1982 (12) TMI 89 - AT - Income Tax

Summary

Issues Involved:
1. Computation of deduction under section 80HH of the Income-tax Act, 1961.
2. Disallowance under section 37(3A) for the assessment year 1980-81.

Issue-wise Detailed Analysis:

1. Computation of Deduction under Section 80HH:

The primary issue in these appeals is the method of computing the deduction under section 80HH of the Income-tax Act, 1961. The assessee, a company engaged in the manufacture and sale of industrial belts in a backward area, claimed a deduction under section 80HH at 20% of the gross income from its business for the assessment year 1979-80. The Income Tax Officer (ITO) reduced this deduction by first setting off business losses, unabsorbed investment allowance, and depreciation carried forward from previous years, resulting in a significantly lower deduction.

The Commissioner (Appeals) upheld the ITO's approach, relying on the Supreme Court decision in Cambay Electric Supply Industrial Co. Ltd. v. CIT, which mandated the set off of prior losses before computing deductions under section 80HH.

On further appeal, the assessee argued that the Supreme Court's decision in Cloth Traders (P.) Ltd. v. Addl. CIT supported their claim for deduction on gross income without setting off past losses. The revenue countered that the Cloth Traders case did not address the set off of past losses, and thus, the Cambay Electric decision should prevail.

The Tribunal examined previous cases, including Raju Consultants and Veeraraghava Textiles (P.) Ltd., where it was held that deductions should be based on gross receipts. The Tribunal found that the legislative intent behind section 80HH was to encourage new industrial undertakings in backward areas by allowing deductions on gross profits, not net income after setting off past losses. The Tribunal noted several reasons supporting this view:
- The Finance Minister's budget speech emphasized meaningful tax exemptions for new undertakings.
- The Supreme Court in Cloth Traders indicated that deductions under Chapter VIA should be on gross income.
- The absence of specific wording in section 80HH, similar to section 80E, suggested that past losses should not be set off before computing the deduction.

The Tribunal concluded that the deduction under section 80HH should be computed based on the gross profit from the new industrial undertaking without setting off past losses. The ITO was directed to recompute the relief accordingly for the assessment year 1979-80 and adjust the income for 1980-81 based on this computation.

2. Disallowance under Section 37(3A) for the Assessment Year 1980-81:

The second issue pertains to the disallowance of Rs. 7,983 under section 37(3A) for the assessment year 1980-81. This expenditure was for name boards supplied to dealers, indicating the availability of the assessee's products. The assessee contended that this did not constitute advertisement expenditure.

The Tribunal disagreed with the assessee's view and confirmed the disallowance, classifying the expenditure as advertisement expenses.

Conclusion:

Appeal No. 237 (Mad.) of 1982 is allowed, directing the ITO to recompute the relief under section 80HH based on gross profits without setting off past losses. Appeal No. 238 (Mad.) of 1982 is partly allowed, confirming the disallowance under section 37(3A).