Murugappa and Sons vs Commissioner of Income Tax

Ratnam, J.—The assessee is a firm. The business of the firm is the promotion of companies. In respect of the assessment year 1972-73, it

filed a return disclosing an income of Rs. 3,741 by way of interest on securities, Rs. 53,813 by way of dividend under the head ""other sources"",

Rs. 8,770 by way of long term capital gains and a loss of Rs. 76,529 under the head ""Business"". In completing the assessment, the Income Tax

Officer disallowed the expenditure of Rs. 4,587 incurred in connection with the foreign travel of one of the partners and after computing the

business loss and setting of the income by way of interest on securities, capital gains and dividend, the net loss was computed at Rs. 5,618. In

doing so, the Income Tax Officer declined to allow deduction u/s 80k and 80T of the Income Tax Act 1961, (hereinafter referred to as ""the Act"").

Aggrieved by that, the assessee preferred an appeal before the Appellate Assistant Commissioner Contending, inter alia, that deductions under

sections 80K and 80T of the Act should have been allowed. The Appellate Assistant Commissioner accepted the contention of the assessee and

directed the Income Tax Officer to grant relief under sections 80K and 80T of the Act. On further appeal by the Revenue to the Tribunal, it was

contended that as the gross total income of the assessee was a negative figure, the assessee was not entitled to claim the benefit of deduction under

sections 80K and 80T of the Act. Considering the relevant positions and taking into account the provisions of sections 80K(2) and 80B(5) of the

Act, the Tribunal held that where the gross total income is a loss, there can be obviously no question of deduction being allowed under Chapter

VI-A of the At and in that view, upheld the order of the Income Tax Officer disallowing the deductions under sections 80K and 80T of the Act.

That conclusion arrived at by the Tribunal has given rise to this reference, wherein at the instance of the assessee, u/s 256(2) of the Act, the

following question of law has been referred for the opinion of this court :

Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that deduction permissible

under sections 80K and 80T was not allowable, in view of the total income being a loss ?

Learned counsel for the assessee contended, referring to sections 67(2) and 80A(3) of the Act and the Decision in Commissioner of Income

Tax Vs. K. Saraswathi Ammal and Others and J.H. Tarapore, that, in the absence of any indication in the allowance sheet in relation to the

disallowance in the assessment of the firm, the partners, with reference to their individual assessment, are placed at a disadvantage in the matter of

claiming the benefit of deductions and allowances and that such a situation ought to be removed. On the other hand, learned counsel for the

Revenue, inviting attention to sections 80A(1), 80A(2) and 80B(5) of the Act and relying upon the decisions in Commissioner of Income Tax,

Bombay City-III, Bombay Vs. Mercantile Bank Ltd., and CIT v. Rambal (P.) Ltd. [1988] ITR 50 , submitted that where the gross total income is

a loss, there can be obviously no question of any deduction being allowed under Chapter VI-A if the Act and the Tribunal was, therefore, right in

its conclusion. Adverting to the difficulty mentioned by learned counsel for the assessee, it was further submitted that, having regard to the limited

scope of the question referred, that fell outside the ambit of the reference.

We have carefully considered the rival submissions. Considering the restricted scope of the reference before this court, we are of the view that it

is unnecessary to go into the difficulties stated to be experienced by the individual partners of a firm in relation to their separate assessments or to

evolve some method by which those so-called difficulties may be remedied. We, therefore, do not feel that the argument of learned counsel for the

assessee deserves any consideration in this reference. We are also of the view that there is no need to consider the decision in Commissioner of

Income Tax Vs. K. Saraswathi Ammal and Others and J.H. Tarapore, relied on by learned consul for the assessee in this connection.

However, the main question that arises for consideration and the decision in this reference is, whether if the gross total income is a loss,

nevertheless, it is open to the assessee to claim the deductions permissible under sections 80K and 80T of the Act. There is no dispute that in this

case, the Income Tax Officer, after adjusting the income on securites, capital gains and dividends against the business loss, arrived at a net loss.

Chapter VI-A, containing sections 80A to 80U at the relevant time, provides for deductions to be made in computing the total income. Section

80A(1) provides that in computing the total income of the assessee from his gross total income, there shall be allowed, in accordance with and

subject to the provisions of Chapter VI-A, the deductions specified in section 80C to 80U (as the section stood at the relevant time). Section

80A(2) provides that the aggregate amount of the deductions under Chapter VI-A shall not, in any case, exceed the gross total income of the

assessee. For the purposes of Chapter VI-A, section 80B(5) of the act defines ""gross total income"" as meaning ""total income computed in

accordance with the provisions of this Act, before making any deduction under this Chapter or u/s 280-O."" It is thus seen that while, u/s 80A(1) of

the Act, the Revenue is empowered, in computing the total income of an assessee, to allow deductions specified in Chapter VI-A from the

assessee''s gross total income, section 80A(2) provides that the aggregate amount of such deductions under Chapter VI-A should not exceed the

gross total income of the assessee. The gross total income u/s 80B(5) of the Act is the total income computed under the provisions of the Act,

prior to making any deduction either under Chapter VI-A or u/s 280-O of the Act. In a case where relief is claimed by the assessee under sections

80K and 80T of the Act, the first step to be taken is to find out whether the assessee''s gross total income includes any income by way of

dividends and long-term capital gains. If that is found, the next step is to compute the assessee''s gross total income which, u/s 80B(5), for

purposes of Chapter VI-A, means the total income computed in accordance with the provisions of the Act, before making any deductions either

under Chapter VI-A u/s 280-O,of the Act.This is the total income computed under the Act but before making the deduction under Chapter VI-A

or u/s 280-O, and if the gross total income is found to be a positive figure, only then, it is possible and permissible to allow the deductions under

Chapter VI-A and not otherwise. This follows from the several provisions of the Act referred to earlier. Where, therefore, the gross total income,

as in this case, is a negative figure, viz., loss, no deduction is permissible either u/s 80K or 80T of the Act. We may in this connection, refer to the

two decisions relied on by learned counsel for the Revenue. In Commissioner of Income Tax, Bombay City-III, Bombay Vs. Mercantile Bank

Ltd., , the assessee claimed the benefit of deduction under sections 80L and 80M of the Act with reference to its negative income in the relevant

assessment years in question. The authorities declined to allow the deduction so claimed by the assessee. In dealing with the question, whether the

authorities were right in doing so, the Bombay High Court pointed out, referring to sections 80A(1), 80A(2) and 80B(5) of the Act, that, for the

purpose of applying the provisions of Chapter VI-A, the first enquiry to be made is, whether the assessee''s gross total income includes any income

by way of dividends and if it does, the next step would be to compute the assessee''s gross total income, which would be the total income

computed under the Act without deductions under Chapter VI-A or u/s 280-O of the Act and only if the gross total income is found to be a

positive figure, the deductions permissible under Chapter VI-A can be given and, therefore, the authorities were not in error in disallowing the

claim made by the assessee for deduction under the provisions of section 80L and 80M of the Act having regard to its negative income in the years

in question. To similar effect is the decision in CIT v. Rambal (P.) Ltd. 1969 50 ITR 198 (to which one of us was a party.) In that case, the

assessee, a private limited company, in respect of the assessment year 1970-71, claimed the benefit of deduction allowable u/s 80I of the Act. The

Income Tax Officer rejected this on the ground that as the total income for that assessment year was determined as ""nil"", no deduction u/s 80I was

permissible or could be given. However, the Appellate Assistant Commissioner accepted the claim of the assessee and the tribunal took the view

that relief u/s 80I of the Act was, in its nature, an independent relief and the deduction permissible thereunder, should, d be given from the business

income, as computed before setting on the loss pertaining to the earlier years. On a reference, this court, referring to Commissioner of Income Tax,

Tamil Nadu-III, Madras Vs. Madras Motors (P.) Ltd., , held that in view of section 80A, section 80A(2) and section 80B(5) occurring in Chapter

VI-A,if the total income, as computed u/s 80B(5) of the Act is ""nil"", then, no relief could be granted based on the other sections in view of the

limitations contained in section 80A(2) according to which, the aggregate amount of deduction under Chapter VI-A shall not, in any case, exceed

the gross total income of the assessee and if the gross total income of the Assessee is determined as ""nil"", then, there is no question of any

deduction being allowed under Chapter VI-A as that will clerly exceed the gross total income of the assessee. We are of the view that the principle

laid down in the decisions referred to above would be applicable in this case also. We, therefore, answer the question referred to us in the

affirmative and against the assessee. The revenue will be entitled to its costs of this reference. Counsel''s fee Rs. 500.