ORDER
Satish Chandra, J.M.
1. This is an appeal filed by the assessee against the order of learned CIT(A), dt. 30th May, 2005, for the asst. yr. 2001-02.
2. The brief facts of the case are that the assessee filed its return for asst. yr. 2001-02 declaring gross total income at Rs. 26,32,989 and it claimed deduction under Section 80HHC Rs. 20,92,136 and of Rs. 5,40,853 under Section 80-IB, resulted the total income at nil. The case was selected for scrutiny. The AO assessed the total income at Rs. 4,61,815. Aggrieved by the order of the AO, the assessee filed an appeal before CIT(A), who partly allowed the appeal. Being aggrieved the assessee is before us.
3. The ground No. 1 of the assessee’s appeal is regarding deduction under Section 80HHC. The assessee claimed deduction under Section 80HHC Rs. 20,92,136 against which the AO allowed Rs. 15,63,331. The AO allowed deduction under Section 80-IB firstly on the gross total income and thereafter she allowed the deduction under Section 80HHC on the reduced figure of gross total income. In other words, the AO allowed deduction under Section 80-IB Rs. 6,58,247, which was reduced from the gross total income and thereafter the claim under Section 80HHC was allowed at Rs. 15,63,331 on the reduced gross total income. Thus, the dispute is whether the deduction under Section 80HHC should be allowed on export income included in gross total income or on the gross total income arrived after allowing deduction under Chapter VI-A of IT Act.
4. The learned Authorised Representative submitted that the assessee had claimed the deduction under Section 80HHC first and then had restricted the claim of deduction under Section 80-IB, upto gross total income as per provisions of Section 80A(2), i.e., the aggregate amount of deduction shall not exceed the gross total income of the assessee. The learned AO arbitrarily and wrongly has first allowed and worked out the deduction under Section 80-IB and afterwards she allowed the deduction under Section 80HHC on the reduced gross total income. It is nowhere mentioned in Section 80HHC that where more than one deductions under Chapter VI-A are available then firstly deduction under Section 80-IB/80-IA shall be given and after that the deduction under Section 80HHC shall be given on the reduced amount. The learned Authorised Representative (has) drawn our attention towards the provisions of Section 80HHC(1) and (3), which state that the deduction under Section 80HHC shall be allowed on the profit derived by the assessee from export of goods. The learned Authorised Representative further submitted that the main section, governing the deductions under Chapter VI-A is 80AB. The Section 80AB of the IT Act clearly mentions that while computing the deduction under a particular sections of Chapter VI-A, the amount of income to be considered shall be the income before making any deduction under Chapter VI-A. The Section 80AB has been given an overriding effect over all other sections given in Chapter VI-A. Thus, the Section 80HHC/80-IA(9) are governed by Section 80AB. The learned Authorised Representative relied on the decision of apex Court in the case of IPCA Laboratory Ltd. v. Dy. CIT , wherein Hon’ble apex Court has held that the Section 80AB has been given an overriding effect over all other sections given in Chapter VI-A. Thus the Section 80HHC/80-IB. would be governed by Section 80AB and deduction under Section 80HHC should be allowed on the basis of export income included in gross total income before making any deduction under Chapter VI-A. The learned Authorised Representative also drawn our attention towards the decision of jurisdictional High Court in the case of CIT v. Rochi Ram & Sons and decision of Tribunal Jaipur Bench in the case of Jt. CIT v. Gupta Chemical (P) Ltd. 33 Tax World 165 (Jp). The learned Authorised Representative (has) submitted that in both the cases the deduction under Section 80HHC was allowed on the gross total income and in both the cases the dispute was over the deduction under Section 80-IA and there was no dispute over the deduction under Section 80HHC. Both the cases also support the assessee’s claim. The learned Authorised Representative submitted that in view of provisions of Section 80AB, the deduction under Chapter VI-A shall be calculated on gross total income of the assessee without reducing gross total income by the amount of any other deduction granted under the Chapter VI-A.
5. On the other hand, learned Departmental Representative, relied on the order of the CIT(A) and of the AO and submitted that the learned AO has rightly restricted the claim of deduction under Section 80HHC from Rs. 20,92,136 to Rs. 15,63,331 on the ground that the deduction under Section 80HHC shall be allowed on the income as reduced by deduction claimed under Section 80-IB. The learned Departmental Representative submitted that the AO has rightly allowed the deduction under Section 80-IB first and then after reducing the gross total income by the amount of this deduction under Section 80-IB, the deduction under Section 80HHC was rightly allowed on the reduced gross total income, which resulted the deduction under Section 80HHC at Rs. 15,63,331 as against Rs. 20,92,136 claimed by the assessee. The learned Departmental Representative (has) drawn our attention towards the provisions of Section 80-IA(9), which are applicable for deduction under Section 80-IB also by virtue of Section 80-IB(13), and submitted that the deduction under Section 80HHC shall not be allowed on the amount of deduction allowed under Section 80-IB. She relied on the decision of jurisdictional High Court in the case of CIT v. Rochi Ram & Sons (supra) and decision of Tribunal, Jaipur Bench in the case of Jt. CIT v. Gupta Chemical (P) Ltd. (supra).
6. We heard both the parties and gone through the material available on record. The dispute is whether the deduction under Section 80HHC should be allowed on export income included in gross total income or on the gross total income arrived after allowing other deduction under Chapter VI-A of IT Act. We have carefully considered the provisions of Sections 80AB, 80HHC and 80-IB of IT Act. The Section 80AB of IT Act is reproduced as under :
“80AB. Where any deduction is required to be made or allowed under any section 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.”
From the language used in Section 80AB it is clear that deduction under Chapter VI-A should be given on the amount of income of that nature as computed in accordance with the provisions of this Act before making any deduction under Chapter VI-A. We respectfully follow the decision of Hon’ble apex Court in the case of IPCA Laboratory Ltd. v. Dy CIT (supra) wherein it has been held that the Section 80AB has an overriding effect over all other sections given in Chapter VI-A. Therefore, whatever mentioned in Section 80-IB or 80HHC would be governed by Section 80AB. So far as the decision of jurisdictional High Court in the case of CLT v. Rochi Ram & Sons (supra) and decision of Tribunal Jaipur Bench in the case of Jt CIT v. Gupta Chemical (P) Ltd. (supra) is concerned, in both the cases there was no dispute over the deduction under Section 80HHC. In both the cases the deduction under Section 80HHC was allowed on gross total income. The relevant para of the judgment Jt. CIT v. Gupta Chemical (P) Ltd. (supra) is reproduced, as under :
“… in this case, there is no dispute that deduction under Section 80HHC of the Act has been allowed to the assessee from the gross total income….”
Further, the relevant para of the judgment CIT v. Rochi Ram & Sons (supra) is reproduced, as under:
“Chapter VI-A of the Act deals with deductions, which are to be allowed while computing the total income. Sub-section (1) of Section 80A of the Act provides that while computing the total income of an assessee, there shall be allowed a deduction from the gross total income, in accordance with and subject to the provisions of this Chapter, the deductions specified in Sections 80C to 80U. ‘Gross total income’ has been defined in Sub-section (5) of Section 80B of the Act. Definition under Section 80B(5) provides that ‘gross total income’ means that total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter. The deduction under Section 80HHC is to be allowed in the total income of the assessee subject to the provisions of this section. There is no dispute that deduction under Section 80HHC has already been allowed by the AO on the gross total income.”
7. Therefore, both the above cases also support the assessee’s claim that the deduction under Section 80HHC should be allowed on the gross total income as done by the AO in the case of Jt. CIT v. Gupta Chemical (P) Ltd. (supra) and in the case of CIT v. Rochi Ram & Sons (supra). As per the scheme of Section 80HHC, the deduction has to be given with reference to total profit. The profit of the business has been defined in Expln. (baa) which is as under :
(baa) “profits of the business” means the profits of the business as computed under the head “Profits and gains of business or profession” as reduced by-
(1) ninety per cent of any sum referred to in cls. (iiia), (iiib) and (iiic) of Section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and
(2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India.
The profit has to be taken as computed under the head “Profits and gains of business or profession”, which means it cannot be reduced by the deduction allowed under Section 80-IB.
8. In the light of above discussion, and by considering the totality of the facts and circumstances of the cases and by keeping in mind the ratio laid down in the case of IPCA Laboratory Ltd. v. Dy. CIT (supra), we hold that the Section 80AB has an overriding effect over all other sections given in Chapter VI-A and deduction under Chapter VI-A should be given on the amount of income of that nature as computed in accordance with the provisions of this Act before making any deduction under Chapter VI-A. Therefore, we set aside both the orders of the lower authorities and direct the AO to allow the deduction under Section 80HHC at Rs. 20,92,136 on the income included in gross total income before making any deduction under Chapter VI-A, however, the total deduction under Sections 80-IB and 80HHC should be restricted upto gross total income.
9. Ground No. 2 in the assessee’s appeal is regarding the disallowance of telephone expenses Rs. 40,103, depreciation on telephone Rs. 267 and sundry balances written off for Rs. 10,034. The learned AO has disallowed 10 per cent of telephone expenses and depreciation on telephone and Rs. 10,034 sundry balances written off by the assessee in the accounts.
10. The learned Authorised Representative submitted that the telephone is being used for official purpose and the disallowance has been made without any basis and evidence showing that this is used for personal purpose. As regard the disallowance in respect of sundry balances written off by the appellant, the learned Authorised Representative submitted that the amount was not recoverable and written off as bad debts. The learned Authorised Representative submitted that the position of law in this regard is that if the necessary entries are made in the regular books of account regarding the writing off of the amounts, then no further requirement is necessary. The claim regarding written off amount of Rs. 10,034 has been made only after passing the necessary entries in the books of account.
11. On the other hand, the learned Departmental Representative supported the orders of the lower authorities and submitted that the estimation made by the learned AO as regard personal use of telephone is reasonable and disallowance of sundry balance written off is also proper as the assessee could not bring any evidence in respect of its saying that the amount is not recoverable.
12. After hearing the rival submissions and by considering the totality of the facts and circumstances of the case, we hold that the disallowance made by the AO in respect of telephone expenses and depreciation on telephone is reasonable as element of personal expenses can’t be ruled out and we confirm the order of CIT on this issue. However, as regards disallowance of sundry debtors written off Rs. 10,034, we are in opinion that the disallowance made by the AO is not proper. The position of law in this regard is clear that if the necessary entries are made in the regular books of account regarding the writing off of the amounts, then no further requirement is necessary. The claim regarding written off amount of Rs. 10,034 has been made only after passing the necessary entries in the books of accounts, therefore, no disallowance should be made in this regard. Therefore, we set aside both the orders of the lower authorities and direct the AO to allow the sundry expenses written off Rs. 10,034.
13. In the result, the appeal filed by the assessee is partly allowed as stated above and announced in the open Court.