2004 (11) TMI 31 - HC - Income Tax

Deduction under section 80HHC - Whether Tribunal is justified in holding that the Assessing Officer was correct in adjusting the brought forward business loss of the earlier year(s) against the business profit of the current year and since after such adjustment the gross total income was computed at nil the assessee was not entitled to deduction u/s 80HHC? - despite some amendment made in the wording of section 80HHC with effect from April 1 1986 it did not make any change in so far as it related to computation of total income of an assessee - we answer the question against the assessee and in favour of the Revenue

Summary

Issues:
1. Interpretation of section 80HHC of the Income-tax Act, 1961 regarding adjustment of brought forward business loss against current year's business profit for deduction under Chapter VI-A.
2. Applicability of Supreme Court's decision in IPCA Laboratory Ltd. v. Deputy CIT [2004] 266 ITR 521 to the assessment years 1985-86 and 1986-87.
3. Relevance of sections 80A(1), 80A(2), 80AB, 80B(5), 2(45) in determining total income and deductions under Chapter VI-A.

Analysis:
1. The primary issue in this case pertains to the interpretation of section 80HHC of the Income-tax Act, specifically regarding the adjustment of brought forward business loss against the current year's business profit for claiming deductions under Chapter VI-A. The court examined whether losses from earlier years can be set off against the profit of the current year to compute the gross total income, impacting the eligibility for deduction under section 80HHC.

2. The judgment refers to the decision of the Supreme Court in IPCA Laboratory Ltd. v. Deputy CIT [2004] 266 ITR 521, which clarified the interpretation of section 80HHC post-April 1, 1986. The Supreme Court held that for claiming deductions under section 80HHC, a positive profit must be determined after considering losses. The court applied this decision to the assessment year 1986-87, emphasizing that losses must be adjusted against profits even for deductions under section 80HHC.

3. The court analyzed various sections including 80A(1), 80A(2), 80AB, 80B(5), and 2(45) to determine the computation of total income and deductions under Chapter VI-A. It highlighted the significance of these sections in calculating gross total income and allowing deductions in accordance with the provisions of the Act. The court emphasized that the principles of accountancy recognize the carry forward and set off of business losses while computing the net profit, which cannot be disregarded in cases related to section 80HHC.

4. Ultimately, the court concluded that the law laid down by the Supreme Court in IPCA Laboratory Ltd. v. Deputy CIT [2004] 266 ITR 521 applied to the assessment year 1985-86 as well. It held that the Assessing Officer was justified in adjusting the brought forward business loss against the current year's profit, resulting in nil gross total income and thereby denying the deduction under section 80HHC of the Income-tax Act.

5. The judgment answered the reference against the assessee and in favor of the Revenue, affirming the adjustment of losses against profits for calculating deductions under section 80HHC. The court's detailed analysis of relevant sections and legal principles provided a comprehensive understanding of the interpretation and application of the Income-tax Act in this context.