Determination Of Quantum Of Deduction Under Section 80-I of Income Tax Act, 1961

ITAT, Mumbai Benches `H’, Mumbai (Third Member)
Gujarat Ambuja Cements Ltd. v. DCIT
ITA No. 6474/Mum/1997

12.1 A plain reading of section 80-I reveals that deduction is available to an assessee whose gross total income includes any profits and gains derived from: – (i) an industrial undertaking, which fulfills all the conditions laid down in that behalf in section 80-1(2); (ii) a ship, which fulfills all the conditions laid down in that behalf in section 80-1(3); (tii) the business of a hotel, which fulfills all the conditions laid down in that behalf in section 80-1(4), and (iv) the business of repairs to ocean-going vessels or other powered craft, which fulfills all the conditions laid down in that behalf in section 80-l(4A).

12.2 It is not disputed that the assessee owns an industrial undertaking, which fulfills all the conditions laid down in section 80-1(2) and is eligible for deduction in respect of the profits and gains derived from such industrial undertaking. Sub-section (6) of section 80-1 is of overriding nature and it lays down a special mode for computation of the profits and gains eligible for deduction under section 80-1. According to section 80-1(6), the profits and gains of an eligible assessee are:- for the purposes of determining the quantum of deduction under section 80-1(1) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year,to be computed as if — such eligible industrial undertaking or eligible ship or eligible business of the hotel or eligible business of repairs to ocean-going vessels or other powered craft were the only source of income of the assessee,- during the previous years relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made. In other words, for the purposes of determining the quantum of deduction under section 80-1, the taxable income of the industrial undertaking is to be ascertained as if such undertaking were an independent unit owned by the assessee and the assessee had no other source of income. Consequently, the unabsorbed losses, unabsorbed depreciation, etc. relating to the eligible industrial undertaking are to be taken into account in determining the quantum of deduction under section 80-1 even though these may actually have been set off against the profits of the assessee from other sources of income of the assessee.

12.3 In this case the assessee is a company and in the previous year relevant to assessment year 1988-89, the assessee had set up its new industrial undertaking in Kodinar for production of cement. From assessment years 1988-89 onwards the assessee has suffered losses on the production and sale of cement but had earned income by way of interest, dividend and capital gains. The losses of the industrial unit have been set off against the interest, dividend and capital gains. In the year under appeal the assessee has been found to be eligible for deduction under section 80-1. The dispute, as pointed out earlier, is limited to the manner of application of sub-section (6) of section 80-1. It may be reiterated that the learned Judicial Member has concurred with the view expressed by the Assessing Officer that for purposes of giving effect to provisions of section 80-1(6) the income derived from the industrial undertaking alone is to be considered as the only source of income of the assessee. The purpose of sub-section (6) of section 80-1 is to ensure that the assessee does not get a double deduction in respect of the income derived from the industrial undertaking. In earlier years the assessee had suffered losses in running the industrial undertaking. If the assessee did not have any other source of income, such losses would have been carried forward and set off against the income of any subsequent year(s). So however, the assessee had income, which was taxable in the respective assessment years. The assessee has set off losses against the taxable income and therefore derived the benefit in such years. In the year under appeal, the benefit derived by the assessee by setting off the losses of the industrial undertaking against the taxable income is adjusted against the benefit sought in respect of the income derived from the industrial undertaking.

12.4 It has got to be borne in mind that sub-section (6) limits the deduction to be computed under sub-section (1) of section 80-I.

12.5 Section 80-I refers to the profits and gains derived from an eligible industrial undertaking and permits a deduction to the extent of 25% of such profits and gains, i.e. the profits and gains derived from the industrial undertaking.

12.6 Sub-section (6) of section 80-I refers to the profits and gains of industrial undertaking to which provisions of sub-section (1) of section 80-I apply. The profits and gains to which provisions of sub-section (1) of section 80-I apply are profits and gains derived from the industrial undertaking. Profits and gains of the industrial undertaking is to be computed as if such an industrial undertaking is the only source of income of the assessee. When it is kept in mind that subsection (6) to section 80-I is applicable in the process of determination of the profits and gains of the industrial undertaking, it will be going out of context if the income of earlier years against which the losses of the industrial undertaking had been set off and benefit availed off would be considered as the profit of the industrial undertaking for sub-section (6) of section 80-I. The interpretation canvassed on behalf of the assessee would defeat the purpose of incorporation of sub-section (6) of section 80-I. Section 80-I was inserted by the Finance (No.2) Act, 1980. It would be relevant to refer to the Departmental Circular No.281 dated 22nd September 1980. In Para 19.4 it has been explained as under: –

“19.4 The new “tax holiday” scheme differs from the existing scheme in the following respects, namely: –

(i) The basis of computing the “tax holiday” profits has been changed from capital employed to a percentage of the taxable income derived from the new industrial unit, ship or approved hotel. In the case of companies, 25 per cent, of the profits derived from new industrial undertakings, etc., will be exempted from tax for a period of eight years and in the case of other taxable entities, 20 per cent, of such profits will be exempted for a like period. In the case of cooperative societies, however, the exemption will be allowed for a period of ten years instead of eight years.

(ii) The benefit of “tax holiday” under the new scheme would be admissible to all small-scale industrial undertakings even if they are engaged in the production of articles listed in the Eleventh Schedule to the Incomes-tax Act. In the case of other industrial undertakings, however, the deduction will be available, as at present, where the undertakings are engaged in the production of articles other than articles listed in the said Schedule.

(iii) In computing the quantum of “tax holiday” profits in all cases, taxable income derived from the new industrial units, etc., will be determined as if such unit were an independent unit owned by an assessee who does not have any other source of income. In the result, the losses, depreciation and investment allowance of earlier years in respect of the new industrial undertaking, ship or approved hotel will be taken into account in determining the quantum of deduction admissible under the new section 80-! even though they may actually have been set off against the profits of the assessee from other sources”.

12.10 Now I proceed to consider the second limb of the contention advanced on behalf of the assessee, which has been accepted by the learned Accountant Member. To recapitulate, the contention advanced on behalf of the assessee is that in the case of an assessee, who owns only one industrial undertaking, the Income from all sources has got to be treated as the income of the industrial undertaking. This contention, at the first sight, may appear to be attractive but in my humble view, it loses its luster when the assessee as a company and the industrial unit being one of its income earning apparatus is considered to exist independently. Under the Income Tax Act, 1961, tax is chargeable on the income of every person. Section 4 of the Act is the charging section, which reads as under: –

“4. (1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and [subject to the provisions (including provisions for the levy of additional income-tax) of, this Act] in respect of the total income of the previous year of every person Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly.

(2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act.Section 2(7) defines an “assessee” to mean a person by whom any tax or any other sum of money is payable under this Act and includes…………. Section 2(31) defines a “person” to include “(in) a company1. When the language of section 80-1 reproduced elsewhere in this order is also kept in mind, there does not remain any scope for doubt that an assessee and an industrial undertaking are recognised distinctly under the statute. Section 80-1 provides that where the gross total of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel. It is evident, the Legislature has been conscious of the distinction between an assessee and the industrial unit etc., i.e. its income earning apparatus. So once a distinction between an assessee as a company and its industrial unit set up by it is kept in mind, the confusion of treating the income of the assessee company from all its sources as the income of the industrial unit will not survive. Therefore, once it is accepted that the company has its own existence as an assessee and industrial unit is one of its profit earning apparatus, the view that the income of an assessee, who owns only one industrial unit, from all the sources has got to be treated as income of the industrial undertaking is bound to fail. If the contention on behalf of the assessee that the income of a company who owns only one industrial undertaking, say Unit No I, has got to be treated as the income of the industrial unit were to be accepted, then the income of any other unit, say Unit No. II, set up by the company at any point of time is bound to be treated as the income of the Unit No. l. This is not even the case of the assessee. The illusion of treating the income from all sources of the assessee company as income of the sole industrial unit will once again disappear once the income of one industrial unit is considered distinct from the income of another industrial unit. If the assessee has income from various industrial units, the income of each unit is different and separate and the entire income from both the units and from any other source belongs to the company, namely the assessee and not the industrial unit No. The position of law will not be different if the assessee owns only one unit and has also income from other sources of income. In such a case, the assessee will have income from industrial unit and the income from other sources of income will be treated as the income of the industrial unit but the income of the company.

12.11 Taking the totality of facts and circumstances of this case into consideration, I am of the considered view that a sum of Rs.4,35,52,0007- (aggregate of brought forward unabsorbed losses, depreciation and investment allowance relating to the eligible industrial undertaking and which was set off in assessment years 1988-89 to 1991-92 against income of assessee from interest, capital gain and dividend) is required to be reduced as per section 80-1(6) of the Income Tax Act, 1961 from current year’s profits derived by the assessee from its eligible industrial undertaking for the purpose of computing deduction under section 80-1(1) of the Act. I hold accordingly. Consequently, with due respects, I disagree with the view expressed by the learned Accountant Member.