M/S J K INDUSTRIES LTD vs. THE JOINT COMMISSIONER OF INCOME TAX

IN THE HIGH COURT OF KARNATAKA AT BANGALORE

Dated this the 26th day of February, 2013

PRESENT

THE HON’BLE MR JUSTICE D V SHYLENDRA KUMAR AND THE HON’BLE MR JUSTICE B SREENIVASE GOWDA

Income Tax Appeal No. 1360 of 2006 BETWEEN:

M/S J K INDUSTRIES LTD., REP. BY ITS ASST. VICE PRESIDENT (COMMERCIAL) SRI NARESH KUMAR MAHESHWARI KRS ROAD METAGALLI MYSORE – 560 016

… APPELLANT

[By M/s A Shankar & M Lava, Advs.] AND:

THE JOINT COMMISSIONER OF INCOME TAX SPECIAL RANGE SHILPASHREE BUILDING MYSORE

… RESPONDENT

[By Sri E R Indrakumar, Sr. Counsel for Sri E I Sanmathi, Adv.]

THIS APPEAL IS FILED UNDER SECTION 260A OF THE INCOME TAX ACT, 1961 ARISING OUT OF ORDER DATED 16.06.2006 PASSED IN ITA NO. 700/BANG/2003, FOR THE ASSESSMENT YEAR 1998-99, PRAYING TO SET ASIDE THE SAID ORDER OF THE TRIBUNAL AND ETC.,

THIS APPEAL COMING ON FOR HEARING, THIS DAY, SHYLENDRA KUMAR J., DELIVERED THE FOLLOWING:

2 J U D G M E N T

Appeal by an assessee under Section 260A of the Income Tax Act, 1961 [for short, the Act], relevant for the assessment year 1998-99, directed against the order 16-6- 2006 passed in ITA No 700/Bang/2003, passed by the income tax appellate tribunal, Bangalore Bench ‘B’.

2) Whether the method of computation of deduction under section 80HHC as approved by the Tribunal is valid in law on the facts of the present case?

3) Whether on the facts and circumstances of the case benefit of section 80HHC can be claimed on the total income after deduction of unabsorbed losses and unabsorbed depreciation or otherwise?

3 4) Whether the Tribunal is justified in law in not giving its finding on specific ground raised before it on the facts and circumstances of the case?

5) Whether, in facts and circumstances of the case, the I.T.A.T. was justified in not holding that notional duty benefit derived by the assessee amounts to cash assistance under section 28(iiib) of the I.T. Act?

4 appeal filed by the very assessee relating to the assessment year 1997-98 answering the questions posed for our answer against the assessee in ITA No 1105 of 2006, decided on 19-2-2013. These two questions are answered accordingly.

5 7. Specific submission, placing reliance on these two decisions, is that the figure which is the amount attributable to profits of the business for the purpose of Section 80HHC of the Act, which is to be multiplied by the fraction of export turnover divided by total turnover for arriving at the computation of the amount qualifying for deduction under Section 80HHC should be in the context of the provisions of Section 80HHC; that it cannot be the figure which is otherwise contemplated under the provisions of the Act in general, particularly for the purpose of allowing the deduction of unabsorbed depreciation of earlier years; that taking the figure of profits of the business for the purpose of Section 80HHC by deducting the unabsorbed depreciation of earlier years and in this case brought from the assessment year 1995- 96, which was in a total sum of Rs 1,99,46,629/- is a mistake, as this deduction had already been factored before arriving at the gross total income by giving deduction and deducting the same amount again from the

6 amount for the purpose of Section 80HHC of the Act is not contemplated and submission is that it amounts to duplicate deduction from the profits for the purpose of Section 80HHC of the Act.

xxx

Explanation :- For the purposes of this section

xxx

(baa) “profits of the business” means the profits of the business as computed under the head “Profits and gains of business or profession” as reduced by –

(1) ninety per cent of any sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28 or of any

7 receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and

(2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India;

makes it very clear that it has reference to the method of computation of profits and gains of business, as it occurs in Chapter IV of the Act and indicated in Section 29 of the Act and that this should be arrived at with reference to the working out the provisions of Section 29 of the Act. Section 29 of the Act reads as under: 29. Income from profits and gains of business or profession, how computed.

The income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43D.

8 only in Section 72(2) of the Act, figuring in Chapter VI and therefore a deduction as per Section 72 is not contemplated while computing the profits and gains of business in terms of Chapter IV of the Act.

9 Submission is that for the purpose of benefit to be given under Chapter VIA, the gross total income concept which has been introduced is also the total income and total income of the assessee under the head of profit or gain from profession or business being with reference to that profit of the assessee as computed in Chapter-IV, which becomes a total income taxable and this is computed as per the provisions of the Act inclusive of the deductions as contemplated under Section 72 of the Act, which is carried forward losses and unabsorbed depreciation of the earlier years and by setting off these amounts, if any, before arriving at the total income of the assessee.

10 80HHC. Deduction in respect of profits retained for export business. xxx

(3) For the purpose of sub-section (1) -

xxx

Provided that the profits computed under clause (a) or clause (b) or clause (c) of this sub- section shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiia) (not being profits on sale of a licence acquired from any other person), and clauses (iiib) and (iiic) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee:

11 holding that they were all notional and the tribunal has not at all dealt with this aspect, though such a specific ground was raised, it became a question of law which has to be looked into, as either matter has to be remanded or the question has to be answered here. 14. The figures claimed by the assessee though did not find as part of the record originally, a copy of such claim through a chartered accountant is independently produced and the figures claimed are as under: Export incentive for the year ending 31-03-1998

Rs. Premium on sale Exim Scrips 49,30,679 Excise duty on finished goods exported 29,23,37,736 Duty on duty free imports 5,28,93,279 Concessional rate of interest on export credit 27,35,947 Central Sales tax on finished goods exported 2,94,48,195

38,23,45,836

Sri Shankar submits that this is being referred to at page 27 of the paper book filed in this appeal, which is part of the assessment year, the same has not been taken for examination.

12 15. On this aspect, Sri Shankar has placed reliance on the decisions in 1) TOPMAN EXPORTS vs COMMISSIONER OF INCOME TAX [(2012) 247 CTR 353] and 2) ASST COMMISSIONER OF INCOME TAX vs PRATIBHA SYNTEX LTD [(1999) 63 TTJ 409]. The reasons given by the tribunal in the latter case is adopted as submissions.

13 officer. It is only in respect of the other amounts that are in dispute.

14 of either received or receivable and not when the actual event has not occurred viz., that when the assessee has not either received or has not become entitled to receive a cash incentive in terms of clauses (iiib) and (iiic) to section 28 of the Act and when the assessee has not actually got a refund or is entitled for a refund as a drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules 1971. Conclusion is that for the purpose of Section 80HHC also, there cannot be a notional computation of these amounts, but it should be actual and either received or receivable, but not otherwise.

15 contemplated under Section 72 of the Act is also dealt with and it is very clearly spelt out therein that Section 72 has to be applied before the total income of an assessee is determined before permitting deduction under Chapter VIA and this is so because of Section 80B(5) of the Act.

16 in section 80-I[1] of the Act when such income is part of the gross total income of the assessee in terms of section 80-I[6] of the Act and such computation of the eligible deduction under section 80-I[1] of the Act is to be made as though such activity was only the source of income of the assessee and seeks to draw parallel between section 80- I[1] and section 80HHC[1] of the Act to submit that for the purpose of computing the eligible amount qualifying under section 80HHC[1] of the Act, the carried forward unabsorbed depreciation as in the case of the present assessee cannot be factored for the purpose of computation under section 80HHC[3] of the Act in view of explanation [baa] to section 80HHC of the Act and therefore submits that while employing the formula, the profits of the business should be before the adjustments or absorption of unabsorbed depreciation of earlier years. 23. On the other hand, Mr. Indra Kumar, learned senior counsel appearing for the respondent – revenue has submitted that section 80-I[1] of the Act while makes a

17 specific reference to gross total income, it is not so in the case of section 80HHC[1] of the Act.

18 argument is only related to the profits of the business and the profits of the business no doubt is also defined under clause (baa) in explanation to Section 80HHC of the Act. It again relegates for working out the profits of the business towards the provisions of the Act themselves computed under the head profits and gain of the business and the further indication as indicated in the two situations to be made out of this amount. That means, even for the purpose of Section 80HHC of the Act, while profits of the business is as computed otherwise under the Act, further deduction as contemplated therein are to be made. That means, while the profits of business as computed in general including the factoring the adjustment towards unabsorbed depreciation of earlier years, has to be made, for the purpose of Section 80HHC from out of this figure further deduction as indicated in the two situations of explanation clause (baa) is to be applied. We do not find either any duplication in the deduction in the brought forward unabsorbed depreciation

19 of the earlier years, as contended by Sri Shankar. On the other hand, as pointed out by Sri Indra Kumar, learned senior counsel appearing for the revenue, discussion on this aspect by the Madras High Court in the case of MADRAS MOTORS PVT LTD [supra] viz., that in arriving at the total income deduction or incentives under Chapter VIA can be claimed only from out of the gross total income, computation of which is computation of the profits of the business under the head profits and gains of business or profession, which is a computation in terms of the Act and not necessarily only under Chapter IV of the Act. It is to be followed and therefore the argument fails.

20 Act. What was specifically ruled in this decision is that the deduction as contemplated under Section 80-IA of the Act cannot be reduced or denied by holding that there can be duplication of the incentive, as the deduction/incentive as provided for under Section 80HHC is already availed of, it cannot be again claimed as part of deduction permitted under Section 80-IA of the Act. It is observed in the said decision that the limiting factor is only the ceiling or cap as indicated in sub-section (2) of Section 80-A of the Act and not with reference to duplication or other views taken by the authorities under the Act. It is, therefore, the first contention urged by Sri Shankar fails.

21 not be entitled for claiming any deduction under chapter VI-A in view of the provisions of sections 80A[2] and 80B[5] of the Act.

22 income, the carried forward losses incurred by the assessee’s another priority unit should be set off which only means that there is reduction in the profits of the assessee and the amount available for claiming deduction under chapter VI-A necessarily gets reduced in view of the ceiling. 30. But, the argument of Sri. Shankar, learned counsel for the appellant that for the purpose of applying the formula i.e., for computation under section 80HHC[3] of the Act, the phrases as defined in the explanations and particularly in this case, explanation [baa] to section 80HHC of the Act has to be kept in mind and it is here we notice that in the wake of the language of explanation [baa] to section 80HHC of the Act, certain further deductions are contemplated from out of the profits of the business as otherwise computed under the head ‘profits and gains of business or profession’.

23 section 28 of the Act. That means even for the purpose of section 80HHC[3] of the Act, when one applies the provisions of explanation [baa] to section 80HHC of the Act and in a situation where the assessee is claiming the benefit for the purpose of first proviso to section 80HHC[3] of the Act, that has to be factored for reduction in terms of explanation [baa] to section 80HHC of the Act.

24 explanation [baa] to section 80HHC of the Act. In fact, it is a fallacy to contend that there is duplication of deduction as the set off of unabsorbed carried forward losses is an exercise that has to be undertaken even while arriving at the gross total income. When once that is achieved, it is because explanation [baa] to section 80HHC of the Act further indicates as to what is the profits of the business for the purpose of section 80HHC of the Act, that again necessarily has to be factored. It is not a situation where the unabsorbed carried forward depreciation is again set off or adjusted, but it has already been done earlier in arriving at the gross total income.

25 the Act does occur in chapter-VI, it qualifies for computation in a situation where there is carried forward unabsorbed depreciation allowance not absorbed for earlier years in terms of section 72[2] of the Act and such is the present situation. This exercise is not because of any provisions of chapter VI-A, but by the operation of the provisions of the Act itself. Section 72[2] of the Act also contemplates that allowance which are brought forward shall be first given effect to i.e., whatever brought forward unabsorbed depreciation allowance was there, that should be first given effect to.

26 have already discussed in the context of while answering the other question which we have said is covered by the earlier decision and there is no need to repeat the same.

27 Act and therefore also we cannot accept the argument as the argument if accepted, it runs contrary to section 80A[2] of the Act and can defeat the very purpose of section 80A[2] of the Act. For all these reasons, we reject the first contention.

28 assessee, has been allowed in full by the assessing officer. It is only in respect of other amounts such as amount attributable to claim based on the excess duty on finished goods exported, the duty on duty free imports, interest and credit export and central sales tax on finished goods exported.

29 showing the actual amount received, claim can be put forth on the basis of the receivable or repayable amount as the case may be.

30 40. Further, we also find that the judgment of the Supreme Court in the case of TOPMAN EXPORTS [SUPRA] was not on this aspect, but was more in the context of the computation under Section 80HHC with reference to clause (baa) being an actual amount and the entitlement for the benefit under sub-section (1) of Section 80HHC of the Act. This judgment is valid to hold that DEPB given by the government of India to an exporter is part of cash assistance and therefore qualifies for addition on the first proviso to Section 80HHC(3) of the Act. Here again, it was under actual basis and not on notional basis, as is the finding in the present case by the authorities below. In fact, the view taken by the authorities below gets support from the fact that the amount claimed by the assessee under other heads referable to Section 28(iiia) to (iiic) having not been factored in computing the business profits in terms of explanation (baa) of Section 80HHC and therefore it has to be necessarily inferred that the assessee itself had not made good the claim, as is claimed and as

31 contended by its learned counsel for the purpose of Section 80HHC of the Act. 41. In the absence of the assessee making good the claim in terms of the amount being either received or receivable or refund being paid or payable, the question of addition of this amount as per the first proviso to sub- section (3) of Section 80HHC of the Act does not arise. Therefore, the second contention is also rejected.

32 explanation [baa] to section 80HHC of the Act, these amounts have to be factored for reduction from out of the profits of the business of the assessee as otherwise computed in terms of the provisions of the Act. The assessee not having factored computation in terms of explanation [baa] to section 80HHC of the Act itself which can only indicate that there are no amounts attributable to deduction, we also find no foundation laid for the amount mentioned and we cannot on hypothetical basis accept the submissions either on facts or in law.

33 the situations of clauses [iiib] and [iiic] of section 28 of the Act, as these claims are not made good by the assessee on an actual basis, but on the other hand claim being sought to be justified on a notional basis even as per the question No.5 sought for answer in this appeal, we do not find any occasion to interfere with the orders passed by the authorities below for answering the questions in favour of the assessee and therefore the second argument relating to such aspects fail.

Sd/- JUDGE

Sd/- JUDGE *pjk