Vildirect: IncomeTax-caselaws-2003-VIL-194-ITAT-

2003-VIL-194-ITAT-

Equivalent Citation: ITD 089, 457, TTJ 082, [2004] 1 SOT 481 (MUM.)

Income Tax Appellate Tribunal BOMBAY

IT APPEAL NO. 1517 (MUM.) OF 1997

Date: 29.01.2003

DEPUTY COMMISSIONER OF INCOME-TAX.

GOVIND RUBBER (P.) LTD.

BENCH

Member(s) : G. C. GUPTA., BEHARI LAL.

JUDGMENT

Behari Lal, Accountant Member.--This appeal of the department is directed against the order of the Commissioner of Income-tax (Appeals)XIII, Mumbai dated 2-1-1997 for the assessment year 1990-91, the grounds of appeal taken up by the department reads as follow:

"1. On the facts and in the circumstances of the case and in law the learned CIT(A) has erred in deleting the addition of Rs. 2,25,376 made to the value of closing stock on account of unutilized MODVAT credit.

2. On the facts and in the circumstances of the case and in law the learned CIT(A) has erred in holding that the amount of Rs. 1.65,325 withdrawn from revaluation reserve and credited to profit and loss account will not form part of the book profit.

3. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that in view of provision of section 115J(1)(iii) book profits attributable to exports should be deducted from the book profits computed under section 115J without going into the reasons given by the Assessing Officer:

2. The assessee-company is manufacturer of cycle tyres and tubes and its factory is located at Ludhiana in Punjab. The first ground of appeal is egarding the deletion of addition of Rs. 2,25,376 made to the value of closing stock on account of unutilised MODVAT credit. This issue is squarely covered in favour of the assessee by the decision of jurisdictional High Court in the case of CIT v. Indo Nippon Chemical Co. Ltd. [2000] 245 ITR 3841 (Bom.). Respectfully following the decision of Bombay High Court, this issue is decided in favour of the assessee.

3. The second ground of appeal is regarding the amount of Rs. 1,65,325 withdrawn from revaluation reserve and credited to profit and loss account. According to the department the learned CIT(A) has erroneously held that the amount of Rs. 1,65,325 will not form part of the book profits. This issue is also covered by the decision of the Supreme Court in the case of Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273 in favour of the assessee. Respectfully following the decision of the Hon'ble Supreme Court, this issue is decided in favour of the assessee.

4. The third ground of appeal pertains to the provisions of section 115J(1A)(iii) of the Act. According to the department, the learned CIT(A) has erroneously held that in view of provisions of section 115J(1A)(iii), book profits attributable to exports should be deducted from the book profits computed under section 115J without going into the reasons given by the Assessing Officer. The assessee-company has claimed deduction of an amount of Rs. 79,913 as per Explanation (iii) to section 115J. The Assessing Officer referred to the provisions of Explanation (iii) to section 115J and has observed that deduction under section 80HHC is to be given as per section 80HHC(3). Section 80HHC(3) talks about proportionate deduction out of profit and gains of business only. The Assessing Officer noticed that in the case of the assessee profits and gains of business after setting off unabsorbed depreciation is nil, therefore, the question of allowing any deduction under section 80HHC either for the purpose of computation under section 115J or for normal working does not arise. The learned CIT(A), however, decided this issue in favour of the assessee and directed the Assessing Officer to deduct the amount of Rs. 79,913 while computing the book profits.

5. The learned departmental representative contended that the Assessing Officer is fully justified in not deducting the amount of Rs. 79,913 from the book profits to be determined for the purpose of section 115J of the Act. The learned departmental representative argued that the total income determined by the Assessing Officer is nil, therefore, the question of allowing any deduction under section 80HHC does not arise. He contended that the deduction computed under section 80HHC(3) is nil, therefore, the deemed deduction of Rs. 79,913 cannot be allowed as there is no provision in the Act to allow deemed deduction. He argued that while making the computation of special deduction, the provisions of sections 80A and 80B applies to all sections in Chapter VIA. Therefore, according to him, special deduction cannot be claimed if total income is nil He, therefore, contended that deduction under section 115J is to be allowed only if deduction under section 80HHC is allowable. The learned departmental representative placed his reliance on the following court cases:

(i) Synco Industries Ltd. v. Assessing Officer of Income-tax [2002] 254 ITR 608 (Bom.).

(ii) CIT v. Gogineni Tobacco Ltd. [2002] 253 ITR 800(SC)

(iii) IPCA Laboratories Ltd. v. Dy. CIT (No. 1) [2001] 251 ITR 401 (Bom.).

6. The learned counsel for the assessee referred to the provisions of Explanation (iii) of section 115J of the Act which reads as follows:

"(iii) The amounts as arrived at after increasing the net profit by the amounts referred to in clauses (a) to (f) and reducing the net profit by the amounts referred to in clauses (i) and (ii) attributable to the business, the profits from which are eligible for deduction under section 80HHC or section 80HHD; so, however, that much amounts are computed in the manner specified in sub-section (3) or sub-section (3A) of section 80HHC or sub-section (3) of section 80HHD, as the case may be, or The learned counsel, thus, contended that on a close and minute inspection and perusal of clause (iii), it will be crystal clear that clause (iii) contemplates following a mandatory step by step chronology as well as the methodology for determining the book profits "attributable to the business" upto the stage of clause (iii) just prior to making the computation under clause (iii). He contended that the net amounts as arrived at after increasing/reducing net profit by amounts in the clauses preceding clause (iii) are only to be reckoned and considered for the purpose of examining the basic eligibility to section 80HHC as also for the purpose of working out the quantum of deduction under section 80HHC. Hence, according to the learned counsel, neither the profits computed under sections 28 to 43C nor any other figures are to be taken into account. The learned counsel contended that the words "the profits from which are eligible" are clinching and overriding. The learned counsel argued that the whole tenor and thrust of clause (iii) is that the book profits as computed under section 115J alone shall constitute the superstructure for determining the eligibility as well as quantum of deduction under section 80HHC and not the computation of profits and gains under sections 28 to 43C, that is, the working under the normal provisions of the Act. The learned counsel argued that clause (iii) is the complete and exhaustive dictionary for determining the basic eligibility as well as the quantum of deduction under section 80HHC for the purpose of computation under section 115J. The learned counsel contended that it is well settled and accepted that section 115J is a self-contained and independent code, and no reference to any other section, provision, etc. is necessary to expound on section 115J.

7. The learned counsel also invited our attention to the new section 115JA and argued that it will throw considerable and significant light to corroborate the interpretation placed by the assessee. According to him clause (viii) of the Explanation which is pari materia to clause (iii) of the Explanation to section 115J to the new successor 115JA will reveal the conspicuous divergence in the working of both the clauses. He argued that it is vital to note that the sequential step by step method to be adopted in computing deduction under section 80HHC with reference to book profits present in clause (iii) of the Explanation to section 115J is completely missing in the new clause (viii) of Explanation to section 115JA. According to him clause (viii) of Explanation to section 115J A straightway opines with the wording "the amounts of profits eligible for deduction under clauses (a), (b) and (c) of sub-section (3) or sub-section (3A)......." and there is no qualification as in the second limb of clause (iii) of Explanation to section 115J, namely, "........so, however, that such amounts are to be computed......" after giving the strict and peremptory computation mechanism in the first limb of clause (iii).

8. The learned counsel referred to the decision of Kerala High Court in the case of CIT v. G.T.N. Textiles Ltd. [2001] 248 ITR 372 and contended that the High Court has propounded that the concept of "Book profit" is the life line and blood of section 115J. According to him, by this decision the view canvassed by the revenue that section 80HHC is to be worked out in conformity with the provisions of sections 28 to 43C i.e., under the normal provisions of the Act as against "book profits" stand advanced by the assessee was displaced and the latter stand of the assessee countenanced. The learned counsel also referred to circular 680 dated 21-2-1994 reported, which was in continuance of Circular No. 559 dated 4-5-1990, existing at the time the assessment order dated 25-2-1993 was passed. He specially invited our attention to paragraph 2 of the circular which reads as follows:

"It may be noted that while deduction under sections 80HHC and 80HHD are related to the profits computed under the head 'Profits and gains of business or profession'. Section 115J is concerned only with book profits. While explaining the scope of Explanation (iii) under section 115J, it was stated in para 9.2 of the Board's Circular No. 559 dated 4-5-1990 that the intention behind introduction of the said Explanation was to ensure that the provisions of section 115J, which provided for a tax on the book profits did not take away the 100 per cent exemption which was to be allowed in respect of export profits and the profits from tourism related industry. It was also stated therein that the intention was that 100 per cent of such profits should be exempt in such cases. In para 9.3(a) of the same circular, it was elaborated that for the purposes of the subject Explanation, the 'net profit' to be excluded shall be computed in the same manner as provided for in section 80HHC(3) or (3A) or section 80HHD(3). Further, the Explanation (iii) under section 115J itself clearly lays down that the amount, as arrived at after adjusting the net profit as shown in the profit and loss account for the relevant previous year by the adjustments referred to in clauses (a) to (f), (i) and (ii) of the said Explanation, should be allowed as deduction, computing the deduction however, in the manner specified under section 80HHC(3) or (3A) or 80HHD(3). It is, therefore, clear that it is only the manner of computation specified in section 80HHC(3) or (3A) or 80HHD, and not the amounts themselves, that should be imported into Explanation (iii) under section 115J. The learned counsel, thus, contended that the emphasis is on "Book Profits" and not on computation under sections 28 to 43C both for eligibility purposes as well as for the purpose of determining the quantum of deduction. The learned counsel further contended that the circulars are binding on the department. To support his contention he referred to the decision of the Supreme Court in the case of UCO Bank v. CIT [1999] 237 ITR 889. He contended that the department cannot argue against the circular and to support his contention he placed his reliance on the decision of the Supreme Court in the case of CST v. Indra Industries [2001] 248 ITR 338 (SC).

9. Regarding the decision of the Supreme Court in the case of Gogineni Tobacco Ltd. relied upon by the learned departmental representative, the learned counsel argued that the Supreme Court merely held that a question of law arises on the issue whether deduction under section 80HHC is to be claimed from total income after deduction of unabsorbed losses or unabsorbed depreciation or otherwise. He, thus, contended that a Supreme Court decision directing the High Court to state a referable question of law does not give a decision on merit. Therefore, according to the learned counsel, this decision is irrelevant to the point in issue in the present case. Regarding the Bombay High Court decision in the case of Synco Industries Ltd., the learned counsel contended that this decision pertains to sections 80A and 80B, therefore, the same is not applicable because the issue under consideration is regarding section 115J and not Chapter VI. He referred to the Mumbai High Court decision in the case of CIT v. Shirke Construction Equipments Ltd. [2000] 246 ITR 429 and contended that the Hon'ble Bombay High Court has categorically held that section 80AB has no application to section 80HHC since it is a self contained-code and not controlled by section 80AB. In the case of IPCA Laboratories Ltd., the learned counsel argued that the principal argument of the assessee is regarding the determination of Book profits under section 115J and not on normal computation provisions of the Act. According to him then normal provisions are not to be considered, the reliance on the above case is misplaced and misconceived. He also argued that the assessee is not claiming any "notional allowances" under section 80HHC, but the, claim is in accordance with the letter and spirit of clause (iii) of the Explanation to section 115J. He contended that when on a legal construction of a section, the assessee is entitled to a particular deduction, the same cannot be denied to the assessee. He argued that it is a well settled law that if the interpretation of a fiscal statute is open to doubt, the construction most beneficial to the subject is to be adopted. To support his contention he placed his reliance on the Supreme Court decision in the case of CIT v. Shahzada Nand & Sons [1966] 60 ITR 392 (SC).

10. We have carefully considered the submissions made by the rival parties. We have also gone through the written submission filed by the learned counsel. The main point for consideration is the determination of book profits under the provisions of section 115J of the Act. The computation of total income for the assessment year under consideration resulted into a loss. Therefore, the Assessing Officer has not made any computation for deduction under section 80HHC. As a consequence, the Assessing Officer has also not allowed any deduction of Book profits attributable to Export under section 80HHC. According to the Assessing Officer, the deduction of book profits attributable to export under section 80HHC for the purpose of tax payable on book profit under section 115J is not allowable because the assessee has not been allowed any deduction under section 80HHC. The Assessing Officer has not taken into consideration the fact that deduction to be allowed under section 80HHC has nothing to do with the book profits to be determined under section 115J of the Act. The profits derived from export of goods or merchandise are to be determined as per the provisions of section 80HHC(3). However, under the provisions of section 80A(2) of the Act, the total amount of the deductions under Chapter VIA must not exceed the gross total income. The "total income" derived from the "gross total income" is a consequence of allowing the permissible deductions may become 'nil' but it cannot turn into a negative figure. Thus, the deduction is permitted only to the extent necessary to wipe out the income but not so as to turn it into a loss. It has been held by the various High Courts that where the gross total income is found to be a net loss, in the concerned year, no deduction under any of the sections 80C to 80U can allowed. We, therefore, fully agree with the department that deduction under section 80HHC is not allowable, where the income determined results into a loss. In the present case, the Assessing Officer has correctly disallowed the benefit of deduction under section 80HHC as the income computed resulted into a loss of Rs. 3,08,70,093. But the issue for our consideration is not allowability of deduction under section 80HHC but the determination of book profits under section 115J of the Act.

11. For the purpose of section 115J, the Explanation defines as to what is meant by the "Book Profit". "Book Profit" means the net profit as shown in the profit and loss account for the relevant previous year as prepared under sub-section (1A). Such book profits will be increased to such net profit by addition of the amounts mentioned in clauses (a) to (f) of the Explanation if these are debited to the profit and loss account. The figure so arrived at will be reduced by the amounts mentioned in clauses (i) to (iv) of the Explanation if they are credited to the profit and loss account. Clause (iii) of the Explanation reads as follows:

"the amounts [as arrived at after increasing the net profits by the amount referred to in clauses (a) to (f) and reducing the net profit by the amounts referred to in clauses (i) and (ii)] attributable to the business, the profits from which are eligible for deduction under section 80HHC or section 80HHD; so, however, that such amounts are computed in the manner specified in sub-section (3) or sub-section (3A) of section 80HHC or sub-section (3) of section 80HHD as the case may be"

The provisions of clause (iii) of the Explanation make it absolutely clear that the amounts which are attributable to a business, the profits of which are eligible for deduction under section 80HHC are deductible. However, these amounts are to be computed as per the provisions of sub-section (3) or sub-section (3A) of section 80HHC of the Act. Thus, the deduction to be made is directly linked with the eligible profits which are entitled for deduction under section 80HHC of the Act. The amounts to be deducted have no nexus with the eligibility of deduction under section 80HHC. If the assessee is carrying on the business of exports only and there is a profit out of export business, such profit would be eligible for deduction while computing the book profits for the purpose of section 115J of the Act. The only condition for the allowability of such amounts is that such profits must also be eligible for deduction under section 80HHC. In the present case, the book profit attributable to export is determined at Rs. 79,193. This profit is eligible for deduction under section 80HHC but deduction under section 80HHC has not been allowed because the income computed for the assessment year resulted into a loss. But this amount of Rs. 79,193 is attributable to the business, the profits from which are eligible for deduction under section 80HHC, therefore, this amount is deductible from the book profits which are to be determined under the provisions of section 115J of the Act as per the provisions of Explanation (iii). The assessee is not entitled for deduction under section 80HHC because the same is not permitted by the provisions of section 80A(2). But so far as section 115J is concerned, the law is without any ambiguity and it permits the deduction of the amount of profits attributable to export under section 80HHC of the Act.

12. The various Court cases relied upon by the learned departmental representative are not relevant to the issue under consideration. In the case of IPCA Laboratories Ltd., the Bombay High Court has laid down that disclaiming export benefits in favour of supporting manufacturers can be done only when there is a profit. In this case the assessee showed net loss from export goods. Under these circumstances, the Hon'ble High Court held that net result should be profits for purpose of claiming deduction under section 80HHC. Thus, the assessee was not allowed deduction under section 80HHC. In this case, the export profit was nil therefore, the question of allowing deduction under section 80HHC does not arise. We are unable to understand how this case is relevant to the issue under consideration. In the present case, we are dealing with the determination of book profits under section 115J of the Act and the main issue is that whether the assessee is entitled for deduction of the book profit attributable to export under section 80HHC when the assessee is denied deduction under section 80HHC because of the provisions of section 80A as the income computed for the assessment year under consideration was negative though the Book Profit attributable to export under section 80HHC was positive. Therefore, we do not find any relevance of this case to the facts of the present case.

13. The Bombay High Court decision in the case of Synco Industries Ltd. is also misplaced so far the issue under consideration is concerned. We have explained in the foregoing paragraphs that where the gross total income is found to be a net loss in the assessment year under consideration, no deduction would be allowable under any of the sections 80C to 80U. The Hon'ble High Court has laid down that the provisions of sections 80A and 80B are applicable to all sections in Chapter VIA and special deduction cannot be claimed if total income is Nil. This is not the issue under consideration. In the present case, we are dealing with the deductions to be allowed while computing the book profits under section 115J of the Act. The deduction under section 80HHC is not allowed because the assessee was having negative income but the facts remains that the deduction was allowable but not allowed because of the provisions of section 80A of the Act. The book profits attributable to export under section 80HHC was determined at Rs. 79,193. This profit was eligible or deduction under section 80HHC. Therefore, under the provisions of Explanation (iii) of section 115J, the eligible profits of Rs. 79,193 were deductible from the book profits while making the computation under section 115J of the Act. For the purpose of Explanation (iii) of section 115J, it is not the deduction under section 80HHC which is relevant but what is relevant is the eligible profits for deduction under section 80HHC. Therefore, this case is also not relevant for the issue under consideration.

14. Similarly, the Supreme Court decision in the case of Gogineni Tobacco Ltd. has not applicable to the facts of the present case as this case also deals with the question whether the benefit under section 80HHC of the Income-tax Act, 1961 can be claimed in the total income after deduction of unabsorbed loss and unabsorbed depreciation. This has nothing to do with the issue under consideration.

15. In the case of GTN Textiles Ltd., relied upon by the learned counsel, the assessee was engaged in the manufacture of goods most of which were exported outside India. Because of substantial amount of depreciation and investment allowance, the assessee did not have taxable income and therefore, the assessing authority made the assessment under section 115J of the Act. The assessee claimed deduction of export profit in the computation of book profit as provided under clause (iii) of the Explanation to section 115Jof the Act. The assessee claimed deduction in the manner provided under section 80HRC(3) of the Act by the following formula:

Export turnover

---------------- X Net profit credited in P&L Account

Total turnover

The assessing authority rejected the said computation and worked out the deduction by applying the formula:

                           Profit comput~d under the provisions of

                           the Income-tax Act, i.e., after setting off

Export turnover            depreciation and investment allowance of

---------------- X         current year and the unabsorbed portion

Total turnover             of it carried forward from earlier years

The Hon'ble 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 books of account and not as calculated under the Act. In our opinion, the present issue is squarely covered with the above decision of the Kerala High Court. Under the circumstances when there are eligible profits from the export business under section 80RRC, the deduction under Explanation (iii) of section 115J would automatically follow.

16. Chapter VIA is a complete code in the matter of deduction to be made in deriving "total income" from gross total income. Deductions have to be allowed in conformity with the detailed provisions contained in Chapter VIA and to the extent specified in respect of each section. The deductions are always allowable out of the taxable income. This is an incentive given to the taxpayer but such incentives can be given only when the assessee is having a positive income. Thus, the incentives cannot be given out of the losses and when the tax payable by the assessee is Nil. That is perhaps the intention of the Legislature to bring on statute the provisions of section 80A(2) of the Act, which put restriction on deductions to be allowed under Chapter VIA of the Act. As per the provisions of this section, the deductions may be permitted only to the extent necessary to wipe out the income but not so as to turn it into a loss. That is why in the present case, the deduction under section 80RRC is not allowable as the net income computed by the Assessing Officer resulted into a loss. But this does not mean the assessee was not having eligible profits from export business as determined under section 80HHC of the Act. As we have mentioned earlier the assessee was having eligible profits of Rs. 79,193. The eligible profits of the business are to be determined as per the provisions of section 80HHC(3) by taking into account the profits of the business pertaining to the assessment year under consideration as per the books of account maintained by the assessee and not as per taxable income computed by the Assessing Officer. Section 115J of the Act pertains to the deemed income of the assessee. This section was brought on the statute to levy tax on certain prosperous companies who were otherwise not paying the tax because of various deductions but were paying dividend. Therefore, restrictions were put on certain deductions. A procedure was laid down in Explanation (iii) of the said section for the determination of Book Profits. Certain deductions were allowed out of the Book profits so determined. The companies who were subject to relief under section 80HHC or section 80HHD were exempted from the provisions of section 115J. Therefore, the computation of Book profits has to be made strictly as per the provisions of Explanation. Explanation (iii) excludes profits which are eligible for deduction under section 80HHC. Such amounts are to be computed in the manner specified in sub-section (3) or sub-section (3A) of section 80HHC as the case may be. There is no ambiguity in these provisions and they are to be strictly construed. The provisions of sections 80HHC and 115J are entirely different. Section 80HHC pertains to deduction whereas section 115J is a charging section. As per section 80HHC, deductions are to be made out of the taxable income if any whereas as per section 115J income has to be determined for charging the tax. Therefore, if deduction is not allowed under sections 80HHC, it is not going to affect the computation under section 115J of the Act as the same has to be made as per the provisions of that section. In view of the discussions above, we do not find any infirmity in the findings of the learned CIT(A) and the same are upheld.

17. In the result, appeal is dismissed.

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