Holding

Section 80‑HHC is governed by Section 80‑AB and unabsorbed business losses under Section 72 can be set off against export profits computed under Section 80‑HHC.

Summary

The Commissioner of Income Tax, Pune appealed against a Bombay High Court judgment that had upheld the assessment of Shirke Construction Equipment Ltd. The issues were whether Section 80‑AB of the Income Tax Act applies to Section 80‑HHC and whether unabsorbed business losses under Section 72 can be set off against profits computed under Section 80‑HHC. The Supreme Court, relying on its earlier decision in IPCA Laboratory Ltd. v. Dy. Commissioner of Income Tax, held that Section 80‑HHC is not a standalone provision but is governed by Section 80‑AB, and therefore losses under Section 72 may be set off against export profits. The Court overruled the contrary views of the Bombay and Kerala High Courts. Consequently, the appeal was allowed and the impugned judgment set aside.

Issues considered

Whether Section 80‑AB can be applied to Section 80‑HHC of the Income Tax Act
Whether unabsorbed business losses of earlier years under Section 72 may be set off against profits determined under Section 80‑HHC

Legislation cited

Income Tax Act, 1961s. 72, s. 80-AB, s. 80-HHC

Subjects

Income TaxSection 80-HHCSection 80-ABSection 72Loss set‑offExport incentivesTax deductionAppellate jurisdiction

Judgment

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COMMISSIONER OF INCOME TAX, PUNE A
v.
SHIRKE CONSTRUCTION EQUIPMENT LTD.

MAY 17, 2007

[ASHOK BHAN AND DAL VEER BHANDARI, JJ.] B

~
Income Tax Act, 1961; Ss. 72, 80-AB & 80-HHC:

Section 80 HHC-Profit-Adjustment of unabsorbed business losses of
earlier years therefrom in term of s. 72 of the Act-Applicability of s. 80-AB c
of the Act-Affirming the judgment of the Tribunal, High Court decided the
question against the Revenue-On appeal, Held: A contrary view was held
by this Court in the decided case ofIPCA Laboratory Ltd v. Dy. Commissioner
of Income tax, Mumbai overruling the judgment impugned in the present
case-Under the circumstances impugned judgment set aside. D
~ The question arose for determination before this Court in the present
appeal filed by the Revenue was as to whether the High Court was right in
affirming the decision of the Tribunal by answering the questions framed by
it against the Revenue as to whether Section 80-AB of the Income Tax Act,
1961 can be applied to Section 80-HHC of the Act and whether, in determination E
of business profit under Section 80HHC of the Act, the unabsorbed business
losses of the earlier years under Section 72 of the Act should be set off.

Allowing the appeal of Revenue, the Court

HELD: 1.1. Taking a contrary view, this Court in the decided case of F
IPCA Laboratory Ltd v. Dy. Commissioner ofIncome Tax, Mumbai has held
that (i) Section 80-HHC of the Income Tax Act is not independent of Section
80-AB of the Act and would be governed by Section 80-AB; and (ii) losses
were to be set off against the profits earned from export of self-manufactured
goods. It has further been held in that case Section 80 HHC would be governed
by Section 80-AB and the decision of the Bombay High Court and the Kerala
G
High Court taking the contrary view does not lay down the correct law to that
_, extent. (Para 6) (21-F-G)

19 H
20 SUPREME COURT REPORTS (2007) 7 S.C.R.
~
.A IPCA Laboratory Ltd v. Dy. Commissioner of Income Tax, Mumbai,
...,._
[20041 12 sec 742, relied on.

C/Tv. Shirke Construction Equipments Ltd, (2000) 246 ITR 429 Boin
and C/Tv. TC. Usha, (2003) 132 Taxmail 297 Ker, held not applicable.

B 1.2. This Court has taken a contrary view to that of the High Court of
Bombay, in CIT v. Shirke Construction Equipments Ltd (the impugned
judgment) and the decision of the High Court ofKerala
.
in C/Tv.
... TC. Usha,
and, overruling them, held that the said decisions cannot be said to be the
-r
correct law. For the foregoing reasons, impugned judgment is set aside.
(Paras 10 and 15) [23-A-B; G)
c
ITO v. lnduflex Products (P) Ltd, [2006) l SCC 458 and P.R. Prabhakar
v. CIT, Coimbatore, (2006) 6 SCC 86, at page 92, relied on.

CIT v. TC. Usha, (2003) 132 Taxman 297 (Ker.) and CIT v. Shirke
Construction Equipments Ltd, (2000) 246 ITR 429 Bom, held not applicable.
D
CIViL APPELLATE JURISDICTION : Civil Appeal No. 6758 of2001.
....
From the Final Judgment and Order dated 24.07.2000 of the High Court
of Bombay in ITA No. 458/PN/1998.

E · Dr. A.E. Chilliah, Sr. Adv., D.K. Singh, Arijit Prasad and Pradeep Shukla
(for B.V. Balaram Das) for the Appellant.

S. Ganesh, Sanad Ramakrishan and Rajeev Mishra (for Mis. P.H. Parekh
& Co.) for the Respondent.

F The Judgment of the Court was delivered by

BHAN, J. I. With the leave of the Court, the Commissioner of Income
Tax, Pune (for short "the Revenue") has filed the present appeal against the
Final judgment and order dated 24th July, 2000 passed by the High Court of
Bombay in ITA No. 458/AN/1998 by which the High Court has affinned the
G decision_ of the Tribunal and dismissed the appeal filed by the Revenue. The
issue involved in this appeal relates to the provisions of the Income Tax Act, ;...
~
196 I (for short "the Act").
1- \
2. The High Court framed the following two questions of law for its
detennination:
H
COMMNR. OF INCOME TAX, PUNE v. SHIRKE CONSTRUCTION EQUIPMENT LTD. [BHAN, J.)
21
:-
l. Whether Section 80-AB can be applied to Section 80-HHC of the A
-->
Act?
2. Whether, in detennination of business profit under Section 80HHC,
the unabsorbed business losses of the earlier years under Section
72 of the Act should be set off?

3. The High Court has decided both the questions against the Revenue
B
and in favour of the assessee. On the first point, the High Court has held that
Section 80-HHC is independent of Section 80-AB and Section 80-AB does not
control Section 80HHC of the Act. On the second point, it has been held that
unabsorbed business losses of the earlier years could not be set off against
the profits from exports. c
4. High Court ofKerala in C/Tv. T.C. Usha, (2003) 132 Taxman 297 (Ker.)
has also taken a similar view and has held that the losses would not be set
off against the profits earned by an assessee from export of the goods
manufactured by it. This decisions of the Bombay High Court in the present
' case and the High Court of Kerala in C.l T. v. T. C. Usha, (supra) have been D
overruled by this Court in JPCA Laboratory Ltd. v. Dy. Commissioner of
Income Tax, Mumbai, [2004] 12 SCC 742.

5. The facts in the present case are similar as that in IPCA Laboratory
Ltd (supra), hence the same are not restated herein. In IPCA Laboratory Ltd.
(supra), the counsel appearing for the assessee had placed reliance on two E
judgments, i.e., one by the Bombay High Court in C/Tv. Shirlee Construction
Equiments Ltd., [2000] 246 ITR 429 Born., which is the judgment impugned in
the instant appeal, and another by the High Court of Kerala in CIT v. T.C.
Usha (supra).
F
6. Taking a contrary view, this Court in IPCA Laboratory ltd (supra)
has held that (i) Section 80-HHC of the Act is not independent of Section 80-
AB and would be governed by Section 80-AB; and (ii) losses were to be set
off against the profits earned from export of self-manufactured goods. It has
further been held in this case that Section 80 HHC would be governed by
Section 80-AB and the decision of the Bombay High Court and the Kerala G
High Court taking the contrary view does not lay down the correct law to that
extent.
.: -\
7. The judgment impugned in the present case, which, as indicated
hereof, was relied has been noticed by this Court in paragraph 7 of the
H
22 SUPREME COURT REPORTS [2007] 7 S.C.R.
-;
A judgment in IPCA case (supra), thus:
"Mr. Dastur also relied upon the case of CIT v. Shirlee Construction +
Equipments Ltd (2000) 246 ITR 429 (Born.). In this case the Bombay
High Court has held that Section 80-HHC is a complete code in itself
and that it is not controlled by Section 80-AB. It was held that profits
B had to be computed under Section 29 and Section 72 was not applicable.
It was held that carry-forward losses could not be set off for computing
profits for the purpose of Section 80-HHC. In this case it was also
noticed that the object was to encourage exports."
~-
8. The judgment of the Kerala High Court in CIT v. T.C. Usha, (2003)
132 Trocman 297 (Ker.), on which reliance was placed by the assessee in IPCA
c Laboratory Ltd. (supra), has been noticed by this Court in paragraph IO of
the said judgment, thus:

"Mr. Dastur also relied upon a judgment in the case of CIT v. T.C.
Usha, (2003) 132 Taxrnan 297 (Ker). In this case the Kerala High Court
was considering an identical question i.e. whether the profits earned
D from export of self-manufactured goods were to be set off against loss
incurred in export of trading goods. The Kerala High Court has
accepted arguments similar to those made by Mr. Dastur and has
concluded that the losses were not to be set off against the profits
eameci from export of own manufactured goods. In coming to this
conclusion the Kerala High Court has proceeded on the footing that
E Section 80-HHC is a self cont; ined code and the proceeds have to be
worked out strictly in accordance with the provisions."

9. Paragraph 14 of the said judgment of this Court in IPCA Laboratory
Ltd. (supra), which answers the questions, is extracted below:

"Section 80-AB is also in Chapter VI-A. It starts with the words
F
"where any deduction is required to be made or allowed under any
f-
section included in this Chapter". This would include Section 80-HHC.
Section 80-AB further provides that "notwithstanding anything
contained in that section". Thus Section 80-AB has been given an
overriding effect over all other sections in Chapter VI-A. Section 80-
AB or over any other provision of the Act. Section 80-HHC would
G
thus be governed by Section 80-AB. Decisions of the Bombay High
Court and the Kera/a High Court to the contrary cannot be said to
be the correct law Section 80-AB makes it clear that the computation
of income has to be in accordance with the provisions of the Act. If
-f- ;;
the income has to be computed in accordance with the provisions of ··
the Act, then not only profits but also losses have to be taken into
H

r
COMMNR. OF INCOME TAX, PUNE v. SHIRKE CONSTRUCTION EQUIPMENT LTD. [BHAN, I.) 23
consideration." A
[Emphasis supplied]

IO. As stated above, this Court has taken a contra view to that of the
High Court of Bombay, in C/Tv. Shirke Construction Equipments Ltd, (2000)
246 ITR 429 (Born.) (the impugned judgment) and the decision of the High B
Court of Kerala in CIT v. T.C. Usha, (2003) 132 Taxman 297 (Ker.) and,
overruling them, held that the said decisions cannot be said to be the correct
law.

11. In /TO v. Jnduflex Products (P) Ltd [2006) l SCC 458, this Court
has held thus:

"It is no doubt true that the term 'profit' implies positive profit which
c
has to be arrived at after taking into consideration the profit earned
from export of both self-manufactured goods and the trading goods
and the profits and losses in both the trades have, thus, to be taken
into consideration."

12. The aforesaid decision of this Court in IPCA Laboratory Ltd. (supra) D
has been relied upon in a subsequent decision of this Court in P.R. Prabhakar
v. CIT, Coimbatore, [2006) 6 SCC 86, at page 92, thus:

"The expression "income arising out of business of export" brings
within its sweep not only the export of any goods or mercharidise
manufactured or possessed by the assessee but also the trading E
goods. Parliament, therefore, intended to provide incentive when a
positive profit is earned by an exporter."

13. Both the aforesaid decisions of this Court in IPCA Laboratory Ltd
(supra) and lnduflex Products (P) Ltd (supra) have been relied upon in a
subsequent decision of this Court in P.R. Prabhakar v. CIT, Coimbatore, F
[2006) 6 sec 86, at page 92, as indicated above.

14. Accordingly the two points which had been posed by the High
Court for its decision are answered in the negative, i.e., against the Revenue
and in favour of the assessee.

15. For the foregoing reasons, we are left with no other option except G
to accept the appeal and set aside the impugned judgment.

16. The appeal stands allowed accordingly. There shall be no order as
to costs.

S.K.S. Appeal allowed. H