'tax-holiday' relating to the assessment year 1967-68 onwards, up to eight years from the year of commencement of the business."

Secondly, though the deduction is taken as a percentage of the profit of the business of the year as a measure, the deduction is allowed out of the total income of the assessee. This shows, as pointed out by the Supreme Court in Cloth Traders' case, that the deduction could be higher than the net income from the business after setting off of past losses. Thirdly, the deduction under this section 80HH is given for a period of ten years which presupposes an assurance of a tax holiday which will be infructuous if the deductions were to be wiped out by setting off of past losses.

7. We find several reasons why it is apparent that the Government has itself given up the formula laid down by the Supreme Court in the case of Cambay Electric, for ascertaining the deductions in respect of the profits of a business :

1. The provision of section 80E of the Act which was considered by the Supreme Court in that case was repealed and substituted by a different provision coupled with a limitation in section 80A(2) of the Act with respect to the gross total income. When Chapter VIA was originally introduced, the Finance Minister said that he was replacing the system of rebates with a straight deduction from the profits of the priority industries to simplify the computation of tax liability. In particular, he said that the straight deduction will be of a proportion of income qualifying for a rebate which obviously meant the gross income from the business and not the income as computed for the purpose of the Act by setting off of past losses, other deductions and the like.

2. In the later case of Cloth Traders, the Supreme Court had to consider the scheme of Chapter VIA and it was observed that all the sections in that Chapter used the same legislative formula opening with identical words 'where the gross total income of the assessee includes income' and pointed out that on a plain reading of those sections, the income referred was only the gross income from the source and not the net income as computed under the Act.

3. It is significant to note that in the case of Cambay Electric, the Supreme Court emphasized the words in parenthesis, namely, 'as computed in accordance with the other provisions of this Act', to arrive at the formula that the income of the business must be computed in accordance with all the provisions of the Act before a proportion thereof is given as a deduction. Those words in parenthesis in section 80E considered in that case are absent in section 80HH and, therefore, the sections of the Act relating to set off of past losses cannot operate in the computation of the deduction.

4. The decision in Cloth Traders' case was given on 4-5-1979 whereas the decision in Cambay Electric was given on 11-4-1978 and still the revenue had not relied on that case in arguing the later appeal indicating that in conformity with the Finance Minister's thinking that the straight deduction will be from the income qualifying the rebate, the idea that the income referred to the net income determined under the Act was given up even if it had such an idea earlier.

5. In the case of Cloth Traders, the Supreme Court pointed out that even though the phrase used was 'income by way of dividend', it cannot refer to the income computed under the Act after deduction of expenses. In the case of section 80HH with which we are concerned, the phrase is 'profits and gains derived from the industrial undertaking'. This is obviously different from 'the income from the business' to be computed under section 29 of the Act after making other deductions. When the Supreme Court has stated that even the usage of words 'income from dividends' could refer only to the gross income from that concern, it stands to reason that when the word 'income' is not used and only the words 'profits and gains', it could not be intended to refer to the income computed under the provisions of the Act in respect of the business but only to the commercial profits of the year before making any deductions allowable under the Act. Such a view has the added advantage of avoiding the fluctuations in the measure taken for the deductions due to setting off of other deductions which may vary year after year in computing the income from business for each assessment year.

6. Again on reading the speech of the Finance Minister, the wording of the section and the intention of the Supreme Court in the case of Cloth Traders it appears that if the intention of the Parliament was otherwise the wording of the section would be completely different so as to say that the deduction shall be a proportionate amount of the income of the industry which forms the component part of the total income. In the absence of such a clear wording any ambiguity that arises in the construction of the meaning of the phrase 'profits and gains from the business' has to be resolved only in favour of the assessee. This is because we have to follow the later decision of the Supreme Court by a larger Bench. [See Union of India v. K.S. Subramanian AIR 1976 SC 2433 and CIT v. Belliss & Morcom (I.) Ltd. [1982] 136 ITR 481, 495 (Cal.)]. Moreover, in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC), it has been held that the construction favourable to the assessee has to be adopted.

8. As we have seen above, no authorised official construction of the section has been released on behalf of the Government to assert that the policy of the Government in enacting section 80HH was to restrict the deduction to a percentage of the net income from the business included in the total income being the actual component part of the total income. It appears that such a view was only a narrow interpretation made by the authorities entrusted with the execution of the Act, being an attempt to restrict the scope of the deductions available to the new industrial establishments especially in backward areas, in response to the inducement offered by the wording of the section. Such an interpretation leading to litigation must be considered to have been settled by the decision of the Supreme Court in the case of Cloth Traders. Yet the controversy is sought to be revised by referring to the introduction of section 80AB of the Act by the Finance (No. 2) Act, 1980, with effect from 1-4-1981. The budget speech of the Finance Minister for 1980-81 merely mentions :

"I also propose to make certain amendments in the Income-tax Act to counteract certain Court decisions which have resulted in unintended benefit to taxpayers. . . ."

However, since section 80AB was not part of the Bill as introduced the notes on clauses only referred to section 80AA of the Act which sought to limit the deductions in respect of section 80M of the Act construed in Cloth Traders' case to the net intercorporate dividend and not the gross dividend before deduction of expenses. However, the notes mentioned in passing that the Supreme Court had observed in respect of other sections also that the deduction was admissible in respect of gross amount of income and not in respect of net income computed under the Act in making the deductions provided under the Act. After section 80AB was enacted the CBDT has issued a Circular No. 281, dated 22-9-1980 stating that that section 80AB unlike section 80AA will not have any retrospective operation.

9. If the contention of the revenue based on section 80AB is to be accepted, it would appear that in an attempt to nullify the decision of the Supreme Court, merely because an interpretation made by the authorities entrusted with the execution of the Act was disapproved the original purpose of the introduction of the straight deduction should be given the go-by. We cannot forget that the scheme of deductions under Chapter VIA was designed as an economic tool to represent a new fiscal policy for regulating the economy. The real object was not to give exemption, in the sense of giving up the revenue which could be collected, but to encourage certain industries to be set up in certain areas. That financial policy underlying the sections appearing in Chapter VIA may not be thwarted by reference to principles of strict construction based on orthodox considerations of loss of the revenue. The maxim ut res magis valeat quam pereat has to be invoked and the section has to be given a sensible meaning so as to make it effective. Even when we read section 80AB we are left with the impression that the Parliament only intended that the past losses should be deducted before taking the measure of the profits from the business for ascertaining the deductions allowable to the industry. Firstly, that section operates only from 1-4-1981 and, therefore, by necessary implication accepts the position before that day as otherwise. Secondly, it refers to the amount of income of that nature as computed in accordance with the provisions of this Act as the income of that nature derived or received by the assessee and which is included in the gross total income. The emphasis here is on 'income received or derived' which can refer only to the income of the year and cannot be the net result after setting off of past losses or deductions carried forward. More significantly the words in parenthesis, namely, 'as computed in accordance with the other provisions of this Act' which occurred earlier in section 80E since repealed have not been incorporated in any of these sections so as to restore the meaning which flowed from them according to the decision in the case of Cambay Electric. In fact the introduction of section 80AB underlines the real purpose of deduction, viz., that it should be a straight deduction from the income from that source of that year as otherwise the entire scheme of deduction would become meaningless.

10. For all these reasons we are convinced that the deductions under section 80HH has to be computed by taking a proportion of a gross profit from the new industrial undertaking in the backward area and give it as a deduction from such gross income similar to the deductions under other sections 37 to 43 of the Act in computing the income from business under section 29. We direct the ITO to recompute the relief accordingly for the assessment year 1979-80. Since the computation of the income for the assessment year 1980-81 will depend upon the computation of the income for the year 1979-80, we direct the ITO to recompute the income for 1980-81 also as a consequence.

11. The only other point in dispute for 1980-81 is disallowance of Rs. 7,983 under section 37(3A). This expenditure represented name boards supplied to various dealers showing that the products of the assessee were available for sale in those places. According to the assessee this did not amount to advertisement expenditure at all. We are unable to agree. We, therefore, confirm the disallowance.

12. In the result, Appeal No. 237 (Mad.) of 1982 is allowed and appeal No. 238 (Mad.) of 1982 is partly allowed.

 

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