M/S NSL SUGARS LTD ,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-5(1)(2), BANGALORE

As far as ground No.2 is concerned, the facts are that the assessee is engaged in the business of manufacture of sugar. In the process of manufacture of sugar, steam is generated. That steam is used to generate electricity. The income earned from such activity is referred to in the order of assessment as income from Cogent plant. The assessee claimed deduction of Rs.24,36,83,037 u/s. 80IA of the Income Tax Act, 1961 (Act) in respect of profits derived from Cogent plant. There is no dispute that the Assessee was entitled to deduction u/s.80IA of the Act and the quantum of deduction was Rs.24,36,83,037 computed in accordance with the provisions of Sec.80IA(1) of the Act. The income from business of the assessee as per the computation of total income was a sum of Rs.22,09,10,637. The gross total income of the assessee was Rs.31,83,19,275.

The AO was of the view that u/s. 80IA of the Act, the deduction allowed cannot be more than the income under the head income from business. In this regard, the AO has observed that if the assessee has 2 or 3 segments of business and if in the eligible business the assessee has earned positive income and in the other segments there is a loss, then the loss in the other segments of business have to be adjusted against income of the eligible business and only on the resultant figure, the assessee would be entitled to deduction u/s. 80IA of the Act. The AO made a reference to the provisions of section 70 of the Act and ultimately came to the conclusion that the deduction claimed by the assessee u/s. 80IA should be restricted to income under the head income from business viz., a sum of Rs.22,09,10,637 as against the claim of assessee for deduction of Rs.24,36,83,037. Aggrieved by the aforesaid action of the AO, the assessee preferred appeal before the CIT(Appeals). , 1228/B/17 & CO No.66/B/2016 Page 4 of 18

Before the CIT(Appeals), the assessee contended that the Assessee has two businesses during the relevant assessment year. One business was in the nature of industrial undertaking which fulfils all the conditions laid down in section 80IA and is eligible for deduction u/s.80IA of the Act. Another business is admittedly not eligible for deduction under section 80IA of the Act. The Assessee submitted that u/s.80IA(5) of the Act, the profits and gains of an eligible business has to be computed or determined as if such business were the only source of income of the assessee during the relevant year and the assessee had no other source of income. Consequently, the total income of the eligible business is to be computed under the provisions of the Act as if the eligible business were the only source of income of the assessee. The opening words of the sub section 5 of section 80IA reads as:- "Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall for the purpose of determining the quantum of deduction under that sub-section 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.". Therefore the subsection 5 of the section 80IA overrides all other provisions of the Act. Having regard to the cardinal principle of interpretation emerged from the maxim "generalia specialibus non derogant" the special provision of section 80-IA(5), which is over riding in the nature, must prevail over general provisions to the extent of its scope and limit. In other words it was submitted that for the purpose of determining the amount of deduction u/s 80IA, the taxable income of the eligible business is to be ascertained and computed as if such eligible business were an independent business owned by the assessee and the , 1228/B/17 & CO No.66/B/2016 Page 5 of 18 assessee had no other source of income. Conversally the unabsorbed losses, unabsorbed depreciation etc relating to the eligible business are to be taken into account in determining the quantum of deduction admissible under section 80IA even though these unabsorbed losses ,unabsorbed depreciation etc relating to the eligible business may actually have been set off against the profits of the assessee from the non eligible business or other sources. Thus the gross total income referred in section 80A(1) and (2), 80AB and 80B(5) for the purpose of determining the quantum of deduction available under section 80IA for the relevant assessment year ,would mean the total income computed in accordance with the provisions of the Act, before making any deduction under chapter VI-A, with reference to the profits and gains of the eligible business, only to which section 80IA applies as if such eligible business were the only source of income of the assessee during that assessment year. The Assessee relied on the following decisions in support of its contention.

The CIT(Appeals) agreed with the submissions so made by the assessee and he directed the AO to allow deduction u/s. 80IA of the Act as claimed by the assessee. Following are the relevant observations of the CIT(Appeals):-

We have heard the submissions of the ld. counsel for the assessee, who relied on the order of CIT(Appeals).

The ld. DR submitted that the CIT(Appeals) in agreeing with the submissions of assessee, has placed reliance on the decision of the Hon’ble Supreme Court in the case of CIT v. Canara Workshop Pvt Ltd. (supra). He pointed out that the aforesaid decision was rendered in the context of erstwhile section 80E of the Act and when the provisions of section 80B(5) and section 80AB of the Act were not part of the Act. He brought to our notice the decision of the Hon’ble Supreme Court in the case of Synco Industries Ltd. v. AO, 299 ITR 444 (SC) wherein the Hon’ble Supreme Court took the view that while working out the gross total income, losses suffered in the earlier years have to be adjusted and if gross total income of assessee is Nil, the assessee will not be entitled to deduction under Chapter VIA. The Court further held that the non obstante clause in , 1228/B/17 & CO No.66/B/2016 Page 7 of 18 section 80I(6) is applicable only to quantum of deduction whereas the total income u/s. 80B(5) which is referred to in section 80I(1) is required to be computed in the manner provided in the Act, which pre-supposes that gross total income shall be arrived at after adjusting losses of other deduction against profits derived from an industrial undertaking. Our attention was also drawn to the decision of the Hon’ble Gujarat High Court in the case of Sintex Industries Ltd. v. ACIT, 219 Taxman 43 (Guj) wherein identical proposition was laid down by following the decision of the Hon’ble Supreme Court in the case of Synco Industries Ltd. (supra). Our attention was also drawn to para 8.2 of this decision, wherein the Hon’ble High Court explained as to how the decision rendered by the Hon’ble Supreme Court in the case of Canara Workshops Pvt. Ltd. (supra) is not applicable in the context of deduction u/s. 80I(6) of the Act.

We have given a careful consideration to the rival submissions. In the decision of Synco Industries Ltd.(supra) rendered by the Hon’ble Supreme Court, the facts were that the Assessee was engaged in the business of oil and chemicals. It had a unit for oil division at Sirohi District, Rajasthan. It had also a chemical division at Jodhpur. The assessee had earned profit in the asst. yrs. 1990-91 and 1991-92 in both the units. However, the assessee had suffered losses in the oil division in earlier years. The Assessee claimed deductions under ss. 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 ss. 80HH and 80-I were allowable. The AO 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. On the above facts, the Hon’ble Supreme Court considered the correctness of the action of the , 1228/B/17 & CO No.66/B/2016 Page 8 of 18 revenue authorities, the Tribunal and the Hon’ble High court concurring with the view of the AO. The Hon’ble Supreme Court held, Clause (5) of s. 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. It follows, therefore, that deductions under Chapter VI-A can be given only if the gross total income is positive and not negative. 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 AO has to take into account the provisions of s. 71 providing for set off of loss from one head against income from another and s. 72 providing for carry forward and set off of business losses. Sec. 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 AO has to work out the gross total income of the assessee. Sub-s. (2) of s. 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. The effect of cl. (5) of s. 80B is that gross total income will be arrived at after making the computation as follows :-

The Hon’ble Supreme Court further held that under s. 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. Sec. 80-I(1) lays down the broad parameters indicating circumstances under which an assessee would be entitled to claim deduction. On the other hand s. 80-I(6) deals with determination of the quantum of deduction. Sec. 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 s. 80-I(1) which categorically states that where the gross total income includes any profits and gains derived from an industrial undertaking to which s. 80-I applies then there shall be a deduction from such profits and gains of an amount equal to 20 per cent. The words "includes any profits’’ used by the legislature in s. 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 s. 80-I(6) the AO, 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, the non obstante clause appearing in s. 80-I(6), is applicable only to the quantum of deduction, whereas, the gross total income under s. 80B(5) which is also referred to in s. 80-I(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 s. 80A(2) nugatory and therefore the interpretation canvassed on behalf of the appellant cannot be accepted. It is true that under s. 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-s. , 1228/B/17 & CO No.66/B/2016 Page 10 of 18 (6) contemplates that only the profits shall be taken into account as if it was the only source of income. However, s. 80A(2) and s. 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 s. 80-I(6) cannot restrict the operation of ss. 80A(2) and 80B(5) which operate in different spheres. As observed earlier s. 80- I(6) deals with actual computation of deduction whereas s. 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 s. 80-I(1), which also refers to gross total income one has to read the expression ‘gross total income’ as defined in s. 80B(5). Therefore, 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 s. 80-I also.

The final conclusion of the Hon’ble Court was that gross total income of the assessee has first got to be determined after adjusting losses of earlier years, unabsorbed depreciation, etc., and if the gross total income of the assessee is ‘Nil’ the assessee would not be entitled to deduction under Chapter VI-A; non obstante clause in s. 80-I(6) cannot restrict the operation of ss. 80A(2) and 80B(5) which operate in different spheres and therefore, loss from the oil division of the assessee was required to be adjusted before determining the gross total income, and since the gross total income was ‘Nil’, assessee was not entitled to claim deduction under s. 80-I.

In CIT Vs. RPG Telecoms Ltd. 292 ITR 355 (Karn), the Hon’ble Karnataka High Court considered the very same issue of deduction u/s.80-I of the Act, whether it should be restricted to gross total income or should be , 1228/B/17 & CO No.66/B/2016 Page 11 of 18 allowed as computed under Sec.80-I(1) of the Act. After considering the decision of Hon’ble Supreme Court relied upon by the CIT(A) in the case of Canara Workshops (supra) in the impugned order, held that loss incurred in leasing business had to be taken into consideration for the purpose of computation of deduction under s. 80-I as Sec. 80AB overrides all sections for the purpose of deductions under Chapter VI-A.

We therefore hold the deduction u/s.80IA of the Act has to be allowed as per Sec.80IA(1) of the Act, but the deduction so arrived at cannot exceed the gross total income of the Assessee.

In the present case, the deduction u/s. 80IA of the Act, considering the business on which deduction u/s.80IA was claimed by the Assessee as the only income of the Assessee, was Rs.24,36,83,037/-. The gross total income of the Assessee was Rs.29,75,89,300/- (as per the return of income of the Assessee). Income under the head “Income from Business or profession” was Rs.20,01,80,662/-. The ceiling of deduction u/s.80IA read with Sec.80AB or 80B(5) or 80A(2) is that it cannot exceed the gross total income, not the income determined under the head “income from Business or profession”. This aspect has not been noticed by the AO or the CIT(A). We therefore hold that the conclusions of the CIT(A) that the Assessee should be allowed deduction u/s.80IA at Rs.24,39,83,037/- as allowing the said deduction would not violate the mandate of law as laid down in the decision of the Hon’ble Supreme Court in the case of Synco Industries Ltd. (supra). For the reasons given above, we sustain the order of CIT(A). We therefore find no merits in Gr.No.2 raised by the revenue in its appeal for AY 2011-12.

Ground No.3 raised by the revenue in its appeal reads as follows:- , 1228/B/17 & CO No.66/B/2016 Page 12 of 18 “3. On the facts and circumstances of the case, the CIT(A) erred in law by stating that harvesting charges paid to labourers by the assessee on behalf of the cane growers is part and parcel of the cost price of sugarcane and the payment of which cannot be covered within the expression "work contract" as defined u/s 194C, when as per assessee, the Alland unit cane price was fixed under two different heads.”

This ground of appeal by the revenue for AY 2011-12 can be conveniently dealt with the grounds of appeal raised by the assessee in AY 2012-13 which reads as follows:-

The facts and circumstances giving rise to the aforesaid grounds of appeal are as follows. In AY 2010-11, the assessee purchased sugarcane , 1228/B/17 & CO No.66/B/2016 Page 13 of 18 from various farmers. The assessee makes payment on account harvesting charges. In AY 2010-11 the assessee paid a sum of Rs.2,07,29,975 on account of harvesting charges. It is an admitted position that the assessee did not deduct tax at source while making payment towards harvesting charges. According to the AO, the assessee ought to have deducted tax at source u/s. 194C of the Act on the aforesaid payment and since assessee failed to do so, the aforesaid sum which was claimed as deduction in computing income cannot be allowed as a deduction in view of the provisions of section 40(a)(ia) of the Act, which provides that where tax is liable to be deducted on a payment and is not so deducted, the same cannot be claimed as an expenditure in computing income from business.

Before the CIT(Appeals), the assessee submitted that the harvesting charges are nothing but payment for purchase of sugarcane from the farmers and that payment by any stretch of imagination cannot be considered as a payment to a contractor for carrying out any work as contemplated u/s. 194C of the Act. In this regard, the assessee pointed out that the payment made to the farmers are ex-factory gate purchase price in instalments following the well established policy of Central Govt. in determining the Statutory Minimum Price (SMP) of sugarcane. The assessee pointed out that it is the obligation and responsibility of the farmers for cutting and harvesting sugarcane and to transport the same from the field to the sugarcane factory. The farmers are paid consolidated price for their sugarcane fixed by Govt. of India and the said price also includes the harvesting and transportation charges. The assessee furnished copies of sugarcane purchase bills depicting the adjustment of harvesting and transportation charges from the cost of purchases. The assessee also placed reliance on the decision of ITAT Ahmedabad Bench in the case of Shree Mahuva Prasad Sahakari Khand Udyog Mandal Ltd. v.

The CIT(Appeals) accepted the arguments on behalf of the assessee and he found on perusal of the sugarcane purchase bills that farmers supplied sugarcane and harvested themselves and incurred transportation charges and those charges were deducted from the purchase price payable for sugarcane. The CIT(Appeals) was therefore of the view that the payment in question did not fall within the ambit of section 194C of the Act and he accordingly deleted the addition made by the AO. Following were the relevant observations of the CIT(Appeals):-

We have heard the rival submissions. The ld. counsel for the assessee reiterated submissions that were made before the CIT(Appeals) and relied on the order of CIT(Appeals) for AY 2011-12. The ld. DR relied on the order of AO.

We have considered the rival submissions. In the order of assessment for both AYs 2011-12 & 2012-13, there has been no discussion whatsoever by the AO as to why the harvesting and transportation payments made by the assessee to the farmers were regarded as payments falling within the ambit of section 194C of the act. In the appellate order for AY 2012-13, the CIT(A) has not discussed this aspect at all and has gone only by the legal proposition as to whether section 40(a)(ia) would be applicable to sums which have already been , 1228/B/17 & CO No.66/B/2016 Page 17 of 18 paid or only to sums which remains payable as on the last date of the previous year. Therefore, the reasons given by the CIT(Appeals) in AY 2011-12 regarding payment on account of harvesting and transportation charges not being in the nature of payment falling within the ambit of section 194C of the Act is only the available material.

We have perused the paperbook filed by the assessee containing sample bills for purchase of sugarcane issued by the assessee. The sample bill shows the value of cane supplied by individual farmers and the transportation & harvesting charges are shown as deduction, which by implication means that the cane price is inclusive of transportation & harvesting charges. The plea of assessee that supply of cane by the farmers to the assessee is on ex gate of sugar factory basis appears to be correct. In our opinion, it would depend on the agreement between the assessee and cane farmers as to whether the cane price fixed between the parties is inclusive of harvesting & transportation charges. If the contract to supply sugarcane is ex field (cost of harvesting and transportation to be borne by the Sugar manufacturer), then it is the responsibility of the assessee to lift the sugarcane from the field to its factory i.e., the assessee has to bear the harvesting and transportation charges for the sugarcane. There is no such material brought on record to come to the conclusion that the harvesting & transportation charges paid by the assessee is on ex-field basis. In such circumstances, we are of the view that, on the basis of probability, the plea of assessee has to be accepted and it has to be held that the payments made by the assessee towards harvesting and transportation charges have to be regarded as payment made for purchase of sugarcane and consequently the provisions of section 194C of the Act do not get attracted. Consequently, we are of the view that the CIT(Appeals) was justified in deleting the addition for AY 2011-12 and was not justified in not deleting the addition for AY 2012-13 apart from not , 1228/B/17 & CO No.66/B/2016 Page 18 of 18 dealing with the submissions of assessee in this regard. We therefore find no substance in ground No.3 raised by the revenue for AY 2011-12 and dismiss the same. We find merit in the grounds of appeal raised by the assessee for the AY 2012-13 and allow the same.

In the result, the appeal by the revenue in is dismissed and the CO No.66/Bang/2016 by the assessee is dismissed, while by the assessee is allowed.