2009 (11) TMI 539 - HC - Income Tax

Section 80HHA: Adjust Non-Industrial Losses First

The Court held that deduction under section 80HHA requires adjusting losses from non-industrial units before setting off against industrial undertaking ... Special deduction – Industrial undertaking – loss from non-industrial unit in terms of section 80AB and section 71 to be adjusted first Issues:1. Deduction under section 80HHA and setting off income against loss from a non-industrial unit.2. Entitlement to depreciation for plant and machinery of the menthol unit.Issue 1: Deduction under section 80HHA and setting off income against loss from a non-industrial unit:The case involved an assessee, a private limited company engaged in the manufacture and sale of basic drugs, claiming deductions under section 80HHA and depreciation for the menthol unit in Rampur. The Assessing Officer partially allowed the deduction under section 80HHA, leading to an appeal. The first appellate authority allowed the appeal, directing not to adjust losses of other units while computing the deduction under section 80HHA. The Income-tax Appellate Tribunal (ITAT) partially allowed the Department's appeal and restored the assessment order. However, it upheld the direction not to adjust losses of other units for section 80HHA deduction. The Tribunal also ruled that the trial run of the plant constituted use, entitling the assessee to depreciation for the relevant assessment year.In analyzing the first question, the Court referred to past judgments, including one involving the assessee for previous assessment years. It highlighted the interpretation of section 80HHA, emphasizing that the deduction is intended for profits and gains of industrial undertakings fulfilling specified conditions. The Court cited decisions supporting the view that the deduction is linked to industrial undertaking profits, not total profits of the assessee. The assessee argued that the issue was settled in their favor based on previous decisions. However, the Court noted conflicting views within the assessee's cases for different years. The Department cited a Supreme Court decision to support its stance on the issue.Ultimately, the Court answered the first question against the assessee, holding that deduction under section 80HHA requires adjusting losses from non-industrial units first before setting off against industrial undertaking income.Issue 2: Entitlement to depreciation for plant and machinery of the menthol unit:Regarding the second question, the Tribunal found that the machinery was put to use, with the Commissioner of Income-tax (Appeals) determining that the trial run of the plant constituted use. Citing a relevant case law, the Tribunal justified allowing depreciation for the assessment year 1987-88 as the machinery was used for business purposes during the relevant accounting year.The Court upheld the Tribunal's decision on the second question, ruling in favor of the assessee and against the Department. It affirmed that the machinery being put to use for business purposes justified the allowance of depreciation for the menthol unit.In conclusion, the Court provided a detailed analysis and ruling on the issues of deduction under section 80HHA and entitlement to depreciation for the plant and machinery of the menthol unit, ultimately deciding against the assessee on the first issue and in favor of the assessee on the second issue.