JUDGMENT Rajes Kumar, J.
1. At the instance of the assessee, the Income Tax Appellate Tribunal, New Delhi has referred the following question of law under Section 256(1) of the Income Tax Act, 1961, hereinafter referred to as "the Act for opinion to this Court for the assessment years 1982-83 and 1983-84.
"Whether oh the facts and in the circumstances of the case and in law the Hon'ble Tribunal was right in ruling that in arriving at the amount eligible for deduction under Section 80HHA of the Income-tax Act, 1961 the loss incurred in the other business and also the unabsorbed loss, depreciation and investment allowance were first to be set off before arriving at the qualifying amount?"
2. The brief facts of the case are as follows:
The assessee is a private limited company engaged in the business of manufacture and sale of basic drugs with its factory at Rampur, U.P. In respect of the manufacturing business the assessee claimed deduction under Section 80HHA of the Act, For the Assessment year 1982-83 the Income Tax Officer computed the income of the factory at Rs. 14. 44,051/- and set off against it the loss at head office at Rs. 5,16,657/-. He also deducted from the balance so arrived at further amounts aggregating to Rs, 3,58, 566/- on account of duty draw backs and cash incentives on the net figure of Rs. 5,68,828/- so arrived at the permitted deduction under Section 80HHA of the Act at 20% at Rs. 1,13, 767/-. So far as the figure relating to assessment year 1983-84 is concerned, the income of factory was Rs. 5,75,432/- and set off against it; the loss at head office was Rs. 5,75,716/-. Therefore, a net loss was Rs. 284/-. In view of this, the question of duty drawback and cash incentive was not considered.
3. When the matter came up before the Commissioner of Income Tax (Appeals), the Commissioner of Income Tax (Appeals) set aside the order of the Income Tax Officer, For the assessment year 1982-83 in the order passed under Section 154 of the Act. The Commissioner of Income Tax (Appeal) held as follows.
The appellate order in this case was passed on 1.10.1983. The appellant vide its petition dated 31.10.1985 has submitted the ground No. 7 of the ground of appeal regarding the incorrect computation of deduction under Section 80HHA had not been decided upon in the said appellate order and this constitutes a mistake which should be rejectified under Section 154. The appellant given an hearing on this petition. On a perusal of the file of the office is found to be correct. It is seen that the ground No. 7 in the ground of appeal was duly examined during the course of hearing on 25.9.1985 which is evident from the notings made on the file. The omission to give a decision on this ground, therefore, constitutes a mistake which needs to be rectified under Section 154. The order dated 1.10.1985 is accordingly rectified in as much as the following paragraph is directed to be incorrect in the said order.
"The next ground relates to the incorrect computation of deduction under Section 80HHA. The appellant in the head office account was dealing in purchase an sale of natural mentha oil. In the pharmaceutical division it was manufactured certain basis drugs. Deduction under Section 80HHA had been claimed in respect of this manufacturing unit. While the Income tax Officer accepted that the appellant was entitled to deduction under Section 80HHA and that the necessary conditions was satisfied but in computing the less amount of deduction he adjusted the loss from the head office set amounting to Rs. 5,16,657/-. It is this adjustment that the appellant has objected. After hearing the learned authorised representative I agree that such adjustment was not correct. Section 80HHA speaks of the profit derived from the industrial undertaking and it is clear therefore, that there is no scope for the inclusion in the said profits of loss of any other unit. Accordingly the adjustment of the head office loss amounting to Rs. 5,16,657/- was not correct. The Income-tax Officer will modify the computation accordingly."
4. The aforementioned finding for the assessment year 1982-83 has been followed in 1983-84.
5. Revenue filed appeal before the Tribunal. The Tribunal allowed the appeal and held as follows:
"Under Section 80HHA, the assessee would be eligible for a deduction of 20% of the profits and gains from a newly established small scale industry in a backward area. What the Section allows is a deduction of 20% from "such profits and gains of a small scale industrial undertaking". The amount on which the deductions have to be calculated is also governed by another Section 80AB. This section reads as follows.
"80AB- where any deduction is required to be made or allowed under any Section (except Section 80M) included in this Chapter under the heading 'C-Deductions in respect of certain incomes', in respect of any income of the nature specified in that section, which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income."
It will be seen from the above that this section is non obstante to anything that is contained in the relevant section i. e. Section 80HHA. The section says that "for the purpose of computing the deduction under Section 80HHA, the amount of income as computed in accordance with the provisions of income tax Act was alone to be deemed to be the amount of income eligible for deduction."
Now the question arises, whether the Head Office losses can be adjusted against the branch office profits. It is clear that the income of the branch has to be computed in accordance with the provisions of this Act, i. el it has to be in accordance with Section 70 Sub-section (1). This section i. e. Section 70(1) require the set off of a loss under any source against the income from any other source under the same head. In this case, under the head "Business", there is one source which shows loss and another source, which shows profits. So these two have to be set off. So the ITO was justified in setting off the loss of the head Office against the profits of the branch. Therefore, the order of the CIT (Appeals dated 1.5.1986 is not correct. The I. T. O's order on this point has to be restored.
We next consider the issue of whether brought forward losses and unabsorbed allowance can be set off. Here also, the provisions of the section are very clear. The ITO has to compute the income or loss of each source of income and, thereafter, set off one against the other in case of profit land loss under the provisions contained in Sections 70 to 73. When there is a brought forward business loss, the ITO has to set off that loss against the profits of that year under Section 72. Only the net result after such set off could be part of the gross total income. A contrary view had been expressed by the Kerala HighCourt in the case of Indian Transformers, 86 ITR 192, but that has been disapproved by the Supreme Court in the case of Cambay Electric Supply Industrial Company Ltd., The matter has against for decision by the Supreme Court in the case of Distributors (Baroda) Ltd., 155 ITR 120 Relying on their earlier decision in the case of Cambay Electric, they have pointed out that the expression "where the gross total income of an assessee includes any income..." would refer to the quantum of income which has gone into the gross total income, The quantum of income naturally has to be after the adjustment of the brought forward loss as well as the adjustment under Section 70(1). Thus, the adjustments made by the IT. O. are in accordance with the law of the land, as laid down by the Supreme Court.
6. We have heard Sri Vikram Gulati. learned counsel for the assessee and Sri shambhu Chopra, learned Standing Counsel for the Revenue.
7. Learned counsel for the assessee submitted that the issue involved in the present case is squarely covered by the decision of the Andhra Pradesh High Court in the case of Commissioner of Income Tax v. Visakha Industries Ltd. ill which it has been held that under Section 80HHA of the Act special deduction is to be computed with reference to the profits of particular undertaking and not with reference to the total profits of the assessee.
8. Learned Standing Counsel submitted that the losses of the head office is also to be considered inasmuch as for the purposes of the deduction, the gross total income has to be considered. He further submitted that unabsorbed loss depreciation and the investment allowance is first to be set off before arriving at a qualifying amount. He further submitted that Section 80AB of the Act contemplates that where any deduction is required to be made or allowed under any section except under Section 80M of the Act in respect of any income of the nature specified in that section which is included in the gross total income of the assessee for the purposes of computing the deduction under that section amount of income of that nature as computed in accordance with the provision of this Act shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income. Thus, the loss of the head office and unabsorbed loss, depreciation and investment allowance were to be set off before arriving at a qualifying amount. In support of his contention, he relied upon the decision of the Apex Court in the case of Commissioner of Income-tax v. Kotagiri Industrial Cooperative Tea Factory Ltd. , and Distributors (Baroda) P. Ltd. v. Union of India .
9. We have given our anxious consideration to the submissions made by the learned counsel for the parties.
10. Sections 80AB, 80B(5) and 80HHA of the Act reads as follows.
"80AB- where any deduction is required to be made or allowed under any Section (except Section 80M) included in this Chapter under the heading 'C-Deduetioiis in respect of certain incomes', in respect of any income of the nature specified in that section, which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act before making arty deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income."
80B(5).- "gross total income" mean the total income computed In accordance with the provisions of this Act, before making any deduction under this Chapter.
80HHA(l).-Where the gross total income of an assessee includes any profits and gains derived from a small-scale industrial undertaking to which this section applies, there shall, In accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty percent thereof."
(2)...
11. A perusal of the above provisions shows that Section 80AB refers to the profits in respect of which deductions are available under various provisions referred to Chapter IV of the Act. According to the said section for the purpose of computing the deduction under the specified section, the amount of income which was included in the gross total income as computed in accordance with the provision of the Act before making any deduction in Chapter IV-A shall alone be considered. To the same effect "gross total income" is defined under Section 80B(5) of the Act. Thus, Section 80AB of the Act is relevant in a case where the deduction is from the gross total income. The perusal of Section 80HHA of the Act shows that the benefit of deduction is referable only to the profits and gains derived from an industrial undertaking computed in accordance with the provisions of the Act, therefore, for the purpose of the deduction under Section 80HHA of the Act only profits and gains of that particular industrial undertaking alone can be looked into and not the profit and gain or losses of other branch or establishment.
12. In the case of CIT v. Canara Workshops P. Ltd. , the assessee was a public limited company engaged in the manufacture of automobile spares. The products manufactured by it was covered by the List in the Fifth Schedule to the Act, which was treated as priority industry, in respect of which the deduction was available at eight per cent of the profits from the industry. The assessee had also commenced another industry for the manufacture of alloy steel, which was also included in the priority list. For the relevant assessment year, the assessee sustained loss in the alloy steel industry; whereas it disclosed profit from the industry of automobile ancillaries and claimed relief under Section 80E of the Act at eight per cent of the profits from the automobile industry. The Income tax Officer rejected the claim of deduction on the entire profit on the automobile Industry and held that the assessee was entitled for deduction under Section 80E of the Act on the profits of manufacture of ;omobile parts only after setting off the loss in the alloy steel industry. In appeal, the Tribunal accepted the contention of the assessee that the deduction was permissible at 8 percent on the entire profits on the automobile part industry without deducting therefrom losses in the alloy steel industry. In reference, the High Court answered the question referred in favour of the assessee. The Revenue filed appeal before the Apex Court. The Apex Court confirmed the judgment of the High Court and held as follows:
"In computing the profits for the purpose of deduction under Section 80E of the Income Tax Act, 1961, the loss incurred by the assessee in the manufacture of alloy steel (a priority industry) could not be set off against the profits of the manufacture of automobile ancillaries (another priority industry). The assessee, was entitled to a deduction at eight percent on the entire profits of the automobile parts industry included in the total income without deducting therefrom the losses in the alloy steel manufacture."
13. The Apex Court while holding above distinguished its earlier decision in the case of Distributors (Baroda) P. Ltd. v. Union of India (supra). Following the aforesaid decision of the "Apex court, the Andhra Pradesh High Court in the case of CIT v. Visakha Industries Ltd. ((supra) has held that the deduction under Section 80HH is a special deduction to be computed with reference to the profits of a particular undertaking and not with reference to the total profit of the assessee. The Court held that the losses suffered from the spinning division cannot be deducted while computing the deduction of asbestos division under Section 80HHA. The Division Bench of the Andhra Pradesh High Court held as follows:
"The benefit of deduction is intended only to certain specified industrial undertaking, which fulfill the conditions specified in the respective provisions. Take another case where an assessee has established an industrial undertaking in respect of which it is entitled for deduction from the profits and gains of that unit. The said unit may not contribute any profits and gains but the assessee derives huge income from non-industrial activity. In such case, if the Department's contention is accepted the assessee is entitled for deduction even though there are no profits from the industrial undertakings. The intention of the Legislature is not to create such a situation, but to provide the benefit of deduction from the profits and gains of an industrial undertaking, which fulfils the conditions specified in the respective provisions of the Act. The said benefit is an incentive intended to boost the industrial activity. Hence, the proper interpretation is that the deduction shall be in respect of the profits and gains of an industrial undertaking, specified in the provisions of the Act and not with reference to the total profits of the assessee. This view is also supported by the decision of the Apex Court in the case of Canara Workshops P. Ltd. ."
14. The Division Bench of the Andhra Pradesh High Court has considered Section 80AB of the Act. The decision of the Apex Court in the case of H.H. Sir Rama Varma v. CIT and various other decisions have been considered while coming to the aforesaid conclusion, we respectfully agree with the view taken by the Division Bench of the Andhra Pradesh High Court. The i decision referred by the learned Standing Counsel in the case of CIT v. Kotagiri Industrial Cooperative Tea Factory Ltd. (supra) is not applicable to the present case and is clearly distinguishable. In that case, the claim of deduction from the gross total income under Section 80P of the Act was under consideration. As stated above, under Section 80HHA of the Act, the deduction is from the profits and gains of the particular industrial undertaking and not from the total gross income of the assessee and, therefore, the profits and gains of that particular undertaking is to be considered for the purposes of the deduction and not the losses of the head office or other undertakings. However, it may be mentioned here that profits and gains of that particular undertaking is to be computed in accordance with the provisions of the Act, which include all sorts of admissible deduction.
15. In view of the aforesaid discussions, we answer the question referred to us in the negative i.e. in favour of the assessee and against the Revenue. However, there shall be no order as to costs.