M/S Synco Industries Ltd
Vs. Assessing Officer, Income Tax, Mumbai & ANR [2008] INSC 451 (13 March 2008)
Ashok Bhan & J.M. Panchal
Civil Appeal No.4190-4191
of 2002 With Civil Appeal No.4192-4193 of 2002 J.M. Panchal, J.
1. These appeals are directed against Judgments dated July 23, 2001 rendered
by the Division Bench of the High Court of Judicature at Bombay in Income Tax
Appeal No. 591/2001 and 592/2002 whereby the opinion expressed by the Assessing
Officer and confirmed by Commissioner of Income Tax (Appeals) Mumbai as well as
the Income Tax Appellate Tribunal Mumbai Bench 'B', Mumbai that the gross total
income must be determined by setting off against the income, the business
losses of the earlier years, before allowing deduction under Chapter VI-A and if
the resultant income is ''Nil'', then the assessee cannot claim deduction under
Chapter VI-A of the Income Tax Act, 1948 ('The Act' for short), is upheld.
2. Since all the appeals raise common questions of law and fact, this Court
proposes to dispose them of by this common Judgment.
3. The facts emerging from the record of the case are as under:- The
appellant-assessee is a Company incorporated under the provisions of the Indian Companies Act,
1956. It is engaged in the business of oil and chemicals. It has a unit for
oil division at Sirohi District, Rajasthan. It has also a chemical division at
Jodhpur. The appellant had earned profit in the assessment year 1990-91 and
1991-92 in both the units. However, the appellant had suffered losses in the
oil division in earlier years. The appellant claimed deductions under Section
80HH and 80-I of the Act, claiming that each unit should be treated separately
and the loss suffered by the oil division in earlier years is not adjustable
against the profits of the chemical division while considering the question
whether deductions under Sections 80HH and 80-I were allowable. The Assessing
Officer noticed that the gross total income of the appellant before deductions
under Chapter VI-A was 'Nil'. Therefore, he concluded that the assessee was not
entitled to the benefit of deductions under Chapter VI-A. Feeling aggrieved the
appellant carried the matters in appeal before the Commissioner of Income Tax (Appeals)
V, Mumbai who confirmed the view of the Assessing Officer by dismissing the
same.
Therefore, the appellant preferred two appeals before Income Tax Appellate
Tribunal Mumbai Bench 'B', Mumbai. The Tribunal held that gross total income of
the appellant had got to be computed in accordance with the Act before allowing
deductions under any Section falling under Chapter VI-A and as the gross total
income of the appellant after setting off the business losses of the earlier
years, was 'Nil', the appellant was not entitled to any deductions either under
Section 80HH or 80-I of the Act. In that view of the matter the Tribunal
dismissed the appeals filed by the appellant.
Thereupon, the appellant invoked jurisdiction of the High Court under
Section 260-A of the Act by filing these appeals. The High Court has dismissed
the same by Judgment dated July 23, 2001 giving rise to the instant appeals.
4. This Court has heard the learned counsel for the parties at length and in
great detail. This Court has also considered the documents forming part of the
appeals.
5. The plea that the appellant had earned profits from the two divisions
during the assessment years in question and therefore losses suffered by the
oil division in earlier years could not have been adjusted against the profits
of the two divisions while considering the question of grant of deduction under
Sections 80-I of the Act, cannot be accepted.
6. In order to resolve the controversy raised by the appellant, it would be
advantageous to refer to the relevant provisions of the Act:- "Section
80A.
-
In computing the total income of an assessee, there shall be allowed
from his gross total income, in accordance with and subject to the provisions
of this Chapter; the deductions specified in Sections 80C to [80U].
-
The aggregate amount of the deductions under this Chapter shall not, in
any case, exceed the gross total income of the assessee.
-
[Where, in computing total income of
an association of persons or a body of individuals, any deduction is admissible
under Section 80G or Section 80GGA [or Section 80GGC] or Section 80HH or Section
80HHA or Section 80HHB or Section 80HHC or Section 80HHD or Section 80-I or
Section 80-IA [or Section 80-IB] [or Section 80- IC] [or Section 80-ID or
Section 80-IE] or Section 80J or Section 80JJ, no deduction under the same
section shall be made in computing the total income of a member or the
association of persons or body of individuals in relation to the share of such
member in the income of the association of persons or body of individuals.]
Section 80B. (5) "gross total income" means the total income computed in
accordance with the provisions of this Act, before making any deduction under
this Chapter.
Section 80-I (6) Notwithstanding anything contained in any other provision
of this Act, the profits and gains of an industrial undertaking or a ship or
the business of a hotel [or the business of repairs to ocean-going vessels or
other powered craft] to which the provisions of sub-section (1) apply shall,
for the purposes of determining the quantum of deduction under sub-section (1)
for the assessment year immediately succeeding the initial assessment year or
any subsequent assessment year, be computed as if such industrial undertaking
or ship or the business of the hotel [or the 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 an including the assessment year for
which the determination is to be made."
7. Section 80A, as originally inserted by the Finance Act, 1965 with effect
from 1.4.1969 dealt with a different topic altogether viz., deductions in
respect of life insurance premia, annuities, contributions and provident fund
etc. The present Section came on the statute book by way of substitution of
Chapter VI A by the Finance (No. 2) Act, 1967, w.e.f. 1.4.1968.
This Section has witnessed several consequential amendments from time to
time by way of insertions, substitutions or omissions.
Sub-Section (1) of Sections 80A lays down that while computing the total
income of an assessee, deductions specified in Sections 80C to 80U shall be
allowed from his gross total income.
This Section has introduced a new concept of 'gross total income' as
distinguished from the 'total income' i.e., the net or taxable income. Clause
(5) of Section 80B defines the expression 'gross total income' to mean the
total income computed in accordance with the provisions of the Act before
making any deductions under Chapter VI-A of the Act. It follows, therefore,
that deductions under Chapter VI-A can be given only if the gross total income
is positive and not negative.
8. If the gross total income of the assessee is determined as 'Nil' then
there is no question of any deduction being allowed under Chapter VI-A in
computing the total income. The Assessing Officer has to take into account the
provisions of Section 71 providing for set off of loss from one head against
income from another and Section 72 providing for carry forward and set off of
business losses. Section 32(2) makes provisions for carry forward and set off
of the unabsorbed depreciation of a particular year.
The effect of the above mentioned provisions is that while computing the
total income, the losses carried forward and depreciation have to be adjusted
and thereafter the Assessing Officer has to work out the gross total income of
the assessee.
Sub-Section (2) of Section 80A specifically enacts that the aggregate of deductions
under Chapter VI-A should not exceed the gross total income of the assessee. If
the gross total income is found to be a net loss on account of the adjustment
of losses of the earlier years or 'Nil', no deduction under this Chapter can be
allowed. As noticed earlier Clause (5) of Section 80B defines the expression
'gross total income' to mean the total income computed in accordance with the
provisions of the Act without making any deductions under Chapter VI-A. The
effect of Clause (5) of Section 80B of the Act is that gross total income will
be arrived at after making the computation as follows:- (i) making deductions
under the appropriate computation provisions;
(ii) including the incomes, if any, under Sections 60 to 64 in the total
income of the individual;
(iii) adjusting intra-head and/or inter-head losses; and (iv) setting off
brought forward unabsorbed losses and unabsorbed depreciation, etc.
9. In C.I.T. v. Kotagiri Industrial Co-op. Tea Factory (1997) 224 I.T.R. 604
(S.C.) the respondent was a co-operative society. It carried on business in
manufacture and sale of tea from bought tea leaves and the purchase and supply
of agricultural manure to members. It was also receiving income from dividend
from investments with other co-operative societies.
In the previous year relevant to the assessment year 1972-73, the assessee
had earned a total income of Rs. 85,150/-. The losses of the earlier year which
had been carried forward to the said assessment year were Rs. 1,82,744/-. The
assessee claimed a deduction of Rs. 53, 386/- under Section 80-P(2) from the
income of Rs. 85, 150/-. The I.T.O. first set off the losses of previous years
that had been carried forward against the income and since the losses were in
excess of the income, he held that no deduction was permissible u/s. 80-P. The
said view, was not accepted by the Appellate Authority. The decision of the
Appellate Authority was affirmed by the Income Tax Appellate Tribunal and High
Court.
While reversing the decision of the High Court, the Supreme Court has held
that in view of the express provision defining the expression ''gross total
income'' in Clause (5) of Section 80B, for the purpose of Chapter VI-A, the
gross total income must be determined by setting off, against the income, the
business losses of the earlier years as required by Section 72, before allowing
deduction u/s. 80-P. The contention raised on behalf of the appellant that the
deduction must first be allowed under Section 80-I and then only the gross
total income as computed under the provisions of the Act before allowing
deductions under Chapter VI- A should be worked out, cannot be accepted. As
noticed earlier Section 80A provides that the deductions shall be allowed out
of the gross total income, whereas Sub-Section (2) restricts the deductions of
the gross total income. It is, therefore, clear that the gross total income of
the assessee has got to be computed in accordance with the Act after adjusting
losses etc. and if the gross total income so determined is positive then the question
of allowing deductions under Chapter VI-A arises, but not otherwise.
10. This Court further notices that predominant majority of the High Courts
have taken the view that deductions under Chapter VI-A of the Act would be
available only if the computation of gross total income as per the provisions
of the Act after setting off carried forward loss and unabsorbed depreciation
of earlier years is not 'Nil'. In Commissioner of Income-Tax, Tamil Nadu- III,
Madras v. Madras Motors (P) Ltd. (1984) 150 ITR 150, after noticing the
definition of 'gross total income' the Madras High Court has held that the
intention of the Parliament, that the deduction under Chapter VI-A is
contemplated only after the total income is computed after setting off of the
unabsorbed depreciation as per Section 72 is evident and therefore Section 72
has to be applied before the total income of an assessee is determined i.e.,
before the deductions under Chapter VI-A are allowed. In Commissioner of
Income-Tax v. Midda Ram (1984) Vol.19 Taxman Pg. 23 again the Madras High Court
has taken the view that having regard to the provisions of Section 80A and 80B,
before making any deduction under Chapter VI-A the total income of the assessee
is to be computed in accordance with the provisions of the Act and such total
income will have to be taken as gross total income from which the deduction
under Chapter VI- A has to be allowed. In the said case the gross total income
so computed after set off of unabsorbed depreciation was 'Nil'. It was, therefore,
held that there was no positive figure from which the deduction under Chapter
VI-A could be allowed. In Commissioner of Income-Tax, West Bengal-II, Calcutta
v.
Bengal Assam Steamship Company Ltd. (1985) 155 ITR 26 the Calcutta High
Court has held that deduction under Section 80L and 80M of the Act are to be
allowed after setting off of losses under Section 71 and 72 because Section
80A(2) limits the aggregate of the deduction allowable to the amount of the
gross total income of the assessee which means that the deduction allowable
cannot result in a negative figure of loss. What is held in the said decision
is that where the gross total income is found to be a net loss there is no
question of any further deductions under Section 80L and 80M. In G.Atherton
& Co. v.
Commissioner of Income-Tax (1987) 165 ITR 527 it is held that the gross
total income and also the dividend income of the assessee had to be computed in
accordance with the provisions of the Act without making any deduction under
Section 80M contained in Chapter VI-A of the Act and as the gross total income
was computed to be a loss, no relief was available to the assessee under
Section 80M. In Commissioner of Income-Tax, Bombay City-III, Bombay v.
Mercantile Bank Ltd. (1988) 169 ITR 44 after examining the scheme envisaged by
Sub-Section 1 of Section 80A, Sub-Section 2 of Section 80A and Sub-Section 5 of
Section 80B the Calcutta High Court has held that the gross total income
defined by Section 80B(5) is the total income computed under the provisions of
the Act, but before making any deductions under Chapter VI-A and if the total
income computed under the Act before making the deductions under Chapter VI-A
is found to be a positive figure, can the deductions permissible under Chapter
VI-A be given. In Commissioner of Income-Tax v. Rambal (P.) Ltd.
(1988) 169 ITR 50 the Madras High Court has taken the view that the relief
under Section 80-I would not be available if net taxable income determined is
'Nil' after computation of gross total income as per the provisions of the Act,
after setting off carried forward loss and unabsorbed depreciation of earlier
years. In Orient Paper Mills Ltd. V. Commissioner of Income Tax (1986) 158
I.T.R. 695 the Calcutta High Court has taken the view that deductions under
Section 80-I cannot exceed gross total income and if gross total income found
is 'Nil' or a net loss the assessee is not entitled to deduction under Section
80-I of the Act. The principle of law enunciated in the said decision is that
Section 80A of the Act lays down certain general principles for the purpose of
deductions to be allowed in computing the total income under Section 80C to 80U
and such deductions are to be allowed from the gross total income of the
assessee in computing the total income. After noticing the definition of the
term gross total income as given in Clause 5 of Section 80B it is held in the
said decision that in the case of a company, total income computed is in
accordance with the provisions of the Act before making any deduction under
Chapter VI-A: what is laid down as principle is that Section 80A(2) limits the
aggregate of the deductions allowable to the amount of the gross total income
of the assessee and therefore deductions allowance cannot result in any
negative figure or loss and therefore where the gross total income is 'Nil' or
net loss in the relevant year the assessee will not be entitled to any relief
under Section 80-I. In Commissioner of Income Tax v.
Sundaravel Match Industries (P) Ltd. (2000) 245 ITR 605 the Madras High
Court has held that losses should be set off against the profits of the
industrial undertaking before granting the deduction under Section 80HH of the
Income-Tax Act, 1961, in view of the specific provisions found in Section 80AB.
In Commissioner of Income-Tax v. Nima Specific Family Trust (2001) 248 ITR 29
the Bombay High Court has taken the view that the legislature has introduced
Section 80A(2) and Section 80A(5) in order to put a ceiling on the claim for
deduction which indicates that if the deductions under Chapter VI-A are to be
claimed then the gross total income should be sufficient to absorb such
deductions i.e. if the gross total income is 'Nil' then deduction under Section
80HH and 80I cannot be claimed because it would mean that aggregate amount of
the deduction would exceed the gross total income of the assessee. In
Commissioner of Income-Tax v. Atam Ballabh Finance Pvt. Ltd. (2002) 258 ITR 485
after noticing the definition of gross total income as given under Section
80B(5) the Delhi High Court has held that while computing the income, all
provisions are required to be applied and only thereafter the deductions have
to be allowed. In IPCA Laboratory Ltd. V. Dy. Commissioner of Income-Tax,
Mumbai (2004) 12 SCC 742 the appellant was a holder of an Export House
certificate. It exported self-manufactured goods as well as goods manufactured
by supporting manufacturers. It had earned a profit from the export of
self-manufactured goods and had suffered loss from the export of trading goods.
In its return for assessment year 1996-97, it claimed deduction under Section
80HHC contending that profits from the two types of export should be considered
separately and the profit in respect of one could not be negated or set off
against the loss from the other. Dismissing the appeal the Supreme Court ruled
that although Section 80HHC has been incorporated with a view to provide
incentive to export houses, if there is a loss then no deduction would be
available under Section 80HHC(1) or (3). What is held is that in arriving at
the figure of positive profit both the profits and loss will have to be
considered and if the net figure is the positive profit then the assessee will
be entitled to a deduction but if the net figure is a loss then the assessee
will not be entitled to a deduction. In Commissioner of Income-Tax v. Lucky
Laboratories Ltd.
(2006) 284 ITR 435 (ALL) it is held that Section 80A (1) of the Act says
that in computing the total income of an assessee it shall be allowed from the
gross total income in accordance with and subject to the provisions of this
Section the deductions specified in Section 80C to 80U whereas sub-section 2 of
Section 80A says that the aggregate amount of the deductions under this Chapter
shall not be in any case exceed the gross total income of the assessee and
therefore the total deduction under Sections 80HH and 80I should not exceed the
gross total income of the assessee.
In Commissioner of Income Tax and Another v. R.P.G.
Telecoms Ltd. (2007) 292 ITR 355 the Karnataka High Court has held that
Section 80AB of the Income-Tax Act, 1961, would override all other Sections for
the purpose of deduction under Chapter VI-A of the Act and while calculating
the gross total income of the company, one has to adjust the losses from one priority
unit against the profits of the other priority unit and if the resultant gross
total income is 'Nil' then the assessee cannot claim deduction under Chapter
VI-A.
11. The above discussion makes it very evident that predominant majority of
the High Courts have taken the view that while working out gross total income
of the assessee the losses suffered have to be adjusted and if the gross total
income of the assessee is 'Nil' the assessee will not be entitled to deduction
under Chapter VI-A of the Act. It is well settled that where the predominant
majority of the High Courts have taken certain view on the interpretation of
certain provisions, the Supreme Court would lean in favour of the predominant
view. Therefore, this Court is of the opinion that the High Court was justified
in holding that gross total income must be determined, by setting off against
the income, the business losses of earlier years, before allowing deduction
under Chapter VI-A and if the resultant income is 'Nil', then the asessee cannot
claim deduction under Chapter VI-A.
12. The contention that under Section 80-I (6) the profits derived from one
industrial undertaking cannot be set off against loss suffered from another and
the profit is required to be computed as if profit making industrial
undertaking was the only source of income, has no merits. Section 80-I (1) lays
down that where the gross total income of the assessee includes any profits
derived from the priority undertaking/unit/division, then in computing the
total income of the assessee, a deduction from such profits of an amount equal
to 20% has to be made. Section 80-I (1) lays down the broad parameters
indicating circumstances under which an assessee would be entitled to claim
deduction. On the other hand Section 80-I (6) deals with determination of the
quantum of deduction. Section 80-I (6) lays down the manner in which the
quantum of deduction has to be worked out. After such computation of the
quantum of deduction, one has to go back to Section 80-I (1) which categorically
states that where the gross total income includes any profits and gains derived
from an industrial undertaking to which Section 80-I applies then there shall
be a deduction from such profits and gains of an amount equal to 20%. The words
"includes any profits'' used by the legislature in Section 80-I(1) are
very important which indicate that the gross total income of an assessee shall
include profits from a priority undertaking. While computing the quantum of
deduction under Section 80-I(6) the Assessing Officer, no doubt, has to treat
the profits derived from an industrial undertaking as the only source of income
in order to arrive at the deduction under Chapter VI-A. However, this Court
finds that the non-obstante clause appearing in Section 80-I(6) of the Act, is
applicable only to the quantum of deduction, whereas, the gross total income
under Section 80B(5) which is also referred to in Section 80I(1) is required to
be computed in the manner provided under the Act which presupposes that the
gross total income shall be arrived at after adjusting the losses of the other
division against the profits derived from an industrial undertaking. If the
interpretation as suggested by the appellant is accepted it would almost render
the provisions of Section 80A(2) of the Act nugatory and therefore the
interpretation canvassed on behalf of the appellant cannot be accepted. It is
true that under Section 80-I(6) for the purpose of calculating the deduction,
the loss sustained in one of the units, cannot be taken into account because
Sub-Section 6 contemplates that only the profits shall be taken into account as
if it was the only source of income. However, Section 80A(2) and Section 80B
(5) are declaratory in nature. They apply to all the Sections falling in
Chapter VI-A. They impose a ceiling on the total amount of deduction and
therefore the non-obstante clause in Section 80-I(6) cannot restrict the
operation of Sections 80A(2) and 80B(5) which operate in different spheres. As
observed earlier Section 80-I(6) deals with actual computation of deduction
whereas Section 80- I(1) deals with the treatment to be given to such
deductions in order to arrive at the total income of the assessee and therefore
while interpreting Section 80-I(1), which also refers to gross total income one
has to read the expression 'gross total income' as defined in Section 80B(5).
Therefore, this Court is of the opinion that the High Court was justified in
holding that the loss from the oil division was required to be adjusted before
determining the gross total income and as the gross total income was 'Nil' the
assessee was not entitled to claim deduction under Chapter VI-A which includes
Section 80-I also.
13. The proposition of law, emerging from the above discussion is that the
gross total income of the assessee has first got to be determined after
adjusting losses etc., and if the gross total income of the assessee is 'Nil'
the assessee would not be entitled to deductions under Chapter VI-A of the Act.
14. The appeals therefore filed by the appellant have no substance and
deserve to be dismissed. Accordingly, all the appeals fail and are dismissed.
There shall be no order as to cost.
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