2005 (8) TMI 80 - HC - Income Tax

Additions on account of lowering of prices of the goods sold - deduction under section 80-I - 1. Whether, Tribunal was legally justified in deleting the made on account of lowering of prices of the goods sold which the Income-tax Appellate Tribunal have allowed as a measure of business expediency? 2. Whether, Tribunal was legally justified in directing to compute the deduction under section 80-I on the total income without excluding any deduction under section 80HH overlooking the provisions of sub-section (9) of section 80HH? - it has been held that the unit is entitled to special deduction under both the sections 80HH and 80-I. So far as the benefit of section 80-I is concerned it is to be granted on the gross total income and not on the income reduced by the amount of income allowed under section 80HH. - In the result, both the questions referred to us are answered in the affirmative, i.e., in favour of the assessee and against the Revenue

Summary

Issues Involved:

1. Legality of deleting the addition of Rs. 48.98 lakhs made by the Assessing Officer due to lowering of prices of goods sold.
2. Computation of deduction under section 80-I on the total income without excluding any deduction under section 80HH.

Issue-wise Detailed Analysis:

1. Legality of Deleting the Addition of Rs. 48.98 Lakhs:

The main issue here was whether the Income-tax Appellate Tribunal was justified in deleting the addition of Rs. 48.98 lakhs made by the Assessing Officer. The Assessing Officer had made this addition on the grounds that the assessee had lowered the prices of goods sold to Dabur India Limited, which led to a significant fall in the gross profit rate from 20.9% to 9.52%. The reasons provided by the assessee for the fall in gross profit included lowering of prices (Rs. 48.98 lakhs), increase in manufacturing and operational expenses (Rs. 31.37 lakhs), and increase in material costs (Rs. 62.25 lakhs). The Assessing Officer accepted the latter two reasons but did not accept the lowering of prices as a valid business expediency.

The Commissioner of Income-tax (Appeals) confirmed the addition, stating that the lowering of prices was not for business purposes but for extraneous considerations. It was noted that the appellant company was a captive manufacturing unit for Dabur India Limited, and the directors of the appellant company were employees of Dabur India Limited. The Tribunal, however, allowed the appeal of the assessee, deleting the addition. The Tribunal found no material evidence to suggest that the lowering of prices was a device to reduce income or that any tax avoidance was manipulated by the assessee or Dabur India Limited. The Tribunal noted that the assessee had limited choices and had to comply with Dabur's terms to continue its business.

The High Court agreed with the Tribunal's findings, stating that the Tribunal had given plausible reasons for accepting the assessee's claim for lowering the price, which resulted in the fall in gross profit. The High Court found no error in the Tribunal's order and upheld the deletion of the addition.

2. Computation of Deduction under Section 80-I:

The second issue was whether the deduction under section 80-I should be computed on the total income without excluding any deduction under section 80HH. The Assessing Officer had allowed the claim under section 80-I after reducing the deduction under section 80HH. The Commissioner of Income-tax (Appeals) accepted the assessee's plea that the calculation for deduction under section 80-I should be done on the whole amount of gross total income and not on the remainder after giving allowance under section 80HH.

The Tribunal upheld the view of the Commissioner of Income-tax (Appeals), directing that the deduction under section 80-I be computed on the total income without excluding any deduction under section 80HH. The High Court agreed with this view, stating that both sections 80HH and 80-I contemplate deductions from gross total income and fall under Chapter VI-A. The court noted that section 80HH(9) only talks about priority and does not refer to the quantum of deduction. The court concluded that both sections independently contemplate separate deductions, and in the absence of any provision to the contrary, the deduction under section 80-I should be computed on the gross total income without excluding the deduction allowed under section 80HH. However, the court also noted that the total deduction under sections 80HH and 80-I should not exceed the gross total income of the assessee, giving priority to the deduction under section 80HH as per sub-section (9) of section 80HH.

The High Court's view was supported by the Division Bench decision of the Madhya Pradesh High Court in the case of J.P. Tobacco Products P. Ltd. v. CIT and the decision of the Bombay High Court in the case of CIT v. Nima Specific Family Trust, both of which held that the unit is entitled to special deduction under both sections 80HH and 80-I, and the benefit of section 80-I is to be granted on the gross total income and not on the income reduced by the amount allowed under section 80HH.

Conclusion:

The High Court answered both questions in the affirmative, in favor of the assessee and against the Revenue, with no order as to costs.