By TIOL News Service

CHANDIGARH, SEPT 07, 2018: THE ISSUE IS - Whether while calculating income for the purpose of computing eligible deduction amount u/s 80IB, loss from one unit can be set off from profit of another unit and net amount is taken into consideration. YES IS THE VERDICT.

Facts of the case

The assessee company, engaged in the manufacturing of domestic home appliances and electric goods, had filed return for relevant AY. It had two units for doing manufacturing activities. The company was claiming deduction u/s 80IC with respect to eligible profits of Unit-1 since AY 2005-06 and this was the sixth year of claim of deduction. Accordingly assessee company had claimed deduction u/s 80-IC to the tune of 30% of the eligible profits in the current year. Business activities in Unit-II started since 12/03/2010. No claim of deduction u/s 80-IC had been made for Unit-II as assessee company had incurred losses in the same. The AO allowed deduction taking into consideration the consolidated profits of Unit-I and Unit-II. The AO deducted the losses of Unit-II from the profit earned from Unit-I and allowed the net profits as eligible deduction u/s 80IC. On appeal, CIT(A) confirmed the order of the AO.

Tribunal held that,

++ in the case of Him Techno forge Ltd, the Court has clearly held that "On perusal of the bare provisions of the Act and the law cited herein above, it is clear that while calculating deductions under Chapter VI-A only the profits derived from priority units are to be taken into consideration, Section 80A(2) specifically provides that the amount of deduction shall not in any case exceed the gross total income of the assessee. There can be no manner of doubt that Section 80AB has overriding effect and will govern the other provisions of Chapter VI-A. This also clearly indicates that only the income derived from a priority undertaking is to be taken into consideration while making deduction. Section 80B(5) indicates that gross total income means the total income computed in accordance with the provisions of this Act. Therefore, we are of the considered view that the phrase "gross total income" will include profits and losses from other units whether they be priority units or non-priority units";

++ section 80AB makes it clear that the computation of income has to be in accordance with the provisions of the Act. If the income has to be computed in accordance with the provisions of the Act, then not only profits but also losses have to be taken into consideration. Courts have enunciated that from the charging provision of the Act, it is discernible that the words "income" or "profits and gains" should be understood as including losses also, so that, in one sense "profits and gains" represent "plus income" whereas losses represent "minus income". In other words, loss is negative profit. Both positive and negative profits are of revenue character. Both must enter into computation, wherever it becomes material, in the same mode of the taxable income of the assessee.";

++ keeping in view the provisions of Section 80AB, signifying the provisions pertaining to the deduction to be made with reference to the income included in the gross total income, Section 80IA(5) which elucidates that notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section(1) apply shall, for the purposes of determining the quantum of deduction under that subsection for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to an including the assessment year for which the determination is to be made and read with section 80IC(7) which indicates the eligible deductions are on par with sub section 5 of Section 80IA and also keeping in view the fact that both the units of the assessee are eligible undertakings, and after interpreting what constitutes gross total income and eligible profits in view of the various judgments as regards to determination of gross total income, it was upheld that the decision of the CIT(A) considering the setting of the negative income of one priority unit with the positive income of the another priority unit before computing the deduction under 80IC. As a result both the appeals of the assessee are dismissed.

(See 2018-TIOL-1453-ITAT-CHD)