2004 (7) TMI 599 - AT - Income Tax

Summary

Issues Involved:
1. Computation of eligible deduction under section 80HHE without deducting losses and unabsorbed depreciation of earlier years.
2. Inclusion of profit under section 41(1) in the eligible business profits for the purpose of deduction under section 80HHE.

Detailed Analysis:

1. Computation of Eligible Deduction Under Section 80HHE:
The primary issue revolves around whether the deduction under section 80HHE should be computed without deducting the losses and unabsorbed depreciation of earlier years. The Revenue contended that the CIT(A) erred in directing the Assessing Officer to compute the eligible deduction without these deductions. The CIT(A) relied on the decision of the Hon'ble Andhra Pradesh High Court in CIT v. Gogineni Tobacco Ltd., which held that deductions under section 80HHC should be computed without deducting the losses and unabsorbed depreciation of earlier years. The Revenue argued that this reliance was misplaced as the Supreme Court in IPCA Laboratory Ltd. v. Dy. CIT held that section 80AB has an overriding effect over all other sections, including section 80HHC, which is in pari materia with section 80HHE.

The Tribunal examined the provisions of section 80AB, which stipulates that for computing deductions under any section included in Chapter VI-A, the amount of income as computed in accordance with the provisions of the Act shall alone be deemed to be the amount of income derived or received by the assessee. It was held that the "profits of business" as defined in the Explanation to section 80HHE must be computed after reducing the unabsorbed depreciation, as it is treated as current year's depreciation under section 32(2). Therefore, the Tribunal concluded that the CIT(A) was in error in not reducing the unabsorbed depreciation while computing the profits of the business for the purpose of section 80HHE.

However, regarding the unabsorbed business losses, the Tribunal held that these losses do not affect the current year's profits of the business for the purpose of section 80HHE. The brought forward losses are set off under section 72 and do not reduce the profits of the business as computed under the Act. Thus, for computing the deduction under section 80HHE, the profits of the business should not be reduced by the brought forward losses. The Tribunal clarified that while the total deduction under Chapter VI-A cannot exceed the gross total income, the eligible profit for deduction under section 80HHE should not be reduced by the brought forward business losses. Consequently, the eligible profit for deduction was determined to be Rs. 72,78,339, not Rs. 35,15,070 as computed by the Assessing Officer.

2. Inclusion of Profit Under Section 41(1):
The second issue was whether the profit of Rs. 36,230 under section 41(1) should be included in the profits of the eligible business for the purpose of computing the deduction under section 80HHE. The CIT(A) directed the Assessing Officer to consider this profit as part of the eligible business profits. The Tribunal upheld this direction, noting that the profit of eligible business must be computed as per the Explanation to section 80HHE. Since the profit of Rs. 36,230 forms part of the profits of business as computed under the head "Profits and gains of business," it should not be excluded from the profits of the eligible business.

Conclusion:
The Tribunal partly allowed the appeal, holding that while the unabsorbed depreciation must be deducted when computing the profits of the business for the purpose of section 80HHE, the brought forward business losses should not be deducted. Additionally, the profit of Rs. 36,230 under section 41(1) should be included in the profits of the eligible business for the purpose of computing the deduction under section 80HHE.