1994 (7) TMI 34 - HC - Income Tax

Summary

Issues Involved:
1. Whether the deduction u/s 80HH should be computed on commercial profits.
2. Whether the assessee is entitled to add provisions for taxes, depreciation, and investment allowance reserve to the net profit for computing commercial profits.

Summary:

Issue 1: Computation of Deduction u/s 80HH on Commercial Profits
The Income-tax Appellate Tribunal concluded that the deduction u/s 80HH should be computed on commercial profits. The Tribunal held that the assessee could add provisions for taxes, depreciation, and investment allowance reserve to the net profit as per the profit and loss account to arrive at commercial profits. However, the High Court disagreed, stating that the deduction u/s 80HH should be based on the "profits and gains derived from an industrial undertaking" included in the gross total income. The Court emphasized that the computation must follow the provisions of the Income-tax Act, particularly sections 80AB and 80B(5), which mandate that deductions under Chapter VI-A should be made from the gross total income computed in accordance with the Act.

Issue 2: Addition of Provisions for Taxes, Depreciation, and Investment Allowance Reserve
The High Court held that the provisions for taxes, depreciation, and investment allowance reserve must be deducted before computing the deduction u/s 80HH. The Court referred to several precedents, including Cambay Electric Supply Industrial Co. Ltd. v. CIT and Distributors (Baroda) P. Ltd. v. Union of India, which supported the view that deductions should be made from the income computed in accordance with the Act. The Court concluded that the Tribunal was not justified in allowing the addition of these provisions to the net profit for computing commercial profits.

Conclusion:
The High Court ruled that the deduction u/s 80HH should be computed based on the profits and gains included in the gross total income, after deducting provisions for taxes, depreciation, and investment allowance reserve. The Tribunal's approach of computing the deduction on commercial profits by adding these provisions was incorrect.