IT: If there is a loss in either of two units of assessee then loss of one unit has to be adjusted against profit of other unit in computing deduction under section 80HHC
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[2013] 33 taxmann.com 242 (Rajasthan)
HIGH COURT OF RAJASTHAN
Madhav Marbles & Granites Ltd.
v.
Assistant Commissioner of Income-tax, Circle-2, Udaipur*
DR. VINEET KOTHARI AND V.K. MATHUR, JJ.
D.B.I.T. APPEAL NO. 147 OF 2007†
JANUARY 29, 2013
Section 80HHC of the Income-tax Act, 1961 - Deductions - Exporter [Computation of deduction] - Assessment year 2003-04 - Whether different units of same assessee-company engaged in manufacturing of different goods, viz., Granite slabs and tiles in Unit-I and Marble slabs and tiles in Unit-III does not make separate Units of same assessee-company as separate and different assessable units for purposes of Act or for that matter for purposes of section 80HHC - Held, yes - Whether, therefore, where assessee had profit from one unit and loss from other unit, loss of such unit had to be adjusted against profits of other unit for purpose of computing profit for computing of deduction under section 80HHC - Held, yes [Para 11][In favour of revenue]
FACTS
| ■ | The assessee, a manufacturer of granite and marbles slabs and tiles, during the relevant assessment year 2003-04, has three different units setup. Unit-I was engaged in manufacturing of Granite tiles, while the Unit-II manufactures Granite slabs and Unit-III was again a manufacturer of Marble slabs and tiles. The assessee claimed deduction under section 80HHC only on the profits on export turnover of Granite division (Unit-I), ignoring the loss on export turnover in respect of Marble division (Unit-III). | |
| ■ | The assessing authority held that the loss of Marble Division (Unit-III) had to be first adjusted against the profit of Unit-I engaged in manufacturing of Granite tiles and only net of the positive profit shall be the 'profits of business' as defined under section 80HHC(4C)(baa) and, accordingly, computed deduction under section 80HHC. | |
| ■ | The Commissioner (Appeals) allowed the claim of the assessee holding that loss in Unit-III was not required to be merged with the profit of Unit-I since two divisions were independent and the assessee maintained separate account. | |
| ■ | The Tribunal however set aside the order of the Commissioner (Appeals) and restored the order of the Assessing Officer. |
On appeal:
HELD
| ■ | The different units of the same assessee-company engaged in manufacturing of different goods, viz., Granite slabs and tiles in Unit-I and Marble slabs and tiles in Unit-III does not make separate Units of the same assessee-company as separate and different assessable units for the purposes of the Act or for that matter for the purposes of section 80HHC. The assessee, a body corporate, in the present case is one. Merely because for the purpose of its accounting or describing different units for the different goods manufactured and exports by it, the assessee has described the same as Unit-I, II and III in the present case, it does not mean that benefit of section 80HHC can be given for Unit-I separately on its profit earned by exports while the loss of Unit-III remains unadjusted against such profit of Unit-I. [Para 11] | |
| ■ | Therefore, the Tribunal was perfectly justified in allowing revenue's appeal. [Para 12] |
CASE REVIEW
IPCA Laboratory Ltd. v. Dy. CIT [2004] 266 ITR 521/135 Taxman 594 (SC) (para 11) followed.
Easter Leather Products (P.) Ltd. v. Dy. CIT [1999] 68 ITD 358 (Delhi)(para 12) not good law.
CASES REFERRED TO
IPCA Laboratory Ltd. v. Dy. CIT [2004] 266 ITR 521/135 Taxman 594 (SC) (para 1) and Easter Leather Products (P.) Ltd. v. Dy. CIT [1999] 68 ITD 358 (Delhi)(para 3).
Sanjay Nahar for the Appellant. K.K. Bissa for the Respondent.
JUDGMENT
Dr. Vineet Kothari, J. - The appellant-assessee has filed this appeal under Section 260A of the Income Tax Act, 1961 (for short, hereinafter referred to as 'Act') being aggrieved by the order of learned Income Tax Appellate Tribunal, Jodhpur Bench, Jodhpur dated 20.07.2007 for the Assessment Year 2003-04, whereby the learned ITAT following the decision of Hon'ble Supreme Court in the case of IPCA Laboratory Ltd. v. Dy. CIT [2004] 266 ITR 521/135 Taxman 594 (SC) held that the deduction under Section 80HHC (3C) can be allowed only, if there is a positive profit or income and if there is a loss in either of two separate Divisions of business then the loss of one Division has to be adjusted against the profit of the other division for the purposes of computing the profit for computing of deduction under Section 80HHC of the Act to the extent prescribed under sub-Section (1B) of Section 80HHC of the Act.
2. The assessee, a manufacturer of Granite and Marbles slabs and tiles, during the relevant assessment year 2003-04, has three different units setup. Unit-I is engaged in manufacturing of Granite tiles, while the Unit-II manufactures Granite slabs and Unit-III is again a manufacturer of Marble slabs and tiles. For the assessment year 2003-04 in question, the assessee claimed the income of Rs. 4,37,81,709/- exempt under Section 10B with respect of Unit-II. While in other two units, the assessee claimed deduction under Section 80HHC of Act of Rs. 2,56,46,746/- in the original return, which education claim was revised upwardly to Rs. 3,02,97,098/- during the course of assessment proceedings. The assessee claimed deduction in Revised Return only on the profits on export turnover of Granite division (Unit-I), ignoring the loss on export turnover in respect of Marble division (Unit-III).
3. The Assessing authority disallowed such revised claim of the assessee and held that the loss of Marble Division (Unit-III) has to be first adjusted against the profit of Unit-I engaged in manufacturing of Granite tiles and only net of the positive profit shall be the "profits of business" as defined under Section 80HHC (4C) (baa) of the Act; and therefore, the benefit of deduction under Section 80HHC of the Act, cannot be given to the extent of increased amount of Rs.3,02,97,098/-. The assessee took the matter further in the first appeal before the learned Commissioner of Income Tax (Appeals), who however, allowed the claim of the assessee following the decision of Bench of Income Tax Tribunal in the case of Easter Leather Products (P.) Ltd. v. Dy. CIT [1999] 68 ITD 358 (Delhi), in which a Bench of learned ITAT held that for the purpose of computation under Section 80HHC in respect of leather division engaged in export, loss in the engineering division is not required to be merged with the profit of leather division, as the two divisions are independent and maintain separate books; and therefore, they cannot be combined for the purposes of working out the deduction under Section 80HHC of the Act.
4. Being aggrieved by these findings of learned CIT (Appeals), the Revenue went up in the present case in a second appeal before the learned ITAT, who allowed the Revenue's appeal on this issue in terms of Hon'ble Supreme Court decision in the case of IPCA Laboratory Ltd. (supra) in the following terms:
".........The short controversy raised before us in this ground is about the setting off of loss in Unit III against the profit of Unit No.1 for the purpose of deduction u/s 80 HHC. The ld. A.R. has relied on the order passed by the Delhi Bench of the Tribunal in the case of Easter Leather Products (P.) Ltd. v. Dy. CIT [1999] 65 TTJ 603 (Del), as per which the loss in one division was not to be merged with the profits of the other division. The contention of the ld. A.R. is without any substance in as much as in that case loss from another unit not connected with the export unit was held to be not adjustable against the profit of export unit. However, in the present case, the loss running unit is not unconnected with exports. Moreover, this contention is no more a good law in view of the decision of the Hon'ble Supreme Court in the case of IPCA Laboratory Ltd. v. CIT 266 ITR 521 (SC) in which it was held that deduction u/s 80HHC (3) (c) can be allowed only if there is a positive profit income in trading goods and if there is a loss in either of the two, then that loss has to be taken into account for the purposes of computing the profits. The ld. A.R. unsuccessfully tried to distinguish its case by contending that clause (a) of sub-section (3) was applicable and not clause (c) of sec.80 HHC (3) as was dealt with by the Hon'ble Supreme Court. In our considered opinion, the Hon'ble Supreme Court has laid down a proposition for adjustment of loss in one unit against the profit of the other unit for allowing deduction by taking into consideration the provisions of sec. 80AB r.w.s. 80B (5). It does not make any difference as to whether the case falls in clause (a) of (c) of sec.80 HHC (3). We, therefore, hold that the ld. CIT (A) failed to take note of the binding judgment of the Hon'ble Supreme Court which was available at the time of passing of his impugned order and erred in accepting the assessee's claim for ignoring the loss in one unit and allowing deduction on the other unit which earned income. We, therefore, set aside the impugned order on this score."
5. Having lost before the ITAT, the assessee has approached this Court by way of present appeal under Section 260A of the Act. While admitting the present appeal, a coordinate bench of this Court framed the following substantial questions of law for consideration vide order dated 13.12.2007: -
| 1. | Whether the learned Tribunal was in error in following the judgment in IPCA Laboratory Ltd. v. CIT 266 ITR 521 (SC) as the basic facts of that case are entirely different from the facts of the present case inasmuch as in that case there was one Unit only, and the question was of adjustment of loss in export towards the profit of trading in manufacturing of the same Unit, and in the present case the two units being the Unit no.1 and 3 have nothing to do with each other except they are owned by one Company? | |
| 2. | Whether on the facts and in the circumstances of the case the turn over and profits/losses of the two Units being Unit No.1 and 3 could be clubbed together to determine the average profit/proportionate profits for the purpose of computing the deductions u/s. 80 HHC? |
6. Learned counsel for the appellant, Mr. Sanjay Nahar, except relying on the findings of learned CIT(A) and the decision of ITAT, Delhi Bench in the case of of Easter Leather Products (P.) Ltd. (supra) could not successfully urge anything contrary to the binding precedent of Hon'ble Supreme Court in the case of IPCA Laboratory Ltd. (supra).
7. On the other hand, Mr. K.K. Bissa, learned counsel for the Revenue submitted that the controversy is no more res-integra and in view of decision of Hon'ble Supreme Court in the case of IPCA Laboratory Ltd. (supra), the ITAT was justified in denying the benefit of deduction u/s 80 HHC without adjustment of loss of Unit-III of marble division against the profits of Unit-I, granite division, in the case of assessee since the owner of both the units is admittedly one limited company, namely, the assessee appellant before this Court.
8. We have heard learned counsels for the parties at some length and perused the impugned orders as well as the judgment cited at bar in the case ofIPCA Laboratory Ltd. (supra).
9. In our opinion the decision of Hon'ble Supreme Court relied upon by the learned ITAT squarely deals with controversy in hand involved in the present before us.
10. The Hon'ble Supreme Court in the case of IPCA Laboratory Ltd. (supra) while dealing with situation of almost similar nature held that profit for determining the benefit of deduction under Section 80 HHC has to be a positive profit income and not a loss or negative profit and, therefore, the losses and profits of respective units of the same assessee-company have to be adjusted and if the net result of the same is the positive profit income, then the deduction under Section 80HHC of the Act has to be computed on the basis of such positive profit income only and not otherwise. It would be appropriate to quote the relevant portion of the ratio of Hon'ble Supreme Court decision in the case of IPCA Laboratory Ltd. (supra) as under: -
"Undoubtedly s. 80-HHC has been incorporated with a view to providing incentive to export houses. Even though a liberal interpretation has to be given to such a provision in the interpretation has to be as per the wordings of this section. If the wordings of the section are clear then benefits, which are not available under the section, cannot be conferred by ignoring or misinterpreting words in the section.
Sub-section 3 (a) deals with the case where the export is only of self-manufactured goods. Sub-s. 3(b) deals with the case where the export is only of trading goods. Thus when the Legislature wanted to take exports from self-manufactured goods or trading goods separately, it has already so provided in sub-s. (3) (a) and 3 (b). It would not be denied that the word "profit" in s. 80-HHC (1) and ss. 80HHC (3) (a) and 3 (b) means a positive profit. In other words if there is a loss then no deduction would be available under s. 80-HHC (1) or 3 (a) or (3) (b). In arriving at the figure of positive profit, both the profits and the losses will have to be considered. If the net figure is a positive profit then the assessee will be entitled to a deduction. If the net figure is a loss then the assessee will not be entitled to a deduction. Sub-s. 3(c) deals with cases where the export is of both self-manufactured goods as well as trading goods. The opening part of sub-s. 3 (c) states "profits derived from such export shall". Then follows (i) and (ii). Between (i) and (ii) the word "and" appears. A plain reading of sub-s. (c) shows that "profits from such exports" has to be profits of exports of self-manufactured goods plus profits of exports of trading goods. The profit is to be calculated in the manner laid down in s. 3 (c) (i) and (ii). The opening words "profit derived from such exports" together with the word "and" clearly indicate that the profits have to be calculated by counting both the exports. It is clear from a reading of sub-s. (1) of s.80-HHC (3) that a decision can be permitted only if there is a positive profit in the exports of both self-manufactured goods as well as trading goods. If there is a loss in either of the two then that loss has to be taken into account for the purposes of computing profits.
Under s. 80-HHC(1) the deduction is to be given in computing the total income of the assessee. In computing the total income of the assessee both profits as well as losses will have to be taken into consideration.
Section 80-B (5) provides that "gross total income" means total income computed in accordance with the provisions of the income-tax Act.
Section 80-AB 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 s. 80-HHC. S. 80-AB further provides that "notwithstanding anything contained in that section." Thus s. 80-AB has been given an overriding effect over all other sections in Chapter VIA. Section 80-HHC does not provide that its provisions are to prevail over s.80-AB or even any other provision of the Act. Section 80-HHC would thus be governed by s.80-AB. Decisions of the Bombay High Court and the Kerala High Court to the contrary cannot be said to be the correct law. Section 80-AB makes it clear that the computation of income has to be in accordance with the provisions of the Act. If the income has to be computed in accordance with the provisions of the Act, then not only profits but also losses have to be taken into consideration.
Even under s.80-HHC (3) (c) (i) the profit is to be adjusted profit of business. The adjusted profit of the business means a profit as reduced by the profit derived from business of exports out of India of trading goods. Thus in calculating the profits under s. (3) (c) (i), one necessarily has to reduce by profits under s. (3) (c) (ii). As seen above the term "profit" means positive profit. Thus if there is loss then those losses in export of trading goods have to be adjusted. They cannot be ignored. A plain reading of s. 80-HHC makes it clear that in arriving at profits earned from export of both self-manufactured and trading goods, the profits and losses in both the trades have to be taken into consideration. If after such adjustments there is a positive profit the assessee would be entitled to deduction under s. 80-HHC(i). If there is a loss he will not be entitled to any deduction."
11. It is undisputed before us that the words "assessee being an Indian company or a person (other than a company) resident of India" is used in Section 80HHC of the Act. The different units of the same assessee company engaged in manufacturing of different goods viz. Granite slabs and tiles in Unit-I and Marble slabs and tiles in Unit-III in the present case before us, does not make separate Units of the same assessee company as separate and different assessable units for the purposes of Income-tax Act, 1961, or for that matter for the purposes of Section 80-HHC of the Act. The assessee, a body corporate, in the present case is one, namely, Madhav Marbles & Granites Ltd. Merely because for the purpose of its accounting politices or describing different units for the different goods manufactured and exports by it, the assessee has described the same as Unit, I, II and III in the present case, it does not mean that benefit of Section 80HHC can be given for Unit-I separately on its profit earned by exports while the loss of Unit-III remains unadjusted against such profit of Unit-I. The purpose of giving benefit of deduction under Section 80-HHC is to encourage the exports and profits derived by the assessee as such during the relevant year would form the basis for determining the extent of such deduction. The Hon'ble Supreme Court has put the said controversy of unit-wise profits beyond pale of doubt in the case of IPCA Laboratory Ltd. (supra) and while in that case exports of self manufactured goods and export by way of trading activity of goods manufactured by others, were clubbed together and loss of one was held to be adjustable against the profit of other Division, before deduction u/s 80 HHC could be computed in the net positive profit, in the present case the profit of Unit-I of Granite and Unit-III of Marble cannot stand on a different footing.
12. In our considered opinion, the controversy is, therefore, no more res-integra and the learned ITAT was perfectly justified in allowing Revenue's appeal in the present case following the Hon'ble Supreme Court decision in the case of IPCA Laboratory Ltd. (supra); and the Tribunal's Delhi Bench decision in the case of Easter Leather Products Pvt. Ltd. (supra), cannot be said to be good law in view of Apex Court decision. Therefore, we are of the view that the present appeal of the assessee has no force and is liable to be dismissed and the substantial questions of law, framed above, deserve to be answered against the appellant-assessee and in favour of Revenue. They are answered accordingly.
13. In view of above, the present appeal of the appellant-assessee is hereby dismissed. No costs.
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Regards,
Regards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
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