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CASE NO.: Appeal (civil)  6758 of 2001

PETITIONER: Commissioner of Income Tax, Pune

RESPONDENT: Shirke Construction Equipment Ltd

DATE OF JUDGMENT: 17/05/2007

BENCH: ASHOK BHAN & DALVEER BHANDARI

JUDGMENT: JUDGMENT       

BHAN, J.

1.      With the leave of the Court, the Commissioner of  Income Tax, Pune (for short "the Revenue") has filed  the present appeal against the Final judgment and  order dated 24th July, 2000 passed by the High Court  of Bombay in ITA No. 458/AN/1998 by which the High  Court has affirmed the decision of the Tribunal and  dismissed the appeal filed by the Revenue.  The issue  involved in this appeal relates to the provisions of the  Income Tax Act, 1961 (for short "the Act").

2.      The High Court framed the following two  questions of law for its determination:

1.      Whether Section 80-AB can be applied to Section  80-HHC of the Act? 2.      Whether, in determination of business profit under  Section 80HHC,  the unabsorbed business losses of  the earlier years under Section 72 of the Act should be  set off?

3.      The High Court has decided both the questions  against the Revenue and in favour of the assessee.  On  the first point, the High Court has held that Section  80-HHC is independent of Section 80-AB and Section  80-AB does not control Section 80HHC of the Act.  On  the second point, it has been held that unabsorbed  business losses of the earlier years could not be set off  against the profits from exports.

4.      High Court of Kerala in CIT v. T.C. Usha [(2003)  132 Taxman 297 (Ker.)].  has also taken a similar view  and has held that the losses would not be set off  against the profits earned by an assessee from export  of the goods manufactured by it.  This decisions of the  Bombay High Court in the present case and the High  Court of Kerala  in C.I.T. v. T.C. Usha (supra) have  been overruled by this Court in IPCA Laboratory Ltd.  v. Dy. Commissioner of Income Tax, Mumbai [(2004)  12 SCC 742].  

5.      The facts in the present case are similar as that

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in IPCA Laboratory Ltd. (supra), hence the same are  not restated herein.  In IPCA Laboratory Ltd. (supra),  the counsel appearing for the assessee had placed  reliance on two judgments, i.e., one by the Bombay  High Court in CIT v. Shirke Construction Equiments  Ltd. [2000 246 ITR 429 Bom.], which is the judgment  impugned in the instant appeal, and another by the  High Court of Kerala in CIT v. T.C. Usha (supra).

6.      Taking a contrary view, this Court in IPCA  Laboratory Ltd. (supra) has held that (i) Section 80- HHC of the Act is not independent of Section 80-AB  and would be governed by Section 80-AB; and (ii)  losses were to be set off against the profits earned  from export of self-manufactured goods.  It has further  been held in this case that Section 80 HHC would be  governed by Section 80-AB and the decision of the  Bombay High Court and the Kerala High Court taking  the contrary view does not lay down the correct law to  that extent.          7.      The judgment impugned in the present case,  which, as indicated hereof, was relied has been  noticed by this Court in paragraph 7 of the judgment  in IPCA case (supra), thus:

"Mr. Dastur also relied upon the case of CIT  v. Shirke Construction Equipments Ltd.  2000 246 ITR 429 (Bom.).  In this case the  Bombay High Court has held that Section  80-HHC is a complete code in itself and that  it is not controlled by Section 80-AB.  It was  held that profits had to be computed under  Section 29 and Section 72 was not  applicable.  It was held that carry-forward  losses could not be set off for computing  profits for the purpose of Section 80-HHC.   In this case it was also noticed that the  object was to encourage exports."

8.       The judgment of the Kerala High Court in CIT v.  T.C. Usha [(2003) 132 Taxman 297 (Ker.)], on which  reliance was placed by the assessee in IPCA  Laboratory Ltd. (supra), has been noticed by this  Court in paragraph 10 of the said judgment, thus:

"Mr. Dastur also relied upon a judgment in  the case of CIT v. T.C. Usha (2003) 132  Taxman 297 (Ker).  In this case the Kerala  High Court was considering an identical  question i.e. whether the profits earned from  export of self-manufactured goods were to be  set off against loss incurred in export of  trading goods.  The Kerala High Court has  accepted arguments similar to those made  by  Mr. Dastur and has concluded that the  losses were not to be set off against the  profits earned from export of own  manufactured goods.  In coming to this  conclusion the Kerala High Court has  proceeded on the footing that Section 80- HHC is a self contained code and the  proceeds have to be worked out strictly in  accordance with the provisions."

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9.      Paragraph 14 of the said judgment of this Court in  IPCA Laboratory Ltd. (supra), which answers the  questions, is extracted below: "Section 80-AB is also in Chapter VI-A.  It  starts with the words "where any deduction  is required to be made or allowed under any  section included in this Chapter".  This  would include Section 80-HHC.  Section 80- AB further provides that "notwithstanding  anything contained in that section".  Thus  Section 80-AB has been given an overriding  effect over all other sections in Chapter VI-A.   Section 80-AB or over any other provision of  the Act.  Section 80-HHC would thus be  governed by Section 80-AB.  Decisions of the  Bombay High Court and the Kerala High  Court to the contrary cannot be said to be  the correct law Section 80-AB makes it clear  that the computation of income has to be in  accordance with the provisions of the Act.  If  the income has to be computed in  accordance with the provisions of the Act,  then not only profits but also losses have to  be taken into consideration."

[Emphasis supplied]

10.     As stated above, this Court has taken a contra view  to that of the High Court of Bombay, in CIT v. Shirke  Construction Equipments Ltd. [(2000) 246 ITR 429  (Bom.)] (the impugned judgment) and the decision of the  High Court of Kerala in CIT v. T.C. Usha [(2003) 132  Taxman 297 (Ker.)] and, overruling them, held that the  said decisions cannot be said to be the correct law.

11.     In ITO v. Induflex Products (P) Ltd. [(2006) 1 SCC  458], this Court has held thus:

"It is no doubt true that the term ‘profit’ implies  positive profit which has to be arrived at after  taking into consideration the profit earned from  export of both self-manufactured goods and the  trading goods and the profits and losses in both  the trades have, thus, to be taken into  consideration."

12.     The aforesaid decision of this Court in IPCA  Laboratory Ltd. (supra) has been relied upon in a  subsequent decision of this Court in P.R. Prabhakar v.  CIT, Coimbatore [(2006) 6 SCC 86, at page 92], thus:

"The expression "income arising out of business  of export" brings within its sweep not only the  export of any goods or merchandise  manufactured or possessed by the assessee but  also the trading goods.   Parliament, therefore,  intended to provide incentive when a positive  profit is earned by an exporter."

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13.     Both the aforesaid decisions of this Court in IPCA  Laboratory Ltd. (supra) and Induflex Products (P) Ltd.  (supra) have been relied upon in a subsequent decision of  this Court in P.R. Prabhakar v. CIT, Coimbatore [(2006)  6 SCC 86, at page 92], as indicated above.

14.     Accordingly the two points which had been posed by  the High Court for its decision are answered in the  negative, i.e., against the Revenue and in favour of the  assessee.

15.     For the foregoing reasons, we are left with no other  option except to accept the appeal and set aside the  impugned judgment.

16.     The appeal stands allowed accordingly.  There shall  be no order as to costs.