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

ITA No. 1228/Bang/2017 is an appeal by the assessee against the order dated 29.3.2017 of the CIT(Appeals)-5, Bengaluru relating to assessment year 2012-13.

We shall first take up for consideration the appeal of revenue for AY 2011-12. Ground Nos.1, 4 & 5 raised by the revenue are general in nature and calls for no specific adjudication. Ground No.2 raised by the revenue reads as follows:-

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).

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

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

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

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.

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

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:-

The facts and circumstances giving rise to the aforesaid grounds of appeal are as follows. In AY 2010-11, the assessee purchased sugarcane

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):-

Aggrieved by the order of CIT(Appeals), the revenue has raised ground No.3 before the Tribunal.

However, on the same set of facts, the CIT(Appeals) in AY 2012-13 held that the provisions of section 194C were attracted. In AY 2012-13 the sum paid on account of harvesting charges was a sum of Rs.9,54,22,413 and the said payment was disallowed for non-deduction of tax at source u/s. 194C of the Act by invoking the provisions of section 40(a)(ia) of the Act. The very same submissions made in AY 2011-12 were made before the CIT(Appeals) for AY 2012-13. The CIT(Appeals) has noticed these argument in para 6 of his order, but has not dealt with the same. Rather, the CIT(Appeals) proceeded on the question where section 40(a)(ia) of the Act would be applicable to a sum which is not paid, but remains payable by the assessee. On that aspect, the CIT(Appeals) came to the conclusion that the consequence of disallowance u/s. 40(a)(ia) of the Act will follow even in respect of amounts that were paid and not the sums which remain payable by the person who makes the payment. It is against the aforesaid order of CIT(A), that the assessee has preferred appeal in ITA No.1228/Bang/2017.

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

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

In the result, the appeal by the revenue in ITA No.37/Bang/2016 is dismissed and the CO No.66/Bang/2016 by the assessee is dismissed, while ITA No.1228/Bang/2017 by the assessee is allowed.