VODAFONE ESSAR GUJARAT LIMITED vs. ASSISTANT COMMISSIONER OF INCOME TAX

C/TAXAP/65/2009 CAV JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 65 of 2009 With R/TAX APPEAL NO. 1191 of 2010

FOR APPROVAL AND SIGNATURE:

HONOURABLE MR.JUSTICE J.B.PARDIWALA

and HONOURABLE MR. JUSTICE BHARGAV D. KARIA

========================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India or any order made thereunder ? ========================================================== VODAFONE ESSAR GUJARAT LIMITED Versus ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-8 ========================================================== Appearance: MR SN SOPARKAR SR COUNSEL WITH MR BANDISH SOPARKAR for the Appellant(s) No. 1 MR MANISH BHATT SR COUNSEL WITH MRS MAUNA M BHATT(174) for the Opponent(s) No. 1 ========================================================== CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA

Date : 03/03/2020 Page 1 of 30

C/TAXAP/65/2009 CAV JUDGMENT

CAV JUDGMENT (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) 1. The Tax Appeal No.65/2009 is arising from the impugned order passed by the Income  Tax Appellate  Tribunal  (“the Tribunal”   for   short)   dated   9th  January,   2009   in   the   ITA No.1369/Ahd/2008   for   the   assessment   year   2005­2006. The   Tax   Appeal   No.1191/2010   is   arising   from   the impugned   order   passed   by   the   Tribunal   dated   27th January,   2009   in   the   ITA   No./1361/Ahd/2009   for   the assessment year 2006­2007. 2. As the issues involved in both the captioned  tax appeals are interconnected, those were heard analogously and are being disposed of by this common judgment and order. 3. For the sake of convenience,  the Tax Appeal No.65/2009 is treated as the lead  appeal. 4. We  are called upon  to consider  the following  substantial question of law : “Whether on the facts and in the circumstances of the case, Income Tax Appellate Tribunal was justified in law in holding that the appellant was not entitled to deduction of Rs.191,59,84,008/­ under Section 80IA of the Income Tax Act,1961 as for the purpose of calculation of deduction under Section 80­IA read with Section 80IA(5) of the Act, provisions of Section 79 of the Act are not applicable?” 5. The  appellant­  Vodafone  Essar  Gujarat  Limited  (here­in­ after referred to as “the assessee”) is a company engaged in Page 2 of 30

C/TAXAP/65/2009 CAV JUDGMENT the   business   of   providing   cellular   telecommunication services   in   the   State   of   Gujarat.   The   assessee   was established   in   the   year   1997­1998.   During   the   previous year relevant to the assessment year 2001­2002, there was a change in the share holding of the assessee company, as a result of which the provisions of section 79 of the Income Tax   Act,   1961     (“the   Act,   1961”   for   short)     was   made applicable   and   the   accumulated   losses   from   the assessment years 1997­1998 to 2001­2002 lapsed. 5.1)     The   assessee   earned   profit   during   the   assessment year 2005­2006 and it being a telecommunication service provider was eligible for 100% deduction under section 80­ IA of the Act, 1961 in respect of the profits derived from the telecommunication services. The assessee therefore, made a claim for deduction under section 80­IA of the Act, 1961 for the first time for the assessment year 2005­2006. 5.2)     The   assessee   filed   its   return   of   income   for   the assessment year 2005­2006 declaring total income at Rs. Nil.   The   assessee   company   computed   the   gross   total income   after   reducing   its   carry   forward   losses   and unabsorbed depreciation after the assessment year 2001­ 2002. The assessee company did not claim the losses prior to   2001­2002   during   which   the   change   in   the   share holding took place  by applying the provision of section 79 of the Act, 1961. Therefore, in the return of income after computing the gross total income, in the aforesaid manner, the assessee claimed deduction under section 80­IA of the Act,1961. The assessee being eligible for deduction of 100% profit  from  the  business  of    telecommunication  services, Page 3 of 30

C/TAXAP/65/2009 CAV JUDGMENT the   whole   of   the   gross   total   income   was   claimed   as deductible under section 80­IA of the Act, 1961. 5.3)   In the return of income, the appellant assessee has shown total income of Rs.191,59,84,008/­ and the entire amount was claimed as deduction under section 80­IA(4)(ii) of the Act, 1961. It was noticed by the Assessing  Officer that the assessee has not brought forward the losses prior to the assessment year 2001­2002 as per the provisions of section  79  of the  Act,  1961.  According  to  the  Assessing Officer, the quantum of deduction available to the assessee under   section   80­IA(4)(ii)   of   the   Act,   1961   is   to   be computed as per the provisions of section 80­IA(5) of the Act,   1961   without   the   application   of   the   provision   of section 79 of the Act, 1961. 5.4)  The Assessing Officer therefore, issued a show cause notice   dated   22nd  December,   2007   calling   upon   the assessee  to  show  cause  as  to  why  the  deduction  under section   80­IA   claimed   by   the   assessee   should   not   be withdrawn   as   there   would   not   be   any   positive   profit available for deduction after considering the losses of the previous   years   to   be   set   off   against   the   income   of   the current   year   because   for   the   purpose   of   calculation   of deduction under section 80­IA read with section 80­IA(5), the  provisions  of section  79  of the  Act,  1961  cannot  be applied.   The   assessee   filed   its   reply   to   the   show   cause notice contending that there cannot be two computations of   the   gross   total   income,   i.e.   one   for   determining   the quantum  for taxable income and the other for claiming of deduction   under   Chapter   VI­A   of   the   Act,   1961.   It   was Page 4 of 30

C/TAXAP/65/2009 CAV JUDGMENT submitted that by invoking section 80­IA(5), the provisions of   section   79   cannot   be   ignored   for   computing   the deduction under section 80­IA of the Act, 1961. 5.5)  The  Assessing  Officer  rejected  the  contention  of the assessee   and   disallowed   the   claim   of   the   assessee   for deduction under section 80­IA of the Act, 1961 considering the deduction under section 80­IA at Rs. Nil determining the total income of Rs.191,71,47,056/­. 5.6)   Being aggrieved by the aforesaid order, the assessee preferred   appeal   before   the   CIT(Appeals).   CIT   (Appeals) confirmed the assessment order and dismissed the appeal. 5.7)   The assessee  therefore,  preferred  Appeal  before  the Tribunal. The Tribunal after considering the provisions of section 80­IA(5) of the Act, 1961 held that the unabsorbed losses   and  the    unabsorbed  depreciation   relating  to   the earlier years and relating to the eligible undertaking are to be   taken   into   account   in   determining   the   quantum   of deduction   under   section   80­IA(1)   of   the   Act,   1961   even though those might actually have been set off against the profits of the assessee from other sources. It was held that the provisions of section 80­IA(5) of the Act, 1961 starting with the non obstante clause would override the provisions of   the   Act,   1961   and   therefore,   for   the   purpose   of computation of deduction under section 80­IA of the Act, 1961, no effect to section 79 of the Act can be given. The Tribunal therefore, concurred with the findings arrived at by   the   Assessing   Officer   and   the   CIT(Appeals)   and dismissed the appeal filed by the assessee on this issue. Page 5 of 30

C/TAXAP/65/2009 CAV JUDGMENT The Tribunal relied on  the decision of a Special Bench of the Ahmedabad Tribunal in the case of ACIT v. Goldmines Shares and Finance Pvt. Ltd  reported in 2008­TIOL­220­ ITAT/AHM­(SB), decision of Supreme Court in case of IPCA Laboratories Ltd. v. DCIT reported in (2004)  266 ITR 521 (SC) and the decision of Mumbai Bench Tribunal in case of Additional CIT v. Ashok Alco Chem Limited reported in (2005) 96 ITD 160 (Mum) to come to the conclusion that losses will not lapse and the provisions of section 79 will not apply for  computation of deduction under section 80­ IA in view of provisions of section 80­IA(5) of the Act, 1961 which   starts   with   a   non   obstante   clause   and   is   wide enough to override the provisions of section 79 of the Act, 1961. : Submissions of the assessee : 6. Learned   Senior   Counsel   Mr.   S.N.   Soparkar   assisted   by learned   advocate   Mr.   B.S.   Soparkar   for   the   assessee submitted   that   the   Tribunal   has   confirmed   the   order passed by the Assessing Officer and CIT(Appeal) by wrongly applying the provisions of section 80­IA(5) of the Act, 1961 to interpret that provisions of section 79 are not applicable for computation  of deduction  under  section  80­IA of the Act,   1961.   It   was   submitted   that   the   Central   Board   of Direct Taxes by Circular No. 1/2016 has clarified the term “initial   assessment   year”   in   section   80­IA(5)   of   the   Act, 1961. He submitted that as per the circular no. 1/2016, it is clarified that once the initial assessment year has been opted by the assessee, the assessee would  be entitled  to claim   deduction   under   section   80­IA   for   10   consecutive Page 6 of 30

C/TAXAP/65/2009 CAV JUDGMENT years beginning from the year in respect of which he has exercised such option  subject to fulfillment  of conditions prescribed  in the section.  According  to Mr.  Soparkar,  as the assessee in the facts of the case had opted for the first time   to   claim   deduction   under   section   80­IA   in   the assessment year 2005­2006, the same would be  the initial assessment  year.  Accordingly,  it was  contended  that  the assessee would be entitled to claim deduction considering the   unabsorbed   losses   or   unabsorbed   depreciation available to the assessee at the beginning of the year. 6.1)  It was therefore, submitted that once the losses prior to   the   assessment   year   2001­2002   stood   lapsed   by operation of section 79 of the Act, 1961 on account of the change  in the shareholding  pattern  of the assessee,   the authorities  and the Tribunal  could  not  have  invoked  the provision of section 80IA(5) of the Act, 1961 for the purpose of calculation of set­off  of losses. The provisions of section 79 are not applicable. 6.2)   It was also sought to be contended  that as per the provisions of section 80­IA(1), the deduction is to be given from the gross total income as per the computation under section 80A and 80AB of the Act. Therefore, the gross total income has to be the same for the purpose of computation of deduction available under section 80­IA of the Act, 1961 and under section 80AB of the Act. 6.3) It was submitted that the computation of gross total income  under  the provisions  of the Act, 1961  cannot  be different   than   the   purpose   of   computation   of   deduction Page 7 of 30

C/TAXAP/65/2009 CAV JUDGMENT under section 80­IA of the Act. 6.4)     It   was   submitted   that   the   non   obstante   clause   of section   80­IA(5)   provides   for   considering   the   profit   and gains of eligible business on standalone basis. In the facts of this case, it is not in dispute that the assessee had only one   business   i.e   telecommunication   services   for   the assessment   year   under   consideration.   Therefore, applicability of section 80­IA(5) of the Act is only for the purpose of computation of profit and gains of the eligible business   of   telecommunication   services   to   which   the provisions   of   sub­section(1)   of   section   80­IA   of   the   Act applies. It was submitted that the provisions of section 80­ IA(5)   cannot   be   interpreted   to   oust   the   applicability   of provisions of section 79 of the Act, 1961. It was therefore, submitted  that  if the  provisions  of section  79  of the Act cannot be considered, then the provisions of section 72 of the  Act which  provides  for carry  forward  and  set off   of business   losses   would   also   not   be   required   to   be considered. 6.5)   It was submitted that the authorities below and the Tribunal have misinterpreted the provisions of sections 72, 79, 80­IA read with section 80­IA(5) of the Act, 1961. : Submissions of the Revenue : 7. On the other hand, the learned Senior Counsel Mr. M.R. Bhatt   with   learned   counsel   Mrs.   Mauna   Bhatt   for   the Revenue submitted that the reliance placed by the assessee on   the   circular   no.   1/2016   dated   15th  February,   2016 Page 8 of 30

C/TAXAP/65/2009 CAV JUDGMENT issued by the Central Board of Direct Taxes  is completely misplaced  because  the issue  in the present  case is with regard to the interpretation of the provisions of section 80­ IA read with sections 72 and 79 of the Act, 1961 and the issue does not relate to the choice of option of the initial year being exercised by the assessee. 7.1)  It was submitted that the option to choose the initial assessment year is provided under section 80­IA(2) of the Act, 1961 read with Rule 18 BBB of the Income Tax Rules, 1962 (“the Rules” for short) read with Form 10 CCB and more   particularly,   clauses   8   and   9   of   the   form.   It   was submitted that there is no factual foundation laid by the assessee by bringing  on record  the Form  No. 10 CCB to indicate that the year in question i.e  the assessment year 2005­2006 is the initial assessment year as per the say of the assessee. According to Mr. Bhatt the year in question is not   the   initial   assessment   year   but   is   the   third   year   of claim. It was therefore, submitted  that in the absence of any foundational fact emerging from the record, the say of the assessee  that  the assessment  year 2005­2006  is the initial assessment year cannot be accepted. 7.2)  On merits of the case, it was submitted that the non obstante clause of section 80­IA(5) would override the non obstante   clause   of   section   79   of   the   Act,   1961.   A   fine distinction   is   sought   to   be   drawn   by   pointing   out   that section  80­IA(5) falls under  Chapter  VIA whereas  section 79 falls under Chapter VI of the Act, 1961. The attention of the Court was drawn  to point out that Chapter VI pertains to the aggregation of income and set off losses whereas the Page 9 of 30

C/TAXAP/65/2009 CAV JUDGMENT Chapter   VI­A   pertains   to   the   deduction   to   be   made   in computing the total income. 7.3)  It was therefore, submitted that in order to compute the deduction available under section 80­IA(1) of the Act, 1961, the non obstante clause in section   80­IA(5) would override the non obstante clause contained in section 79 of the Act.   Having regard  to the difference  in the two non obstante clauses, it was submitted that as per section 80­ IA(5),    the  source  of   income   should  only  be  the  eligible business,  whereas  section  79  would  operate  to  calculate the aggregate  total income  as per Chapter­VI of the Act, 1961.  Therefore,  according  to Mr.  Bhatt,  there  would  be two different calculations of the profit and gains of eligible business   i.e   one   for   the   purpose   of   calculating   the aggregate   total   income   under   Chapter   VI   and   the   other calculation   would   be   for   the   purpose   of   computing deduction under section 80­IA of the Act read with Section 80­IA(5) of the Act, 1961. 7.4)     In   support   of   the   above   submissions,   the   learned Senior Counsel placed reliance on the following decisions : i)  Synco Industries Ltd. v. Assessing Officer, Income­ Tax, Mumbai reported in 2008 (299) ITR 444. ii)  IPCA Laboratories Limited v. Deputy Commr of I­t, Mumbai reported in 2004 (266) ITR 521. iii)   Commissioner of Income­tax v. Ganga Corporation Asbestos Pvt Ltd reported in 2014 (366) ITR 582 Page 10 of 30

C/TAXAP/65/2009 CAV JUDGMENT iv)      Commissioner   of   Income­tax,   Bangalore   v.   J.H. Gotla reported in 1985 (1560 ITR 323. 7.5) Relying on the aforesaid  decisions, it was submitted that the Tribunal was justified in law in holding that the assessee was not entitled to deduction under section 80­IA of   the   Act,   1961   as   for   the   purpose   of   calculation   of deduction under section 80­IA read with section 80­IA(5) of the Act, the provisions of section 79 of the Act, 1961 are not applicable. Learned  Senior Counsel in the alternative also argued that in the present case, it would be necessary to ascertain as to whether the loss claimed to have lapsed relates   only   to   the   business   loss   or   not.   It   was   also contended that the provisions of section 79 would not be applicable if it is found that there is unity of control and there  is no  change  in the  share  holding  of the  assessee company and it requires to be ascertained as to whether after   the   alleged   change   in   the   year   2001,   transferee shareholders had unity of control or not. It was therefore, alternatively   submitted   to   remit   the   matter   back   to   the Assessing   Officer   to   ascertain   such   facts.   In   support   of such   contention,   reliance   was   placed   on   the   following decisions : i)  Commissioner   of   Income­tax   v.   ACME   Paper   Ltd reported in 1996(218) ITR 475. ii)    Commissioner   of   Income­tax   v.   Shri   Subhulaxmi Mills Ltd. reported in 249 ITR 795 (SC) Page 11 of 30

C/TAXAP/65/2009 CAV JUDGMENT iii)  Commissioner   of   Income­tax   v.   Amarsinghji   Mills Ltd reported in 2006( 286) ITR 129 : Analysis : 8. In order to answer the substantial question of law arising as to whether for the purpose of calculation of deduction under section 80­IA read with section 80­IA(5)  of the Act, provisions of section 79 of the Act are applicable or not, it would be germane to refer to relevant provisions of the Act, 1961. • Section 2(45)  reads as under : “2(45) “―total income” means the total amount of income referred to in section 5, computed in the manner laid down in this Act;” • Section 66 reads as under : “CHAPTER VI AGGREGATION OF INCOME AND SET OFF OR CARRY FORWARD OF LOSS Aggregation of income Total income.— 66. In computing the total income of an assessee, there shall be included all income on which no income­tax is payable under Chapter VII.” • Section 72(1) reads as under : “Carry forward and set off of business losses.— 72.(1) Where for any assessment year, the net result of the computation   under   the   head Profits   and   gains   of ―

business or profession is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any Page 12 of 30

C/TAXAP/65/2009 CAV JUDGMENT head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or, where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and— (i) it shall be set off against the profits and gains, if any, of any   business   or   profession   carried   on   by   him   and assessable for that assessment year; (ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on:]” • Section 79 reads as under : “79.Carry   forward   and   set   off   of   losses   in   the   case   of certain   companies.—Notwithstanding   anything   contained in this Chapter, where a change in shareholding has taken place in a previous year in the case of a company, not being   a   company   in   which   the   public   are   substantially interested,   no   loss   incurred   in   any   year   prior   to   the previous year shall be carried forward and set off against the income of the previous year unless— (a) on the last day of the previous year the shares of the company carrying not less than fifty­one per cent of the voting   power   were   beneficially   held   by   persons   who beneficially held shares of the company carrying not less than fifty­one per cent of the voting power on the last day of the year or years in which the loss was incurred: Provided that nothing contained in this section shall apply to a case where a change in the said voting power takes place in a previous year consequent upon the death of a shareholder or on account of transfer of shares by way of gift to any relative of the shareholder making such gift: Provided further  that nothing contained in this section shall apply to any change in the shareholding of an Indian company which is a subsidiary of a foreign company as a result of amalgamation or demerger of a foreign company subject to the condition that fifty­one per cent shareholders of   the   amalgamating   or   demerged   foreign   company Page 13 of 30

C/TAXAP/65/2009 CAV JUDGMENT continue to be the shareholders of the amalgamated or the resulting foreign company.” • Section 80A reads as under : “Chapter VIA DEDUCTION TO BE MADE IN COMPUTING TOTAL INCOME A­General 80A.   Deductions   to   be   made   in   computing   total income.— (1) 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 section 80C to [80U]. (2)The   aggregate   amount   of   the   deductions   under   this Chapter   shall   not,   in   any   case,   exceed   the   gross   total income of the assessee. (3) Where, in computing the 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 80­I or section 80­IA [or section 80­IB] [or section 80­IC] [or section 80­ID or section 80­IE] [ or section 80J] [ or section 80JJ], no deduction under the same section shall be made in   computing   the   total   income   of   a   member   of   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 80AB reads as under : “[80AB.  Deductions   to   be   made   with   reference   to   the income   included   in   the   gross   total   income.  Where   any deduction is required to be made or allowed under any section 3*** 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 Page 14 of 30

C/TAXAP/65/2009 CAV JUDGMENT 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.]” • Section 80B(5) reads as under : “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 80­IA(1) (2) and (5)  reads as under : “80­IA(1)   Where   the   gross   total   income   of   an   assessee includes any profits and gains derived by an undertaking or   an   enterprise   from   any   business   referred   to   in   sub­ section(4) (such business being hereinafter referred to as the   eligible   business),     there   shall,   be   allowed,   in computing the total income of the  assessee, a deduction of an amount equal to hundred percent of the profits and gains   derived   from   such   business   for   ten   consecutive assessment years. (2)   The deduction specified in sub­section(1) may, at the option   of   the   assessee,   be   claimed   by   him   for   any   ten consecutive assessment years out of fifteen years beginning from the year in which the undertaking or the enterprise develops and begins to operate any infrastructure facility or starts providing telecommunication service or develops an industrial park (or develops) a special economic zone referred to in clause (iii) of sub­section (4) or generates power or commences transmission or distribution of power or undertakes substantial renovation and modernisation of the existing transmission or distribution lines. xxx (5)  Notwithstanding   anything   contained   in   any   other provision of this Act, the profits and gains of an eligible Page 15 of 30

C/TAXAP/65/2009 CAV JUDGMENT business to which the provisions of sub­section (1) apply shall,   for   the   purposes   of   determining   the   quantum   of deduction under that sub­section 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.” 9. Upon analysis of the above provisions, it appears that i)  The assessee is required to compute total income from which carry forward and set off of business loss is granted under section 72 of the Act, 1961 ii)   Section   79   starts   with   a   non   obstante   clause “Notwithstanding   anything   contained   in   this   Chapter” where   a   change   in   the   shareholding   takes   place   in   a previous   year   in   the   case   of   a   company   not   being   a company in which the public are substantially interested, no loss incurred in any year prior to the previous year shall be carried  forward  and  set off against  the income  of the previous year. In other words the company shall not carry forward or set off the business losses against the income of the   previous   year   where   there   is   a   change   in   the shareholding   of   the   company   subject   to   the   conditions prescribed in clause (a) of section 79 of the Act, 1961. iii)   Section 66 which falls under Chapter­VI and Section 80­A   which   falls   under   Chapter   VIA   pertain   to   the computation of 'total income' of the assessee. Section  66 provides that in computing the total income of an assessee, Page 16 of 30

C/TAXAP/65/2009 CAV JUDGMENT there shall be included all income on which no income tax is payable under Chapter­VII. Chapter ­VI also provides for set­off and carry forward of losses and the mechanism for claim of set­off of losses. Whereas Chapter VIA provides for the   deduction   to   be   made   in   computing   total   income. Section 80A provides that in computing the total income of an assessee, there shall be deduction specified in section 80C to 80U from the gross total income, in accordance with and subject to the provisions of Chapter VIA. iv) As per Section 80B(5) of the Act, 1961, the 'Gross total income' means the 'total income' computed in accordance with the provisions of the Act before making any deduction under Chapter VIA meaning  thereby  that the assessee is required   to   calculate   the   total   income   computed   in accordance with the provisions of the Act, 1961 to arrive at the gross  total  income  prior  to deduction  under  Chapter VIA. v) Section 80­IA of the Act, 1961 which is inserted by the Finance   Act,   1999   with   effect   from   1st  April,   2000   and substituted by Finance Act, 2001 with effect from 1st April, 2002  provides  that  where  the 'Gross  total  income'  of an assessee   includes   any   profit   and   gains   derived   by   an undertaking or an enterprise from any business referred to in   sub­section(4),   there   shall,   in   accordance   with   and subject  to the  provisions  of section  80­IA, be  allowed  in computing the total income of the assessee, a deduction of an amount equal to 100% of profit and gains derived from such business for 10 consecutive assessment years. Sub­ section(2)   of   Section   80­IA   provides   option   to   select   10 Page 17 of 30

C/TAXAP/65/2009 CAV JUDGMENT consecutive years out of 15 years beginning from the year in which the undertaking  or the enterprise develops  and begins   to   operate   any   infrastructure   facility   or   starts providing telecommunication services etc. vi) In the case on hand,  the assessment year 2005­2006 was opted as the first year in the block of 10 consecutive assessment years for claiming deduction under section 80­ IA (1) of the Act 1961. This fact of the option exercised by the   assessee   is   not   disputed   by   the   Assessing   Officer. Therefore,   the   assessment   year   2005­2006   is   initial assessment   year   and   circular   no.   1/2016   would   be applicable to the facts of the case. vii)    Section  80­IA(5)  of the  Act,  1962  stipulates  that  in order  to compute  the  quantum  of deduction  under  sub­ section(1)   of   section   80­IA,   the   profit   and   gains   of   the eligible   business   shall   be   computed   as   if   such   eligible business were the only source of income  of the assessee. It is also stipulated that for this purpose the other provisions of the Act are to be ignored meaning thereby, the profit and gain   of   the   eligible   business   of   the   assessee   is   to   be computed  on  standalone  basis  only.  If the  assessee  has more   than   one   business   and   one   of   such   is   eligible business  for the purpose  of deduction  under section  80­ IA(1) of the Act, 1961, then the profit and gains of such eligible business is required to be computed as if no other business of assessee is in existence. To illustrate, if loss of eligible business is set off against the business income of other  business  which  is not  eligible  for deduction  under section  80­IA  of the  Act,  1961,  then  such  loss  which  is Page 18 of 30

C/TAXAP/65/2009 CAV JUDGMENT already   set­off   is   to   be   considered   for   the   purpose   of computation of quantum of deduction under section 80­IA of the Act from the profit and gains of eligible business and such loss would be deducted from the profit and gains at the  time  of computation  of quantum  of deduction  under section 80­IA(1) of the Act, 1961. However, in the facts of present case, the profit of the assessee for the year under consideration   is   only   from   the   eligible   business   of   the assessee and therefore, the profit and gains of the business for the purpose of determining the quantum of deduction under sub­section (1) of section 80­IA of the Act, 1961 is to be computed applying the provisions of the Act, 1961. 10. In order to apply the provisions of the Act, 1961, first 'gross total income' is to be computed. In order to compute 'gross total income' for the year under consideration, it is to be verified whether the assessee is entitled to any carry forward  or set off of the business  losses  of the previous year or not which is available at the beginning of the year. For the purpose  of computing  'gross total income' in the facts of the case, it is not in dispute that after the carry forward loss is set off, there was positive income prior to deduction under Chapter VI A of the Act, 1961. 11. The submission made on behalf of the Revenue that only  section  72  of  the  Act  should  be  considered  for  the purpose  of  computation  of  quantum  of  deduction  under section   80­IA   without   giving   effect   to   the   provisions   of section 79 of the Act, is contrary to the Scheme of the Act inasmuch  as  it is not  the  intention  of the  legislature  to deny legitimate deduction available to the assessee in the Page 19 of 30

C/TAXAP/65/2009 CAV JUDGMENT manner  in which  the authorities  have  tried  to apply  the provisions of section 80­IA(5) of the Act. 12. The   plain   reading   of   section   80­IA(5)   of   the   Act indicates that it nowhere provides that for the purpose of computation of quantum of deduction under sub­section(1) of section 80­IA, the losses which have lapsed by operation of section 79 of the Act has to be ignored and thereafter the provisions   of   section   72   has   to   be   applied.   If   such interpretation   is   accepted,   the   carry   forward   of   losses which otherwise is not available to the assessee to be set off, cannot be considered for the purpose of computation of quantum of deduction under sub­section(1) of section 80­ IA   of   the     Act,   1961   when   there   is   only   one   eligible business from which the profit and gain is derived by the assessee for the year under consideration. 13. Reliance placed by the learned Senor Counsel for the Revenue in case of  Synco Industries Ltd.(supra) is of no assistance    as  in the  said  decision,  the  Apex  Court  has held that as the gross total income of assessee was Nil, the assessee was not entitled to deduction under Chapter VI­A which   includes   section   80­I.   The   issue   of   interplay   of sections 72 and 79 of  Chapter­VI was not before the Apex Court. The Apex Court has held as under :

“10. This Court further notices that predominant majority of the High Courts have taken the view that deductions under Chapter VI­A 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 Income­Tax, Tamil Nadu­ III, Madras v. Page 20 of 30

C/TAXAP/65/2009 CAV JUDGMENT 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 VI­A 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 deduc­ tions under Chapter VI­A are allowed. In Commissioner of Income­Tax 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 VI­A 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 VI­A could be allowed. In Commissioner of Income­Tax,   West   Bengal­II,   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 Income­Tax (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 VI­A 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 Income­Tax, Bombay City­III, Bombay v. Mercantile Bank Ltd.   (1988)   169   ITR   44   after   examining   the   scheme envisaged by Sub­Section 1 of Section 80A, Sub­Section 2 of   Section   80A   and   Sub­Section   5   of   Section   80B   the Page 21 of 30

C/TAXAP/65/2009 CAV JUDGMENT 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   VI­A  and  if  the  total   income computed   under   the   Act   before   making   the   deductions under Chapter VI­A is found to be a positive figure, can the deductions permissible under Chapter VI­A be given.  In Commissioner   of   Income­Tax  v.  Rambal   (P.)   Ltd.  (1988) 169 ITR 50 the Madras High Court has taken the view that the relief under Section 80­I 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 80­I 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 80­I 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 VI­A: 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   80­I.   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   Income­Tax   v.   Nima Specific Family Trust (2001) 248 ITR 29 the Bombay High Page 22 of 30

C/TAXAP/65/2009 CAV JUDGMENT 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   VI­A   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 Income­Tax 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 IPC

A Laboratory   Ltd.   V.   Dy.   Commissioner   of   Income­Tax, Mumbai (2004) 12 SCC 742 the appellant was a holder of an Export House certificate. It exported self­manufactured goods   as   well   as   goods   manufactured   by   supporting manufacturers. It had earned a profit from the export of self­manufactured goods and had suffered loss from the export of trading goods. In its return for assessment year 1996­97,   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 80H­ HC(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   Income­Tax   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 provi­ sions of this Section the deductions specified in  Section 80C to 80U whereas sub­section 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 Page 23 of 30

C/TAXAP/65/2009 CAV JUDGMENT 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   Income­Tax   Act,   1961,   would   override   all   other Sections for the purpose of deduction under Chapter VI­A 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 VI­A. 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 VI­A 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 VI­A and if the resultant income is 'Nil', then the asessee cannot claim deduction under Chapter VI­A.

C/TAXAP/65/2009 CAV JUDGMENT Revenue. 15. The decision of the Apex Court in the case of  IPCA Laboratories Ltd. (supra) reiterate that after adjustment if there is a positive profit, the assessee would be entitled to deduction under section 80HHC(i) and if there is loss, the assessee would not be entitled to any deduction. The Apex Court was not considering as to how the total income is to be  computed  to  arrive  at  the  gross  total  income  for  the purpose   of   deduction   under   section   80IA(1)   of   the   Act, 1961. 16. In   the   case   of    Amarsinghji   Mills  Ltd(supra),   the question   before   this   Court   was   whether   new   business carried out by the assessee was same as that of the earlier years and  whether the assessee would be entitled to carry forward of loss or not. This Court  held as under : “11. After stating thus, it is laid down that for the purpose of determining whether the business is the same a fairly adequate   test   would   be   whether   there   was   inter­ connection, interlacing, inter ­dependence and unity by the existence   of   common   management,   common   business organisation, common administration, common fund and a common place of business. In the facts of the case before the   Apex   Court   the   assessee   was   originally   importing certain articles from abroad which business came to be dis­continued and the assessee started exporting articles manufactured in India to different foreign countries. The Apex Court held that the fact that the procedure involved in the two activities was entirely different was not by itself sufficient to establish that the business was not the same. That   there   was   a   common   control   and   common management of the same Board of Directors carrying on both the activities in two different years. 12. Applying the tests to the facts found by the Tribunal, it Page 25 of 30

C/TAXAP/65/2009 CAV JUDGMENT can   be   seen   that   the   Tribunal   has   recorded   that   the assessee had common management and common control of business.   That   there   was   no   difference   in   the   business carried   on   by   the   assessee   in   two   different   accounting periods considering the unity of control. Nothing has been pointed   out   on   behalf   of   the   applicant­revenue   to   even suggest that these findings of fact recorded by the Tribunal are not correct, except for making a faint effort that the Tribunal had not found that there was common place of business. As can be seen from facts on record the decision in   the   case   of   B.R.   Ltd.   (supra)   had   been   pressed   into service   on   behalf   of   the   assessee   even   before   the Commissioner (Appeals) as well as the Tribunal. None of the   authorities   have   been   invited   to   render   any   such finding. Therefore, at this stage, it is not possible to raise a presumption that the place of business was not common, nor is it necessary to send the matter back for this limited purpose,  considering   the  period   which   has  elapsed,   the accounting period being year ended on 30th June, 1982.” 17. In the case on hand,  there is no dispute with regard to   the   business   of   the   assessee   which   is   providing telecommunication services, therefore, the decision in case of    Amarsinghji   Mills   Ltd(supra),   relied   upon   by   the Revenue   for   alternative   submission   would   also   not   be applicable in the facts of the case. 18. In the case of   ACME Paper Ltd (supra), a Division Bench of the Madhya Pradesh High Court had considered the  issue  of section  79(b)  of the  Act,  1961,  wherein  the Court held as under : “6. Section 79 of the Income­tax Act clearly lays down the carry forward and set off of losses in the case of certain companies. It is true that both the conditions as mentioned in Section 79(a) and (b) of the Income­tax Act are that on the   last   day   of   the   previous   year,   the   shares   of   the company carrying not less than fifty­one per cent. of the Page 26 of 30

C/TAXAP/65/2009 CAV JUDGMENT voting power were beneficially  held by the persons who beneficially held shares of the company carrying not less than fifty­one per cent. of the voting power on the last day of the year or years in which the loss was incurred and Sub­clause (b) as it stood at the relevant time was that the Assessing   Officer   is   satisfied   that   the   change   in   the shareholding was not effected with a view to avoiding or reducing any liability to tax. The burden is on the Revenue to show whether any change in the shareholding was not effected with a view to avoiding or reducing any liability to tax. No such finding has been recorded by the Assessing Officer   or   by   the   appellate   authority,   therefore,   the Tribunal has held that in the absence of this finding, there is no reason to deny the benefit of set off of the losses. We are of the opinion that the view taken by the Tribunal is well founded that it was one of the first conditions to deny this benefit clause to record the finding that any change in shareholding   was   effected   with   a   view   to   avoiding   or reducing   any   liability   to   tax.   Since   there   is   no   positive finding that this change in shareholding was done for the purpose of avoiding orreducing the tax liability, then in that case, there was no option with the Tribunal, but to permit the set off of the losses during the assessment year 1978­79. This was permitted obviously that there was no such reason for avoiding or reducing the tax liability. The Tribunal has allowed the set­off on being satisfied that the change in shareholding was not effected with a view to avoiding or reducing the tax liability. Therefore, in this view of the matter, the view taken by the Tribunal appears to be justified.   Hence,   this   reference   is   answered   against   the Revenue and in favour of the assessee. The reference is answered accordingly.” 19. From the above dictum, it is clear that the burden is on   the   Revenue   to   establish   that   any   change   in   the shareholding  was not effected  with  a view to avoiding  or reducing any tax liability. As the Assessing Officer has not gone  into  this  aspect  at the  time  of assessment,  at this stage, it would not be appropriate to consider the issue as to whether the shareholding   was genuine or not   for the Page 27 of 30

C/TAXAP/65/2009 CAV JUDGMENT purpose of computation of quantum under section 80­IA(1) for the year under consideration.  Similarly in the decision in   the   case   of  Ganga   Corporation   Asbestos   Pvt   Ltd (supra),  the Division  Bench  of the Allahabad  High  Court considered the issue whether business of the assessee had remained the same or whether there was cause of unity of control  and  common  management.    Such  a issue  is not arising from the facts of the case, reliance placed by the Revenue for the alternative submission is not required to be considered. 20. The reliance placed on the decision of Supreme Court in   case   of  J.H.   Gotla    (supra),   for   the   purpose   of considering   as   to   what   constitutes   the   income   of   the assessee, the Supreme Court  has held as under : “41. The question in the instant case is within a short compass. It can be accepted without much doubt that   income would include loss. If it were a question of  inclusion of the income the wife or minor child to whom assets have been transferred by the assessee and with which the business was carried on or by which income was derived by the wife or he minor child, then in including   that   income   either   of   the   wife   or   nor   child.   such income should be computed in accordance with Section 10 and other   provisions   of   the   Act   i.e.   including   Section   24(1)   and Section 24(2) of the Act. But the question that arises here is whether against the inclusion of such income, loss suffered by the assessee in a previous year which was     carried forward under Section 24(1) of the Act should be allowed to be set off or not. The revenue contends that it cannot be. It lays emphasis on the fact that set off for the carried forward loss is permitted only by Section 24(1) of the Act and there should be strict literal construction   of   Section   24(2)   and   as   such   in   view   of   the provisions of     Section 24(2)(ii) which stipulates that loss to be carried    forward must be ’loss sustained by him in any other business, profession or vocation, it shall be set off against the profits and gains, if any, of any business, profession or vocation carried on by him in that year; provided that the business, profession   or   vocation   in   which   the   loss   was         originally Page 28 of 30

C/TAXAP/65/2009 CAV JUDGMENT sustained   continued   to   be   carried   on   by   him   in   that   year’. Therefore,   it   is   required   that   the   business,   profession   or vocation against profits of which the set off is claimed must be carried on by the assessee in that year. But the problem here is that the business out of whose share income of the wife or minor child is derived is no longer carried on by the assessee himself in the subsequent year in which set off is being claimed. On   behalf   of   the   revenue   it   was   emphasised   that   this requirement is to be strictly followed. Revenue emphasised that the requirement continues irrespective of the  clarification of the Board   of   Revenue   by   Circular   in   1944   and   in   spite   of   the addition of Explanation 2 to Section 64(2) by Amending Act of 1979   with   effect   from   1980.   Therefore,   it   was   urged   that legislative intent was clear and it was not possible to hold other­ wise. 42.   On   the   other   hand   on   behalf   of   the   assessee   it   was contended that it would often result in extreme anomaly and hardship, for instance in the example noticed before. It was further stressed on behalf of the revenue that equity has no place in interpreting fiscal legislation. 43. We need not, for the purpose of the instant case, express any opinion whether circulars in the instant case should be construed   as   contemporaneous   exposition   of   the   Legislative intent. The question was discussed exhaustively in the case of Desh   Bandhu   Gupta   and   Co.   and   Others.   v.   Delhi   Stock Exchange Association Ltd. [1979] 4 S.C.C. 565 (AIR 1979 SC 1049) 44.  Our attention was also drawn to the decision in the case of Manickam and Co. v. The State of Tamil Nadu 39 S.T.C. 12 at page 18 as well as Craies on Statute Law (Sixth Edn.) page 147.” 21. Thus,   the   Apex   Court   held   that   if   strict   literal construction   leads   to   an   absurd   result   i.e   result   not intended to be served by the object of the legislation, then if other construction is possible, such construction should be   preferred   and   attempt   should   be   made   to   prefer construction which results in equity rather than justice. 22. Therefore, in the facts of the case, when there is no Page 29 of 30

C/TAXAP/65/2009 CAV JUDGMENT issue of any strict or otherwise literal construction of the provisions of the Act, the application of section 80­IA(5) of the Act to deny the effect of provisions of section 79 of the Act   cannot   be   sustained   as   per   the   Scheme   of   the Act,1961.     When   the   loss   of   earlier   years   have   already lapsed, then the same cannot be notionally carried forward and set off against the profit and gains of the assessee's business for the year under consideration in computing the quantum of deduction under section 80­IA(1)   of the Act, 1961.  The  provision  of section  80­IA(5)  of the  Act,  1961 cannot be invoked to ignore the provisions of section 79 by virtue of which the business loss of the assessee prior to year 2001­2002 has already lapsed. The Assessing Officer, CIT(Appeals) and the Tribunal were therefore, not justified in applying  section 80­IA(5) of the Act so as to ignore the losses which have already lapsed by operation of section 79 of the Act. 23. For the foregoing  reasons,  the  appeals  are allowed. The   Impugned   orders   passed   by     the   Tribunal   in   the respective  Tax  Appeals  are    quashed  and  set aside.  The substantial question is answered in favour of the assessee and against the Revenue. Tax Appeals  are disposed of with no order as to costs. (J. B. PARDIWALA, J) (BHARGAV D. KARIA, J) RAGHUNATH R NAIR Page 30 of 30