By TIOL News Service

NEW DELHI, MAR 02, 2019: THE issue is - Whether deductions allowable under Sec 80HH are to be allowed from gross profits & gains and not net income. YES is the verdict of the SC Larger Bench.

Facts of the case

The dispute between the Revenue and the assessee is only about whether Section 80HH benefits available to an undertaking engaged in manufacturing or in the hotel business, is 20% deduction of gross profits and gains or net income? Assessees wanted deduction at the rate of 20% of profits and gains, i.e., gross profits but the stand of the Income Tax Department was that deduction at the rate of 20% was to be computed after taking into account depreciation, unabsorbed depreciation and investment allowance.

As per the Department, the income of the assessee was to be computed in accordance with the provisions contained in Sections 28 to 44DB which were the provisions for computation of ‘income’ under the head ‘profits and gains of business or profession’. Once income was arrived at after the application of such provisions, 20% thereof was allowable as deduction under Section 80HH. The assessees, on the other hand, submitted that Section 80HH used the expression ‘profits and gains’ which was different from ‘income’. Therefore, whatever profit and gains are earned by an undertaking covered by Section 80HH of the Act, 20% thereof is admissible as deduction. Assessee was of the view that from such profits and gains of the industrial undertaking, depreciation or unabsorbed investment allowances which were the deductions admissible under Sections 32 and 32AB of the Act, could not be taken into consideration.

The issue was referred to the Larger Bench as the Divison Bench in the case of Motilal Pesticides (I) Pvt. Ltd. vs. Commissioner of Income Tax, Delhi-III had taken the view which was favourable to the Department. This view was followed by the High Court in its judgment dismissing the appeals of the assessees. The assessees in these appeals submitted that the the view taken in Motilal Pesticides case was not a correct view as it ignored certain earlier judgments on this very issue.

Having heard the parties, the Larger Bench held that,

++ sub-section (1) of Section 80HH allows “a deduction from such profits and gains of an amount equal to 20 per cent thereof”, in computing the total income of the assessee. Thus, so far as deduction admissible under this provision is concerned it is from the ‘profits and gains’. In this context first question would be: what meaning is to be assigned to the expression ‘profits and gains’? Here we find that the reference order dated 5th November, 2014 rightly draws a distinction between ‘profits and gains’ and ‘income’;

++ the scheme of the Act insofar as assessment of income is concerned, particularly, with reference to computing the income as provided in Chapter IV of the Act and contrasted it with the deductions that are allowable under Chapter VI-A of the Act while computing total income. That scheme itself draws distinction between the the concept ‘income’ on the one hand and ‘profits and gains’ on the other hand. Insofar as computation of income under the head ‘profits and gains’ from business or profession is concerned, Section 28 of the Act mentions various kinds of incomes which are chargeable under this head. Therefore, all those incomes specifically mentioned in that provision when earned by a particular assessee, are to be aggregated to arrive at profits and gains of the assessee. Section 29 thereof mentions the method of arriving at ‘income’ which is to be computed in accordance with the provisions contained in Sections 30-43D of the Act. Sections 30-43D contain deductions of various kinds which are in the nature of expenditure or the like nature. After providing the deductions admissible in these provisions, one arrives at the figure of net profits which would become the net income under the head ‘profits and gains of business or profession’;

++ in contrast, under Chapter VI-A of the Act certain deductions are given by way of incentives. Assessees may earn these deductions on fulfilling the eligibility conditions, even when they are not in the nature of any expenditure incurred by the assessee. Here, Section 80A of the Act provides that in computing the total income of assessee, there shall be allowed from his gross total income, in accordance with the subject of the provisions of this Chapter, the deductions specified in Sections 80C to 80U. Sections 80C to 80U contain different subject matters and also specify particular percentage of deductions for a particular period. Significantly, Section 80A itself uses the expression ‘from his gross total income’ as it states that deduction is to be allowed to an assessee ‘from his gross total income’. Moreover, different provisions from Sections 80C to 80U, while mentioning the percentage at which and for which period a particular deduction is allowable, also specifies as to how such a deduction is to be worked out, namely, specific percentage of deduction of which component. These sections provide different parameters. Insofar as Section 80HH is concerned, it specifically mentions that deduction @ 20% of ‘profits and gains’;

++ reading of Section 80HH along with Section 80A would clearly signify that such a deduction has to be of gross profits and gains, i.e., before computing the income as specified in Sections 30 to 43D of the Act. It is correctly pointed out by Division Bench in the reference order that in Motilal Pesticides case, the Court followed the judgment rendered in the M/s. Cloth Traders (P) Ltd. which was a case under Section 80M of the Act, on the premise that language of Section 80HH and Section 80M is the same. This basis is clearly incorrect as the language of two provisions is materially different. We are, therefore, of the considered opinion that judgment of Motilal Pesticides is erroneous. We, therefore, overrule this judgment.

++ we are unable to subscribe to the contention of the senior counsel for the Revenue that Section 80AB, which was inserted by Finance (No. 2) Act, 1980 with effect from 1st April, 1981 is clarificatory in nature. It is a provision made with prospective effect as the very Amendment Act says so. Therefore, it cannot apply to the Assessment Years 1979-80 and 1980-81, when Section 80AB was brought on the statute book after these assessment years. This position becomes clear from the reading of Circular No. 281 dated September 22, 1980 issued by the Central Board of Direct Taxes itself. This circular the reasons for adding new Sections 80AA and 80AB. It refers to judgment in M/s. Cloth Traders case and mentions that the directions specified in the aforesaid sections will be calculated with reference to the net income as computed in accordance with the provisions of the Act (before making any deduction under Chapter VIA) and not with reference to the gross amount of such income, subject, however, to the other requirements of the respective sections. Notwithstanding the same, this circular also categorically mentions that it will take effect from April 01, 1981;

++ the change in legal position is brought about only, with the insertion of Section 80AB and made applicable from Assessment Year 1981-82. In view thereof, judgments in the case of M/s. Cloth Traders relied by the Revenue will be of no relevance. Likewise, judgment in Kotagiri Industrial Cooperative Tea Factory Ltd. decided altogether different question, which can be discerned from the passages extracted therefrom and will have no application to the instant case.

(See 2019-TIOL-96-SC-IT-LB)