1993 (12) TMI 22 - HC - Income Tax

High Court Decision: Section 80M Deduction Denied, Errors in Tribunal's Ruling

The High Court ruled against the assessee in a case concerning the computation of total income and deductions under section 80M. The court held that the ... Carry Forward, Depreciation And Development Rebate, Set Off Of Loss, Special Deduction, Unabsorbed Depreciation Issues Involved:1. Whether the Income-tax Officer erred in computing the total income and wrongly allowed the deduction under section 80M.2. Whether the Tribunal was correct in holding that the Commissioner of Income-tax's order under section 263 cannot survive.3. Whether the assessee had the option not to set off the loss of Kanisha Steels against income from other sources.4. Whether the assessee is entitled to carry forward the loss of Kanisha Steels and set it off against future profits.5. Whether the Tribunal was justified in observing that the option to not set off losses would not affect the total income.Issue-wise Detailed Analysis:1. Error in Computing Total Income and Deduction under Section 80M:The Commissioner of Income-tax issued a show-cause notice stating that the Income-tax Officer erred in computing the total income for the assessment year 1976-77 and wrongly allowed the deduction of Rs. 1,02,578 under section 80M. The gross total income of the assessee was 'nil' before making any deduction under Chapter VI-A, thus making the deduction under section 80M inapplicable. The Commissioner referred to the Supreme Court's decision in Cambay Electric Supply Industrial Co. Ltd. v. CIT, which emphasized that the total income must be computed in accordance with the Act before any deductions under Chapter VI-A are applied.2. Tribunal's Holding on Commissioner of Income-tax's Order under Section 263:The Tribunal allowed the assessee's appeal, stating that the Commissioner of Income-tax's order could not survive because the Income-tax Officer had adjusted unabsorbed depreciation and development rebate, not carried forward losses. The Tribunal held that the Department should have brought the issue to the assessee's notice and given an opportunity for a hearing before making such adjustments. However, the High Court found that the Tribunal did not properly consider the show-cause notice and the final order of the Commissioner, which were consistent with the principles laid down by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT. Therefore, the Tribunal's decision was erroneous.3. Option to Not Set Off Loss of Kanisha Steels:The assessee contended that it had the option not to set off the loss of Kanisha Steels against income from other sources under the head 'Business income.' However, the High Court held that the total income must be computed after considering profits and losses from different heads of income. Sections 71 and 72 do not provide an option to carry forward losses without setting them off against current profits. Thus, the assessee's contention was rejected.4. Entitlement to Carry Forward Loss of Kanisha Steels:Since the answer to the previous issue was negative, the question of carrying forward the loss of Kanisha Steels did not survive. The High Court further noted that the assessee is not entitled to carry forward such losses and set them off against future profits, reinforcing the necessity of computing total income by considering all sources.5. Tribunal's Observation on Option Affecting Total Income:The Tribunal observed that the option to not set off losses would not affect the total income. However, the High Court disagreed, stating that the computation of total income requires considering all sources of income and losses. The Act does not allow an option to show profit from one source while carrying forward the loss from another. Therefore, the Tribunal's observation was incorrect.Conclusion:The High Court answered questions Nos. 1 and 5 in the negative, in favor of the Revenue, and against the assessee. Questions Nos. 2, 3, and 4 were also answered in favor of the Revenue, rejecting the assessee's contentions. The reference was disposed of with no order as to costs.