Restriction on Deduction due to section 80-IA(9)

Chapter VIA of the Income-tax Act, 1961 deals with various
deductions. Part A of this Chapter details the scheme of deductions, while part
C contains the provisions for allowing certain deductions in respect to profits
and gains from a business. Section 80A, falling in part A, provides that
deductions are to be made from the gross total income, and that the aggregate
amount of the deductions shall not exceed the gross total income.

Section 80AB, also falling in part A of Chapter VIA, provides
that where any deduction is required to be made or allowed under any section
falling in part C of that Chapter, in respect of any income of the nature
specified in any of the relevant sections which is included in the gross total
income, the amount of income of that nature as computed in accordance with the
provisions of the Income-tax Act shall be deemed to be the amount of income of
that nature derived or received by the assessee and included in his gross total
income.

Section 80IA(9), which falls in part C of Chapter VIA,
provides as under :

The question that repetitively arises for the consideration
of the courts is about the quantum of deduction in cases where an assessee is
eligible to claim deduction under more than one section of part C of Chapter VIA
based on different criteria, for instance, u/s.80HHC for export profits and
section 80IA for new industrial undertaking, and the manner of computation of
deductions under both the sections. While the Delhi and Kerala High Courts have
held that for the purpose of computing deduction u/s.80HHC, the deduction
already allowed u/s.80IA has to be reduced from the eligible business profits,
the Bombay and Madras High Courts have taken a contrary view that the amount of
such deduction u/s.80IA is not to be reduced in computing the export profits for
the purpose of deduction u/s.80HHC, so however the aggregate of the deductions
under both the provisions is restricted to the business profits derived from the
eligible business.

To illustrate, if the profits of an eligible business are 100
and the deduction u/s.80IA is 20, the issue is whether, for the purpose of
computation of the deduction u/s.80HHC, the profits of the business are to be
considered as 80 (as held by the Delhi High Court) or as 100 (as considered by
the Bombay High Court). There is no dispute that the total deduction cannot
exceed 100. The issue, therefore, really is whether the profits eligible for
computation of the deduction u/s.80HHC is impacted by the provision of section
80IA(9), or whether the said provision restricts the quantum of deduction
u/s.80HHC after it is computed.

Though the decisions covered in this column pertain to
deductions u/s.80IA and u/s.80HHC, and deduction u/s.80HHC is no longer
available, the principle laid down by these decisions would still be applicable
in the context of section 80IA and other deductions under part C of Chapter VIA.

The issue arose recently before the Delhi High Court in the
case of Great Eastern Exports v. CIT, 237 CTR (Del.) 264, and four other
cases disposed of through a common order.

In all these cases, the assessees had claimed deductions
under both section 80HHC and section 80IA. The Assessing Officer reduced the
amount of business profits by the deduction allowed u/s.80IA for computing the
deduction u/s.80HHC, negating the stand of the assessees that for computing
deduction u/s.80HHC, the eligible profits were to be taken, irrespective of the
deduction allowed u/s.80IA i.e., without reducing such profits by the
amount of deduction claimed u/s.80IA.

The Delhi High Court examined the provisions and the history
of Chapter VIA, and noted that prior to the amendment made by insertion of
section 80IA(9) in 1999, it had been held by the courts that each relief under
Chapter VIA was a separate one and had to be independently determined, and would
not be abridged or diluted by any of the other reliefs.

The argument on behalf of the assessees was that this
amendment had not made any change as to the manner of computation and deduction
of various provisions under part C of Chapter VIA, but only restricted the total
deduction under all those sections to the profits and gains. It was argued that
section 80AB, the controlling and governing section for all deductions under
part C of Chapter VIA, was a non obstante clause and would therefore
prevail over section 80IA(9); it referred to ‘gross total income’, and not ‘net
income’. It was also argued that a harmonious construction should be given
rather than a literal interpretation, considering the object of section 80IA(9)
of preventing deduction of more than 100% of profits and gains of the
undertaking by claiming multiple deductions under different sections.

The Delhi High Court, analysing the provisions of section
80IA(9), observed that by reading the plain language, once an assessee was
allowed deduction u/s.80IA to the extent of such profits and gains, he was not
to be allowed further deductions under part C of Chapter VIA in respect of such
profits and gains, and that in no case the deduction would exceed the profits
and gains of such eligible business. According to the Delhi High Court, the
expressions used ‘deduction to the extent of such profits’ and the word ‘and’ in
this section were very crucial. According to the Court, while the first
expression signified that if an assessee was claiming benefit of deduction of a
particular amount of profits and gains u/s.80IA, to that extent profits and
gains were to be reduced while calculating the deductions under part C of
Chapter VIA. The use of the word ‘and’, signified that the said provision was
independent — namely, the total deduction should not exceed the profits and
gains in a particular year.

The Delhi High Court observed that even a layman who had some proficiency in English would understand the meaning of that provision in the manner that they had explained, and that the provision aimed at achieving two independent objectives. According to the Delhi High Court, if the language of the statute was plain and capable of one and only one meaning, that obvious meaning had to be given to the provision. The Delhi High Court rejected the argument that section 80AB would be rendered otiose by such interpretation, by holding that there was no conflict within the two provisions, as section 80AB dealt with computation of deductions on gross total income, whose purpose was achieved, even otherwise, on reading these provisions and interpreting them in the manner they had done. The Delhi High Court refused to consider the clarification given by CBDT Circular number 772, on the ground that the notice and objects of accompanying reasons were only an aid to construction, which was needed only when literal reading of the provisions led to an ambiguous result or absurdity.

The Delhi High Court therefore held that for the purpose of computing deduction u/s.80HHC, the deduction already allowed u/s.80IA had to be reduced from the profits of the business.

Associated Capsules’ case:

The issue again recently came up before the Bombay High Court in the case of Associated Capsules (P) Ltd. v. Dy. CIT & Anr., 237 CTR (Bom.) 408.

In this case, the assessee had claimed deduction u/s.80IA at 30% of the profits and gains from the eligible business undertakings and deductions u/s.80HHC at 50% of the profits from the export of goods. The Assessing Officer computed the deduction u/s.80HHC on the business profits computed after deducting 30% of such profits which was allowed u/s.80IA.

The Commissioner (Appeals) held that section 80IA(9) did not authorise the Assessing Officer to reduce the amount of profits of business allowed as deduction u/s.80IA from the total profits of business while computing deduction u/s.80HHC, that both deductions have to be computed independently, and thereafter the deduction computed u/s.80IA has to be allowed in full and the deduction computed u/s.80HHC was to be restricted to the balance profits of the business duly reduced by the deduction allowed u/s.80IA, so that the aggregate of the deductions did not exceed the profits of the business of the undertaking.

The Income Tax Appellate Tribunal reversed the order of the Commissioner(Appeals), following the decision of the Special Bench of the Tribunal in the case of Asst. CIT v. Hindustan Mint & Agro Products (P) Ltd., 119 ITD 107 (Del). The Tribunal held that section 80IA(9) had the effect of reducing the eligible profits available for deduction u/s.80HHC.

Before the Bombay High Court, on behalf of the assessee, it was argued that the restriction imposed by section 80IA(9) was not applicable at the state of computation of deduction u/s.80HHC(3), but was applicable at the stage of allowing deduction u/s.80HHC(1). It was argued that the plain reading of section 80IA(9) did not suggest that the deduction allowable u/s.80HHC had to be computed by reducing the amount of profits allowed u/s.80IA. It was argued that wherever the Legislature intended that the deduction allowed under one section shall affect the computation of deduction allowable under another section, the Legislature had specifically stated so by using the term ‘such part of profits shall not qualify’, which term was not used in section 80IA(9). It was further argued that the expression ‘profits of the business’ for the purpose of deduction u/s.80HHC had been defined in that section, and that section 80IA(9) did not use a non obstante provision to override that definition.

It was further argued on behalf of the assessee that the basis for deduction u/s.80IA and u/s.80HHC were totally different, and that therefore the restriction imposed u/s.80IA(9) had no relation to the computation of deduction u/s.80HHC. It was further urged that the two restrictions contained in section 80IA(9) have to be read together and on such a reading, it was clear that the restrictions were with reference to allowability and not computability of deductions under other provisions of part C of Chapter VIA. Reliance was placed on the explanatory memorandum to the Finance Bill, 1998 explaining the reasons for inserting section 80IA(9), and to the CBDT Circular number 772, dated 23rd December 1998 for this proposition. Lastly, it was argued that deduction u/s.80IA was on one part of the profits (profits of an industrial undertaking), while deduction u/s.80HHC was on a different part of the profits (profits derived from exports), and that both deductions were not allowed on the same profit.

On behalf of the Revenue, it was argued that a plain reading of section 80IA(9) showed that the deduction to the extent of profits claimed and allowed u/s.80IA could not be taken into account while computing deduction u/s.80HHC. It was claimed that in order to check the misuse of double deduction, it was necessary to exclude the deduction allowed u/s.80IA from profits available for deduction u/s.80HHC. Reliance was placed on the decision of the Delhi High Court in the case of Great Eastern Exports (supra) and on the decision of the Kerala High Court in the case of Olam Exports (India) Ltd. v. CIT, 229 CTR (Ker.) 206, where a similar view had been taken by the courts. Lastly, it was argued that the restrictions u/s.80IA(9) affected the whole of section 80HHC, and not just the allowability.

The Bombay High Court analysed the background and object behind insertion of section 80IA(9), as explained in the explanatory memorandum to the Finance Bill, 1998, 231 ITR (St) 252. The Bombay High Court also examined the language of section 80IA(9) which provided that the deduction to the extent of profits allowed u/s.80IA shall not be allowed under any other provisions, which, according to the Bombay High Court, did not even remotely refer to the method of computing deduction under other provisions, but merely sought to curtail allowance of deduction and not computability of deduction under any other provision of part C of Chapter VIA. According to the Bombay High Court, the words ‘shall not be allowed’, could not be interpreted as ‘shall not qualify’.

The Bombay High Court considered the decision of the Delhi High Court in the case of Great Eastern Exports (supra), and noted that the Delhi High Court had failed to consider one of the arguments of the counsel for the Revenue in that case. The counsel had argued that in the matter of grant of deduction, the first stage was computation of deduction and the second stage was the allowance of deduction, and that computation of deduction had to be made as provided in the respective sections and it was only at the stage of allowing deduction u/s.80IA(1) and also under other provisions of part C of Chapter VIA, that the provisions of section 80IA(9) came into operation. The Bombay High Court noted that the Delhi High Court had not rejected this argument and therefore could not have arrived at the conclusion that it did without rejecting that argument. The Bombay High Court expressed its dissent with the views of the Kerala High Court for the same reasons.

The Bombay High Court noted that the object of section 80IA(9) was to prevent taxpayers from claiming repeated deductions in respect of the same amount of eligible income and in excess of the eligible profits, and not to curtail the deductions allowable under various provisions of part C of Chapter VIA. The Bombay High Court therefore held that section 80IA(9) did not affect the computability of deduction under various provisions of part C of Chapter VIA, but affected the allowability of such deductions, so that the aggregate deduction u/s.80IA and other provisions under part C of Chapter VIA did not exceed 100% of the profits of the business of the assessee.

A similar view had been taken by the Madras High Court in the case of SCM Creations v. Asst. CIT, 304 ITR 319.

Observations:

The purpose behind insertion of section 80IA(9) has been set out in CBDT Circular No. 772, dated 23rd December, 1998 as under:
“It was noticed that certain assessees claimed more than 100% deduction on such profits and gains of the same undertaking, when they were entitled to deductions under more than one Section of Chapter VIA. With a view to providing suitable statutory safeguard in the Income-tax Act to prevent the taxpayer from taking undue advantage of the existing provisions of the Act by claiming repeated deductions in respect of the same amount of eligible income, even in cases where it exceeds such eligible profits of an undertaking or a hotel, inbuilt restrictions in section 80HHD and section 80IA have been provided by amending the Section, so that such unintended benefits are not passed on to the appellant.”

The purpose of the amendment gathered from the understanding of the Board clearly seems to be to restrict the total of the deductions to 100% of the eligible profits. Had the Delhi High Court appreciated this part of the contention of the assessee that even the Board, the administrative body, was of the view that the scope of the provision contained in section 80IA(9) was to restrict the aggregate of the deductions under the two provisions of the Chapter C to the overall profits and gains, its conclusion may have been different. The Court instead rejected any need to apply its mind to such an analogy on the ground that adopting such an insidious approach was not called for where the language of the provision was clear. The stand of the Board is clearly derived from the memorandum explaining the provisions of section 80IA(9). In any case, the stand taken by the Board could have been taken as a concession conferred on the taxpayer by the Government.

The Chapter is replete with the provisions introduced for curtailing the base for deduction like section 80HHB(5), section 80HHBA(4), section 80HHD(7), section 80IE(4), section 80P, etc. These provisions use a language materially different to the language employed by section 80IA(9) for restricting the scope of the computation of deduction itself. The Parliament where desired had adopted a clear and different language to convey its aim of diluting the basis of deduction and restricting the scope of the computable income.

Section 80IA(9) as explained by the Memorandum and the Circular merely provides that when a deduction u/s.80IA has been allowed, deduction to the extent of such profits and gains shall not be allowed under any other provision, and does not state that such profits and gains shall not be taken into account for computing such other deductions. The Bombay High Court has appreciated in the proper perspective the difference between inclusion of such profits in a computation and inclusion of such profits in the actual deduction as explained by the Memorandum and the Circular.

G. P. Singh in ‘Principles of Statutory Interpretation’ suggests a departure from the rule of literal interpretation as under:
“It has already been seen that a statute has to be read as a whole and one provision of the Act should be construed with reference to other provisions in the same Act so as to make a consistent enactment of the whole statute.

Such a construction has the merit of avoiding any inconsistency or repugnancy either within a section or between a section and other parts of the statute. It is the duty of the Courts to avoid a ‘head on clash’ between two sections of the same Act and whenever it is possible to do so, to construe provisions which appear to conflict so that they harmonise.”

The Bombay High Court’s interpretation in Associated Capsule’s case is a step towards harmonising the provisions of section 80AB, section 80HHC and section 80IA(9).

It is significant to note, specially in the context of section 80HHC, that the deduction under that section is required to be computed w.r.t. the profits of the business which is artificially defined under Explanation (baa) of the said section and such artificial profits are far detached form the profit that is eligible for deduction u/s.80IA and therefore it is difficult to hold that the double deduction is claimed on the same profit. In any case, as noted, the basis on which the amount of deduction is computed under the two different provisions is significantly different.

A provision introduced for restricting the scope of a benefit under another provision has to contain a non obstante clause which is found missing in section 80HHC and on this count alone, any attempt to curtail the basis of the profit eligible for deduction u/s.80HHC should be avoided. Section 80IA(9) should at the most be seen to be achieving the same thing as is achieved by section 80AB and may be taken as a provision introduced to achieve greater clarity on the subject.

The decision of the Bombay High Court has the effect of overruling the two decisions of the Special Bench in the case of Rogini Garments & Others, 111 TTJ 274 (Chennai) and Hindustan Mint & Agro Products (P) Ltd., 123 TTJ 577 (Del.) and dissenting with the two decisions of the High Courts of Delhi and Kerala. In view of the sharp division of views of the Courts and considering the fact that the issue has the large tax effect, it is desired that the issue be settled at the earliest by the Apex Court.