Facts of the Case

The appeals were filed by the Revenue relating to Assessment Years 1992-93, 1993-94, 1994-95, 1995-96 and 2000-01.

The assessee, Sona Koyo Steering Systems Limited, operated two separate industrial units, namely:

  1. Steering Unit
  2. Axle Unit

During the relevant assessment years, one unit earned profits while the other incurred losses.

The assessee claimed deduction under Section 80-I of the Income-tax Act, 1961 on the profits of the eligible unit.

The Assessing Officer computed the deduction after setting off the losses of one unit against the profits of the other unit. The Commissioner of Income Tax (Appeals) upheld the same approach.

The assessee challenged the computation before the Income Tax Appellate Tribunal (ITAT), contending that both units were independent industrial undertakings and deduction under Section 80-I should be computed separately for each eligible unit without adjusting the losses of another unit.

The ITAT accepted the assessee’s contention and directed the Assessing Officer to grant deduction without setting off the losses of one unit against the profits of the other unit, subject to availability of gross total income under Section 80B(5).

Aggrieved by the ITAT orders, the Revenue filed appeals before the Delhi High Court.

Issues Involved

Whether, while computing deduction under Section 80-I of the Income-tax Act, 1961, the loss of one eligible industrial undertaking can be set off against the profits of another eligible industrial undertaking before determining the quantum of deduction?

Whether Sections 80-I(6) and 80B(5) require computation of deduction unit-wise by treating each eligible industrial undertaking as an independent source of income?

Whether the decision of the Supreme Court in Synco Industries Ltd. v. Assessing Officer (299 ITR 444) supports adjustment of losses of one unit against profits of another eligible unit for computing deduction under Section 80-I?

Petitioner’s Arguments

The Revenue contended that:

  • The issue stood covered by the judgment of the Supreme Court in Synco Industries Ltd. v. Assessing Officer & Another (299 ITR 444 SC).
  • While determining eligibility for deduction under Chapter VI-A, losses of one unit must be adjusted against profits of another unit.
  • Gross Total Income must first be computed after considering all permissible adjustments and set-offs.
  • Therefore, deduction under Section 80-I should be calculated only after adjusting losses of one industrial undertaking against profits of another undertaking.

Accordingly, the Revenue argued that the ITAT erred in allowing deduction without inter-unit set-off.

Respondent’s Arguments

The assessee submitted that:

  • The Delhi High Court judgment in CIT v. Dewan Kraft Systems Pvt. Ltd. (297 ITR 305 Delhi) directly covered the issue in favour of the assessee.
  • Section 80-I(6) contains a non-obstante clause and mandates that the profits of an eligible industrial undertaking be computed as if that undertaking were the only source of income.
  • Each industrial undertaking must be treated independently while determining the quantum of deduction.
  • Losses of another eligible unit cannot be reduced from the profits of the profit-making eligible unit for purposes of Section 80-I deduction.
  • The Supreme Court decision in Synco Industries dealt with computation of Gross Total Income and not with the method of computing the quantum of deduction under Section 80-I(6).

The assessee therefore supported the ITAT’s order.

Court Findings / Order

The Delhi High Court dismissed all appeals filed by the Revenue and decided the issue in favour of the assessee.

The Court held that:

  • Section 80-I(6) requires computation of profits of an eligible industrial undertaking as if it were the only source of income.
  • Every eligible industrial undertaking must be treated separately and independently for determining the quantum of deduction.
  • Losses of one eligible industrial undertaking cannot be set off against profits of another eligible industrial undertaking for computing deduction under Section 80-I.
  • Only profit-making eligible units are relevant for calculation of deduction under Section 80-I.
  • The Supreme Court decision in Synco Industries Ltd. does not support the Revenue’s contention.
  • Synco Industries merely explains that Gross Total Income must first be computed after adjusting losses and if Gross Total Income becomes nil, no deduction under Chapter VI-A can be allowed.
  • The Supreme Court itself recognized that for computing the quantum of deduction under Section 80-I(6), the eligible undertaking must be treated as the only source of income.

The substantial question of law was answered in favour of the assessee and against the Revenue.

The appeals were dismissed.

Important Clarification

The judgment clearly distinguishes between:

Computation of Gross Total Income

For determining Gross Total Income under Section 80B(5), losses and adjustments under the Act must be considered.

Computation of Deduction under Section 80-I

For computing the quantum of deduction under Section 80-I(6), each eligible industrial undertaking must be treated independently as if it were the only source of income.

Accordingly:

  • Losses of another eligible industrial undertaking cannot reduce the profits of the profit-making eligible undertaking for deduction purposes.
  • However, if Gross Total Income after statutory adjustments becomes nil, no deduction under Chapter VI-A can ultimately be allowed.

Sections Involved

  • Section 80-I of the Income-tax Act, 1961
  • Section 80-I(1)
  • Section 80-I(6)
  • Section 80B(5)
  • Chapter VI-A of the Income-tax Act, 1961

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2010:DHC:834-DB/BDA10022010ITA4162009.pdf  

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