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Kindly find judgment of Madras High Court which supports the view taken by the Mumbai Special Bench in case of Syncome formulation.

2009-TIOL-199-HC-MAD-IT

IN THE HIGH COURT OF MADRAS

Tax Case (Appeal)Nos.216 to 219 of 2009
And M.P.Nos.1 of 2009 in T.C.A.Nos.217 to 219 of 2009

THE COMMISSIONER OF INCOME TAX, CHENNAI

Vs

M/s FUTURA POLYESTER LIMITED
(Formerly known as M/s Futura Polymers)
1A, Kamarajar Salai,
Manali, Chennai 68

K Raviraja Pandian And M M Sundresh JJ.,

Dated: April 16, 2009

Appellant rep by: Mr.Arun Kurian Joseph

Income tax - Sec 80HHC benefits - Assessee is a manufacturer-exporter of polymer products - while computing the profit u/s 115JA the assessee claims deduction u/s 80HHC - AO disallows - CIT(A) allows Assessee's appeal and Tribunal upholds the same - held, AO is not entitled to touch the P&L account prepared as per provisions of Companies Act while arriving at profit u/s 115J and the book profit thus calculated should be the basis for taxation - deduction u/s 80HHC to be limited only to profits of eligible category only - no infirmity in the Tribunal's order - Revenue's appeal dismissed

JUDGEMENT

Per: K Raviraja Pandian J.:

The revenue on appeal against the order of the Income Tax Appellate Tribunal, dated 31.07.2008 passed in ITA Nos.357 to 360/Mds/2008 n respect of the assessment years 1998-99 to 2001-02.

2. The assessee is a domestic company engaged in the business of manufacture and export of polymers, plastic and polymerised products. For the assessment years 1998-99 to 2001-02, the assessee company filed return showing a loss under the head "business". The Assessee company offered to tax certain income computed under section 115HA and claimed a deduction u/s 80HHC while computing the profit u/s 115JB. The Assessing Officer held that the assessee is not entitled to any deduction under section 80HHC while determining the taxable income on the basis of the book profit under Section 115JA since the computation of business income under the regular provisions resulted in nil figure for each of the assessment years. The Assessing Officer found that since there was no eligible provisions governing "profits and gains of business or profession", the assessee company is not entitled for any deduction under section 80HHC from its book profits as per clauses (viii)(iv) of the Explanation appended to section 115JA and completed the assessment.

3. This finding of the assessing officer has been reversed by the Commissioner of Income Tax (Appeals) on appeal being filed by the assessee by holding that for the purpose of computing book profit under Section 115JA, relief u/s 80 HHC has to be worked out on the basis of the book profits as against the normal computation of income.

4. This was confirmed by the Tribunal on the appeal taken out by the revenue. The correctness of the same is now canvassed before this Court by the revenue by formulating the following question of law:-

"Whether in the facts and circumstances of the case, the Tribunal was right in allowing deduction u/s 80HHC on the basis of book profits u/s 115JB and not on the basis of eligible profits u/s 80HHC as per normal computation".

5. We have heard the argument of the learned counsel for the revenue and perused the materials available on record.

6. The issue involved in the present appeals is squarely covered by the decision of a Division Bench of this Court in which one of us (K.Raviraja Pandian,J) was a party in the case of Commissioner of Income Tax vs. Rajanikant Schnelder and Associates P. Ltd., reported in 302 ITR 22), wherein it has been observed as follows:-

"4. We are not able to subscribe our view to the grounds taken in the appeal that the deduction under Section 80 HHC is allowable only on the profits and gains arrived at under Sections 28 to 44B of the Income Tax Act. In the case on hand, it is the stand of the assessee that the relief under section 80HHC should be based on the profit ascertained under Section 115JA only but not on income computed under Sections 28 to 44 of the Act. The Tribunal after considering the Judgments of the Supreme Court in the case of Surana Steels P. Ltd., vs. Deputy CIT (1999) 237 ITR 777 and in the case of Apollo Tyres Ltd., vs. CIT (2002) 255 ITR 273 (SC) and analyzing the order impugned found that the provisions of Section 115J are similar to the provisions of Section 115JA of the Act. In order to come to the conclusion the Tribunal has also taken note of sub-section (4) of section 115JA and referred to the dictum laid down by the Supreme Court in the case of Apollo Tyres Ltd., vs. CIT (2002) 255 ITR 273 wherein it was held that the Assessing Officer while computing the book profits of a company under Section 115J of the Income Tax Act, 1961, has only the power to examine whether such books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer thereafter has the limited power of making increases and reductions as provided for in the Explanation Section 115J. The Assessing Officer does not have the jurisdiction to go behind the net profits shown in the profit and loss account except to the extent provided in the Explanation. The use of the words "in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act" in Section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the Assessing Officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinized and certified by the statutory auditors and approved by the company in the general meeting and thereafter to be filed before the Registrar of Companies, who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub-section (1A) of section 115H does not empower the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company.

5. The Assessing Officer is not entitled to touch the profit and loss account prepared by the assessee as per the provisions contained in the Companies Act, while arriving at the book profit under Section 115J and the book profit so arrived at should be the basis for taxation and therefore, the computation under Section 80HHC should be limited to the case of profits of eligible category only. The Tribunal has also come to the conclusion that in view of the non obstante clause available in Section 115JA it was clear that the provisions is a self-contained one and no other provision would have effect on it and thereby it was to be implemented as contained in the said provision. The Tribunal has also further given a reason to the effect that section 80HHC is clear about this aspect that profit only is to be taken into account but not income and sub-section (3) of Section 115JA itself took care of the provisions relating to the adjustment of loss or depreciation and carry forward of the income. The finding arrived at by the Tribunal is correct and followed the decision of the Supreme Court. We are of the view that the conclusion arrived at by the Tribunal cannot be complained of".

7. Hence, following the same, the question of law is answered against the revenue and the appeals are dismissed. Consequently, connected miscellaneous petitions are also dismissed.

I don.t think there is any writ petition against the Rule 8D. If one goes through the judgement of Daga Capital ,there are various contradictions in the judgment itself. Nowhere D.R has argued that Rule 8D is restropective in nature.Further when there was no rule 8D, what is the sancity of disallowance made by the Assessing Officer.

POLYFEX PVT LTD V/S CIT .257 ITR 343

You have to offer interest as income and do not have to wait for the order of the Tribunal.Kindly read TAMIL NADU INDUSTRIAL INVESTMENT CORP LTD V/S DCIT(2004) 270 ITR 556(Madras) and also the decision of Apex Court in case of POLYFEX India .

Your presumption is correct. It is contract of sale and purchase and not works contract.

As regards computation of 80HHC on adjusted Book Profit , I think for the time being controversy has been settled by Mumbai Special Bench in case of SYNCOME FORMULATION.106 ITD 193 which is in favour of the assessee. However whether department has chaalenged in High Court and what is the stauas of the appeal u/s 260A of the Act. As regards though Mumbai Tribunal has held that Sunset Clause is not applicable.However Chennai Tribunal has taken a contrary decision as given below

2009-TIOL-150-ITAT-MAD
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'A', CHENNAI
ITA No.457(Mds)/2007
Assessment Year : 2003-04
M/s BONFIGLIOLI TRANSMISSIONS PVT LTD
PLOT-NO AC-7 TO AC-11, SIDCO INDUSTRIAL ESTATE
THIRUMUDIVAKKAM, CHENNAI-44
PAN : AABCB1675N
Vs
THE ASSISTANT COMMISSIONER OF INCOME TAX
COMPANY CIRCLE-I(2), CHENNAI
M K Chaturvedi, VP and Ahmad Fareed, AM
Dated : December 23, 2008
Appellant Rep by : Shri R Seshagiri Rao
Respondent Rep by : Shri Shaji P Jacob
Computation of deduction u/s 80HHC for the purpose of 115JA/JB
Deduction should be computed u/s 80HHC(3) using book profits. Decision of ITAT Spl. Bench, Mumbai in DCIT Vs Syncome Formulations ( 106 ITD 193 ) followed.
While allowing deduction u/s 80HHC for the purpose of sec. 115JA/JB, effect has to be given to sub-sec. (1B) of sec. 80HHC wherein the deduction for each year is restricted to certain percentage of the deduction otherwise available. Sub-section (3) of sec. 80HHC is a machinery provision dealing with the mode of computation of deduction whereas the deduction can be allowed only in accordance with the prescription of the enabling section ie. 80HHC(1). The enabling section is governed by the restrictive provision laid down under sub-section (1B) of sec. 80HHC.
Appeal of assessee partly allowed.
ORDER
Per : M K Chaturvedi :
This appeal by the assessee is directed against the order dated 6.12.2006 passed by the Commissioner(Appeals)-III, Chennai and relates to the assessment year 2003-04.
2. Shri R Seshagiri Rao, learned counsel for the assessee appeared before us and neatly identified the two issues involved as under:-
1. Whether on facts and in law, the assessee while computing the book profits under section 115JA of the Income-tax Act, 1961 is entitled to reduce the net profit as per the profit and loss account by the profits eligible for deduction under section 80HHC of the Act?
2. Whether in the facts and circumstances of the case the eligible profits under section 80HHC based on book profits could be determined by resorting to the provisions of section 80HHC(1B)(iii) of the Act?
No other ground was pressed before us. As such the other grounds raised in the appeal are dismissed as not pressed.
3. In regard to the first question both the parties agreed that the issue stands covered in favour of the assessee by the decision of the Special Bench of the Tribunal rendered in the case of DCIT Vs. Syncome Formulations(I) Ltd., 106 ITD 193 (Mum.)(SB) = (2007-TIOL-96-ITAT-MUM-SB). In this case the Tribunal has held that the deduction under section 80HHC in the case of MAT assessment is to be worked out on the basis of adjusted book profit and not on the basis of profit computed under the regular provisions of law applicable to the computation of profits and gains of business or profession. No contrary decision was placed before us. We, therefore, respectfully following the precedent decide this issue in favour of the assessee and against the Revenue.
4. Adverting to the second question we find that section 80HHC(1B)(iii) clearly stipulates that for the purposes of sub-sections(1) and (1A) the extent of deduction of the profits shall be an amount equal to fifty per cent thereof for an assessment year beginning on the first day of April, 2003. This provision cannot be ignored.
5. Section 80HHC provides for deduction in respect of profits retained for export business, etc. The Finance Act, 2000 amended the provisions of section 80HHC to the effect that the extent of deduction would be reduced to 80% for assessment year 2001-02, 60% for assessment year 2002-03, 40% for assessment year 2003-04 and 20% for assessment year 2004-05. The deduction would cease to be available from assessment year 2005-06 onwards. To cushion the impact of difficulties induced by competition on the one hand and infrastructural bottlenecks faced by exporters on the other, Finance Act, 2001 has amended the rate of phasing our of these deductions. The deduction from profits shall now be reduced to 70% for assessment year 2002-03, 50% for assessment year 2003-04 and 30% for assessment year 2004-05. The deduction would however cease to be available from assessment year 2005-06 and onwards.
6. The contention of the learned counsel for the assessee that deduction under section 80HHC allowed without making recourse to the provisions of sub-section(1B) of section 80HHC is not correct. Section cannot be read in a truncated manner. Sub-section(3) of section 80HHC is a machinery section which prescribes the modus for the computation of deduction. The deduction is allowed in accordance with the prescription of the enabling section 80HHC(1). The enabling section is governed by the restrictive provision laid down under sub-section(1B) of section 80HHC. Reading the section as a whole, in the year under consideration deduction as computed in accordance with the machinery section can be allowed only upto 50% and not beyond that. As such we do not find any merit in the contention of the learned counsel for the assessee. We, therefore, decide this issue in favour of the Revenue and against the assessee.
7. In the result the appeal of the assessee stands partly allowed.

Let,s wait for the outcome .

I think Department would not accept the claim of higher rate of depreciation.It is better you amortised the entire cost of the poject over 3 years and then show profit accordingly.
There is no povision in the Act which allows you to set off of short term loss against taxable income.

You have not given full details regarding your brought forward loss.Further the brought forward loss of A.Y. 2003-04 will depend on the outcome of the appeal of A.Y. 2003-04.In case you succeed in appeal,the entire loss will automatically be carried forward and has to be set off. If ,you did not had loss in A.Y.2004-05 and you had just set off the carried forward loss of A.Y. 2003-04 , then filing of belated return for succedding A.Y"s will not dis entile you from carrying forward and setoff of loss of A.Y. 2003-04.By filing your return belated, you only lose the right of loss of that assesseement year being carried forward.This will only apply to business loss and not to depreciation.Yiu will find lots of judgement on this issue.

It has become a very debateable question.Though there has been decision of Mumbai Tribunal in case of J.M.Stock Brokers and that of Lucknow Tribunal In case of sorath Infrastructure in favour of assessee. However recently Ahmedabad Tribunal in an unreported decision has held in favour of revenue considering the frequency of transcation.

Dear Friends,
Kindly look for Bombay High Court Judgment of Piaggio cars pvt ltd. I have written citation in my diary and will revert back to you after a week. Secondly Ahmedbad Tribunal in case of Bharatbhai J Vyas and Delhi Tribunal in case of Guruji Entertainment has also held that Deepreciation is not allowable on Goddwill. As regarding Deprecition on Non-compete fees , i have copy of one unreported judgement of A'bad Tribunal which also  says depreciation is not allowable on Non-Compete fees.The Bombay High Court though in favoyr of assessee is not direct judgment.

Pawan Singla