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CASE NO.: Appeal (civil)  4190-4191 of 2002

PETITIONER: M/s Synco Industries Ltd

RESPONDENT: Assessing Officer, Income Tax,Mumbai & Anr

DATE OF JUDGMENT: 13/03/2008

BENCH: ASHOK BHAN & J.M. PANCHAL

JUDGMENT: J U D G M E N T  

CIVIL APPEAL NO.4190-4191 OF 2002 WITH CIVIL APPEAL NO.4192-4193 OF 2002

J.M. PANCHAL, J.

                 1.              These appeals are directed against  Judgments  dated  July 23, 2001 rendered by the Division Bench of the High Court of  Judicature at Bombay in Income Tax Appeal No. 591/2001 and  592/2002 whereby the opinion expressed by the Assessing Officer  and confirmed by Commissioner of Income Tax (Appeals) Mumbai  as well as the Income Tax Appellate Tribunal Mumbai Bench ’B’,  Mumbai that the gross total income must be determined by setting  off against the income, the business losses of the earlier years,  before allowing deduction under Chapter VI-A and if the resultant  income is ’’Nil’’, then the assessee cannot claim deduction under  Chapter VI-A of the Income Tax Act, 1948 (’The Act’ for short), is  upheld.

2.              Since all the appeals raise common questions of law  and fact, this Court proposes to dispose them of by this common  Judgment.

3.              The facts emerging from the record of the case are as  under:-         The appellant-assessee is a Company incorporated under the  provisions of the Indian Companies Act, 1956.  It is engaged in the  business of oil and chemicals.  It has a unit for oil division at  Sirohi District, Rajasthan.  It has also a chemical division at  Jodhpur.  The appellant had earned profit in the assessment year  1990-91 and 1991-92 in both the units.  However, the appellant  had suffered losses in the oil division in earlier years. The  appellant claimed deductions under Section 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 Sections 80HH and 80-I were  allowable.  The Assessing Officer 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.  Feeling aggrieved  the appellant carried the matters in appeal before the  Commissioner of Income Tax (Appeals) V, Mumbai who confirmed  the view of the Assessing Officer by dismissing the same.   Therefore, the appellant preferred two appeals before Income Tax

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Appellate Tribunal Mumbai Bench ’B’, Mumbai.  The Tribunal held  that gross total income of the appellant had got to be computed in  accordance with the Act before allowing deductions under any  Section falling under Chapter VI-A and as the gross total income of  the appellant after setting off the business losses of the earlier  years,  was ’Nil’,  the appellant was not entitled to any deductions  either under Section 80HH or 80-I of the Act.  In that view of the  matter the Tribunal dismissed the appeals filed by the appellant.   Thereupon, the appellant invoked jurisdiction of the High Court  under Section 260-A of the Act by filing these appeals.  The High  Court has dismissed the same by Judgment dated July 23, 2001  giving rise to the instant appeals.

4.              This Court has heard the learned counsel for the parties  at length and in great detail.  This Court has also considered the  documents forming part of the appeals.

5.              The plea that the appellant had earned profits from the  two divisions during the assessment years in question and  therefore losses suffered by the oil division in earlier years could  not have been adjusted against the profits of the two divisions  while considering the question of grant of deduction under  Sections 80-I of the Act, cannot be accepted.

6.              In order to resolve the controversy raised by the  appellant, it would be advantageous to refer to the relevant  provisions of the Act:- "Section 80A. (1) In computing the total income  of an assessee, there shall be allowed from his  gross total income, in accordance with and  subject to the provisions of this Chapter; the  deductions specified in Sections 80C to [80U].

(2) The aggregate amount of the deductions  under this Chapter shall not, in any case, exceed  the gross total income of the assessee.

[(3) Where, in computing total income of an  association of persons or a body of individuals,  any deduction is admissible under Section 80G  or Section 80GGA [or Section 80GGC] or Section  80HH or Section 80HHA or Section 80HHB or  Section 80HHC or Section 80HHD or Section 80-I   or Section 80-IA [or Section 80-IB] [or Section 80- IC] [or Section 80-ID or Section 80-IE] or Section  80J or Section 80JJ, no deduction under the  same section shall be made in computing the  total income of a member or the association of  persons or body of individuals in relation to the  share of such member in the income of the  association of persons or body of individuals.]

Section 80B. (5) "gross total income" means the  total income computed in accordance with the  provisions of this Act, before making any  deduction under this Chapter.

Section 80-I (6) Notwithstanding anything  contained in any other provision of this Act, the  profits and gains of an industrial undertaking or  a ship or the business of a hotel [or the business  of repairs to ocean-going vessels or other powered  craft] to which the provisions of sub-section (1)

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apply shall, for the purposes of determining the  quantum of deduction under sub-section (1) for  the assessment year immediately succeeding the  initial assessment year or any subsequent  assessment year, be computed as if such  industrial undertaking or ship or the business of  the hotel [or the business of repairs to ocean- going vessels or other powered craft] were the  only source of income of the assessee during the  previous years relevant to the initial assessment  year and to every subsequent assessment year up  to an including the assessment year for which  the determination is to be made."

7.              Section 80A, as originally inserted by the Finance Act,  1965 with effect from 1.4.1969 dealt with a different topic  altogether viz., deductions in respect of life insurance premia,  annuities, contributions and provident fund etc.  The present  Section came on the statute book by way of substitution of  Chapter VI A by the Finance (No. 2) Act, 1967, w.e.f. 1.4.1968.   This Section has witnessed several consequential amendments  from time to time by way of insertions, substitutions or omissions.   Sub-Section (1) of Sections 80A lays down that while computing  the total income of an assessee, deductions specified in Sections  80C to 80U shall be allowed from his gross total income.         This Section has introduced a new concept of ’gross total  income’ as distinguished from the ’total income’ i.e., the net or  taxable income.  Clause (5) of Section 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 of the Act.  It follows, therefore,  that deductions under Chapter VI-A can be given only if the gross  total income is positive and not negative.

8.              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  Assessing  Officer has to take into account the provisions of Section 71  providing for set off of loss from one head against income from  another and Section 72 providing for carry forward and set off of  business losses.  Section 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 Assessing  Officer has to work out the gross total income of the assessee.   Sub-Section (2) of Section 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.  As noticed earlier Clause (5) of Section 80B defines the  expression ’gross total income’ to mean the total income computed  in accordance with the provisions of the Act without making any  deductions under Chapter VI-A.  The effect of Clause (5) of Section  80B of the Act is that gross total income will be arrived at after  making the computation as follows:-

(i)     making deductions under the appropriate computation      provisions;

(ii)    including the incomes, if any, under Sections 60 to 64  in the total income of the individual;

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(iii)   adjusting intra-head and/or inter-head losses; and

(iv)    setting off brought forward unabsorbed losses and  unabsorbed depreciation, etc.

9.                In C.I.T. v. Kotagiri Industrial Co-op. Tea Factory  (1997) 224 I.T.R. 604 (S.C.) the respondent was a co-operative  society.  It carried on business in manufacture and sale of tea  from bought tea leaves and the purchase and supply of  agricultural manure to members.  It was also receiving income  from dividend from investments with other co-operative societies.   In the previous year relevant to the assessment year 1972-73, the  assessee had earned a total income of Rs. 85,150/-. The losses of  the earlier year which had been carried forward to the said  assessment year were Rs. 1,82,744/-.  The assessee claimed a  deduction of Rs. 53, 386/- under Section 80-P(2) from the income  of Rs. 85, 150/-.  The I.T.O. first set off the losses of previous  years that had been carried forward against the income and since  the losses were in excess of the income, he held that no deduction  was permissible u/s. 80-P.  The said view, was not accepted by the  Appellate Authority.  The decision of the Appellate Authority was  affirmed by the Income Tax Appellate Tribunal and High Court.   While reversing the decision of the High Court, the Supreme Court  has held that in view of the express provision defining  the  expression ’’gross total income’’ in Clause (5) of Section 80B, for  the purpose of Chapter VI-A, the gross total income must be  determined by setting off, against the income, the business losses  of the earlier years as required by Section 72, before allowing  deduction u/s. 80-P.  The contention raised on behalf of the  appellant that the deduction must first be allowed under Section  80-I and then only the gross total income as computed under the  provisions of the Act before allowing deductions under Chapter VI- A should be worked out, cannot be accepted.  As noticed earlier  Section 80A provides that the deductions shall be allowed out of  the gross total income, whereas Sub-Section (2) restricts the  deductions of the gross total income.  It is, therefore, clear that the  gross total income of the assessee has got to be computed in  accordance with the Act after adjusting losses etc. and if the gross  total income so determined is positive then the question of  allowing deductions under Chapter VI-A arises, but not otherwise.

10.             This Court further notices that predominant majority of  the High Courts have taken the view that deductions under  Chapter VI-A of the Act would be available only if the computation  of gross total income as per the provisions of the Act after setting  off carried forward loss and unabsorbed depreciation of earlier  years is not ’Nil’.  In Commissioner of Income-Tax, Tamil Nadu- III, Madras v. Madras Motors (P) Ltd. (1984) 150 ITR 150, after  noticing the definition of ’gross total income’ the Madras High  Court has held that the intention of the Parliament, that the  deduction under Chapter VI-A is contemplated only after the total  income is computed after setting off of the unabsorbed  depreciation as per Section 72 is evident and therefore Section 72   has to be applied before the total income of an assessee is  determined i.e., before the deductions under Chapter VI-A are  allowed.  In Commissioner of Income-Tax v. Midda Ram (1984)  Vol.19 Taxman Pg. 23 again the Madras High Court has taken  the view that having regard to the provisions of Section 80A and  80B, before making any deduction under Chapter VI-A the total  income of the assessee is to be computed in accordance with the

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provisions of the Act and such total income will have to be taken  as gross total income from which the deduction under Chapter VI- A has to be allowed.  In the said case the gross total income so  computed after set off of unabsorbed depreciation was ’Nil’.  It  was, therefore, held that there was no positive figure from which  the deduction under Chapter VI-A could be allowed.  In  Commissioner of Income-Tax, West Bengal-II, Calcutta v.  Bengal Assam Steamship Company Ltd. (1985) 155 ITR 26 the  Calcutta High Court has held that deduction under Section 80L  and 80M of the Act are to be allowed after setting off of losses  under Section 71 and 72 because Section 80A(2) limits the  aggregate of the deduction allowable to the amount of the gross  total income of the assessee which means that the deduction  allowable cannot result in a negative figure of loss.  What is held  in the said decision is that where the gross total income is found  to be a net loss there is no question of any further deductions  under Section 80L and 80M.  In G.Atherton & Co. v.  Commissioner of Income-Tax (1987) 165 ITR 527 it is held that  the gross total income and also the dividend income of the  assessee had to be computed in accordance with the provisions of  the Act without making any deduction under Section 80M  contained in Chapter VI-A of the Act and as the gross total income  was computed to be a loss, no relief was available to the assessee  under Section 80M.  In Commissioner of Income-Tax, Bombay  City-III, Bombay v. Mercantile Bank Ltd. (1988) 169 ITR 44  after examining the scheme envisaged by Sub-Section 1 of Section  80A, Sub-Section 2 of Section 80A and Sub-Section 5 of Section  80B  the Calcutta High Court has held that the gross total income  defined by Section 80B(5) is the total income computed under the  provisions of the Act, but before making any deductions under  Chapter VI-A and if the total income computed under the Act  before making the deductions under Chapter VI-A is found to be a  positive figure, can the deductions permissible under Chapter VI-A  be given.  In Commissioner of Income-Tax v. Rambal (P.) Ltd.  (1988) 169 ITR 50 the Madras High Court has taken the view  that the relief under Section 80-I would not be available if net  taxable income determined is ’Nil’ after computation of gross total  income as per the provisions of the Act, after setting off carried  forward loss and unabsorbed depreciation of earlier years.  In  Orient Paper Mills Ltd. V. Commissioner of Income Tax (1986)  158 I.T.R. 695 the Calcutta High Court has taken the view that  deductions under Section 80-I cannot exceed gross total income  and if gross total income found is ’Nil’ or a net loss the assessee is  not entitled to deduction under Section 80-I of the Act.  The  principle of law enunciated in the said decision is that Section 80A  of the Act lays down certain general principles for the purpose of  deductions to be allowed in computing the total income under  Section 80C to 80U and such deductions are to be allowed from  the gross total income of the assessee in computing the total  income.  After noticing the definition of the term gross total income  as given in Clause 5 of Section 80B it is held in the said decision  that in the case of a company, total income computed is in  accordance with the provisions of the Act before making any  deduction under Chapter VI-A: what is laid down as principle is  that Section 80A(2) limits the aggregate of the deductions  allowable to the amount of the gross total income of the assessee  and therefore deductions allowance cannot result in any negative  figure or loss and therefore where the gross total income is ’Nil’ or  net loss in the relevant year the assessee will not be entitled to any  relief under Section 80-I.  In Commissioner of Income Tax v.  Sundaravel Match Industries (P) Ltd. (2000) 245 ITR 605 the  Madras High Court has held that losses should be set off against  the profits of the industrial undertaking before granting the  deduction under Section 80HH of the Income-Tax Act, 1961, in  view of the specific provisions found in Section 80AB.  In

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Commissioner of Income-Tax v. Nima Specific Family Trust  (2001) 248 ITR 29 the Bombay High Court has taken the view  that the legislature has introduced Section 80A(2) and Section  80A(5) in order to put a ceiling on the claim for deduction which  indicates that if the deductions under Chapter VI-A are to be  claimed then the gross total income should be sufficient to absorb  such deductions i.e. if the gross total income is ’Nil’ then  deduction under Section 80HH and 80I cannot be claimed because  it would mean that aggregate amount of the deduction would  exceed the gross total income of the assessee.  In Commissioner  of Income-Tax v. Atam Ballabh Finance Pvt. Ltd. (2002) 258  ITR 485 after noticing the definition of gross total income as given  under Section 80B(5) the Delhi High Court has held that while  computing the income, all provisions are required to be applied  and only thereafter the deductions have to be allowed.  In IPCA  Laboratory Ltd. V. Dy. Commissioner of Income-Tax, Mumbai  (2004) 12 SCC 742 the appellant was a holder of an Export House  certificate.  It exported self-manufactured goods as well as goods  manufactured by supporting manufacturers.  It had earned a  profit from the export of self-manufactured goods and had suffered  loss from the export of trading goods.  In its return for assessment  year 1996-97, it claimed deduction under Section 80HHC  contending that profits from the two types of export should be  considered separately and the profit in respect of one could not be  negated or set off against the loss from the other.  Dismissing the  appeal the Supreme Court ruled that although Section 80HHC has  been incorporated with a view to provide incentive to export  houses, if there is a loss then no deduction would be available  under Section 80HHC(1) or (3).  What is held is that in arriving at  the figure of positive profit both the profits and loss will have to be  considered and if the net figure is the positive profit then the  assessee will be entitled to a deduction but if the net figure is a  loss then the assessee will not be entitled to a deduction.   In  Commissioner of Income-Tax v. Lucky Laboratories Ltd.  (2006) 284 ITR 435 (ALL) it is held that Section 80A (1) of the Act  says that in computing the total income of an assessee it shall be  allowed from the gross total income in accordance with and  subject to the provisions of this Section the deductions specified in  Section 80C to 80U whereas sub-section 2 of Section 80A says  that the aggregate amount of the deductions under this Chapter  shall not be in any case exceed the gross total income of the  assessee and therefore the total deduction under Sections 80HH  and 80I should not exceed the gross total income of the assessee.   In Commissioner of Income Tax and Another v. R.P.G.  Telecoms Ltd. (2007) 292 ITR 355 the Karnataka High Court  has held that Section 80AB of the Income-Tax Act, 1961, would  override all other Sections for the purpose of deduction under  Chapter VI-A of the Act and while calculating the gross total  income of the company, one has to adjust the losses from one  priority unit against the profits of the other priority unit and if the  resultant gross total income is ’Nil’ then the assessee cannot claim  deduction under Chapter VI-A.

11.             The above discussion makes it very evident that  predominant majority of the High Courts have taken the view that  while working out gross total income of the assessee the losses  suffered have to be adjusted and if the gross total income of the  assessee is ’Nil’ the assessee will not be entitled to deduction  under Chapter VI-A of the Act.  It is well settled that where the  predominant majority of the High Courts have taken certain view  on the interpretation of certain provisions, the Supreme Court  would lean in favour of the predominant view.  Therefore, this  Court is of the opinion that the High Court was justified in holding  that gross total income must be determined, by setting off against

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the income, the business losses of earlier years, before allowing  deduction under Chapter VI-A and if the resultant income is ’Nil’,  then the asessee cannot claim deduction under Chapter VI-A.

12.             The contention that under Section 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.  Section 80-I (1) lays down that  where the gross total income of the assessee includes any profits  derived from the priority undertaking/unit/division, then in  computing the total income of the assessee, a deduction from such  profits of an amount equal to 20% has to be made.  Section 80-I  (1) lays down the broad parameters indicating circumstances  under which an assessee would be entitled to claim deduction.  On  the other hand Section 80-I (6) deals with determination of the  quantum of deduction.  Section 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  Section 80-I (1) which categorically states that where the gross  total income includes any profits and gains derived from an  industrial undertaking to which Section 80-I applies then there  shall be a deduction from such profits and gains of an amount  equal to 20%.  The words "includes any profits’’ used by the  legislature in Section 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 Section 80-I(6) the Assessing Officer, 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, this Court finds that the non-obstante  clause appearing in Section 80-I(6) of the Act, is applicable only to  the quantum of deduction, whereas, the gross total income under  Section 80B(5) which is also  referred to in Section 80I(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 Section 80A(2) of the Act nugatory and therefore the  interpretation canvassed on behalf of the appellant cannot be  accepted.  It is true that under Section 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-Section 6 contemplates  that only the profits shall be taken into account as if it was the  only source of income.  However, Section 80A(2) and Section 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 Section 80-I(6)  cannot restrict the operation of Sections 80A(2) and 80B(5) which  operate in different spheres.  As observed earlier Section 80-I(6)  deals with actual computation of deduction whereas Section 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 Section 80-I(1), which also refers to gross total  income one has to read the expression ’gross total income’ as  defined in Section 80B(5).  Therefore, this Court is of the opinion  that 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 Section 80-I also.

13.             The proposition of law, emerging from the above  discussion is that the gross total income of the assessee has first

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got to be determined after adjusting losses etc., and if the gross  total income of the assessee is ’Nil’ the assessee would not be  entitled to deductions under Chapter VI-A of the Act.

14.             The appeals therefore filed by the appellant have no  substance and deserve to be dismissed.  Accordingly, all the  appeals fail and are dismissed.  There shall be no order as to cost.