2013 (5) TMI 152 - HC - Income Tax

Method of computation of deduction U/s 80HHC - Whether the deduction claimed by the assessee U/s 80HHC of the Act should have been given first and then the adjustments of unabsorbed depreciation should have been taken place - Held that - The decision of the Supreme Court in the case of IPCA Laboratory Ltd. v. Dy.(2004 (3) TMI 9 - SUPREME Court) and this decision had been followed by the Madhya Pradesh High Court in the case of VIPPY Solvex Products Ltd. v. CIT (2004 (11) TMI 31 - MADHYA PRADESH High Court) opined that the unabsorbed depreciation and carried forward losses of the earlier year should be first factored in while arriving at the taxable income and as against balance available, the benefit of deduction under section 80HHC of the Act can be claimed. We having noticed the ratio of the Supreme Court in the Judgments referred to above, that deduction can be claimed only against positive profits and positive profit necessarily implies the adjustments and set off of the depreciation allowance of earlier years and carried forward losses of earlier years and that Judgment having the binding effect on this court, it has to be necessarily ruled that the benefit under section 80HHC of the Act can be claimed only after the unabsorbed depreciation of the earlier years is adjusted against the profits of the current year and then only the benefit extended under section 80HHC of the Act can be given effect to. Tribunal was correct in taking the view that the Appellate Commissioner was not justified in reversing the view taken by the Assessing Officer and the order of the Tribunal is proper, does not suffer from any error of law and therefore we answer the questions posed in the affirmative to hold that the Tribunal was correct in taking the view that the assessee was not entitled to claim the benefit of deduction even before adjusting unabsorbed depreciation of the earlier years - Revenue s appeal is dismissed.

Issues Involved:
1. Whether the Tribunal was justified in law in holding that the benefit of deduction under section 80HHC of the Act can be availed by the assessee only on the total income as computed after setting off the unabsorbed depreciation of the earlier years.
2. Whether the method of computation of deduction under section 80HHC as approved by the Tribunal is valid in law on the facts of the present case.
3. Whether the benefit of section 80HHC of the Act can be claimed on the total income after deduction of unabsorbed losses and unabsorbed depreciation or otherwise.

Detailed Analysis:

1. Justification of Tribunal's Decision on Deduction under Section 80HHC:
The assessee, a limited company engaged in the export business, claimed a deduction under section 80HHC of the Income Tax Act for the Assessment Year 1997-98. The Assessing Officer set off the unabsorbed depreciation of earlier years against the total income before allowing the deduction under section 80HHC, resulting in no taxable income. The Appellate Commissioner reversed this decision, but the Tribunal upheld the Assessing Officer's view, leading to the present appeal.

The Tribunal's decision was based on the Supreme Court's ruling in IPCA Laboratory Ltd. v. Dy. CIT, which mandated that unabsorbed depreciation and carried forward losses must be factored in before arriving at the taxable income for claiming deductions under section 80HHC. The Tribunal's decision was supported by similar rulings from the Madhya Pradesh High Court and the Supreme Court's emphasis on the concept of "positive profit" for such deductions.

2. Validity of the Method of Computation of Deduction under Section 80HHC:
The assessee argued that the Supreme Court's decision in IPCA Laboratory Ltd. was not applicable as it dealt with inter-source set off of losses within export activities, whereas the present case involved a single export activity. However, the court noted that the principle of computing profit for section 80HHC by considering both profits and losses was upheld by the Supreme Court, emphasizing the significance of section 80AB, which controls the computation of deductions under Chapter VI-A, including section 80HHC.

The court also considered the changes in section 32(2) of the Act regarding the carry forward of unabsorbed depreciation and concluded that these changes did not affect the fundamental requirement of arriving at positive profits after setting off unabsorbed depreciation for claiming deductions under section 80HHC.

3. Claiming Benefit under Section 80HHC on Total Income After Deduction of Unabsorbed Losses and Depreciation:
The court examined whether the benefit under section 80HHC should be computed independently of unabsorbed depreciation. The assessee contended that section 80HHC should allow deductions before adjusting unabsorbed depreciation. However, the court referred to the Supreme Court's decisions in IPCA Laboratory Ltd., Shirke Construction Equipment Ltd., and A.M. Moosa, which established that deductions under section 80HHC can only be claimed against positive profits, determined after adjusting for unabsorbed depreciation and losses.

The court concluded that the Tribunal was correct in its view that the benefit under section 80HHC can only be claimed after adjusting for unabsorbed depreciation of earlier years. The Madras High Court's decision in CIT v. Sharon Vaneers (P.) Ltd., which followed similar reasoning, further supported this conclusion.

Conclusion:
The court affirmed the Tribunal's decision, stating that the assessee was not entitled to claim the benefit of deduction under section 80HHC before adjusting unabsorbed depreciation of earlier years. The appeal was dismissed, and the Tribunal's order was upheld as legally sound and free from error.

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