ITA 267 OF 2008, ITA 1316 OF 2008, ITA 4 OF 2009, Page 1 of 37 ITA 907 OF 2009, ITA 906 OF 2008, ITA 1002 OF 2008 REPORTABLE * IN THE HIGH COURT OF DELHI AT NEW DELHI ITA 267 OF 2008, ITA 1316 OF 2008 ITA 4 OF 2009, ITA 907 OF 2009 ITA 906 OF 2008, ITA 1002 OF 2008 % Judgment reserved on:13.07.2010 Date of Decision:29.11.2010. (1) ITA 267 OF 2008 M/s Great Eastern Exports ….APPELLANT Through: Mr. Kanan Kapoor, Advocate Versus The Commissioner o f Income Tax ….RESPONDENT Through: Ms. Prem Lata Bansal, Advocate (2) ITA 1316 OF 2008 M/s Arctic India Engg. (P) Ltd. ….APPELLANT Through: Ms. Shashi M. Kapila, Advocate Versus Dy. Commissioner of Income Tax ….RESPONDENT Through: Ms. Prem Lata Bansal, Advocate (3) ITA 4 OF 2009 The Commissioner of Income Tax ….APPELLANT Through: Ms. Prem Lata Bansal, Advocate Versus M/s S.M. Flanges Pvt. Ltd ….RESPONDENT Through: Mr. K. Sampath, Advocate (4) ITA 907 OF 2009 The Commissioner of Income Tax ….APPELLANT Through: Ms. Prem Lata Bansal, Advocate Versus M/s S.M. Flanges Pvt. Ltd ….RESPONDENT Through: Ms. Shashi M. Kapila, Mr.Siddharth Kapila and Mr. R. R.Maurya, Advocates. ITA 267 OF 2008, ITA 1316 OF 2008, ITA 4 OF 2009, Page 2 of 37 ITA 907 OF 2009, ITA 906 OF 2008, ITA 1002 OF 2008 (5) ITA 906 OF 2008 Eastern Medikit Ltd. ….APPELLANT Through: Mr. Anoop Sharma, Advocate with Mr. Manu K. Giri, Advocate Versus Dy. Commissioner of Income Tax ….RESPONDENT Through: Ms. Prem Lata Bansal, Advocate (6) ITA 1002 OF 2008 Neetee Clothing Private Ltd. ….APPELLANT Through: Dr. Rakesh Gupta, Advocate with Mr. Ashwani Taneja, Ms. Poonam Ahuja and Ms. Aarti Saini, Advocates Versus The Commissioner of Income Tax …RESPONDENT Through: Ms. Prem Lata Bansal, Advocate. CORAM :- HON’BLE MR. JUSTICE A.K. SIKRI HON’BLE MS. JUSTICE REVA KHETRAPAL 1. Whether Reporters of Local newspapers may be allowed to see the Judgment? 2. To be referred to the Reporter or not? 3. Whether the Judgment should be reported in the Digest? A.K. SIKRI, J. 1. In all these appeals, we are concerned with the manner in which profits and gains of the business are to be ascertained before computing the relief under Section 80HHC of the Income Tax Act (hereinafter would be referred to as „the Act‟). There are certain deductions which are allowed under Section 80IA of the Act as well. Therefore, to put it precisely question for consideration is: once a particular Undertaking or Enterprise becomes entitled to claim and is ITA 267 OF 2008, ITA 1316 OF 2008, ITA 4 OF 2009, Page 3 of 37 ITA 907 OF 2009, ITA 906 OF 2008, ITA 1002 OF 2008 allowed deduction of certain amount of the profits and gains under Section 80IA of the Act, whether deduction to the extent of such profits claimed under Section 80IA would not be allowed for computing deduction under Section 80 HHC or whether the profits and gains are to be computed and deduction undertaken independently all over again, irrespective of the deduction already claimed and allowed under Section 80 IA of the Act. This question revolves around the interpretation which is to be given to sub-Section (9) of Section 80IA of the Act and that provision reads as under: “(9) Where any amount of profits and gains of an {undertaking} or of an enterprise in the case of an assessee is claimed and allowed under this section for any assessment year, deduction to the extent of such profits and gains shall not be allowed under any other provisions of this Chapter under the heading “C-Deductions in respect of certain incomes”, and shall in no case exceed the profits and gains of such eligible business of {undertaking} or enterprise, as the case may be”. 2. It is manifest that a the plain reading of the aforesaid provision suggests that the amount of profits and gains claimed by the assessee and allowed to it under that provision is not to be allowed again and to the extent of such profits and gains, the profits and gains are to be reduced to that extent while claiming deduction under other provisions under the heading “C-deductions in respect of certain incomes” and that would include Section 80HHC. According to the counsels for the assessees, however, the answer is not that simple and they exhort us to examine the question in the context of the aim of Chapter VIA which contains these provisions and also the case law which has emerged on the interpretation thereof. ITA 267 OF 2008, ITA 1316 OF 2008, ITA 4 OF 2009, Page 4 of 37 ITA 907 OF 2009, ITA 906 OF 2008, ITA 1002 OF 2008 Therefore, before reverting back to the question again, we would like to traverse through relevant provisions of the said Chapter as well as case law relied upon. Scheme of Chapter VI A before its amendment: 3. Chapter VIA of the Act deals with certain deductions. It is in three parts. Part A described as „General‟ details the scheme of deductions. Part B enumerates specific deductions which are allowed in respect of certain payments and Part-C contains the provisions for allowing certain deductions in respect of profits and gains from business. A reading of the provisions falling in Part-A would demonstrate that deductions under this Chapter are to be made from “the gross total income”. Various kinds of deductions are provided in Part B and C. However, the general provision contained in Section 80A mandates that the aggregate amount of deductions under this Chapter would not exceed “the gross total income” of the assessee. Section 80 A reads as under:- “Section 80A - Deductions to be made in computing total income-(1) In computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of this Chapter, the deductions specified in sections 80C to 80U. (2) The aggregate amount of the deductions under this Chapter shall not, in any case, exceed the gross total income of the assessee. (3) Where, in computing the total income of an association of persons or a body of individuals, any deduction is admissible under section 80G or [section 80GGA or section 80GGC] or section 80HH or section 80HHA or section 80HHB or section 80HHC or section 80HHD or section 80-I or section 80-IA [or section 80-IB] [or section 80-IC] [or section 80-ID or section 80-IE] or section 80J or section 80JJ, no deduction under the same section shall be made in computing the total income of a ITA 267 OF 2008, ITA 1316 OF 2008, ITA 4 OF 2009, Page 5 of 37 ITA 907 OF 2009, ITA 906 OF 2008, ITA 1002 OF 2008 member of the association of persons or body of individuals in relation to the share of such member in the income of the association of persons or body of individuals. (4) Notwithstanding anything to the contrary contained in section 10A or section 10AA or section 1 0B or section 10BA or in any provisions of this Chapter under the heading “C-Deductions in respect of certain incomes”, where, in the case of an assessee, any amount of profits and gains of an undertaking or unit or enterprise or eligible business is claimed and allowed as a deduction under any of those provisions for any assessment year, deduction in respect of, and to the extent of, such profits and gains shall not be allowed under any other provisions of this Act for such assessment year and shall in no case exceed the profits and gains of such undertaking or unit or enterprise or eligible business, as the case may be. (5) Where the assessee fails to make a claim in his return of income for any deduction under section 10A or section 10AA or section 10B or section 10BA or under any provision of this Chapter under the heading “C.-- Deductions in respect of certain incomes”, no deduction shall be allowed to him thereunder.] (6) Notwithstanding anything to the contrary contained in section 10A or section 10AA or section 10B or section 10BA or in any provisions of this Chapter under the heading “C-Deductions in respect of certain incomes”, where any goods or services held for the purposes of the undertaking or unit or enterprise or eligible business are transferred to any other business carried on by the assessee or where any goods or services held for the purposes of any other business carried on by the assessee are transferred to the undertaking or unit or enterprise or eligible business and, the consideration, if any, for such transfer as recorded in the accounts of the undertaking or unit or enterprise or eligible business does not correspond to the market value of such goods or services as on the date of the transfer, then, for the purposes of any deduction under this Chapter, the profits and gains of such undertaking or unit or enterprise or eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date. Explanation.--For the purposes of this sub-section, the expression “market value”,-- (i) in relation to any goods or services sold or supplied, means the price that such goods or services would fetch if these were sold by the undertaking or unit or ITA 267 OF 2008, ITA 1316 OF 2008, ITA 4 OF 2009, Page 6 of 37 ITA 907 OF 2009, ITA 906 OF 2008, ITA 1002 OF 2008 enterprise or eligible business in the open market, subject to statutory or regulatory restrictions, if any; (ii) in relation to any goods or services acquired, means the price that such goods or services would cost if these were acquired by the undertaking or unit or enterprise or eligible business from the open market, subject to statutory or regulatory restrictions, if any.] [(7) Where a deduction under any provision of this Chapter under the heading "C.--Deductions in respect of certain incomes" is claimed and allowed in respect of profits of any of the specified business referred to in clause (c) of sub-section (8) of section 35AD for any assessment year, no deduction shall be allowed under the provisions of section 35AD in relation to such specified business for the same or any other assessment year.” 4. The “gross total income” is defined in Section 80B (5) to mean the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter. 5. A conjoint reading of Section 80A (2) and 80B (5) would bring out the fact that various deductions provided in this Chapter are to be computed on the “gross total income‟. It also follows that where such gross total income is found to be a net loss in the year concerned, no deduction under this Chapter is to be allowed. 6. The contours and scope of the scheme contained in Chapter- VIA has come up for discussion before various High Courts. Interplay of Section 80HHC and 80-I involving same kind of issue first came up for consideration before Madhya Pradesh High Court and was discussed elaborately in its decision contained in J.P. Tabacco Private Limited Vs. Commissioner of Income Tax, 229 ITR 123 (M.P.). The question which was framed for the opinion of the Court, in that case was of following nature :- ITA 267 OF 2008, ITA 1316 OF 2008, ITA 4 OF 2009, Page 7 of 37 ITA 907 OF 2009, ITA 906 OF 2008, ITA 1002 OF 2008 “Whether the Tribunal is right in law in holding that the deduction under section 80-I is to be allowed on balance of income after deducting the relief under section 80HH from gross total income and not from gross total income as defined in Section 80B (5) of the Act ?” 7. The Court answered the question in the negative and in favour of the assessee holding that the two provisions are independent and deductions under Section 80-I is not be allowed on the balance of income after deducting the relief under Section 80 HH from the gross total income. The Court traced the history of various legislative amendments made in the aforesaid provisions following in Chapter VIA of the Act and following discussion ensued thereupon:- “Sub-section (9) of Section 80HH, as it stood prior to insertion of Section 80I by the Finance (No. 2) Act, 1980, with effect from April 1, 1981, originally included only Section 80J. Section 80J providing for deduction in respect of. the profits and gains from newly established industrial undertakings or ships or hotel business in certain cases did not make any provision for reduction of the gross total income by the amount of deduction admissible to the assessee under Section 80HH. It was only by an amendment of the said Section 80J that the provision for reducing the gross total income by the amount of deduction under Section 80HH of the Act by the Direct Taxes (Amendment) Act, 1974, with effect from April 1, 1974, was inserted. Section 80I was inserted in its present form by the Finance (No. 2) Act, 1980, with effect from April 1, 1981, and by the same Finance (No. 2) Act, Section 80HH(9) was amended and the words "Section 80I or" were inserted to make the said provision ITA 267 OF 2008, ITA 1316 OF 2008, ITA 4 OF 2009, Page 8 of 37 ITA 907 OF 2009, ITA 906 OF 2008, ITA 1002 OF 2008 applicable to Section 80I as well. However, no provision was made in Section 80I to provide for deduction of the gross total income by deduction allowed under Section 80HH for the purpose of allowing deduction under Section 80I. It would, thus, be seen that when Section 80J already existed in Sub-section (9) of Section 80HH, an amendment was made in Section 80J in the year 1974 but no such provision was made in so far as Section 80I was concerned. This clearly centra- indicates that Sub-section (9) of Section 80HH by itself meant that deduction allowed under Section 80HH is to be reduced from the gross total income for granting the benefit of Section 80J and, for that matter, of Section 80I. It was provided in Section 80J itself by later amendment while no such provision was made in Section 80I even though inserted on a later date. The provision of law is, therefore, clear that in so far as the benefit of Section 80I is concerned, it has to be granted on the gross total income and not on the income reduced by the amount allowed under Section 80HH. In the result, we find that the Tribunal was not right in holding that deduction under Section 80I is to be allowed only on the balance of the income after deducting the relief under Section 80HH from the gross total income and accordingly we answer the said question in favour of the assessee and against the Revenue”. 8. Special Leave petition against this decision was dismissed by the Supreme Court. (See 245 ITR (ST) 71). The Judgment of Madhya Pradesh High Court was thereafter repeatedly followed by the same Court as well as other High Courts. All these judgments were taken ITA 267 OF 2008, ITA 1316 OF 2008, ITA 4 OF 2009, Page 9 of 37 ITA 907 OF 2009, ITA 906 OF 2008, ITA 1002 OF 2008 note of by the Supreme Court in JCIT Vs. Mandideep Engineering and Packaging India Private Ltd. 292 ITR 1 (SC) which passed the following short and crisp order in that case:- “1.The point involved in the present case is whether sections 80HH and 80-I of the Income-tax Act, 1961, are independent of each other and therefore a new industrial unit can claim deductions under both the sections or the gross total income independently or that deduction under Section 80HH can be taken on the reduced balance after taking into account the benefit taken under section 80HH. 2. The Madhya Pradesh High Court in J.P. Tobacco Products P. Ltd. Vs. CIT reported in (19980 229 ITR 123 took the view that both the sections are independent and, therefore, the deductions could be claimed both under sections 80HH and 80-I on the gross total income. Against this judgment, special leave petition was filed in this court which was dismissed on the ground of delay on July 21, 2000 (see {2000} 245 ITR (St.) 71). The decision in J.P. Tobacco Products P. Ltd. {1998) 229 ITR 123 (MP) was followed by the same High Court in the case of CIT Vs. Alpine Solves P. Ltd. In IT.A. No. 92 of 1999 decided on May 2, 2000. Special leave petition against the decision was dismissed by this court on January 12,2001, (see {2001} 247 ITR (St.) 36). This view has been followed repeatedly by different High Courts in a number of cases against which no special leave petitions were filed meaning thereby that the Department has accepted the view taken in these judgments. See CIT v. Chokshi Contacts P. Ltd. {2001} 251 ITR 587 (Raj); CIT v. Amod Stamping {2005} 274 ITR 176 (Guj}; CIT v. Mittal Appliances P. Ltd. {2004} 270 IUTR 65 (MP); CIT v. Rochiram and Sons {2004} 271 ITR 444 (Raj); CIT v. Prakash Chandra Basant Kumar {2005} 276 ITR 664 (MP); CIT v. S.B. Oil Industries P. Ltd. (2005) 274 ITR 495 (P & H); CIT v. SKG Engineering P. Ltd. {2005} 119 DLT 673 and CIT v. Lucky Laboratories Ltd. {2006} 200 CTR 305 (All). Since the special leave petitions filed against the judgment of the Madhya Pradesh High Court have been dismissed and the Department has not filed the special leave petitions against the judgments of different High Courts following the view taken in those judgments cannot be permitted to take a ITA 267 OF 2008, ITA 1316 OF 2008, ITA 4 OF 2009, Page 10 of 37 ITA 907 OF 2009, ITA 906 OF 2008, ITA 1002 OF 2008 contrary view in the present case involving the same point. According, the civil appeal is dismissed. No costs.” 9. It is thus clear that the consistent view taken by various High Courts was affirmed by the Supreme Court. It is not necessary to discuss all these judgments. However, we would like to reproduce certain observations from the judgment of Rajasthan High Court in CIT Vs. Chokshi Contacts P. Ltd., 251, ITR 587 (Raj.) as it discusses the issue in greater details and in fact discusses the scheme of the Act in short and highlights Chapter VIA in particular. The scheme of the Act which is taken note of by the Court and described is that Chapter 1 deals with preliminary definitions by defining various expressions used in the Act subject to the context of the issue. Chapter II deals with the basis of charge for levying income tax and additional income tax and deals with charging of the tax of income and the scope of total income determined for the purpose of computation of income and certain other matters. Chapter III deals with the incomes which do not form part of the total income at all. Chapter IV deals with computation of total income from different sources. For this purpose it divides the sources of income in six sub- heads on the basis of which income from each source is to be computed. Part D of Chapter IV deals with the computation of income from profits and gains of business or profession with which we are concerned. Chapter E deals with computation of capital gains and Part F deals with the income from other sources. Remaining Part A and Part C dealing with income from salaries and from house property respectively. Part B of Chapter IV which dealt with the income from interest on securities has since been deleted. Part D of ITA 267 OF 2008, ITA 1316 OF 2008, ITA 4 OF 2009, Page 11 of 37 ITA 907 OF 2009, ITA 906 OF 2008, ITA 1002 OF 2008 Chapter IV deals with computation of profits and gains of business or profession providing which of the incomes fall within the definition of profits and gains of business or profession, what deductions or adjustments are to be allowed, and what deductions are not permissible and the extent of permissible adjustments and allowance of deduction of various nature with which we are not presently concerned. Chapter V deals with income of other persons to be included in assessee's total income. Chapter VI deals with aggregation of the income from different sources and to set off or carry forward of loss computed under different sources of income of the assessee. 10. The Court then proceeded to discuss the scheme of Chapter VIA in the following manner:- “Chapter VI-A which consists of Sec. 80-A to Sec. 80-W deals with specified concession in computing tax as well as specified deduction to be made in computing total income. These concessions or deductions are extended in connection with certain investment expenses and areas of business and trade activity with object of incentive to savings, and promotion to experts as well as economic development with emphasis on providing new industries in backward areas. We in the present case are concerned with specific deductions to be made in computing total income of the assessee under that Chapter. It is further significant to notice that Chapter VIA becomes operative on reaching the last stage of computation of income from different sources until Chapter VI. While ultimately net taxable income ITA 267 OF 2008, ITA 1316 OF 2008, ITA 4 OF 2009, Page 12 of 37 ITA 907 OF 2009, ITA 906 OF 2008, ITA 1002 OF 2008 for any assessment year is determined only after reaching net result after applying all provisions, as are applicable in respect of different matter. Yet each Chapter deals with independent subject matter al different stages. As noticed briefly above, the Chapter IV sets the stage for computing income from different sources. On computing income from each different sources, and income of other persons in certain cases to be added in total income, stage is reached for making adjustments of losses of the current year from any sources as well as losses carried forward from previous year to be adjusted against income of current year.” 11. Reading various provisions of this Chapter together, the Court was of the view that specific provisions were made that the gross total income computed before reaching the stage of invoking the provisions of Chapter VIA, was not to be further adjusted in quantifying any claim to further deduction under that Chapter. The Court noted that the “gross total income” was assigned a special meaning under this Chapter by defining the same in Section 80B (5) of the Act. The Court then took note of the provisions contained in Section 80 AB of the Act which read as under:- “Section 80AB:- Where any deduction is required to be made or allowed under any Section (except section 80M) included in this Chapter under the heading "C.--Deductions in respect of certain incomes" in respect of any income of the nature specified in that Section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the ITA 267 OF 2008, ITA 1316 OF 2008, ITA 4 OF 2009, Page 13 of 37 ITA 907 OF 2009, ITA 906 OF 2008, ITA 1002 OF 2008 deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income.” 12. Interpreting Section 80 B (5) and Section 80 AB of the Act together, the