Commissioner of Income Tax vs Mentha and Allied Products

Prakash Krishna, J.—The Income Tax Appellate Tribunal Delhi Bench B, New Delhi has referred the following two questions relating to the assessment year 1987-88 for the opinion of this Court:

Whether on the facts and circumstances of the case, the Tribunal was right in holding that the deduction is allowable u/s 80HHA with regard to the income derived from industrial undertaking before setting off such income against loss from a non-industrial unit in terms of Section 80AB and Section 71 of the Income Tax Act, 1961 ?

Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the plant and machinery of the menthol unit, Rampur was put to use for purposes of business during the relevant accounting year for the assessment year 1987-88 and was entitled to depreciation in the said assessment year specially relying on the decision reported in Commissioner of Income Tax, Gujarat Vs. Suhrid Geigy Ltd.,

The assessee is a private limited company engaged in the business of manufacture and sale of basic drugs with its factory at Rampur, U. P. It is a closely held company and its assessment was completed on March 31, 1989 on a total income of Rs. 12,32,860. In the assessment proceeding it claimed deductions u/s 80HHA as also depreciation amounting to Rs. 1,91,280 in the menthol unit (Rampur). The claim u/s 80HHA was allowed in part by the Assessing Officer which was the subject-matter of challenge in appeal before the first appellate authority who, vide his order dated May 2, 1990, allowed the appeal by following his own order in the assessee''s case for the assessment years 1982-83 and 1986-87. The matter was carried in second appeal by the Department before the Income Tax Appellate Tribunal. The Income Tax Appellate Tribunal (hereinafter referred to as "the ITAT") allowed the appeal of the Department in part and restored the assessment order. However, on the question of deduction u/s 80HHA the direction given by the first appellate authority not to adjust the losses of other units while computing the deduction u/s 80HHA was upheld. As regards question No. 2 is concerned, the Tribunal has held that the trial run of the plant by the appellant constitutes use thereof and the assessee is entitled for depreciation in the relevant assessment year accordingly.

Heard Sri Shambhu Nath Chopra, learned standing counsel for the Department and Shri Piyush Agrawal, learned Counsel for the respondent -assessee.

Taking the first question first, it may be noted that the Tribunal in paragraph 8 of its order has confirmed the directions issued by the Commissioner of Income Tax (Appeals) to the Assessing Officer not to adjust the losses of other unit while computing deduction u/s 80HHA of the Act. It may be noted that identical controversy in the case of the assessee was there in respect of the assessment years 1982-83 and 1986-87. The matter relating to the assessment year 1982-83 came up before this Court in Income Tax Reference No. 115 of 1992 : Mentha and Allied Products P. Ltd. v. CIT [2007] 293 ITR 49 (All). This Court by its judgment dated August 1, 2005 on interpretation of Section 80HHA, after distinguishing the judgment of the apex court in the case of Commissioner of Income Tax, Tamil Nadu-V, Madras Vs. Kotagiri Industrial Co-operative Tea Factory Ltd., Kotagiri, has followed a Division Bench decision of the Andhra Pradesh High Court in the case of Commissioner of Income Tax Vs. Visakha Industries Ltd., wherein it was held as follows (page 476):

The benefit of deduction is intended only to certain specified industrial undertaking, which fulfil the conditions specified in the respective provisions. Take another case where an assessee has established an industrial undertaking in respect of which it is entitled for deduction from the profits and gains of that unit. The said unit may not contribute any profits and gains but the assessee derives huge income from non-industrial activity. In such case, if the Department''s contention is accepted the assessee is entitled for deduction even though there are no profits from the industrial undertakings. The intention of the Legislature is not to create such a situation, but to provide the benefit of deduction from the profits and gains of an industrial undertaking, which fulfils the conditions specified in the respective provisions of the Act. The said benefit is an incentive intended to boost the industrial activity. Hence, the proper interpretation is that the deduction shall be in respect of the profits and gains of an industrial undertaking, specified in the provisions of the Act and not with reference to the total profits of the assessee. This view is also supported by the decision of the apex court in the case of Commissioner of Income Tax (Central), Madras Vs. Canara Workshops (P) Ltd., Kodialball, Mangalore,

Sri Piyush Agrawal, learned Counsel for the assessee submits that the controversy stands concluded in favour of the assessee in view of the decision aforestated inter parties.

However, very fairly the attention of court was invited to another decision in I. T. R. No. 60 of 1996 (Mentha and Allied Products P. Ltd. v. CIT [2007] 293 ITR 49 (All)) inter parties whereby this Court for the assessment year 1986-87 has held as follows (page 50):

Whether on the facts and circumstances of the case, the Tribunal was right in holding that the deduction allowable u/s 80HHA with regard to the income derived from the industrial undertaking after setting off such income against loss from a non-industrial unit in terms of Section 80AB and Section 71 of the Income Tax Act, 1961 ?

So far as the second question is concerned, it has been noted in the statement of case itself that for the earlier assessment year 1982-83, the same issue was decided in favour of the Department and against the assessee relying upon the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, and in the case of Distributors (Baroda) Pvt. Ltd. Vs. Union of India (UOI) and Others, No reason has been mentioned by the Tribunal in the statement of the case, as to why despite the above, the question was referred to the High Court.

When a question is covered by the decision of the Supreme Court, there is no reason for referring the same to the High Court u/s 256(1).

Further, even during arguments we have not been shown any good reason on the basis of which the decision of the Supreme Court could be distinguished in respect of the assessment year 1986-87, which is involved in the present case.

We, therefore, answer question No. 2 in terms of the aforesaid decision of the Supreme Court in favour of the Department and against the assessee.

We are faced with two divergent views in the case of the assessee itself involving the assessment years 1982-83 and 1986-87. But that is not the end of the matter. Sri Shambhu Chopra, learned standing counsel, submits that at any rate the controversy involved herein is squarely answered by the apex court in Synco Industries Ltd. Vs. Assessing Officer, Income Tax, Mumbai and Another,

In the case of Synco Industries Ltd. Vs. Assessing Officer, Income Tax, Mumbai and Another, the Supreme Court interpreted the words "gross total income". Section 80HHA provides for deduction in respect of profits and gains from newly established small scale industries/undertakings in certain areas. In the opening part of its Sub-section (1), the expression "gross total income" has been used therein. The said expression also finds place in Section 80B(5). The apex court had an occasion to interpret that expression with reference to Section 80B(5) and has held that "gross total income" of the assessee has first got to be determined after adjusting the losses, etc., and if the gross total income of the assessee is nil, the assessee would not be entitled to deduction under Chapter VT-A of the Act. It has approved the judgment of the High Court holding that loss from another division of the assessee was required to be adjusted before determining the "gross total income" and as the gross total income was nil, the assessee was not entitled to claim deduction under Chapter VI-A which includes Section 80-I also. Noticeably, Section 80HHA also finds place in the said Chapter VI-A. This being so, the dictum as laid down by the apex court referred to above, will apply with full force in respect of deduction u/s 80HHA of the Act. The said decision was sought to be distinguished by the assessee on the ground that therein the "gross total income" was nil while in the case on hand positive income has been assessed. The said distinction pointed out by the assessee is not material and is a distinction without there being a distinction.

No material was placed before us to persuade us to take a different view of the matter, by the assessee.

We, therefore, answer question No. 1 in the negative, i.e., against the assessee and in favour of the Department by holding that while allowing deduction u/s 80HHA with regard to the income derived from the industrial undertaking loss from a non-industrial unit in terms of Section 80AB and Section 71 of the Income Tax Act has to be adjusted first.

So far as the second question is concerned, the Tribunal has found that the machinery was put to use. It was found by the Commissioner of Income Tax (Appeals) that the trial run of the plant constitutes use thereof. It has been held in Assistant Commissioner of Income Tax Vs. Ashima Syntex Ltd., a plant and machinery is entitled for depreciation even if used for trial production. This being so, the order of the Tribunal is perfectly justified and calls for no interference. In other words, it rightly allowed the depreciation for the assessment year 1987-88 as it was put to use for the purposes of business during the relevant accounting year. We, therefore, answer the second question in the affirmative, i.e., in favour of the assessee and against the Department.

In view of divided success of the parties, no order as to costs.