1994 (10) TMI 4 - HC - Income Tax

Backward Area, Income Tax Act, New Industrial Undertaking, Profits And Gains, Special Deduction

Summary

Issues Involved:
1. Correctness of the Appellate Tribunal's decision to allow relief under section 80HH of the Income-tax Act, 1961.
2. Method of calculation for the deduction under section 80HH.
3. Interpretation of "profits and gains" versus "income" under section 80HH.
4. Applicability of Supreme Court judgments and other case laws to the issue at hand.

Issue-wise Detailed Analysis:

1. Correctness of the Appellate Tribunal's Decision to Allow Relief Under Section 80HH:
The primary issue referred to the court was whether the Appellate Tribunal was correct in law in allowing relief under section 80HH. The Tribunal had allowed the relief based on the precedent set by the Supreme Court in Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243, interpreting that the relief should be given on the gross profits and gains of the assessee from the industrial undertaking. The Tribunal also noted that section 80AB, which might have affected this interpretation, came into force only from the assessment year 1981-82 and was not applicable to the assessment year 1978-79.

2. Method of Calculation for the Deduction Under Section 80HH:
The controversy centered around the method of calculation for the deduction under section 80HH. The assessee argued that the deduction should be calculated on the gross profits and gains derived from the industrial undertaking, while the Revenue contended that it should be calculated on the net income after accounting for past business losses and unabsorbed depreciation.

3. Interpretation of "Profits and Gains" Versus "Income" Under Section 80HH:
The court analyzed the language of section 80HH, which allows a deduction of twenty percent of the "profits and gains" derived from an industrial undertaking. The court concluded that the term "profits and gains" connotes income from business or profession computed in accordance with the provisions of the Act, including permissible deductions provided in sections 30 to 43D.

4. Applicability of Supreme Court Judgments and Other Case Laws:
The court referred to several Supreme Court judgments to interpret the provisions correctly:
- Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC): The Supreme Court held that in granting relief under section 80E, deductions such as development rebate and depreciation must be accounted for to arrive at the net profits.
- Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120 (SC): The Supreme Court overruled its earlier decision in Cloth Traders (P.) Ltd. and held that deductions should be based on the net income computed according to the Act's provisions.
- H.H. Sir Rama Varma v. CIT [1994] 205 ITR 433 (SC): The court held that long-term capital losses from earlier years must be set off against current long-term capital gains before allowing deductions under section 80T.

The court also considered other judgments cited by the assessee but found them either distinguishable or not in line with the Supreme Court's pronouncements.

Conclusion:
The court concluded that the deduction under section 80HH should be calculated at twenty percent of the net profits and gains from the industrial undertaking, after accounting for deductions in accordance with the provisions of the Income-tax Act. The question referred was answered in the negative, in favor of the Revenue, and against the assessee.