1996 (8) TMI 142 - AT - Income Tax

Assessment Year Industrial Undertaking Investment Allowance Mistake Apparent From Record Profits And Gains Supreme Court

Issues Involved:
1. Deduction under section 80HH of the Income-tax Act.
2. Rectification under section 154 of the Income-tax Act.
3. Inclusion or exclusion of investment allowance in computing deductions.

Detailed Analysis:

1. Deduction under section 80HH of the Income-tax Act:
The primary issue in the case revolves around the proper computation of the deduction under section 80HH of the Income-tax Act. The original assessment allowed the deduction on a gross profit of Rs. 1,44,36,149 before allowing deductions under sections 32 and 32A. The Assessing Officer later determined this to be an excess allowance and proposed to re-determine the deduction after considering these deductions. The assessee contended that the deduction should be allowed on the profit after adjustment of current year's depreciation and investment allowance but before unabsorbed investment allowance and previous years' relief. However, the Assessing Officer held that deductions under section 80HH should be determined on the profit after giving effect to unabsorbed deficiencies of earlier years.

The CIT(A) upheld the assessee's contention, directing the Assessing Officer to compute the deduction under section 80HH before deducting investment allowance from the profits and gains of the industrial undertaking. The Tribunal, however, had previously ruled in the assessee's own case for assessment years 1987-88 and 1988-89 that the CIT(A) was not justified in such a direction, relying on the Supreme Court decision in H. H. Sir Rama Varma v. CIT and Cambay Electric Supply Industrial Co. Ltd. v. CIT, which held that items like unabsorbed depreciation and development rebate should not be excluded when computing deductions.

2. Rectification under section 154 of the Income-tax Act:
The Assessing Officer issued a notice under section 154 proposing to rectify the original assessment by re-determining the deduction under section 80HH. The rectification was based on the premise that the original assessment had allowed an excess deduction. The learned D.R. argued that the rectification was justified, citing various judicial precedents that supported the reduction of investment allowance before computing the deduction under section 80HH.

However, the learned Counsel for the assessee argued that at the time of the original assessment, there was a debate and doubt regarding the inclusion or exclusion of investment allowance, and thus, the rectification was not permissible under section 154. The Counsel cited the Calcutta High Court's decision in Jiyajeerao Cotton Mills Ltd. v. ITO, which held that the law laid down by the Supreme Court does not have retrospective operation in obliterating the existence of prior debate or doubt.

3. Inclusion or exclusion of investment allowance in computing deductions:
The debate centered on whether investment allowance should be deducted before computing the deduction under section 80HH. The learned D.R. referred to multiple cases, including Cambay Electric Supply Industrial Co. Ltd. and Mettur Chemical & Industrial Corpn. Ltd., to argue that investment allowance must be reduced before computing the deduction. The learned Counsel for the assessee, however, pointed out that the Supreme Court decision in Mettur Chemical & Industrial Corpn. Ltd. was rendered much later and pertained to section 84, not section 80HH. Additionally, the Counsel highlighted that the Tribunal itself had referred the question of law regarding this issue to the High Court, indicating that the matter was still not settled.

Conclusion:
The Tribunal concluded that at the time of the rectification, there was an ongoing debate and the issue was not free from doubt. The Tribunal noted that the matter required a long drawn process of reasoning, and thus, it did not fall within the purview of section 154. The Tribunal held that the Assessing Officer was not justified in passing the rectification order under section 154, reducing the claim under section 80HH. Consequently, the appeal by the revenue was dismissed, though not for the reasons mentioned by the CIT(A).

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