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TMI Blog1982 (12) TMI 89X X X X Extracts X X X X X X X X Extracts X X X X ..... nion that the business loss of the earlier years, unabsorbed investment allowance and also the depreciation carried forward from the earlier years should first be deducted, with a consequence that the deduction of section 80HH was allowable only on the net income from business and it worked out to Rs. 14,284 only. The result of the computation was that for the assessment year 1979-80 there was a net taxable income of Rs. 18,650 as against net loss of Rs. 72,662. Consequently, the ITO disallowed the carry forward of the loss of Rs. 72,670 claimed by the assessee. 3. The assessee appealed and relied on the decision of the Tribunal in the case of Bharat Foam Industries Ltd., where it had been held that the deduction under section 80HH should be allowed in the gross income of the business without deducting the carry forward loss of the earlier years. The Commissioner (Appeals) was of the opinion that in view of the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84, the set off of the prior losses was a necessary step in the computation of relief under section 80HH and, therefore, the order of the Tribunal could not be fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion in the case of Cloth Traders was not concerned with the set off of past losses whereas that point was decided by the Supreme Court in the case of Cambay Electric and, therefore, the relief should be computed only after setting off of the past losses. 6. A look at the provisions of the section would make it clear that what we are concerned with is the measure from which a proportion has to be ascertained for the purpose of granting relief. In other words a percentage of the profits of the particular business is given as a deduction to encourage the setting up of a new industrial undertaking in a backward area. The revenue has not cared to reveal to us the background of the enactment so as to understand the real intention of the Government in granting this deduction which is not an exemption from income but a deduction designed as an economical tool for the purpose of dispersing the industries into backward areas. If this object is kept in mind, it may not be difficult to imagine that the Government really intended that the deduction should be only a percentage of the net income of the business computed for tax purposes after setting off of past losses because in a nascent ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had to consider the scheme of Chapter VIA and it was observed that all the sections in that Chapter used the same legislative formula opening with identical words 'where the gross total income of the assessee includes income' and pointed out that on a plain reading of those sections, the income referred was only the gross income from the source and not the net income as computed under the Act. 3. It is significant to note that in the case of Cambay Electric, the Supreme Court emphasized the words in parenthesis, namely, 'as computed in accordance with the other provisions of this Act', to arrive at the formula that the income of the business must be computed in accordance with all the provisions of the Act before a proportion thereof is given as a deduction. Those words in parenthesis in section 80E considered in that case are absent in section 80HH and, therefore, the sections of the Act relating to set off of past losses cannot operate in the computation of the deduction. 4. The decision in Cloth Traders' case was given on 4-5-1979 whereas the decision in Cambay Electric was given on 11-4-1978 and still the revenue had not relied on that case in arguing the later appeal indic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... struction favourable to the assessee has to be adopted. 8. As we have seen above, no authorised official construction of the section has been released on behalf of the Government to assert that the policy of the Government in enacting section 80HH was to restrict the deduction to a percentage of the net income from the business included in the total income being the actual component part of the total income. It appears that such a view was only a narrow interpretation made by the authorities entrusted with the execution of the Act, being an attempt to restrict the scope of the deductions available to the new industrial establishments especially in backward areas, in response to the inducement offered by the wording of the section. Such an interpretation leading to litigation must be considered to have been settled by the decision of the Supreme Court in the case of Cloth Traders. Yet the controversy is sought to be revised by referring to the introduction of section 80AB of the Act by the Finance (No. 2) Act, 1980, with effect from 1-4-1981. The budget speech of the Finance Minister for 1980-81 merely mentions : "I also propose to make certain amendments in the Income-tax Act t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in accordance with the provisions of this Act as the income of that nature derived or received by the assessee and which is included in the gross total income. The emphasis here is on 'income received or derived' which can refer only to the income of the year and cannot be the net result after setting off of past losses or deductions carried forward. More significantly the words in parenthesis, namely, 'as computed in accordance with the other provisions of this Act' which occurred earlier in section 80E since repealed have not been incorporated in any of these sections so as to restore the meaning which flowed from them according to the decision in the case of Cambay Electric. In fact the introduction of section 80AB underlines the real purpose of deduction, viz., that it should be a straight deduction from the income from that source of that year as otherwise the entire scheme of deduction would become meaningless. 10. For all these reasons we are convinced that the deductions under section 80HH has to be computed by taking a proportion of a gross profit from the new industrial undertaking in the backward area and give it as a deduction from such gross income similar to the d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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