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TMI Blog1982 (12) TMI 52X X X X Extracts X X X X X X X X Extracts X X X X ..... ce worked out to Rs. 93,558. It may be stated that the ITO made the above computation without any discussion in his order. 3. Being aggrieved, the assessee carried the matter in appeal before the Commissioner (Appeals) and contended that interest disallowed under section 40(b) form part and parcel of profits and gains of the business of the assessee and, therefore, deduction under section 80HH should be determined with reference to gross amount of profits after making the disallowance under section 40(b) and not on basis of net amount of profit de hors the said disallowance. The learned Commissioner, however, did not find any substance in this argument. He pointed out that profits and gains of business have to be understood in normal commercial sense which would mean the net amount of profit as determined by the ITO before disallowance under section 40(b). In other words, according to the Commissioner (Appeals) the relief under section 40(b) had to be determined with reference to divisible income of the firm and not with reference to the income from profits and gains of business as determined under section 28 of the Act. In coming to this decision, the Commissioner (Appeals) reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als with deductions from the gross total income. It states that where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking to which the provisions of this section apply, there shall be allowed in computing the total of income of the assessee a deduction of 20 per cent of the amount of such profits. It Cambay Electric's case, the Supreme Court while dealing with the provisions of section 80E as is stood have laid down the following steps which are required to be taken before the special deduction is allowed. The said steps are as follows : " ...First, compute the total income of the concerned assessee in accordance with the other provisions of the Act, i.e., in accordance with all the provisions except section 80E ; secondly, ascertain what part of the total income so computed represents the profits and gains attributable to the business of the specified industry (here generation and distribution of electricity) ; and, thirdly, if there be profits and gains so attributable, deduct 8 per cent thereof from such profits and gains and then arrive at the net total income exigible to tax. As regards the first step mentioned above, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions of the Act, namely, sections 28 and 29 of the Act. The latter section requires computation of profits and gains in accordance with the provisions laid down in sections 30 to 44A of the Act. Thus, once having determined the total income it will be the gross total income for the purpose of section 80HH. The second step is to cull out the profits and gains derived from the industrial undertaking. In doing so, the disallowance under section 40(b) has to be taken into consideration as the interest paid to partners is nothing but appropriation of profits by the firm. The character of interest to partner's is in no way different than the other profits as it would be evident from the following observations of the Supreme Court in CIT v. R.M. Chidambaram Pillai [1977] 106 ITR 292. At page 296 it is stated as follows : " The scheme of the Act, eyeing it with special reference to sections 10(4)(b) and 16(1)(b), designate employee's salary as profit, where the servant is none other than a partner, i.e., co-owner of the business. If such be the rationale of the relevant provisions, the key to the solution of the problem is within easy reach. Salaries are profits known by a diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... object of the legislature and not such as would defeat the same. " Therefore, viewed from any angle the decisions of the authorities below are clearly unsustainable and the relief due to the assessee has to be determined with reference to gross amount of profit after including interest to partners as aforesaid. 7. Now we turn to IT Appeal Nos. 2306 and 2307. The assessee is a registered firm which carries on business in manufacture and sale of electric starters, voltage stabilizers, etc. It, inter alia, claimed relief under section 80HH on the basis of gross amount of its profits inclusive of interest and salary paid to partners amounting to Rs. 59,065, for the assessment year 1978-79. Similarly, for the assessment year 1979-80 it claimed relief under section 80HH on the gross amount of profit inclusive of interest to partners amounting to Rs. 74,229. Both the ITO as well as the AAC negatived the contention of the assessee and held that the assessee was entitled to relief under section 80HH on basis of the net amount of profit exclusive of interest paid to partners which was disallowed under section 40(b). 8. For the reasons set out in detail in IT Appeal No. 2304 (Ahd.) of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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