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Bihar Mercantile Union (P.) Ltd. Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Kolkata
Decided On
Judge
Reported in(1984)10ITD887(Kol.)
AppellantBihar Mercantile Union (P.) Ltd.
Respondentincome-tax Officer
Excerpt:
.....of the assessee. in fact, he disallowed the entire claim of the assessee under section 80hh.3. the assessee appealed to the commissioner (appeals), who allowed the relief under section 80hh on the profit of the manufacturing unit computed after deducting the extra weighted relief under section 35b.the assessee is in appeal before the tribunal against the said decision of the commissioner (appeals).4. shri k.d. singhania, the learned representative for the assessee, took me through the orders of the ito as well as the commissioner (appeals) and explained the facts as recorded above. he also took me through the provisions of section 80hh and pointed out that the relief under that section is to be granted on 'profits and gains derived from an industrial undertaking'. he urged that the.....
Judgment:
1. This appeal has been filed by the assessee against the order dated 22-4-1982 of the Commissioner (Appeals). This appeal relates to the assessment year 1977-78. The relevant" previous year was the calendar year 1976. The assessee is a company deriving income from business in the manufacture and sale of silk fabrics.

2. The first ground in this appeal relates to the computation of the relief under Section 80HH of the Income-tax Act, 1961 ('the Act'), due to the assessee. The assessee manufactures silk in a backward area qualifying for relief under Section 80HH. The place of manufacture is organised as a branch having its own branch accounts. The goods produced were sold by the head office. The head office maintains a separate account. There is a very small portion of purchase and sale by the head office apart from the sale of the goods received from the branch. The dispute in this appeal does not relate to the question as to whether the assessee is entitled to the relief under Section 80HH.Admittedly, the assessee is entitled to such relief and the same was being given to the assessee in the earlier years. Again, there is no dispute about the fact that relief under Section 80HH should be confined to the profits from the manufacturing activities of the branch and should not extend to the profits from the small trading activities of the head office of the goods not manufactured by the assessee. The assessee has no grievance on this account. The dispute in this appeal relates to the question as to whether the profit of the manufacturing unit is to be computed for the purpose of relief under Section 80HH, after deducting the relief under Section 35B of the Act or before deducting the relief under Section 35B. Here again, there is no dispute that the actual expense incurred by the assessee for export markets development allowance has to be deducted while computing the profit of the manufacturing unit for the purpose of relief under Section 80HH.The assessee admits this. The case of the assessee before the ITO was that the relief under Section 80HH should be calculated on the profit of the manufacturing unit before deducting the extra weighted deduction of one-third of the actual expenses. The ITO did not agree with the contention of the assessee. In fact, he disallowed the entire claim of the assessee under Section 80HH.3. The assessee appealed to the Commissioner (Appeals), who allowed the relief under Section 80HH on the profit of the manufacturing unit computed after deducting the extra weighted relief under Section 35B.The assessee is in appeal before the Tribunal against the said decision of the Commissioner (Appeals).

4. Shri K.D. Singhania, the learned representative for the assessee, took me through the orders of the ITO as well as the Commissioner (Appeals) and explained the facts as recorded above. He also took me through the provisions of Section 80HH and pointed out that the relief under that section is to be granted on 'profits and gains derived from an industrial undertaking'. He urged that the profits and gains of a business are to be understood in the normal commercial sense, especially when it has not been specifically defined in the Act.

According to him, the profits of the manufacturing unit can be calculated in the commercial sense after deducting only the actual expenses incurred for export markets development. The notional deduction given under Section 35B is not a real expense. That allowance is relevant for arriving at the taxable income ; but it is not relevant for arriving at the commercial profits of the manufacturing unit. He relied on the decision of the Supreme Court in the case of Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243 for the proposition that the reliefs under the various Sub-sections of Section 80 of the Act have to be given on the gross amount and not after deducting any expenses, real or notional, therefrom.

5. Shri S. Das Gupta, the learned representative for the department, on the other hand, supported the order of the Commissioner (Appeals). He stated that 'gross total income' has been defined under Section 80B of the Act. Gross total income has to be arrived at after giving all allowances outside Chapter VIA of the Act. Hence, relief under Section 35B has to be deducted even when computing the income of the manufacturing unit, which is a separate source of income. It is only the net income so computed that had to be included in the total income.

Hence, he urged that the claim of the assessee has been rightly rejected.

6. I have considered the contentions of both the parties as well as the facts on the record. I find force in the contentions raised for the assessee. The phrase 'profits and gains derived from an industrial undertaking has not been defined in the Act. Hence, its meaning has to be understood in the general commercial sense. In order to arrive at the profit from an undertaking, only the actual expenses are deducted.

Notional expenses are not deducted. This is the accountancy principle followed in the commercial world. Hence, profits of an undertaking can mean only the amount arrived at after deduction of actual expenses only and without the deduction of the notional expenses like the relief under Section 35B. This relief has been given for encouraging exports.

This is really not an expense that goes out of the pocket of the assessee. Hence, this amount cannot go to reduce the commercial profit, though it may reduce the taxable profit. As has been held in the case of Cloth Traders (P.) Ltd. (supra), once a reference to 'the profits and gains of the business' is made, then it should mean the gross figure and not the net figure included for the purpose of taxation. I am aware of the amendment to the law by the introduction of Section 80AB in the Act, but the said section came into force only with effect from 1-4-1981. I am now concerned with an assessment year prior to the date from which Section 80AB came into force. The introduction of Section 80AB in the statement also supports the view that the ratio of Cloth Traders (P.) Ltd.'s case (supra) will apply to Section 80HH also.

Hence, I hold that the claim of the assessee deserved acceptance and so I direct that relief under Section 80HH should be allowed on the profits of the manufacturing unit before deducting the extra weighted deduction allowed under Section 35B.7. The next ground in the appeal states that the relief under Section 80J of the Act should have been allowed in accordance with the decision in the case of Century Enka Ltd. v. ITO [1977] 107 ITR 909 (Cal.), i.e., on the gross assets of the unit without deducting any liability therefrom. I have heard both the parties in the matter. I find that the validity of the recent retrospective amendment to Section 80J is now under the consideration of the Supreme Court. Hence, I vacate the orders of the Commissioner (Appeals) as well as the ITO on this point and restore this matter to the file of the ITO to be decided afresh in accordance with law as finally settled by the Supreme Court after giving a reasonable opportunity of being heard to the assessee.

8. The last ground in this appeal states that the disallowance of interest under Section 40A(8) of the Act should have been calculated on the net disallowable expenditure of interest. I find that this matter does not arise out of the order of the Commissioner (Appeals) and so I reject this ground as incompetent.


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