Soma Textiles & Industries Ltd.,, ... vs Department Of Income Tax

ी एन0एस0 सैनी, लेखा सद य एवं ी कुल भारत, या%यक सद य के सम& BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND SHRI KUL BHARAT, JUDICIAL MEMBER आयकर अपील सं./ ITA No. 971/Ahd/2011 %नधा)रण वष)/Assessment Year: 2007-2008

ACIT (OSD), Cir.8 Soma Textiles & Industries Ltd. Ahmedabad. Vs Rakhial Road Rakhial, Ahmedabad.

PAN : AADCS 0405 R

अपीलाथ,/ (Appellant) -.यथ,/ (Respondent)

Revenue by : Shri Nimesh Yadav, Sr.DR Assessee(s) by : Shri G.C. Pipara

सन ु वाई क तार ख/ Dateof Hearing : 23/03/2015 घोषणा क तार ख / Date of Pronouncement: 17/04/2015

आदे श/O R D E R

PER N.S. SAINI, ACCOUNTANT MEMBER: This appeal filed by the

Revenue is against the order of the Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad dated 28.1.2011.

2. In ground no.1 of the appeal, the grievance of the Revenue is that the CIT(A) erred in directing to allow the loss under section 115JB(2)(iii) as computed by the assessee in its return of income.

3. Brief facts of the case are that the assessee in the revised return filed on 19.10.2005 declared total income at NIL under normal provisions of Income Tax Act, 1961. The assessee declared book profit ITA No.971/Ahd/2011 2

under section 115JB at Rs.3,37,57,883/-. The assessee-company derived income from two units i.e. Ahmedabad Unit and Baramati Unit. The Baramati unit was a hundred percent EOU and therefore, profits were exempt under section 10B of the Act till A.Y.2003-04.

4. From the perusal of the calculation of book profit under section 115JB, the AO found that while determining loss under section 115JB(2)(iii), the assessee-company compared between unabsorbed depreciation and unabsorbed loss of Ahmedabad Unit only, and unabsorbed loss of Rs.4,23,87,539/- being lesser of the two, was deducted from book profit. The AO vide his order dated 28.12.006, passed under section 143(3), determined the book profit under section 115JB at Rs.3,55,85,593/-. Thus, there was a disallowance of Rs.18,27,710/- made on account of recomputation of deduction under section 80HHC.

5. The AO vide his order dated 20.8.2010 has recomputed the profit u/s.115JB at Rs.8,36,84,223/-. In the re-assessment proceedings under section 147, the AO determined the book profit at Rs.8,36,84,223/-. The AO determined the loss under section 115JB(2)(iii) of the Act at Rs.NIL. The AO calculated and combined the unabsorbed loss and unabsorbed depreciation of both the Baramati Unit (EOU) and Ahmedabad Unit for each of the year starting from Asstt.Year 1999-2000 and ending on Asstt.Year 2002-03, and then compared them, and as a result, there was unabsorbed depreciation, but there was no business loss. By applying the provision of section 115JB(2)(iii), the AO determined the loss at NIL, and thus claim of loss of the assessee of Rs.4,23,87,539/- was disallowed.

6. On appeal, the CIT(A) held as under:

"Decision : I have considered the facts of the case and the contentions of the AR of the appellant. It is pertinent here to note that the text of Section 11JB starts with non obstinate clause ITA No.971/Ahd/2011 3

meaning thereby that it has overriding effect. On perusal of the provision of Section 115JB it is amply clear that it specifically excludes the income and expense related to such income to which section 10 applies from its ambit Therefore, determination and computation of income to which section 10 applies shall not be governed by the deeming provision of Section 115JB. The income/loss from Baramati unit (100% EOU) have been already excluded from the book profit for all the years starting from A Y 1999-2000 to A Y 2002-03 in respect of which brought forward losses have been set off in the year under consideration. I find with the contention of the AR of the appellant that when these losses were ignored//excluded in their year of origination from the book profit of the respective years u/s 115JB, the same can not be considered for the purpose of set off u/s 115JB(iii) of the Act.

Even otherwise, I agree with the AR of the appellant that determination and computation of income to which section 10 applies shall not be governed by the deeming provision of Section 115JB. Therefore, the computation of the same is governed by the provision of Section 10. Provision of Section 10B which were applicable to Baramati Unit(100% EOU) of the appellant make it amply clear that while computing the total income of the assessee in computing total income of the assessee of the previous year immediately succeeding the last of the relevant assessment years, no loss as referred to in sub section (1) of Section 72 or sub- section 3 of section 74 relating to the undertaking shall be carried forward or set off. Though Section 115JB is a separate code itself and the loss as mentioned in Section 115JB(2)(iii) is as per books per accounts, the spirit and the intention of legislation are quite clear from the provision of Section 10B and the same is implied in the provision of Section 115JB though not specifically mentioned in the said section.

Therefore, I direct AO to allow the loss u/s 115JB(2)(iii) as computed by the appellant company in its return of income dated 19/10/2005. As a result, this ground is allowed in favor of the appellant."

7. We have heard rival submissions and perused the orders of the lower authorities and material available on record. In the instant case, the assessee while computing its book profit under section 115JB of the Act claimed deduction of Rs.4,23,87,539/- under section 115JB(2)(iii). The AO at page no.2 of the assessment order worked out that cash loss for the Asstt.Year 1999-2000 to 2002-03 was NIL, and there was only ITA No.971/Ahd/2011 4

unabsorbed depreciation, and therefore, the assessee was not eligible for any deduction under section 115JB (3) (iii).

8. On appeal, the CIT(A) directed the AO to allow deduction under section 115JB(3)(iii) as per the working made by the assessee. However, we find that the working made by the assessee has not been brought on record either by any of the lower authorities, or by either of the parties before us. From the order of the CIT(A), it is not clear as to how the CIT(A) has verified the working made by the assessee. We, therefore, set aside the orders of the lower authorities, and remit the matter back to the file of CIT(A) for adjudicating the issue afresh by passing a speaking order. Needless to mention, the CIT(A) shall allow reasonable opportunity of hearing to both the parties before passing the order afresh. Thus, this ground of the Revenue is allowed for statistical purpose.

9. In ground no.2 the grievance of the Revenue is that the CIT(A) erred in directing to recomputed the deduction under section 80HHC of the Act for the purpose of deduction under section 115JB(2)(iv) on the book profit declared by the assessee.

10. The AO vide his order dated 20.8.2010 recomputed deduction under section 80HHC at NIL for the purpose of deduction from book profit under section 115JB(2)(iv) of the Act. The AO deducted brought forward loss from the eligible profit under the normal provisions of the Act, and the resultant figure was NIL. According to the AO, the profit of the business from export, as computed under section 80HHC means profit determined after setting off loss under sections 72, 73 and 74 of the Act. Further, the AO set off unabsorbed loss of both the units i.e. Ahmedabad and Baramati Unit (a hundred percent EOU).

11. On appeal, the CIT(A) held as under:

ITA No.971/Ahd/2011 5 "Decision : After considering the legal provision and submission of the appellant, I agree with the contention of the AR of the appellant company. Section 115JB is a separate code in itself. While determining income under section 115JB, the AO is not entitled to touch upon the profit and loss account prepared by the assessee as per provisions contained in the Companies Act while arriving at the book profit under section 115J and the book profit arrived at must be the basis for taxation. Further, the thrust in the provision of Section 80HHC is on profit and not on income as contemplated in Section 80AB. Further, setting off of losses of Ahmedabad Unit in which there is no export, against profit of Baramati Unit is not permitted as it would defeat the very purpose of insertion of Section 80HHC.

Therefore, I direct the AO to recompute the deduction u/s 80HHC for the purpose of deduction u/s 115JB(2)(iv) on the basis of book profit declared by the appellant u/s 115JB (1) of the Act. "

12. We have heard rival submissions and perused the orders of the lower authorities and material available on record. According to the AO, the deduction allowable to the assessee under section 80HHC for the purpose of deduction from book profit under section 115JB(2)(iv) is the figure of eligible profit under the normal provisions of the Act, after deducting the brought forward loss therefrom. Since, he computed the deduction as above at NIL, therefore, he held that no deduction was allowable to the assessee under section 115JB(2)(iv) of the Act.

13. On appeal, the CIT(A) held that for the purpose of allowing deduction under section 80HHC from the book profits, the book profit of the assessee from the eligible business was to be considered, and hence directed the AO to allow deduction on the basis of profit declared by the assessee under section 115JB(1) of the Act.

14. Being aggrieved, the Revenue is in appeal before us.

15. The Ahmedabad Bench of the Tribunal in the case of DCIT Vs. Sun Pharmaceutical Industries Ltd., in ITA nos.363&692/Ahd/2002 for the Asstt.Year 1998-1999 by order dated 7.1.2011 held as under:

ITA No.971/Ahd/2011 6 "16. Ground no.5 in the appeal of the assessee relates to deduction u/s 80HHC of the Act for the purpose of computation of book profits in terms of clause (viii) of the explanation appended below the extant sec. 115JA(2) of the Act. The AO while computing book profits in terms of provisions of sec. 115JA of the Act allowed deduction u/s 80HHC of the Act, on the eligible export profits of the business computed under the normal provisions as against the claim of the assessee for computation of such deduction on the basis of book profits.

17. On appeal, the learned CIT(A) upheld the findings of the AO.

18. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. AR on behalf of the assessee contended that the issue is now settled by the decision of the Hon'ble Apex Court in the case of Ajanta Pharma,327 ITR 305(SC) and by the Hon'ble Madras High Court in Bhari Information Technology System,328 ITR 380(Mad.).On the other hand, the ld. DR supported the findings of the ld. CIT(A) and contended that only taxable profits computed under the normal provisions have to be considered while determining amount of deduction u/s 80HHC of the Act for the purpose of sec. 115JA of the Act.

19. W e have heard both the parties and gone through the facts of the case as also the decisions relied upon. W e find that while adjudicating the claim for deduction u/s 80HHC of the Act for ITA nos.363&692/Ahd/02 determining the book profits u/s 115JA of the Act ,the Mumbai Special Bench of ITAT in the case of DCIT vs. Syncome Formulations (I) Ltd.,106 ITD 193 held that the deduction under section 80HHC in a case of MAT assessment is to be worked out on the basis of the adjusted book profits and not on the basis of the profit computed under the regular provisions of law applicable to the computation of profit and gains of business or profession. However, subsequently, Hon'ble Bombay High Court in their aforesaid decision in CIT Vs. Ajanta Pharma Ltd.,223 CTR(Bom.)441 overruled the decision in the case of Syncome Formulations (I) Ltd.(supra). On further appeal by the assessee, Hon'ble Apex Court in the case Ajanta Pharma Ltd. vs. CIT, 327 ITR 305(SC) while referring to the relevant provisions of sec. 115JB and sec. 80HHC of the Act upheld the view taken by the Special Bench in the case of Syncome Formulations (I) Ltd.(supra) in the following terms:

" 7. In recent times, the number of zero-tax companies and companies paying marginal tax has grown, hence, vide the Finance (No.2) Act, 1996, levy of minimum tax on companies having "book profits" stood introduced. The ITA No.971/Ahd/2011 7

scheme envisaged payment of minimum tax by deeming 30% of the book profits computed under the Companies Act, as taxable income, in a case where the total income as computed under the provisions of the 1961 Act, is less than 30% of the book profit. The word "book profit" has been defined in Section 115JA(2) read with the Explanation thereto to mean the net profit as shown in the Profit and Loss Account, as increased by the amount(s) mentioned in clauses (a) to (f), and as reduced by amount(s) covered by clauses (i) to (ix) of the Explanation. These may be called for the sake of brevity as "Upward and Downward Adjustments". From the above it is clear that Section 115JA is a self-contained Code and will apply notwithstanding any provisions in the 1961 Act. In this case, we are concerned with Downward Adjustment, particularly clause (viii) which refers to the amount(s) of profits eligible for deduction under Section 80HHC, computed under Section 80HHC(3) but subject to conditions specified in Sections 80HHC(4) and 80HHC(4A).

8. By the Finance Act, 2000, Section 115JB was inserted w.e.f. 1.4.2001 providing for levy of MAT on certain companies. Section 115JB, though structured differently, stood inserted to provide for payment of advance tax by MAT companies. Section 115JB is the successor section to Section 115JA. In essence, it is the same except that Section 115JA provided for MAT on companies, so far as it does not deem the book profit as total income. Under ITA nos.363&692/Ahd/02 Section 115JB, however, clause (viii) of Section 115JA is re-numbered as clause

(iv). Section 115JB continues to remain a self-contained Code.

9. On the other hand, Section 80HHC(1) inter alia states that where an assessee, who is the Indian resident, is engaged in the business of exports out of India of any goods earns convertible foreign exchange then in computing the total income, a deduction of the profits derived from such exports would be admissible.

Thus, Section 80HHC provides for tax incentives. Section 80HHC(1) at one point of time laid down that an amount equal to the amount of deduction claimed should be debited to the P&L Account of the previous year in respect of which deduction is to be allowed and credited to the reserve account to be utilized for the business purpose. Section 80HHC(1) concerns eligibility whereas Section 80HHC(3) concerns computation of the quantum of deduction/tax relief. At one point of time prior to the Finance ITA No.971/Ahd/2011 8

Act, 2000, exporters were allowed 100% deduction in respect of profits derived from export of goods. However, that has now been reduced in a phase-wise manner under Section 80HHC(1B). It may be noted that all assessable entities are not eligible for deduction under Section 80HHC. Similarly, only eligible goods are entitled to such special deduction under Section 80HHC(1). A bare reading of Section 80AB shows that computation of deduction is geared to the amount of income, but Section 80HHC(3), which refers to quantification of deduction is geared to the exports turnover and not to the income. On the other hand, Section 115JB refers to levy of MAT on the deemed income. The above discussion is only to show that Sections 80HHC and 115JB operate in different spheres. Thus, two essential conditions for invoking Section 80HHC(1) are that assessee must be in the business of export and secondly that sale proceeds of such exports should be receivable in India in convertible foreign exchange. Hence, Section 80HHC(1) refers to "eligibility" whereas Section 80HHC(3) refers to computation of tax incentive. Coming to Section 80HHC(1B) it is clear that after Finance Act, 2000 w.e.f. assessment year 2001-02 exporters would not get 100% deduction in respect of profits derived from exports but that they would get deduction of 80% in the assessment year 2001-02, 70% in the assessment year 2002-03 and so on. Thus, Section 80HHC(1B) deals not with "eligibility" but with the "extent of deduction". As earlier stated, Section 115JB is a self-contained Code. It taxes deemed income. It begins with a non-obstante clause. Section 115JB refers to computation of "book profits"

which have to be computed by making Upward and Downward adjustments. In the Downward Adjustment, vide clause (iv) it seeks to exclude "eligible" profits derived from exports. On the other hand, under Section 80HHC(1B) it is the extent of deduction which matters. The word "thereof" in each of the items under Section 80HHC(1B) is important. Thus, if an assessee earns Rs.100 crores then for the assessment year 2001-02, the extent of deduction is 80% thereof and so on which means that the principle of proportionality is brought in to scale down the tax incentive in a phased manner. However, for the purposes of computation of book profits which computation is different from normal computation under the 1961 Act/computation under Chapter VIA, we need to keep in mind the Upward and Downward Adjustments and if so read it becomes clear that clause (iv) covers full export profits of 100% as "eligible profits" and that the same cannot be reduced to 80% by relying on Section 80HHC(1B). Thus, for computing "book profits" the Downward Adjustment, in the ITA nos.363&692/Ahd/02 above example, would be Rs.100 crores and not Rs.90 crores. The idea being to exclude "export profits" from computation of book profits under ITA No.971/Ahd/2011 9

Section 115JB which imposes MAT on deemed income. The above reasoning also gets support from the Memorandum of Explanation to the Finance Bill, 2000.

10. One of the contentions raised on behalf of the Department was that if clause

(iv) of Explanation to Section 115JB is read in entirety including the last line thereof (which reads as "subject to the conditions specified in that section"), it becomes clear that the amount of profits eligible for deduction under Section 80HHC, computed under clause (a) or clause (b) or clause (c) of sub-section (3) or sub-section (3A), as the case may be, is subject to the conditions specified in that Section. According to the Department, the assessee herein is trying to read the various provisions of Section 80HHC in isolation whereas as per clause (iv) of Explanation to Section 115JB, it is clear that book profit shall be reduced by the amount of profits eligible for deduction under Section 80HHC as computed under clause(a) or clause(b) or clause(c) of subsection (3) or sub-section (3A), as the case may be, of that Section and subject to the conditions specified in that Section, thereby meaning that the deduction allowable would be only to the extent of deduction computed in accordance with the provisions of Section 80HHC. Thus, according to the Department, both "eligibility" as well as "deductibility" of the profit have got to be considered together for working out the deduction as mentioned in clause (iv) of Explanation to Section 115JB.We find no merit in this argument. If the dichotomy between "eligibility" of profit and "deductibility" of profit is not kept in mind then Section 115JB will cease to be a self-contained code. In Section 115JB,as in Section 115JA, it has been clearly stated that the relief will be computed under Section 80HHC(3)/(3A), subject to the conditions under sub-clauses (4) and (4A) of that Section. The conditions are only that the relief should be certified by the Chartered Accountant.

Such condition is not a qualifying condition but it is a compliance condition. Therefore, one cannot rely upon the last sentence in clause (iv) of Explanation to Section 115JB (subject to the conditions specified in sub-clauses (4) and (4A) of that Section) to obliterate the difference between "eligibility" and "deductibility" of profits as contended on behalf of the Department."

19.1 Before this, in the case of CIT Vs. Rajnikant Schnelder& Associates P Ltd.,302 ITR 22(Mad), the Hon'ble Madras High Court held that the AO was not entitled to alter the profit and loss account prepared by the assessee under the provisions of the Companies Act while arriving at book profits u/s 115JA of the Act and the book profits so arrived at should be the basis for taxation ITA No.971/Ahd/2011 10

and computation u/s 80HHC should be limited to the case of profits of eligible category only. This decision has been reiterated in CIT Vs. SPEL Semiconductor Ltd.,323 ITR 488(Mad.), when it was held that the deduction u/s 80HHC of the Act in an assessment u/s 115JA is to be ITA nos.363&692/Ahd/02 worked out on the basis of adjusted book profits and not on the basis of the profit computed under the regular provisions of law applicable to the computation of profits and gains of business or profession. An SLP filed by the Revenue against this decision has been dismissed as reported in 320 ITR(St.)21. Following the decision in Rajnikant Schnelder& Associates P Ltd.(supra) ,similar view was taken in Bhari Information Technology System,328 ITR 380(Mad.).

19.2 In the light of view taken by the Hon'ble Apex Court in their aforesaid decision in Ajanta Pharma Ltd.(supra) as also by the Hon'ble Mdras High Court, we have no alternative but to vacate the findings of the ld. CIT(A) and direct the AO to allow deduction u/s 80HHC of the Act on the basis of adjusted book profits and not on the basis of the profit computed under the regular provisions of law applicable to the computation of profits and gains of business or profession. Therefore, ground no. 5 in the appeal of the assessee is allowed."

16. Respectfully following the same, we confirm the order of the CIT(A) on this issue, and dismiss the ground of the appeal of the Revenue.

17. In the appeal of the Revenue is partly allowed for statistical purpose.

Order pronounced in the Court on Friday the 17th April, 2015 at Ahmedabad.

Sd/- Sd/- (KUL BHARAT) ( N.S. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated 17/04/2015