HIGH COURT OF MADRAS
Carborundum Universal Ltd.
Versus
Deputy Commissioner of Income-tax, Special Range VI, Chennai
TAX CASE (APPEAL) NO. 993 OF 2005
JUNE 4, 2012
JUDGMENT
Mrs. Chitra Venkataraman, J.
The assessee is on appeal against the order of the Income Tax Appellate Tribunal relating to the assessment year 1989-90, raising the following substantial questions of law:
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1. |
Whether on the facts and circumstances of the case the Tribunal is right in holding that deduction under Section 32AB has to be allowed from the profits for the purpose of determining the relief under Section 80HH and 80I? | |
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2. |
Whether on the facts and circumstances of the case the Tribunal ought not to have held that relief under Section 32AB relatable to Plant and Machinery installed in other units should not be deducted from the profits of the new industrial undertakings for the purpose of computing relief under Section 80HH and 80I? | |
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3. |
Whether on the facts and circumstances of the case, the Tribunal was right in holding that depreciation on guest house building has to be disallowed as per Section 37(4) of the Income Tax Act, 1961? |
2. As far as the third substantial question of law is concerned, learned counsel appearing for the appellant fairly submits before this Court that the said issue is covered against the assessee by reason of the decision of the Supreme Court reported in Britannia Industries Ltd. v. CIT [2005] 278 ITR 546. Hence, this Tax Case Appeal stands rejected as far as the third substantial question of law is concerned.
3. The first two substantial questions of law raise a common issue as to the computing of the relief under Section 80HH and 80I.
4. There is no dispute over the fact that the assessee company is eligible for deduction under Section 80HH and 80I as well as investment deposit allowance under Section 32AB of the income Tax Act. While computing the deduction under Sections 80HH and 80I, the Assessing Authority reduced the profits of the newly formed industrial undertakings by making deduction under Section 32AB and rejected the assessee’s contention that there could be no deduction under Section 32AB while computing the eligible profits and gains for the purpose of working out the deduction under Section 80HH and 80I of the Income Tax Act. The assessee further contended that the relief under Section 32AB in respect of machinery installed in the units have nothing to do with the eligible business falling for consideration under Section 80HH and 80I.
5. In considering the claim of the assessee, the Commissioner of Income Tax (Appeals) pointed out that the claim of the assessee for exclusion of investment deposit allowance from the gross total income of the new industrial undertaking is contrary to the decision of the Supreme Court reported in Distributors (Baroda) (P.) Ltd. v. Union of India [1985] 155 ITR 120. Aggrieved by this, the assessee went on appeal before the Tribunal, which confirmed the view of the authorities below. The Tribunal referred to the decision of this Court reported in CIT v. Sundaravel Match Industries (P.) Ltd. [2000] 245 ITR 605 and held that special deduction has to be computed in respect of the total income calculated under the provisions of the Act. Aggrieved by this, the assessee is on appeal before this Court.
6. Learned counsel appearing for the assessee pointed out that while there is no dispute as regards the computation of the gross total income of the assessee in accordance with the provisions of the Act, the deduction, to be considered under Chapter VI-C, particularly with reference to Section 80HH, has to be with reference to the profits and gains ‘derived’ from the industrial undertaking. Thus the deduction granted under Section 80HH to the extent of 20% has to be computed on the profits and gains derived from the industrial undertaking. In other words, the computation has to be confined to those profits and gains which have a direct nexus to the industrial activity of the industrial undertaking. He further pointed out that Section 32AB relief is granted on the book profits. However, in respect of the gross total income, for the purpose of considering the deduction, it has to follow the definition as per Section 80B(5). Once the gross total income is in accordance with the provisions of the Act, the deduction under the respective provision has to follow the phraseology used in the particular deduction Section. Thus by applying Section 80AB to Section 80HH, the profits and gains of the undertaking that has to be computed for the purpose of working out the deduction under Section 80HH are those that have a direct nexus to the income derived from an industrial undertaking. In this connection, learned counsel referred to the decision reported in Liberty India v. CIT [2009] 317 ITR 218 to contend that the connotation of the words “derived from” is narrower as compared to that of the words “attributable to” and the profits and gains derived from the industrial undertaking under Section 80HH for the purpose of granting the relief to the extent of 20% deduction must cover sources not beyond the first degree. Since the relief under Section 32AB is not falling under the first degree of source, the question of including Section 32AB as part of the profits and gains does not arise. Thus the inclusion of income as profits and gains of business must follow the terminology used under the particular provision. Thus, read in the context of the decision of the Apex Court reported in Liberty India (supra) as well as IPCA Laboratory Ltd. v. Dy. CIT [2004] 266 ITR 521/135 , he submitted that the Tribunal committed a serious error in rejecting the appeal. He further submitted that the relief under Section 32AB has nothing to do with the profits and gains derived from the industrial undertaking.
7. Per contra, learned Standing Counsel appearing for the Revenue supported the order of the Tribunal and submitted that in the computation of profits and gains of an industrial undertaking, for the purpose of granting relief under Section 80HH, the guiding factor is the provision given under Section 80AB of the Income Tax Act. Hence, no fault could be found in the order of the Tribunal.
8. Heard learned counsel appearing on either side and considered the materials placed on record.
9. In the decision reported in IPCA Laboratory Ltd. (supra), the Apex Court considered the provisions under Section 80AB on the issue relating to deduction under Section 80HHC. Pointing out that Section 80AB is given an overriding effect by the expression “notwithstanding anything contained in that Section”, the Apex Court held:
“Section 80AB is also in Chapter VI-A. It starts with the words “where any deduction is required to be made or allowed under any section of this Chapter”. This would include section 80HHC. Section 80AB further provides that “notwithstanding anything contained in that section”. Thus section 80AB has been given an overriding effect over all other sections in Chapter VI-A. Section 80HHC does not provide that its provisions are to prevail over section 80AB or over any other provision of the Act. Section 80HHC would thus be governed by section 80AB.”
10. In the decision reported in Liberty India (supra), the Apex Court pointed out that Section 80HH and 80IB restrict the relief of deduction to a specific percentage of the profits derived from such industrial undertaking after the specified date. Pointing out to the importance of the phrase “derived from” the industrial undertaking as against the profits and gains “attributable to” the industrial undertaking, the Apex Court further held that the connotation of the words “derived from” is narrower as compared to that of the words “attributable to”. The use of the expression “derived from” clearly point out the intention of the Parliament to cover sources not beyond the first degree. Thus on the question as to whether DEPB and duty drawback receipts would fall under the first degree source for the purpose of considering the same as part of the profits derived from the eligible business under Section 80IB, the Apex Court held that such profits belong to the category of ancillary profits of such undertakings. Extending the law laid down in the above-said decisions to the provision thus available under Section 80HH, we have no hesitation in accepting the case of the assessee.
11. A reading of Section 80HH shows that from the gross total income, deduction at a particular percentage is granted under the said Section to the eligible assessee from the profits and gains derived from that industrial undertaking. Thus, what is given as deduction is the profits and gains derived by the industrial undertaking, subject to the industrial undertaking satisfying other qualifications.
12. As already seen, the phrase “derived from”, being narrower and in contradistinction to the term “attributable to” income which do not have a direct nexus to the industrial undertaking, cannot be regarded as having been derived from the industrial undertaking.
13. In the context of the claim under Section 80HH, 80HHC and 80I, in the decision reported in CIT v. N.S.C. Shoes [2002] 258 ITR 749, this Court held that interest received on deposits cannot be regarded as income derived from industrial undertaking, since the direct and proximate link of the deposits is with the deposit in the Bank and not with the industrial undertaking.
14. It is no doubt true that while calculating the gross total income of the assessee, the same is done as per the definition under Section 80B(5). In the background of the scheme of deduction under Chapter VIA and the decisions of the Apex Court, particularly on Section 80AB, we have no hesitation in accepting the plea of the assessee that the relief under Section 32AB, relatable to plant and machinery installed in other units, could not be deducted from the profits of the new industrial undertaking for the purpose of computing the relief under Section 80HH and 80I.
15. Even though learned Standing Counsel appearing for the Revenue pointed out that the calculation has to follow the provisions of the Act, yet, as already pointed out, when what goes for deduction under Chapter VIA is the eligible profits and gains, it has to have relevance to the profits and gains derived from an industrial undertaking and it has to be essentially of those profits and gains, having direct nexus to the industrial undertaking, which alone are taken into a consideration for the purpose of working out the relief under Section 80HH. Thus, what is to be included for the purpose of working out the gross total income is not the same as what is to be computed as profits and gains derived by the eligible industrial undertaking.
16. On the clear-cut language of the Section thus looked at and guided by the decisions referred to above, we have no hesitation in holding that in computing the profits and gains derived from the industrial undertaking for the purpose of relief under Section 80HH and 80I, relief under Section 32AB ought not to have got into the reckoning. In the circumstances, we agree with the submission of the learned counsel appearing for the assessee and set aside the order of the Tribunal to hold that the deduction under Section 32AB ought not to have been considered in working out the profits and gains of the undertaking for the purpose of determining the deduction relief under Section 80HH and 80I. Hence, as far question No.1 and 2 are concerned, we allow the assessee’s Tax Case Appeal.
In the result, this Tax Case Appeal stands partly allowed. No costs.
Rectification
Mrs. Chitra Venkataraman, J. – We delivered the judgment in the above appeal on 4.6.2012. We held therein that in computing the profits and gains derived from the industrial undertaking for the purpose of grant of relief under Sections 80HH and 80I, relief under Section 32AB could not be included. After the delivery of the judgment, learned standing counsel appearing for the Revenue placed before us on 8.6.2012, the unreported decision of this Court rendered in T.C.(A) Nos. 800 of 2004 and 175 to 177 of 2005 by order dated 13.3.2012, wherein similar question came up for consideration before this Court on the includability of the allowance under Section 32AB for the purpose of working out the relief under Sections 80HH and 80I. Having regard to the same, we reposted the case for hearing the learned counsel and accordingly after hearing the learned counsel on either side today, we pass this supplemental order. A reading of the above referred unreported decision shows that this Court referred to the following Apex Court decisions:-
