2012 (9) TMI 371 - SC - Income Tax

Supreme Court clarifies PSU deductions under Income Tax Act, stresses accurate profit calculations

The Supreme Court remitted a case involving a PSU's entitlement to deductions under Sections 80HH and 80I of the Income Tax Act for the assessment year ... Denial of deduction u/s 80HH and 80I for Petrochemical Unit - the basis of allocation of profits amongst the three units as shown in the Computation of Income was not explained - Held that:- Though neither Section 80HH nor Section 80I statutorily obliged assessee company to maintain its accounts unit-wise and that it was open for it to maintain its accounts in a consolidated form in order to put an end to the litigation between the Tax Department and the PSU the case is remitted to the AO to ascertain whether the assessee had correctly calculated its net profits for assessment year 1992-93 in respect of its petrochemical unit for the purposes of claiming deduction under Sections 80HH and 80I. As in the present case, assessee company has prepared its Financial Statements on Consolidated Basis from which it has worked out unit-wise net profits and once such working is certified by the Auditors the net profit computation (unit-wise) could be placed before the AO who can find out whether such profit(s) is properly worked out and on that basis compute deduction under Section 80HH/80 - in favour of assessee by way of remand. Issues:Assessment of deduction under Sections 80HH and 80I for a PSU with multiple units - Requirement of maintaining unit-wise accounts for claiming deduction - Challenge to High Court decision on maintaining segregated accounts.Analysis:The case involved a civil appeal by the Department regarding the assessment year 1992-93, challenging the decision of the Gauhati High Court in ITR No. 4 of 2001. The appellant, a PSU formerly known as BRPL, had three separate units engaged in different businesses. It was entitled to claim deductions under Sections 80HH and 80I of the Income Tax Act, 1961 for the relevant assessment year. The controversy arose when the CIT issued a show cause notice under Section 263, alleging excessive deductions allowed by the Assessing Officer without proper unit-wise profit bifurcation. The High Court set aside the Tribunal's decision, prompting the Department to file a civil appeal.During the proceedings, it was debated whether the PSU was required to maintain unit-wise accounts to claim deductions under Sections 80HH and 80I. The Tribunal had ruled that there was no statutory obligation to maintain such accounts but recommended unit-wise audited accounts to end the litigation. However, the High Court overturned this decision, leading to the current appeal. The Supreme Court noted the cryptic nature of the High Court's order and decided to remit the case to the Assessing Officer for verification of the net profits calculation for the petrochemical unit. The Court clarified that while there was no statutory requirement to maintain unit-wise accounts, the PSU could opt for consolidated accounts to resolve the dispute.In conclusion, the civil appeal was disposed of with no order as to costs, emphasizing the need for accurate net profit calculations for the petrochemical unit to claim deductions under Sections 80HH and 80I. The Court directed the PSU to provide unit-wise net profit computations certified by auditors for assessment by the Assessing Officer, aiming to bring an end to the ongoing litigation between the Tax Department and the PSU.