1992-VIL-160-ITAT-IND

Equivalent Citation: ITD 041, 223,

Income Tax Appellate Tribunal INDORE

Date: 30.01.1992

INCOME-TAX OFFICER.

Vs

HINDUSTAN ELECTRO GRAPHITES LIMITED.

BENCH

Member(s)  : S. K. JAIN., N. S. CHOPRA.

JUDGMENT

Per Shri N. S. Chopra, AM --- 1 to 3. [These paras are not reproduced here as they involve minor issues.].

4. The fourth ground of appeal is that the CIT(A) is not justified in directing the ITO to allow admissible deduction under section 80HH before adjusting/setting off of past losses. The assessee had made a claim of deduction of Rs. 87,96,426 under section 80HH of the Income-tax Act against its profit and loss without set off of earlier years' losses. The ITO took the view that after allowing deductions under sections 32, 32A, 71 and 72, there was no positive income of the assessee for the relevant assessment year and, therefore, no deduction was available to the assessee under section 80HH. The assessee was successful in appeal before the learned CIT(A) who, following the Hon'ble Madras High Court decision in CIT v. Katpadi Co-operative Timber Works Ltd. [1982] 135 ITR 287, took the view that deduction under section 80HH " has to be allowed from the gross total income ". He, accordingly, directed the Assessing Officer to allow deduction under section 80HH " before adjusting the carry forward losses ".

5. The learned Standing Counsel for the department, Shri Saxena, argued that for computation of income of the relevant assessment year, the brought forward losses are necessarily required to be adjusted. He argued that deduction under section 80HH is available on income computed for the relevant assessment year only after setting off of brought forward losses. The learned counsel for the assessee, on the other hand, supported the order of the learned CIT(A). He also placed reliance on Orissa High Court judgment in CIT v. Tarun Udyog [1991] 191 ITR 688 and Chandigarh Bench of the Tribunal order in the case of ITO v. Punjab Rice Sheller [1990] Taxation 99(4) -- 1 and Ahmedabad Bench of the Tribunal decision in DFI (P.) Ltd. [IT Appeal No. 148/(Ahd.) of 1979 for the assessment year 1977-78 and argued that deduction under section 80HH is allowed on gross total income of the relevant assessment year before setting off of brought forward losses and unabsorbed depreciation of the earlier year.

6. We have beard the arguments and carefully considered the submissions of the rival parties. Deduction under section 80HH is available in respect of profit and gains from newly established industrial undertaking or hotel business in backward areas where the gross total income of the assessee includes any profits and gains derived from such industrial undertaking or the business of a hotel. A deduction from such profits and gains of an amount equal to 20% thereof is allowable in computing the total income of the assessee for a limited period. The position is simple when there are no past losses and/or unabsorbed depreciation, etc. however, when there are past business losses including unabsorbed depreciation, the manner in which the same are to be treated for the purpose of working out income for deduction under section 80HH is required to be looked into in accordance with the relevant provisions of the Act. Insofar as brought forward business losses are concerned, it is settled law that the same are to be taken in computation of profits and gains from business. This is because the time available for carry forward of business loss is limited to eight years. Therefore, brought forward business losses are necessarily required to be taken into account for the purpose of computing income under the head profits and gains. Our view is supported by the judgment of the Calcutta High Court in Universal Cargo Carriers Inc. v. CIT [1987] 165 ITR 209 wherein their Lordships have observed that " on a consideration of relevant statutory provisions, it appears to us that business losses, as contemplated in section 72 of the Income-tax Act, 1961, is the net result of a particular computation under the head ' Profits and gains of business '. On such computation, business loss in a particular year is determined and after which it can be carried forwards ". We, therefore, agree with Shri Saxena that brought forward business loss must be adjusted against profits and gains, at such profits and gains for deduction under section 80HH.

7. The unabsorbed depreciation is, however, on a different footing. It is allowable as set off not only against the income of profits and gains, but against any other head of income. It is allowable as a set off as a special category of loss being an allowance. Further, unlike business losses, there is no time limit for carrying forward unabsorbed depreciation. Therefore, unabsorbed depreciation is altogether a different and special category of loss and, therefore, cannot be treated as business loss to determine profits and gains for deduction under Chapter VIA. Here again we deem it necessary to refer to the observations of the Hon'ble Calcutta High Court in the case of Universal Cargo Carriers Inc. :---

" So far as depreciation is concerned, the Income-tax Act, 1961, provides for compensation of the same by an allowance. Such allowance by itself is not a loss but if it cannot be absorbed in a particular year against business income, then it is carried forward as unabsorbed depreciation allowance under section 32(2). This unabsorbed depreciation allowance does not enter into the computation of the business loss of the assessee in that particular year.

In the subsequent year, such unabsorbed depreciation allowance is treated to be a part of the depreciation allowance of the succeeding year and the assessee is entitled to claim absorption in respect of the same in the succeeding year.

On a strict reading of section 72, it cannot be said that unabsorbed depreciation allowance of an assessee is a business loss, particularly as it does not enter into the computation contemplated under the said section.

If a depreciation allowance cannot be and is not absorbed in a particular year from the point of view of an accountant, the business suffers a loss, but for the purpose of enabling an assessee to obtain the advantage of carrying forward such unabsorbed depreciation allowance and having it adjusted against the business income of the subsequent year, unabsorbed depreciation allowance and the business loss carried forward must be treated as separate. "

Therefore, even though unabsorbed depreciation is a part of the " loss ", yet for the purposes of set off it is treated differently from the brought forward losses. The Supreme Court of India in the case of Garden Silk Weaving Factory v. CIT [1991] 189 ITR 512 has observed as under :---

" There is nothing anomalous or absurd in the statute providing for a dissection of the amount of loss for purposes of carry forward and providing for a special or different treatment to unabsorbed depreciation in this regard although it is a component element of the genus described as " loss ".

8. For the purposes of set off there is no time limit for unabsorbed depreciation which retains its own distinct character even in succeeding year from depreciation of the current year.

9. In view of the above discussion, we do not agree with Shri Saxena that unabsorbed depreciation is also to be deducted from business income of the current year for the purposes of computation of deduction under section 80HH. The Assessing Officer is, accordingly, directed to allow deduction under section 80HH out of the profits and gains of the assessee after adjusting brought forward business losses only, if any, against current year's profits and gains of the assessee's business. To this extent the CIT(A)'s order is reversed. This ground of appeal is, therefore, partly allowed.

10 and 11. [These paras are not reproduced here as they involve minor issues.

 

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that VATinfoline Multimedia is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.