Section 80-IA(7) provides for determination of amount of deduction not for deduction actually allowable

IN THE ITAT COCHIN BENCH

Hotel & Allied Trades (P.) Ltd.

versus

Deputy Commissioner of Income-tax, Circle-1(1)

IT APPEAL. NOS. 378 & 379 (coch.) of 2005, 552 (COCH.) OF 2006 & 598, 663-666 (Coch.) of 2007

[ASSESSMENT YEARS 1999-2000 to 2005-06]

OCTOBER 25, 2012

ORDER

B.R. Baskaran, Accountant Member

All these appeals filed by the assessee or the revenue, as the case may be, are directed against the orders passed by the Ld. CIT(A)-II, Kochi and they relate to the assessment years mentioned against the respective appeals in the caption stated above. All these appeals were heard together, since common issues are involved in them. Accordingly, these appeals are being disposed of by this common order, for the sake of convenience. However, we prefer to dispose of the appeals assessment year wise.

2. We shall take up the appeal filed by the assessee for the assessment year 1999- 2000. In this appeal, the assessee is challenging the validity of the re-opening of the assessment. It is noticed that the return of income filed by the assessee was initially processed u/s. 143(1) of the Act on 04-02-2002. Subsequently, the Assessing Officer reopened the assessment by issuing a notice u/s. 148 of the Act on 25-06-2002 after duly recording the reasons for the same. Thus, it is also noticed that the assessment has been re-opened within four years from the end of the assessment year and further the return filed by the assessee had been processed earlier only u/s. 143(1) of the Act. An identical question under identical set of facts was considered by the Hon’ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers Pvt. Ltd. 291 ITR 500 and the Hon’ble Apex Court upheld the reopening of the assessment in that case. Hence, by following the said decision of the Hon’ble Supreme Court, we do not find any infirmity in the decision of the Ld. CIT(A) in upholding the re-opening of the assessment.

3. The next issue in this year relates to the deduction claimed u/s. 80HHD of the Act. The facts borne out of the record are that the assessee was operating two hotel units, viz., Hotel named at Bangaram Island and another hotel named Coconut lagoon. There is no dispute that both the units are eligible for deduction u/s 80HHD of the Act. It appears that the assessee claimed deduction u/s. 80 HHD of the Act in respect of each of the unit separately. However, the Assessing Officer aggregated the results of both the units and allowed deduction u/s. 80HHD of the Act on the combined profit. The Ld. CIT(A) also upheld the method followed by the Assessing Officer. Hence, the assessee is in appeal before us.

4. Both the parties has agreed that the impugned issue has been decided against the assessee by the Hon’ble Jurisdictional High Court of Kerala in the assessee’s own case reported in (2007) 294 ITR 67. We have gone through the said decision and notice that the very same issue was considered by the Hon’ble Jurisdictional High Court in the assessee’s own case relating to the assessment years 1992-93 and 1993-94, wherein the High Court has held that deduction u/s. 80HHD has to be computed with reference to the “profits and gains of the business as a whole”. Thus the contention of the assessee that the deduction u/s 80HHD is required to be computed for each eligible business separately has already been rejected by the Jurisdictional High Court. We notice that the decision rendered by the Ld. CIT(A) is in accordance with the binding decision of the Hon’ble Jurisdictional High Court of Kerala and hence, we do not find any reason to interfere with his decision.

5. The next issue in this year relates to the deduction u/s. 80-IA of the Act. The hotel unit named “Coconut lagoon” was eligible for deduction u/s 80-IA of the Act during this year. The AO computed the profit from this unit, after making certain disallowances, at Rs.1,69,55,436/-. The Assessing Officer noticed that the Gross total income of the assessee after aggregation of income from all heads stood at Rs.1,28,45,976/-. Accordingly, the AO took the view that the deduction u/s 80-IA should be computed on the Gross total income of Rs.1.28 crores and not on Rs.1.69 crores, as the Gross total income was less than the actual profit from the above said unit. Accordingly, the AO computed the deduction u/s 80-IA at Rs.48,87,518/- as given below:-

The Ld CIT(A) also confirmed the order of the AO on this issue.

6. By adverting our attention to the provisions of sub sec.7 of sec. 80-IA (sub. Sec. 5 in new section 80-IA introduced with effect from 2000-2001 and the said sec. 80-IA(5) is made applicable to sec. 80IB also as per the sub sec. 13 of sec. 80IB), the learned counsel for the assessee contended that deduction u/s. 80-IA has to be computed on the profits of the eligible unit, by treating the same as the only source of income. He further submitted that sec. 80-IA/80IB is a self contained regulation and it has overriding effect over all other provisions of the Act. Hence the amount of deduction computed there under is eligible for deduction even if the Gross total income results in a lesser figure or loss, since sub section 5 of sec. 80-IA overrides any other provisions of the Act including sec. 80A(2) and sec. 80AB of the Act. Thus, according to the assessee, the amount of deduction computed u/s 80-IA is eligible for deduction even if there is no Gross Total income or the Gross Total income results in a minus figure. On the contrary, the Ld D.R strongly supported the order of Ld CIT(A) on this issue.

7. We have heard the rival contentions on this issue. The provisions of sec. 80A(2) and sec. 80AB and sub sec. 7 of sec. 80-IA are relevant here. Hence, we extract the relevant provisions for the sake of convenience.

80A(2) : The aggregate amount of the deductions under this chapter* shall not, in any case, exceed the gross total income of the assessee.

(* Chapter VI-A, which includes deductions specified in sec. 80C to 80VV, including deduction u/s 80-IA).

80AB:- Where any deduction is required to be made or allowed under any section included in this chapter under the heading “C – Deductions in respect of certain incomes“** in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income.

(** Deduction u/s 80-IA falls in this category)

80-IA(7):- Notwithstanding anything contained in any other provisions of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purpose of determining the quantum of deduction under sub-section (5) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year 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.

8. A careful reading of section 80-IA(7), referred supra, suggests that the said sub section overrides any other provisions of the Act only for the limited purpose of determining the quantum of deduction under sub sec. 5 of sec. 80-IA. However, it can be seen that the provisions of sec. 80AB overrides the provisions of sec. 80-IA, since the deduction u/s 80-IA falls in under the heading “C – Deductions in respect of certain income”. The legal position in this regard was explained by the Hon’ble Supreme Court in the case of IPCA laboratory Ltd v. DCIT (266 ITR 521) as under:-

“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 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 provisions of this Act. Section 80HHC would thus be governed by section 80AB.”

According to sec. 80AB, the amount of income of the nature specified in sec. 80-IA, which is included in the Gross Total Income, shall be deemed to be the amount of income of that nature derived or received by the assessee for the purpose of computing deduction u/s 80-IA of the Act, i.e., the amount of deduction u/s 80-IA shall be computed only with reference to the amount of income from eligible business, which is included in the “Gross Total Income”. This provision shall have application if the profits and gains of eligible business computed under sec. 80-IA get reduced while including the same in the Gross total income.

9. Accordingly, in our view, a combined reading of the provisions of sub sec. 7 of sec. 80-IA and sec. 80AB would suggest that

(a)  the “Profits and gains of an eligible business”, to which the provisions of sec. 80-IA(1) shall apply, shall be restricted to the amount of income of that nature that is included in the Gross total income and

(b)  the quantum of deduction shall be computed on such profit, as if such eligible business were the only source of income of the assessee.

The question whether the quantum of deduction so computed is fully eligible for deduction or not has to be determined by considering the provisions of sub sec. 2 of 80A, which provides that the aggregate amount of deductions under Chapter VIA shall not, in any case, exceed the gross total income. In our view, the words “in any case” have greater significance in this sub section. The words “Shall not”, by themselves indicate the mandatory nature of this section. The words “in any case” attached to the words “Shall not” would indicate that the statute intends to make double sure its intention that the aggregate amount of deductions should not exceed the gross total income. We may here mention that the determination of amount of deduction u/s 80-IA is one thing and the quantum of amount actually allowable is another thing. In our view; sub. Sec. 7 of 80-IA provides for determination of amount of deduction and sec. 80AB & sub. Sec. 2 of sec. 80A provide for the amount actually allowable while computing the total income. Hence we are unable to agree with the contentions of the assessee that the provisions of sec. 80-IA is code by itself to which the provisions of sec. 80A(2) and 80AB shall not apply.

10. In the instant case, it is seen that the AO has computed deduction u/s 80-IA on the amount of Gross total income as reduced by the deduction given u/s 80HHD of the Act. According to the discussions made in the preceding paragraphs, the computation of deduction u/s 80-IA made by the AO would be correct only if the Gross total income consisted of, only income of that nature which is eligible for deduction u/s 80-IA of the Act. Otherwise, the deduction u/s 80-IA is required to be computed with reference to the amount of income of that nature, which is included in the Gross total income. The aggregate amount of deductions under chapter VIA shall be restricted to the amount of Gross total income. In the instant case, the break up details of the Gross total income is not borne out of record. Hence, the issue of computation of deduction u/s 80-IA requires fresh examination in the light of discussions made supra. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to examine this issue afresh in the light of discussions made supra.

11. The next issue in the assessment year 1999-2000 relates to the computation of interest u/s. 234C of the Act on the tax payable u/s. 115JA of the Act. This issue is now decided by the Hon’ble Supreme Court in the case of CIT v. Rolta India Ltd., 330 ITR 470, in which it has been held that the assessee is liable to pay interest for short payment of advance tax even on the income computed u/s 115JB of the Act. Accordingly we uphold the order of the Ld. CIT(A) on this issue.

12. We shall now take up the appeal filed by the assessee for the assessment year 2000-2001. The assessee is assailing the decision of the Ld CIT(A) in confirming the computation of deduction made u/s 80HHD and sec. 80IB of the Act. We notice that the assessee has claimed deduction u/s 80IB of the Act in this year, where as in the immediately preceding year, it had claimed deduction u/s 80-IA of the Act for the very same source of income from hotel business. No explanation is available on record in respect of this shift from sec. 80-IA to sec. 80IB. Be that as it may, it is an admitted fact that the Gross total income returned by the assessee resulted in negative figure and the AO has also computed the Gross total income, after making certain disallowances and adjustments, at (-) Rs.2.15 crores. In view of the said loss, the AO denied the deduction claimed by the assessee u/s 80HHD as well as u/s 80IB of the Act. The said order of the AO was also confirmed by the Ld CIT(A).

13. We have already noticed that the provisions of sec. 80A(2) mandates that the aggregate amount of deductions under Chapter VI-A shall not, in any case, exceed the gross total income of the assessee. In view of the discussions made in the preceding paragraphs, we are of the view that the Ld CIT(A) was right in law upholding the denial of deduction u/s 80HHD and 80IB of the Act. Accordingly, we uphold his order.

14. We shall now take up the appeal filed by the assessee for the assessment year 2001-02. In this year also, the assessee has declared loss in its return of income. The Gross total income computed by the AO has also resulted in a loss of Rs.9,49,711/-. In view of the specific provisions of sec. 80A(2), in our view, the assessee is not eligible for any deduction under Chapter VI-A of the Act. Accordingly, we uphold the order of Ld CIT(A) in confirming the denial of deduction u/s 80HHD and 80IB of the Act. The assessee has raised one more issue in this year, i.e., the determination of loss to be carried forward to the succeeding year. In our view, the determination of amount of loss eligible for carry forward is required to be worked out afresh in accordance with our decision on various issues and hence it is consequential in nature. Accordingly this issue does not require any adjudication.

15. Now we shall take up the appeals filed by both the parties for the assessment year 2002-03. In this year, the AO completed the assessment u/s 143(3) r.w.s. 147 of the Act. It is seen that the return of income filed by the assessee was initially processed u/s 143(1) of the Act. Thereafter, the assessing officer issued notice u/s 154/155 of the Act in order to rectify certain mistakes. However, subsequently, the AO noticed escapement of income and hence reopened the assessment by issuing notice u/s 148 of the Act by recording the reasons. In the assessment order, the AO has specifically stated that the proceedings initiated u/s 154/155 gets merged with that of section 147/148 of the IT Act, 1961. Before the ld CIT(A), the assessee contended that, as per the Kelvinator India decision of Hon’ble Delhi High Court (256 ITR 1), which takes into consideration a numerous other courts decision, no reopening u/s 147 can be made after the due date of completing scrutiny assessment u/s 143(3) has been allowed to be lapsed by the AO. It was also contended that there should not be simultaneous action by the AO under sec. 154 and 147 by placing reliance on the decision of Hon’ble Gujarat High Court in the case reported in 245 ITR 775. The Ld CIT(A) was convinced with the said contentions and accordingly held that the reopening of assessment is void ab initio. Hence, the Ld CIT(A) did not adjudicate the grounds raised on merits. Aggrieved, the revenue has filed appeal before us. On an abundant caution, the assessee has also filed appeal on merits of the case, which were not adjudicated by the Ld CIT(A).

16. We have heard the parties and also perused the record. First of all, we notice that there is no simultaneous action u/s 154 and also u/s 147 of the Act, as contended by the assessee. We have already noticed that the AO has specifically stated in the assessment order that the proceedings initiated u/s 154/155 has got merged with the reassessment proceedings. Secondly, the return of filed by the assessee was processed u/s 143(1) and subsequently the AO has issued notice u/s 148 of the Act within four years from the end of the assessment year. Hence, as per the decision of the Hon’ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers Pvt. Ltd. 291 ITR 500, the reopening of assessment is perfectly in accordance with the law. In view of the above, we set aside the order of Ld CIT(A) on this legal issue. We have already noticed that the first appellate authority has not adjudicated the grounds raised by the assessee on merits. Hence, we feel it appropriate to set aside all matters to the file of Ld CIT(A) in order to enable him to adjudicate the grounds raised on merits and we order accordingly. Accordingly the appeals filed by both the parties are disposed of.

17. Now we shall take up the appeal filed by the revenue for the assessment year 2003-04. Following two issues are contested in this appeal.

(a)  Eligibility of deduction u/s 80HHD and 80IB of the Act.

(b)  Validity of decision of Ld CIT(A) in allowing deduction of carry forward depreciation while computing book profit u/s 115JB of the Act.

18. The Gross total income computed by the AO in this year, after making certain disallowances and adjustments, resulted into “NIL” figure. We have already held that the provisions of sec.80A(2) have mandatory application, according to which the aggregate amount of deductions under Chapter VI-A shall not, in any case, exceed the gross total income. Accordingly, we are of the view that the AO was right in law in denying deduction u/s 80HHD of the Act, which falls under Chapter VI-A of the Act. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore that of the AO.

19. The next issue in the appeal filed by the revenue for the assessment year 2003-04 relates to the deduction of carry forward depreciation while computing book profit u/s 115JB of the Act. The AO noticed that the assessee has deducted the carry forward depreciation amounting to Rs.73,54,058/-, which was computed under the Income tax Act, where as the clause (iii) of Explanation 1 to section 115JB provides for deduction as under:-

“(iii) the amount of loss brought forward or unabsorbed depreciation whichever is less as per books of account.

Explanation:- For the purposes of this clause,–

(a)  the loss shall not include depreciation;

(b)  the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation is nil”.

Accordingly the AO held that the assessee is not entitled to deduct the carry forward depreciation computed under the income tax provisions from the book profit computed u/s 115JB of the Act. The AO further noticed that the books of account did not show any brought forward loss. Since the brought forward loss as per books of account was NIL, the AO held that the assessee is not eligible for deduction of any amount as per clause (iii) of Explanation 1 to sec. 115JB of the Act. However, the Ld CIT(A) directed the AO to allow deduction of carry forward depreciation as claimed by the assessee with the observation that the AO has disallowed the claim without assigning any reason. We notice that the Ld CIT(A) did not give any reason or finding in support of his decision.

20. However, we find merit in the observations made by the AO. First of all, clause (iii) of Explanation 1 to sec. 115JB, which is extracted above mandates that the deduction of amount of loss brought forward or unabsorbed depreciation whichever is less should be as per books of account. Hence the assessee was wrong in law in claiming deduction of carry forward depreciation, which was determined under the income tax Act. Secondly, the AO has given a specific finding that there is no carry forward loss as per the books of account, in which case, the assessee is not eligible to claim any deduction under clause (iii) in view of specific provisions contained in clause (b) of the Explanation given under the above said clause (iii). Accordingly, we set aside the order of Ld CIT(A) on this issue and restore that of the AO.

21. Now we shall take up the appeal filed by the revenue for the assessment year 2004-05. Following two issues are contested in this appeal.

(a)  Eligibility of deduction u/s 80HHD

(b)  Validity of charging interest u/s 234C of the Act on the tax payable u/s 115JB of the Act.

22. The Gross total income computed by the AO in this year, after making certain disallowances and adjustments, resulted into “NIL” figure. We have already held that the provisions of sec.80A(2) have mandatory application, according to which the aggregate amount of deductions under Chapter VI-A shall not, in any case, exceed the gross total income. Accordingly, we are of the view that the AO was right in law in denying deduction u/s 80HHD of the Act, which falls under Chapter VI-A of the Act. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore that of the AO.

23. The issue regarding charging of interest u/s 234C on the tax payable u/s 115JB of the Act has since been settled by the Hon’ble Supreme Court in the case of Rolta India Limited (330 ITR 470), in which it has been held that the assessee is liable to pay interest for short payment of advance tax even on the income computed u/s 115JB of the Act. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore that of the AO.

24. Now we shall take up the appeal filed by the revenue for the assessment year 2005-06. Following two issues are contested in this appeal.

(a)  Eligibility of deduction u/s 80HHD of the Act.

(b)  Validity of decision of Ld CIT(A) in allowing deduction of carry forward depreciation while computing book profit u/s 115JB of the Act.

25. We notice that the AO has computed the Gross total income for this year at Rs.2,32,46,035/-, but did not discuss/consider the eligibility of deduction u/s 80HHD of the Act. It is also not known whether the assessee has claimed the said deduction in its return of income. The Ld CIT(A) directed the AO to allow the deduction u/s 80HHD of the Act. The revenue is aggrieved by the said decision of Ld CIT(A).

26. The matter of eligibility of deduction u/s 80HHD of the Act has since been settled by the Hon’ble High Court of Kerala in the assessee’s own case reported in 294 ITR 67. We have also discussed about this issue in the preceding paragraphs. Accordingly, we modify the order of Ld CIT(A) on this issue and direct the AO to consider the eligibility of deduction in accordance with law and also by following the binding decision of jurisdictional High Court in the assessee’s own case referred supra.

27. The next issue relates to the validity of allowing deduction of carry forward depreciation while computing book profit u/s 115JB of the Act. We notice that the AO has computed the income under normal provisions of the Act, since it exceeded the book profit. Hence the issue raised by the revenue is academic in nature. In any case, we have dealt with this issue while adjudicating the appeal of the revenue for the assessment year 2003-04 in the preceding paragraphs, which shall apply in this year also.

28. In the result, the appeal filed by the assessee for the assessment year 1999- 2000 is treated as partly allowed. The appeals of the assessee for the assessment years 2000-01 and 2001-02 are dismissed. The appeal of the assessee and the appeal of the revenue for the assessment year 2002-03 are treated as partly allowed. The appeals of the revenue for the assessment years 2003-04 to 2005-06 are allowed.