2011 (12) TMI 115 - HC - Income Tax

Deduction u/s 80HHC setting off of aggregate brought forward losses of amalgamating company from both export and non-export activities in determining profit of the business for computing deduction Held that - Section 80AB makes it clear that the computation of income has to be in accordance with the provisions of the Act. Not only profits but also losses have to be taken into consideration. Expression profit occurring in Section 80HHC means a positive profit. To arrive at a net figure of positive profits, losses from export as well as non-export activities are to be taken into consideration. See IPCA Laboratories Ltd Vs. DCIT (2004 - TMI - 6141 - Supreme court). Decided against the assessee.

Issues Involved:
1. Whether the Tribunal erred in holding that aggregate brought forward losses of the amalgamating company from both export and non-export activities were liable to be set off in determining "profit of the business" for computing deduction under Section 80HHC of the Act.
2. Whether the Tribunal erred in applying the ratio of the decision rendered by the Supreme Court in IPCA Laboratory Ltd. v. DCIT, without appreciating that the issue in that case was limited to the set off of losses from one export business against profit from another export business.

Detailed Analysis:

Issue 1: Set Off of Aggregate Brought Forward Losses
The appellant/assessee, engaged in the manufacturing and export of BOPP film, merged with another company that had substantial brought forward losses from both export and non-export activities. The primary contention was whether these aggregate brought forward losses should be set off in determining "profit of the business" for computing deductions under Section 80HHC of the Income Tax Act.

The Assessing Officer (AO) initially held that both export and non-export losses should be set off. However, the CIT (A) reversed this decision, stating that only export losses should be set off. The Tribunal later upheld the AO's view, leading to the appeal.

The appellant argued that under Section 78(2) of the Act, losses of one entity cannot be carried forward and set off in the hands of another entity, except as provided under Section 72A, which allows for the carry forward and set off of unabsorbed business losses and depreciation of the amalgamating company. The appellant further contended that the losses from non-export activities should not reduce the deduction available under Section 80HHC, which is intended to encourage exports.

Issue 2: Application of IPCA Laboratory Ltd. Decision
The Tribunal relied on the Supreme Court's decision in IPCA Laboratory Ltd. v. DCIT, which dealt with the set off of losses from trading goods against profits from self-manufactured goods in the context of Section 80HHC. The appellant argued that the Tribunal misapplied this decision, as it did not address the specific issue of non-export losses.

The Supreme Court in IPCA Laboratory Ltd. had held that "profit" under Section 80HHC means positive profit, and both profits and losses must be considered to arrive at a net figure. If the net figure is a loss, no deduction is available. This interpretation was extended to mean that losses from both export and non-export activities must be considered to determine the "profit of the business."

Judgment Analysis:
The High Court analyzed the relevant provisions and the Supreme Court's ruling in IPCA Laboratory Ltd. It noted that Section 80HHC aims to provide deductions based on positive profits derived from exports, and losses from both export and non-export activities must be considered to arrive at this figure.

The Court highlighted that Section 80AB, which has an overriding effect on all sections in Chapter VI-A except Section 80M, mandates that income computation must consider both profits and losses. The Court further referenced the Supreme Court's interpretation that the term "profit" in Section 80HHC includes both positive and negative profits, reinforcing that losses must be accounted for in the deduction calculation.

In conclusion, the High Court held that the Tribunal correctly applied the Supreme Court's decision in IPCA Laboratory Ltd., affirming that aggregate brought forward losses from both export and non-export activities must be set off in determining the "profit of the business" for computing deductions under Section 80HHC. The appeal was dismissed, and the Tribunal's decision was upheld.

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