2014 (9) TMI 19 - HC - Income Tax

Deduction of unabsorbed investment allowances Computation of deduction u/s 80HHC(1) and (3) Adjustment to be made under the head PGBP Held that - The deduction u/s 80HHC(1) is to be allowed on the profits and gains as computed under the head Profits and gains of business or profession - the deduction u/s 80HHC(3) is required to be computed after setting off of the unabsorbed investment allowance u/s 32A(3) from profits of the business relying upon Ipca Laboratory Ltd. Versus Deputy Commissioner of Income-Tax 2004 (3) TMI 9 - SUPREME Court - Section 80HHC would be governed by Section 80AB - deduction u/s 80HHC has to be computed out of the income of profits and gains of business in accordance with the provisions of the Act as stated u/s 80AB. The deductions under Chapter VI-A in which Section 80HHC falls, has to be computed on the gross total income from business determined after deducting all deductions allowable under sections 30 to 43D of the Act - for the purpose of computing the benefits u/s 80HHC, unabsorbed investment allowance is required to be set off while computing the income chargeable under the head Profits and gains of business or profession Decided in favour of revenue.

Issues Involved:
1. Whether the ITAT was justified in holding that unabsorbed investment allowances cannot be deducted while computing the profits of business or profession, particularly in view of special benefits claimed by the Assessee under Chapter VI-A?
2. Whether the Revenue is entitled to set off unabsorbed investment allowances from the profits of the business for the purpose of computing benefits under Section 80HHC claimed by the Assessee, particularly in view of the mechanism set up in explanation (bba) to Section 80HHC for computing profits of the business?

Detailed Analysis:

Issue 1: Unabsorbed Investment Allowances and Profits of Business or Profession

The respondent, engaged in the export of processed iron ore, claimed deductions under Section 80HHC for the Assessment Year 1991-92. The Assessing Officer (AO) reduced the unabsorbed investment allowance from the income under the head "Profits and gains of business or profession," which consequently reduced the deduction available under Section 80HHC. The Commissioner of Income-tax (Appeals) upheld the AO's decision. However, the ITAT, referencing its earlier decisions in Z.F. Steering Gear (India) Limited and Allana Frozen Foods Private Limited, ruled in favor of the respondent, stating that unabsorbed investment allowances should not be deducted from the business profits for computing the deduction under Section 80HHC.

Issue 2: Set Off of Unabsorbed Investment Allowances and Section 80HHC

The Revenue contended that unabsorbed investment allowances must be set off while computing income under the head "Profits and gains of business or profession," thereby reducing the deduction under Section 80HHC. The Revenue cited decisions in Ashwini Cold Storage Pvt. Ltd. and Vishwas Foot Wear Co. Ltd., supported by the Supreme Court's decision in IPCA Laboratory Ltd., to argue that unabsorbed allowances should be deducted from business profits before computing deductions under Chapter VI-A.

Court's Consideration and Judgment:

1. Statutory Provisions:
- Section 32A(3) and Section 80HHC(3) reference profits computed under the business head. Section 80HHC(3) specifies that the deduction is based on "profits and gains of business or profession."
- The Court noted that Section 32A(3) is placed in Chapter IV-D, indicating that unabsorbed investment allowances should be considered under the head "Profits and gains of business or profession."

2. Case Law Analysis:
- The Madras High Court in Ashwini Cold Storage Pvt. Ltd. and Vishwas Foot Wear Co. Ltd. held that unabsorbed depreciation and investment allowances must be deducted from business profits for computing deductions under Section 80HHC, aligning with the Supreme Court's interpretation in IPCA Laboratory Ltd.
- The Bombay High Court's Full Bench in Plastiblends India Limited ruled that special deductions under Chapter VI-A must be computed on gross total income after considering all deductions allowable under Sections 30 to 43D.

3. Conclusion:
- The Court found merit in the Revenue's appeal, holding that unabsorbed investment allowances must be set off against the profits of the business before computing the deduction under Section 80HHC.
- The Court reasoned that the deduction under Section 80HHC should be computed after setting off unabsorbed investment allowances from business profits, consistent with the statutory provisions and judicial precedents.

Final Judgment:
The appeal was allowed in favor of the Revenue, holding that unabsorbed investment allowances must be set off while computing income under the head "Profits and gains of business or profession" for the purpose of deductions under Section 80HHC. The Court ruled that the ITAT erred in its interpretation, and the deduction under Section 80HHC should be computed after considering unabsorbed investment allowances.

Conclusion:
The High Court ruled in favor of the Revenue, emphasizing that unabsorbed investment allowances must be deducted from business profits before computing deductions under Section 80HHC, thus aligning with the statutory framework and judicial precedents. The appeal was allowed, and no order as to costs was made.

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