Court rules Section 80AB can’t limit tax deductions under Sections 80I & 80HH

Get the full picture - access the original judgement of the court order here

Case Name

Win Laboratories Ltd. vs. Assistant Commissioner of Income Tax (High Court of Bombay)

Income Tax Appeal No. 844 of 2002

Date: 18th November 2021

Key Takeaways

• Binding Nature of Supreme Court Observations: Even obiter dicta (passing remarks) from the Supreme Court are binding on High Courts
• Uniform Application Across Similar Sections: The reasoning applied to Section 80-IA in the Reliance Energy case extends to Sections 80I and 80HH due to their identical language structure
• Section 80AB Limitations: Section 80AB cannot be interpreted to restrict the scope of industrial deduction provisions

Issue

The central legal question was: “Whether on the facts and in the circumstances of the case the Tribunal was justified in law in holding that in view of the provisions of Section 80AB of the Income Tax Act, 1961, the loss of Rs.3,24,080/- sustained by the Generic Division was to be deducted from the profits of Bulk Drugs Division for the purposes of computing deduction under Section 80HH and 80I of the Income Tax Act, 1961?”

Facts

Win Laboratories Ltd. had two divisions - a Generic Division and a Bulk Drugs Division. The Generic Division made a loss of Rs. 3,24,080, while the Bulk Drugs Division made profits. The company wanted to claim tax deductions under Sections 80HH and 80I on the profits from the Bulk Drugs Division without first adjusting the losses from the Generic Division.

The Income Tax Tribunal (ITAT) said “no way” - they ruled that the company had to first set off the losses against the profits before claiming any deductions, citing Section 80AB of the Income Tax Act.

Arguments

Win Laboratories’ Position (Appellant):

• Mr. Jasani argued that this issue was already settled by the Supreme Court in Commissioner of Income Tax-I vs. Reliance Energy Ltd.
• Even though the Reliance Energy case dealt with Section 80-IA, the same principle should apply to Sections 80I and 80HH

Tax Department’s Position (Respondent):

• Mr. Pinto argued that the ITAT was correct in requiring loss set-off before granting deductions
• He contended that Section 80AB specifically restricts deductions under Sections 80HH and 80I
• He relied on Commissioner of Income-Tax vs. Sundaravel Match Industries (P.) Ltd.
• He tried to dismiss the Reliance Energy observation as mere obiter dicta

Key Legal Precedents

The court relied heavily on Commissioner of Income Tax-I vs. Reliance Energy Ltd., where the Supreme Court made a crucial observation about Section 80AB.

The High Court explained that Sections 80I, 80IA, and 80HH all have identical language structures, differing only in the types of industries they cover:

• Section 80I: Deductions for industrial undertakings, ships, hotels, or vessel repair businesses
• Section 80IA: Deductions for industrial undertakings or infrastructure development enterprises
• Section 80HH: Deductions for newly established industrial undertakings or hotel businesses in backward areas

Judgement

The High Court ruled in favor of Win Laboratories Ltd. Here’s their reasoning:

1. Supreme Court Authority: The court emphasized that even if the Supreme Court’s observation in Reliance Energy was obiter dicta, it’s still binding on High Courts
2. Identical Provisions: Since Sections 80I, 80IA, and 80HH have identical language except for the applicable industries, the Reliance Energy principle applies to all three sections
3. Section 80AB Limitation: The court categorically stated that “Section 80AB of the Act cannot be read to be curtailing the width of Section 80-IA of the Act”

Final Order: The appeal was disposed of with no order as to costs, and the substantial question of law was answered in the negative.

FAQs

Q1: What does this judgment mean for companies with multiple divisions?

A: Companies can claim deductions under Sections 80I and 80HH on profits from eligible divisions without necessarily setting off losses from other divisions first.

Q2: Why did the court extend the Reliance Energy ruling to other sections?

A: Because Sections 80I, 80IA, and 80HH have identical language structures - they only differ in the types of businesses they cover.

Q3: Is Section 80AB completely useless now?

A: Not exactly. The court didn’t say Section 80AB has no role, just that it cannot be used to curtail the width of deduction provisions like Sections 80I and 80HH.

Q4: What’s the significance of obiter dicta being binding?

A: This reinforces the hierarchical nature of Indian courts - even passing remarks from the Supreme Court carry weight and must be followed by lower courts.

Q5: How does this affect tax planning for industrial companies?

A: Industrial companies now have more clarity that they can structure their operations across divisions while still claiming eligible deductions, without mandatory loss set-offs in all cases.

On 15/9/2004 the following substantial question of law was framed:

"Whether on the facts and in the circumstances of the case the Tribunal was justified in law in holding that in view of the provisions of Section 80AB of the Income Tax Act, 1961, the loss of Rs.3,24,080/- sustained by the Generic Division was to be deducted from the profits of Bulk Drugs Division for the purposes of computing deduction under Section 80HH and 80I of the Income Tax Act, 1961 ?"

2. Mr. Jasani at the outset submitted that this question is squarely covered by the judgment of the Apex Court in the Commissioner of Income Tax-I vs. Reliance Energy Ltd. Mr. Jasani submitted that though in Reliance Energy (supra) Section 80-IA of the Income Tax Act, 1961 (the Act) was discussed, it would still squarely apply to the case at hand to Sections under consideration, i.e., 80I and 80HH of the Act.

3. Mr. Pinto per contra, strongly opposed the appeal and

submitted that the ITAT had correctly concluded that the losses should be

set-off against the profits of industrial undertaking before granting

deduction under Section 80 HH of the Act in view of the specific provision

found in Section 80AB of the Act. Mr. Pinto submitted that to an extent

Section 80AB of the Act restricts the deduction granted under Section

80HH and 80I of the Act. Mr. Pinto relies on the judgment of

Commissioner of Income-Tax vs. Sundaravel Match Industries (P.) Ltd.

4. If one considers Section 80I of the Act it provides for deduction

in respect of profits and gains from Industrial undertaking after a certain

date etc. It applies to industrial undertaking or a ship or the business of a hotel or business of repairs to ocean going vessels or other powered craft. Section 80IA of the Act provides for deductions in respect of profits and gains from industrial undertaking or enterprises engaged in infrastructure development etc. Section 80HH of the Act provides for deduction in respect of profits and gains from a newly established industrial undertaking or a hotel business in backward area. If we consider the language applied in these three sections, they are identical except that the industry to which it becomes applicable differs. Therefore, even if the judgment of the Apex Court in Reliance Energy Limited (supra) was in regard to Section 80-IA of the Act, in our view it covers even Sections 80I and 80HH of the Act.

5. In Reliance Energy (supra) the Apex Court had categorically

stated that Section 80AB of the Act cannot be read to be curtailing the

width of Section 80-IA of the Act. Mr. Pinto submitted that this observation

of the Apex Court was in the nature of obiter. It is settled law that even if the observation of the Apex Court is in the nature of obiter, the same will be binding on the High Courts.

6. In the circumstances, in view of what is said in Reliance

Energy Limited (supra) by the Apex Court we will have to answer the

question noted above in negative.

7. Appeal disposed with no order as to costs.

(AMIT B. BORKAR, J) (K. R. SHRIRAM, J.)