Commissioner of Income Tax Vs Vardhman Spinning and General Mills Ltd.

Rajesh Bindal, J.@mdashThe Revenue is in appeal before this Court against the order dated August 8, 1989, passed by the Income Tax Appellate Tribunal, Chandigarh Bench (for short, "the Tribunal") in I.T.A. No. 614/ Chandi/1984, for the assessment year 1978-79, raising the following substantial question of law:

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in allowing deduction u/s 80J and investment allowance of the current year before allowing depreciation of the current year?

2. A perusal of the order passed by the learned Commissioner of Income tax (Appeals), Jalandhar (for short, "the CIT(A)") shows that the issue involved in the present case, in fact, is as to whether the Assessing Officer had erred in law in allowing reference u/s 80J of the Income Tax Act, 1961 (for short, "the Act") before allowing of difference. However, subsequently it was recorded as relief u/s 80J and investment allowance of the current year before allowing depreciation of the current year. Accordingly, we deem it appropriate to reframe the question of law which shall read as under:

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in allowing deduction u/s 80J of the current year before allowing depreciation and investment allowance of the current year?

3. The assessee in the present case is engaged in the business of spinning of cotton, staple and polyester viscose yarn. It is also owning a steel mill. Return for the assessment year in question was filed on August 31, 1978, declaring the income at Rs. 1,02,77,871. During the course of assessment proceedings, the Assessing Officer did not allow the relief u/s 80J of the Act before the allowance of depreciation. However, the Commissioner of Income Tax (Appeals) accepted the claim made by the assessee and directed that the relief u/s 80J of the Act and the investment allowance of the current year should be allowed before allowing depreciation for the current year. The order was upheld by the Tribunal in appeal by the Revenue.

4. Learned Counsel for the Revenue submitted that the view expressed by the Tribunal is totally contrary to the provisions of law as Sections 80AB and 80B(5) of the Act clearly provide for the manner in which the deduction under Chapter VI-A are to be calculated. He submitted that deduction u/s 80J of the Act is to be calculated on the net income after grant of all other deductions under the Act except provided under Chapter VI-A of the Act of which Section 80J is a part.

5. On the other hand, learned Counsel for the assessee submitted that the Tribunal in the present case had followed its earlier decision in the case of Mahavir Spinning Mills Ltd. and the Revenue having not disclosed the status of the case should not be heard on the merits in the present case as well. He further submitted that the view expressed by the Tribunal in the present case is strictly in conformity with law. Section 80J of the Act provides that deduction has to be calculated on the gross total income.

6. Before we express our opinion on the question, referred to above, it would be appropriate to refer to the enunciation of law thereof by hon''ble the Supreme Court and various High Courts.

7. In Commissioner of Income Tax Vs. Vishnu Oil and Dal Mills, , the Rajasthan High Court held that for determination of the relief u/s 80HH of the Act, the total income of the assessee has to be worked out after deducting unabsorbod losses and unabsorbed depreciation and the income eligible for deduction will be the net income as computed in accordance with the provisions of the Act and not the gross income.

8. In Commissioner of Income Tax, Tamil Nadu-V, Madras Vs. Kotagiri Industrial Co-operative Tea Factory Ltd., Kotagiri, , while considering Section 80B(5) of the Act, it was held that before considering the deduction u/s 80P(2) of the Act, the carry forward losses of the earlier years in accordance with the provisions of Section 72 of the Act were to be deducted. Section 80B(5) of the Act, which defines "gross total income", provides that the total income should be determined in accordance with the provisions of the Act before making any deduction under this Chapter.

9. The hon''ble Supreme Court in Motilal Pesticides (I.) Pvt. Ltd. Vs. Commissioner of Income Tax, , while dealing with the issue as to whether an assessee was entitled to deduction u/s 80HH of the Act in the gross total income or the net income as computed, after taking into consideration the provisions of Sections 80AA and 80AB of the Act, opined that the provisions of Section 80AB of the Act are declaratory in nature and the deduction u/s 80HH of the Act is admissible from the net income and not gross income.

10. The Bombay High Court in Grasim Industries Ltd. Vs. Assistant Commissioner of Income Tax and Others, , while holding Section 80AB of the Act, inserted with effect from April 1, 1981, by the Finance (No. 2) Act, 1980, to be declaratory in nature, held that the deduction u/s 80HH of the Act was admissible only after deductions are given under Sections 30 to 43A of the Act.

11. In Commissioner of Income Tax Vs. Cadila Chemicals Pvt. Ltd., , the Gujarat High Court while considering the issue as to whether the relief u/s 80HH of the Act is to be worked out without deducting depreciation from the profits of the company, opined that keeping in view the provisions of Section 80AB of the Act before making any deduction u/s 80HH of the Act, depreciation will have to be deducted before hand.

12. Section 80B of the Act is part of Chapter VI-A and the deduction u/s 80J is also provided therein.

13. This Court had considered a similar issue in CIT v. Mahavir Spinning Mills Ltd. [2007] 293 ITR 492 (P&H), where the question was regarding grant of deduction u/s 80 before allowing deduction under Sections 80HH and 32A of the Act. The issue was considered and answered in favour of the Revenue while relying upon a judgment of the hon''ble the Supreme Court in Motilal Pesticides (I.) Pvt. Ltd. Vs. Commissioner of Income Tax, .

14. In Synco Industries Ltd. v. Assessing Officer (Income Tax) [2008] 299 ITR 444, the hon''ble the Supreme Court while dismissing the appeal filed by the assessee and upholding the judgment passed by the Bombay High Court held that the gross total income of the assessee must be determined considering the income carrying forward losses of the earlier year before allowing deductions under Chapter VI-A of the Act and if the gross total income is nil, the assessee cannot claim deductions under Chapter VI-A of the Act.

15. In the present case, the assessee sought deductions u/s 80J of the Act on the gross total income before allowance. However, in view of enunciation of law, as referred to above, before allowing deduction u/s 80J of the Act, the gross total income which is arrived at after granting of deductions for the previous year prior thereto has to be considered.

16. For the reasons mentioned above, the question referred to above is answered in favour of the Revenue and against the assessee. The reference is disposed of accordingly.