Deduction u/s 80HH available out of gross profits before insertion of Section 80AB with effect from 1st April, 1981 –Supreme Court overrules its previous judgment
ABCAUS Case Law Citation:
ABCAUS 2808 (2019) (03) SC
Important Case Laws Cited/relied upon by the parties
Motilal Pesticides (I) Pvt. Ltd. vs. Commissioner of Income Tax (2000) 9 SCC 63
M/s. Cloth Traders (P) Ltd. v. Additional C.I.T., Gujarat (1979) 3 SCC 538
The Section 80HH of the Income Tax Act, 1961 (the Act) grants deduction from profits and gains to an undertaking engaged in manufacturing or in the business of the hotel. The deduction is admissible at the rate of 20% of the profits and gains of undertaking for 10 assessment years. Certain conditions are to be fulfilled in order to be eligible for such a deduction.
The issue in the instant case was interpretation of the provisions of Section 80HH of the Income Tax Act, 1961 (the Act) as it existed for the Assessment Years 1979-80 and 1980-81. The question was whether the deduction was available out of ‘income’ as computed under the Act or out of ‘profits and gains’, without deducting here from ‘depreciation’ and ‘investment allowance’.
In other words, the Conflict was with respect to one aspect viz. 20% deduction of gross profits and gains or net income.
Whereas the assessees claimed deduction at the rate of 20% of profits and gains, i.e., gross profits, the stand of the Income Tax Department was that deduction at the rate of 20% is to be computed after taking into account depreciation, unabsorbed depreciation and investment allowance.
To put it otherwise, as per the Department, the income of the assessee was to computed in accordance with the provisions contained in Sections 28 to 44DB which are the provisions for computation of ‘income’ under the head ‘profits and gains of business or profession’.
According to the Revenue, once income is arrived at after the application of the aforesaid provisions, 20% thereof is allowable as deduction under Section 80HH. The assessees, on the other hand, submitted that Section 80HH uses the expression ‘profits and gains’ which is different from ‘income’. Therefore, whatever profit and gains are earned by an undertaking covered by Section 80HH of the Act, 20% thereof is admissible as deduction. As a corollary, from such profits and gains of the industrial undertaking, depreciation or unabsorbed investment allowances which are the deductions admissible under Sections 32 and 32AB of the Act, cannot be taken into consideration.
The Hon’ble Supreme Court pointed clarified that the scheme of the Act insofar as assessment of income is concerned draws distinction between the concept ‘income’ on the one hand and ‘profits and gains’ on the other hand. Insofar as computation of income under the head ‘profits and gains’ from business or profession is concerned, Section 28 of the Act mentions various kinds of incomes which are chargeable under this head.
The Hon’ble Supreme Court pointed out that all those incomes specifically mentioned in that provision when earned by a particular assessee, are to be aggregated to arrive at profits and gains of the assessee. Section 29 thereof mentions the method of arriving at ‘income’ which is to be computed in accordance with the provisions contained in Sections 30-43D of the Act. Sections 30-43D contain deductions of various kinds which are in the nature of expenditure or the like nature. After providing the deductions admissible in these provisions, one arrives at the figure of net profits which would become the net income under the head ‘profits and gains of business or profession’. In contrast, as mentioned above, under Chapter VI-A of the Act certain deductions are given by way of incentives.
The Hon’ble Supreme Court was of the view that the assessees may earn these deductions on fulfilling the eligibility conditions contained therein, even when they are not in the nature of any expenditure incurred by the assessee.
It was noted that at this juncture, section 80A of the Act provides that in computing the total income of assessee, there shall be allowed from his gross total income, in accordance with the subject of the provisions of this Chapter, the deductions specified in Sections 80C to 80U.
The Hon’ble Supreme Court observed that significantly, Section 80A itself uses the expression ‘from his gross total income’ as it states that deduction is to be allowed to an assessee ‘from his gross total income’. Moreover, different provisions from Sections 80C to 80U, while mentioning the percentage at which and for which period a particular deduction is allowable, also specifies as to how such a deduction is to be worked out, namely, specific percentage of deduction of which component. These sections provide different parameters. Insofar as Section 80HH is concerned, it specifically mentions that deduction @ 20% of ‘profits and gains’.
The Hon’ble Supreme Court opined that reading of Section 80HH along with Section 80A clearly signified 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.
The Hon’ble Supreme Court concurred with the Division Bench in that in the case where the Supreme Court held a favourable view to the Department, the Court followed its other judgment which was a case under Section 80M of the Act, on the premise that language of Section 80HH and Section 80M is the same.
The Hon’ble Supreme Court overruled its previous favourable judgment and held that the basis taken in as it was clearly incorrect as the language of two provisions was materially different.
The Hon’ble Supreme Court disagreed with the Revenue that Section 80AB, which was inserted by Finance (No. 2) Act, 1980 with effect from 1st April, 1981 is clarificatory in nature.
The Hon’ble Supreme Court observed that section 80AB 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.
The Hon’ble Supreme Court pointed out that the position becomes clear from the reading of CBDT Circular No. 281. This circular inter alia describes the reasons for adding new Sections 80AA and 80AB. It referred to judgment of the Apex Court and mentioned that the directions specified in the aforesaid sections will be calculated with reference to the net income as computed in accordance with the provisions of the Act (before making any deduction under Chapter VIA) and not with reference to the gross amount of such income, subject, however, to the other requirements of the respective sections.
The Apex Court noted that the said circular also categorically mentioned that it would take effect from 01.04.1980.
Accordingly, the appeal of the assessee was allowed