2005 (9) TMI 272 - AT - Income Tax

Disallowed deduction u/s 80-I - Profits And Gains From Industrial Undertaking - setting off brought forward notionally unabsorbed losses and depreciation from earlier years - HELD THAT - On a careful consideration of facts and circumstances of the case we are of the view that the issue is not debatable in nature. Because of non obstante clause contained in section 80-I(6) the provisions will have overriding effect over other provisions of the Act. Section 80-I(6) does enact a legal fiction providing that the profits and gains of new industrial undertaking shall be computed as if the new industrial undertaking were the only business of the assessee from the date of its establishment and the past years depreciation and losses are to be set off against the income of assessee from the undertaking. Therefore the new industrial undertaking is retrospectively quarantined or isolated from the other income-producing activity for determining the profits and gains for the purpose of eligibility u/s 80-I. Hence the order passed by the Assessing Officer giving effect to the order of CIT(A) allowing deduction u/s 80-I without setting off unabsorbed losses from assessment year 1991-92 against the income for assessment years 1992-93 and 1993-94 was erroneous as well as prejudicial to the interests of revenue. The ld. CIT was therefore justified in setting aside the assessment. In the result the appeal of the assessee is dismissed.

Summary

Issues:
- Setting off of loss of earlier years brought forward notionally for deduction under section 80-I of the Income-tax Act, 1961.

Detailed Analysis:

1. Background:
The appeal by the assessee was against the order under section 263 of the Income-tax Act, 1961 passed by the Commissioner of Income-tax, Chennai-IV for the assessment year 1995-96. The main issue was the setting off of brought forward notionally unabsorbed losses and depreciation from earlier years for the purpose of deduction under section 80-I of the Act.

2. Assessing Officer's Decision:
The Assessing Officer initially rejected the claim of the assessee for deduction under section 80-I. However, the CIT(A) allowed the claim in principle and directed the Assessing Officer to verify and allow the claim if the assessee was eligible. The Assessing Officer then allowed the claim without setting off the brought forward losses, leading to the Commissioner considering the order erroneous and prejudicial to revenue.

3. Commissioner's Decision:
The Commissioner held that the doctrine of merger did not apply in this case. He emphasized that the eligible unit for deduction under section 80-I should be treated as an independent undertaking, and profits should be computed accordingly. The Commissioner relied on relevant court decisions to support his conclusion.

4. Tribunal's Analysis:
The Tribunal considered conflicting decisions on the issue. It noted that section 80-I(6) creates a legal fiction where profits are computed as if the eligible unit were the only source of income. The Tribunal emphasized that the provisions of section 80-I(6) have overriding effect over other provisions of the Act.

5. Legal Precedents:
The Tribunal referenced the decision of the Hon'ble Supreme Court in a related case and emphasized the legal fiction created by section 80-I(6). It highlighted that the new industrial undertaking should be isolated for profit determination under section 80-I.

6. Tribunal's Decision:
After considering all arguments and legal provisions, the Tribunal concluded that the issue was not debatable. It upheld the Commissioner's decision to set aside the assessment, stating that the Assessing Officer's failure to set off unabsorbed losses was erroneous and prejudicial to revenue.

7. Final Verdict:
Ultimately, the Tribunal dismissed the appeal of the assessee, affirming the decision of the Commissioner to set aside the assessment due to the failure to set off unabsorbed losses while allowing the deduction under section 80-I.

This detailed analysis highlights the key points and legal interpretations made in the judgment regarding the setting off of brought forward losses for deduction under section 80-I of the Income-tax Act, 1961.