2019 (3) TMI 171 - SC - Income Tax

Deduction u/s 80HH - computation of deduction - whether it is to be available out of income as computed under the Act or out of profits and gains , without deducting therefrom depreciation and investment allowance ? - HELD THAT - 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. 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 2000 (2) TMI 9 - SUPREME COURT is erroneous. We, therefore, overrule this judgment. Unable to subscribe to 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 inter alia describes the reasons for adding new Sections 80AA and 80AB. It is, thus, clear that change in legal position is brought about only, with the insertion of Section 80AB and made applicable from AY 1981-82. In view thereof, judgments in the case of M/s. Cloth Traders 1979 (5) TMI 2 - SUPREME COURT relied by the Revenue will be of no relevance

Issues Involved:
1. Interpretation of Section 80HH of the Income Tax Act, 1961.
2. Determination of whether deductions under Section 80HH should be computed from 'gross profits and gains' or 'net income'.
3. Relevance of the judgment in Motilal Pesticides (I) Pvt. Ltd. vs. Commissioner of Income Tax.
4. Applicability of Section 80AB to the assessment years in question.

Detailed Analysis:

1. Interpretation of Section 80HH of the Income Tax Act, 1961:
The core issue in these appeals is the interpretation of Section 80HH of the Income Tax Act, 1961, which provides deductions from income at specified rates for certain industrial undertakings. The specific question is whether the deduction should be available out of 'income' as computed under the Act or out of 'profits and gains' without deducting 'depreciation' and 'investment allowance'. Section 80HH states: "Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, 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 per cent thereof."

2. Determination of whether deductions under Section 80HH should be computed from 'gross profits and gains' or 'net income':
The assessees argue that the deduction should be computed from 'gross profits and gains' without considering depreciation and investment allowance. They contend that the term 'profits and gains' is distinct from 'income', and thus, deductions under Sections 32 and 32AB should not be subtracted. Conversely, the Income Tax Department asserts that the deduction should be computed after applying the provisions for computation of 'income' under Sections 28 to 44DB, which include depreciation and investment allowance.

3. Relevance of the judgment in Motilal Pesticides (I) Pvt. Ltd. vs. Commissioner of Income Tax:
The High Court followed the judgment in Motilal Pesticides, which favored the Department's view. The assessees argue that this judgment is incorrect as it overlooks earlier judgments and misinterprets the terms 'profits and gains' and 'income'. The Division Bench referred the matter to a larger Bench due to the conflict in interpretations.

4. Applicability of Section 80AB to the assessment years in question:
Section 80AB, inserted by the Finance (No. 2) Act, 1980, with effect from 1st April 1981, clarifies that deductions should be computed with reference to 'income' included in the gross total income. However, the Court noted that this section is prospective and does not apply to the assessment years 1979-80 and 1980-81. The Circular No. 281 dated September 22, 1980, issued by the Central Board of Direct Taxes, confirms this by stating that Section 80AB will apply from the assessment year 1981-82 onwards.

Judgment:
The Court concluded that the language of Section 80HH, which allows "a deduction from such profits and gains of an amount equal to 20 per cent thereof", indicates that the deduction should be computed from 'gross profits and gains' before applying the provisions for computation of income under Sections 30 to 43D. The judgment in Motilal Pesticides was deemed erroneous as it incorrectly equated the language of Section 80HH with Section 80M. Therefore, the Court overruled the Motilal Pesticides judgment and held that deductions under Section 80HH should be computed from 'gross profits and gains'. Consequently, the appeals were allowed.

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