Supreme Court remands case to assess deduction under Sections 80HH (of Income Tax Act, 1961) and 80I (of Income Tax Act, 1961) despite no statutory requirement for unit-wise accounts.

Case Name:

Commissioner of Income Tax Vs Bongaigaon Refinery And Petrochemical Limited

Civil Appeal No. 1679 of 2004

Key Takeaways:

- The Supreme Court held that neither Section 80HH (of Income Tax Act, 1961) nor Section 80I (of Income Tax Act, 1961) statutorily obliged BRPL to maintain unit-wise accounts.

- However, to put an end to the litigation, the court remitted the case to the Assessing Officer to ascertain whether BRPL had correctly calculated its net profits for the petrochemical unit for claiming deduction under Sections 80HH (of Income Tax Act, 1961) and 80I (of Income Tax Act, 1961).

- The court directed that if BRPL had not worked out unit-wise net profits from its consolidated financial statements, it could be done by the auditors, and the Assessing Officer could then compute the deduction based on the certified unit-wise profit computation.

Issue:

Whether BRPL was statutorily obliged to maintain unit-wise accounts to claim deduction under Sections 80HH (of Income Tax Act, 1961) and 80I (of Income Tax Act, 1961).

Facts:

- BRPL was a public sector undertaking engaged in refinery, petrochemical, and polyester staple fiber businesses through three separate units set up in different financial years.

- For the assessment year 1992-93, the Assessing Officer allowed deduction under Sections 80HH (of Income Tax Act, 1961) and 80I (of Income Tax Act, 1961) after examining the unit-wise profit and loss statement filed by BRPL.

- The Commissioner of Income Tax (CIT) issued a show-cause notice under Section 263 (of Income Tax Act, 1961), stating that BRPL should have maintained segregated accounts for each unit to claim the deduction.

- BRPL argued that there was no statutory requirement to maintain unit-wise accounts under Sections 80HH(5) (of Income Tax Act, 1961) and 80I(7) (of Income Tax Act, 1961) (of Income Tax Act, 1961).

Arguments:

- The Income Tax Department contended that BRPL should have maintained segregated accounts for each unit to claim the benefit of Sections 80HH and 80I.

- BRPL argued that there was no statutory requirement to maintain unit-wise accounts, and it had provided the necessary details to the Assessing Officer, who had allowed the deduction after due investigation.

Judgment:

The Supreme Court held that neither Section 80HH (of Income Tax Act, 1961) nor Section 80I (of Income Tax Act, 1961) statutorily obliged BRPL to maintain unit-wise accounts, and it was open to BRPL to maintain its accounts in a consolidated form. However, to put an end to the litigation between the Tax Department and BRPL, the court remitted the case to the Assessing Officer to ascertain whether BRPL had correctly calculated its net profits for the assessment year 1992-93 concerning its petrochemical unit for claiming deduction under Sections 80HH (of Income Tax Act, 1961) and 80I (of Income Tax Act, 1961).

The court directed that if BRPL had not worked out unit-wise net profits from its consolidated financial statements, it could be done by the auditors, and the Assessing Officer could then compute the deduction based on the certified unit-wise profit computation.

FAQs:

Q1. Why did the Supreme Court remand the case to the Assessing Officer?

A1. The Supreme Court remanded the case to the Assessing Officer to ascertain whether BRPL had correctly calculated its net profits for the petrochemical unit for claiming deduction under Sections 80HH (of Income Tax Act, 1961) and 80I (of Income Tax Act, 1961), despite there being no statutory requirement to maintain unit-wise accounts.

Q2. Was BRPL required to maintain unit-wise accounts to claim the deduction?

A2. No, the Supreme Court held that neither Section 80HH (of Income Tax Act, 1961) nor Section 80I (of Income Tax Act, 1961) statutorily obliged BRPL to maintain unit-wise accounts, and it was open to BRPL to maintain its accounts in a consolidated form.

Q3. What was the court's direction regarding the calculation of unit-wise net profits?

A3. The court directed that if BRPL had not worked out unit-wise net profits from its consolidated financial statements, it could be done by the auditors, and the Assessing Officer could then compute the deduction based on the certified unit-wise profit computation.

Q4. What was the significance of the court's decision?

A4. The court's decision clarified that while there was no statutory requirement to maintain unit-wise accounts for claiming deduction under Sections 80HH (of Income Tax Act, 1961) and 80I (of Income Tax Act, 1961), the assessee must provide the necessary information to the Assessing Officer to correctly calculate the deductible profits.

This civil appeal filed by the Department relates to the assessment year 1992-93. By this civil appeal the Department seeks to challenge the decision of the Gauhati High Court dated 6.6.2002 in ITR No. 4 of 2001.

At the outset, it is pointed out by learned counsel for the original assessee that Bongaigaon Refinery and Petrochemical Limited (for short "BRPL") has since merged into IOC. Permission to carry out formal amendment within two weeks is accordingly granted. BRPL was a PSU engaged in refinery, petrochemical and polyester staple fibre business. Three different and separate units were set up by BRPL in the financial years 1979-80, 1985-86 and 1988-89 respectively. The three units were engaged in production of separate and distinct types of products. They were three different Industrial Undertakings. It is not in dispute that BRPL was entitled to claim deduction under Sections 80HH (of Income Tax Act, 1961) and 80I (of Income Tax Act, 1961) during the relevant assessment year 1992-93. BRPL could not claim such deduction till assessment year 1992-93 as its net taxable income for earlier assessment years was Nil. It was only in assessment year 1992-93 when the gross total income became positive that BRPL claimed relief for its Petrochemical Unit under Section 80HH (of Income Tax Act, 1961) and under Section 80I (of Income Tax Act, 1961). However, BRPL could not claim such deduction for its Refinery Unit as the period for which such relief could be claimed had expired. Further, it could not claim such deduction for its Polyester Staple Fibre Unit as it had negative income during the accounting year ending 31.3.1992 corresponding to assessment year 1992-93.

As far as the present assessment proceedings are concerned, suffice it to state, that the AO while framing assessment, under Section 143(3) (of Income Tax Act, 1961) allowed deduction after examining and being satisfied with the unit-wise profit & loss statement filed by BRPL. Subsequently, CIT, Shillong issued a show cause notice under Section 263 (of Income Tax Act, 1961) saying that the AO had allowed excess deduction under Sections 80HH (of Income Tax Act, 1961) and 80I (of Income Tax Act, 1961). According to him, the net profit revealed in the audited Profit & Loss Account for the assessment year 1992- 93 was not supported by bifurcation of the profits amongst the said three units. That, the basis of allocation of profits amongst the three units by BRPL, as shown in the Computation of Income, was not explained. That, when separate accounts for each of the three units are not prepared, the only method which BRPL could have adopted to work out their net profits (unit-wise) had to be on the basis of proportion of turnover of each of the three units. In reply to the said show cause notice, the assessee submitted all relevant details relating to bifurcation of net profits (unit-wise) was placed before the AO who had examined the material placed before him and after detailed investigation had passed the order of assessment and, therefore, show cause notice under section 263 (of Income Tax Act, 1961) was not maintainable. These arguments of the assessee were rejected by the CIT. To put it briefly, the controversy under Section 263 (of Income Tax Act, 1961) proceedings was whether the assessee was statutorily obliged to maintain its accounts unit-wise for claiming deduction under Sections 80HH (of Income Tax Act, 1961) and 80I (of Income Tax Act, 1961). That, BRPL had maintained Consolidated Accounts whereas according to CIT, BRPL should have had maintained Segregated Accounts for each of the three units if BRPL wanted benefit of sections 80HH and 80I. Against the order of CIT the matter came by way of appeal to the ITAT which came to the conclusion that there was no statutory requirement under Section 80HH(5) (of Income Tax Act, 1961)/80I(7) of the I.T. Act, 1961 (as it then stood) to maintain unit-wise accounts. However, the Tribunal observed that "considering the totality of facts and circumstances of the case and to put an end to litigation, BRPL should submit unit-wise audited accounts and claim deduction under Sections 80HH (of Income Tax Act, 1961) and 80I (of Income Tax Act, 1961)". Against the said decision the assessee BRPL went in appeal. By the impugned judgment the order of the Tribunal was set aside by the High Court, hence this civil appeal is filed by the Department.

At the outset, it may be stated that the impugned order of the High Court is cryptic. Ordinarily, we would have remitted the case to the High Court for de novo consideration. The High Court has relied upon its earlier judgment, which, in our view, is not applicable on all fours to the facts of the present case. However, to put an end to the litigation, we are of the view, that though neither Section 80HH (of Income Tax Act, 1961) nor Section 80I (of Income Tax Act, 1961) (as it then stood) statutorily obliged BRPL to maintain its accounts unit-wise and that it was open to BRPL to maintain its accounts in a consolidated form in order to put an end to the litigation between the Tax Department and the PSU we remit the case 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 (of Income Tax Act, 1961) and 80I (of Income Tax Act, 1961). In the present case, BRPL has prepared its Financial Statements on Consolidated Basis from which it has worked out unit-wise net profits. If not done, it could be done by the Auditors even today from the Consolidated Books of Accounts. 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 (of Income Tax Act, 1961)/80I.

In the light of the above directions, this civil appeal stands disposed of with no order as to costs.

[S.H. KAPADIA]

[MADAN B. LOKUR]

New Delhi,

September 05, 2012.