2004 (2) TMI 297 - AT - Income Tax

Summary

Issues Involved:

1. Whether the interest earned by the assessee on deposits can be considered as profits derived from an industrial undertaking under sections 80-HH and 80-I.
2. Whether the losses of one industrial undertaking should be set off against the profits of another industrial undertaking for the purposes of computing deduction under section 80HH.
3. Whether 90 percent of the receipts of the leasing division should be excluded from the profits of the business for the purpose of computing deduction under section 80HHC.

Issue-wise Detailed Analysis:

1. Interest Earned on Deposits:

The first issue revolves around whether the interest earned by the assessee on deposits can be classified as profits derived from an industrial undertaking under sections 80-HH and 80-I. This matter was resolved by the Supreme Court in Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278, which held that interest income earned on deposits cannot be considered as profits derived from an industrial undertaking. Consequently, the Tribunal decided this issue in favor of the Revenue and against the assessee, reversing the orders of the CIT(A).

2. Setting Off Losses Against Profits for Section 80HH:

The second issue pertains to whether the losses of one industrial undertaking should be set off against the profits of another industrial undertaking for computing deduction under section 80HH. The facts reveal that the assessee, engaged in the manufacture and sale of bulk drugs, had two units with one incurring losses and the other earning profits. The assessee claimed deduction under section 80HH for the profits of the profitable unit, relying on the Supreme Court judgment in CIT v. Canara Workshops (P.) Ltd. [1986] 161 ITR 320. However, the Assessing Officer contended that the deduction should be on the net profits after setting off the losses of the losing unit against the profits of the profitable unit, citing several reasons including the scheme of the Act and the insertion of section 80AB.

Upon appeal, the CIT(A) ruled in favor of the assessee, holding that the deduction should be based on the profits of the industrial undertaking without setting off the losses of the other unit. The Tribunal upheld the CIT(A)'s decision, applying the Supreme Court's reasoning in Canara Workshops (P.) Ltd., emphasizing that incentive provisions should be construed liberally to achieve their legislative purpose. The Tribunal noted that the legislative intent was to encourage the setting up of new industries and that profits from such industries should be incentivized without being diminished by losses from other units. The Tribunal rejected the Assessing Officer's reasoning, affirming that section 80HH should be interpreted in line with the principles established in Canara Workshops (P.) Ltd.

3. Exclusion of Leasing Division Receipts for Section 80HHC:

The third issue concerns whether 90 percent of the receipts from the leasing division should be excluded from the profits of the business for computing deduction under section 80HHC. The Tribunal agreed that such receipts fall within the provisions of Explanation (baa) after sub-section (4B) of section 80HHC. However, the assessee argued that the exclusion should be of the net receipts after deducting the expenditure incurred to earn such receipts. The Department opposed this, referencing the Tribunal's decision in Choudhary Garments v. Dy. CIT [2003] 86 ITD 779 (Mum.).

Given the divergence of opinion on this issue, the Tribunal adhered to the legal principle that when two views are possible, the one favorable to the assessee should be adopted. Thus, the Tribunal ruled that 90 percent of the net receipts should be excluded from the profits of the business for computing the deduction under section 80HHC, modifying the order of the CIT(A) accordingly.

Conclusion:

In summary, the Tribunal ruled in favor of the Revenue on the issue of interest earned on deposits, upheld the CIT(A)'s decision on setting off losses against profits under section 80HH, and modified the CIT(A)'s order to exclude 90 percent of the net receipts from the leasing division for computing deduction under section 80HHC. The appeals were accordingly allowed or partly allowed based on these determinations.