Citation Codes

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Case Number

R.C No. 126 of 1986

Attorney(S)

For the Appellant: M.J.Swamy, S.R.Ashok, Advocates.

Judges

Syed Shah Mohammed Quadri
N.Y Hanumanthappa, JJ.

Acts

section 80HH of the Income-tax Act (for short The Act).
Section 80AA (by Finance (No. 12) Act, 1980)
INCOME TAX ACT

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Smart Summary

Structured Summary of the Opinion (Syed Shah Mohammed Quadri, J.)

Factual and Procedural Background

This Court was asked to answer a question of law referred by the Income‑Tax Appellate Tribunal, Hyderabad, under Section 256(2) of the Income‑tax Act in I.T.C. No. 6 of 1964. The reference question (as posed by the Tribunal) was whether the Tribunal was correct in law in allowing relief under Section 80HH.

The assessee was a company engaged in manufacturing various diesel locomotives. For the assessment year 1978‑79 the assessee claimed a deduction under Section 80HH. The assessee's income for that year was computed at Rs. 57,882 before setting off past business loss and unabsorbed depreciation; if those items were set off, the taxable income would become nil. The Income‑tax Officer denied relief under Section 80HH; the Appellate Commissioner of Income‑Tax confirmed the assessment; the assessee appealed to the Income‑Tax Appellate Tribunal which, on October 14, 1982, allowed the appeal. The Tribunal relied on the Supreme Court decision in Cloth Traders (P) Ltd. v. Addl. C.I.T. and held that Section 80AB (which came into force with effect from 1‑4‑1981) did not affect the assessee's entitlement for the assessment year in question. The Tribunal's order produced the reference to this Court.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in allowing relief under Section 80HH of the Income‑tax Act (as referred by the Tribunal).
More particularly (and central to the controversy before the Court): whether the deduction under Section 80HH is to be calculated on the gross profits and gains of the industrial undertaking or on the profits and gains as computed (i.e., net) in accordance with the provisions of the Income‑tax Act (after allowable deductions such as those in Sections 30 to 43A and other applicable provisions).

Arguments of the Parties

Revenue's Arguments (Standing Counsel Sri S.R. Ashok)

On a proper construction of Section 80HH, the deduction granted thereunder must be calculated on the net income of the assessee from the industrial undertaking (i.e., after making the deductions allowable under the Act).

Assessee's Arguments (Counsel Sri M.J. Swamy)

The expression used in Section 80HH is “profits and gains” and not “income”; therefore the deduction should be given on the gross profits and gains of the assessee from the industrial undertaking (i.e., before making deductions provided by the Act).

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court in this Opinion
Cloth Traders (P) Ltd. v. Addl. C.I.T. (1979) 118 ITR 243	Held (earlier) that deduction under Section 80M should be calculated with reference to the full amount of dividends received (i.e., without reducing by deductions allowed under the Act).	The Tribunal had relied on this decision to allow relief; the Court notes that Cloth Traders led to legislative responses (Section 80AA and 80AB) and that this earlier view was later overruled by the Supreme Court in Distributors (Baroda) P. Ltd. v. Union of India.
Cambay Electric Supply Industrial Co. v. C.I.T. (1978) 113 ITR 84	Explained the steps for giving a special deduction under Chapter VI‑A (e.g., compute total income according to other provisions of the Act, ascertain profits attributable to specified business, then apply the specified percentage deduction to those profits as so computed).	The Court relied on this decision to support the proposition that profits and gains must be computed in accordance with the provisions of the Act before applying a Chapter VI‑A special deduction.
Distributors (Baroda) P. Ltd. v. Union of India (1985) 155 ITR 120	Constitution Bench overruled Cloth Traders and held that deductions under Section 80M are to be computed with reference to the amount of dividend as computed in accordance with the provisions of the Act (i.e., net dividend), not the gross amount received.	The Court relied on this authority as decisive: it established that the Legislature intended deductions in Chapter VI‑A to be computed with reference to amounts as computed under the Act. This case was used to reject the argument for computing special deductions on gross amounts.
SIR v. C.I.T. (1984) 205 ITR 433	Held that certain losses (long‑term capital losses) must be set off against gains of the current year before allowing the Chapter VI‑A deduction; discussed the declaratory purpose of Section 80AB.	The Court cited this to show the parity of reasoning that Section 80AB declared the existing law about the manner of computing deductions under Chapter VI‑A, reinforcing that deductions are to be computed after making relevant set‑offs and deductions under the Act.
C.I.T. v. Canara Workshops P. Ltd. (1986) 161 ITR 320	Distinguished losses of other industries from losses of the same industry: profits of the industry eligible for special deduction under Section 80E were not to be reduced by losses of other industries of the same assessee to which the provision did not apply.	The Court considered this decision (relied upon by the assessee) but rejected the assessee's argument that, by parity, carried‑forward losses should not be set off when computing the amount eligible for the special deduction; the Court found the reasoning inapplicable to the facts before it.
C.I.T. v. Madras Motor & General Ins. Co. Ltd. (1986) 159 ITR 601 (Madras HC)	Addressed scope of special deduction under Section 80K and related issues (including whether certain deductions should be made before granting the Chapter VI‑A benefit).	The Court observed this decision but held that it did not help the assessee in the present controversy, given the later Supreme Court pronouncements.
C.I.T. v. Tarun Udyog (1991) 191 ITR 688 (Orissa HC)	Held that relief under Section 80HH was to be allowed on the profits of the industrial undertaking before deducting investment allowance under Section 32A.	The Court disagreed with the Orissa High Court view, noting that it was not consistent with the later Supreme Court authority (Distributors (Baroda) and Cambay) and therefore did not represent the correct law.

Court's Reasoning and Analysis

The Court began with the text of Section 80HH(1), noting that it allows, "in computing the total income of the assessee," a deduction equal to twenty per cent of the "profits and gains" derived from an industrial undertaking or hotel to which the section applies. The central analytic task was to determine at what stage (and on what measure) that twenty per cent deduction applies.

The Court engaged in statutory interpretation, reading Section 80HH together with related provisions:

It noted the definition of "gross total income" in Section 80B(5) as the total income computed in accordance with the provisions of the Act before making any deduction under that Chapter (i.e., Chapter VI‑A).
It referred to Section 14's classification of income heads, observing that "Profits and gains of business or profession" (head D) are computed in accordance with the Act and form part of total income; the expression "profits and gains" was understood by the Court to mean the income from business computed in accordance with the provisions of the Act.
The Court observed that, for purposes of computing profits and gains under head D, permissible deductions are provided by Sections 30 to 43D. Chapter VI‑A (which contains special deductions such as Section 80HH) provides additional "Special Deductions."
On this basis the Court reasoned that Section 80HH's reference to "profits and gains" is to profits and gains "as computed in accordance with the provisions of the Act" — that is, after taking into account the statutory deductions applicable to that head (subject to the particular scheme of Chapter VI‑A as interpreted).

The Court then examined precedent and subsequent legislative history:

It recounted that Cloth Traders had adopted a view favourable to calculating a Chapter VI‑A deduction with reference to gross receipts (full dividend) and that this decision had prompted the insertion of Section 80AA (and later Section 80AB) to clarify computation. However, a later Constitution Bench in Distributors (Baroda) P. Ltd. overruled Cloth Traders and held that deductions under Section 80M must be computed with reference to amounts as computed in accordance with the Act (i.e., net figures).
The Court relied on Cambay Electric Supply Industrial Co. v. C.I.T. which set out the procedural steps to be followed before allowing a Chapter VI‑A special deduction: (1) compute total income in accordance with other provisions of the Act (except the special deduction), (2) ascertain the portion of total income representing profits attributable to the specified business, and (3) apply the percentage deduction to those profits as so computed. The Court used this to support its conclusion that the underlying profits must be computed in conformity with the Act prior to applying the Chapter VI‑A percentage deduction.
The Court also cited SIR v. C.I.T. to show that Section 80AB was enacted to declare the manner of computing deductions under Chapter VI‑A and that relevant set‑offs/losses must be made before such special deductions are applied.

The Court considered decisions relied upon by the assessee (e.g., Canara Workshops, Madras Motor, Tarun Udyog) but explained why those authorities did not persuade it to adopt the assessee's position. In particular, the Court distinguished Canara Workshops on the ground that that decision dealt with the effect of losses of other industries and that the facts and reasoning did not support the assessee's argument that carried‑forward losses of the same industry should not be set off when computing the Chapter VI‑A deduction. The Court found the Orissa High Court decision in Tarun Udyog inconsistent with the later Supreme Court pronouncements and therefore not persuasive.

On the whole, synthesising the statutory language, the structure of the Act (including Sections 30–43A and Chapter VI‑A), and controlling case law (especially Cambay and Distributors (Baroda)), the Court concluded that the twenty per cent deduction under Section 80HH must be calculated with reference to profits and gains as arrived at in accordance with the provisions of the Income‑tax Act — i.e., after making the permissible deductions under the Act (net profits), not on gross profits.

Holding and Implications

Holding: The Court answered the reference in the negative and held in favour of the Revenue and against the assessee. Concretely, the Court held that the deduction under Section 80HH must be calculated at twenty per cent of the net profits and gains of the industrial undertaking as arrived at after making deductions in accordance with the provisions of the Income‑tax Act, and not at twenty per cent of the gross profits and gains of the industrial undertaking.

Implications:

Direct effect on the parties: The Tribunal's allowance of the Section 80HH relief on the basis of gross profits was reversed in principle by the Court's answer to the reference; the Court answered the question in favour of the Revenue and against the Assessee.
Broader consequence: The opinion applies established principles from Supreme Court authority (notably Cambay and Distributors (Baroda)) to clarify that Chapter VI‑A deductions (including Section 80HH) are to be computed with reference to amounts determined in accordance with the provisions of the Act (i.e., after allowable deductions), and it treats earlier contrary views (and decisions that would allow gross‑based computation) as not representing the correct law in light of those Supreme Court pronouncements.
The opinion does not purport to create a new doctrine beyond applying and reconciling existing statutory language and controlling precedent; the immediate outcome is the limitation on claiming Section 80HH deduction on gross profits rather than on net profits as computed under the Act.

Note: This summary strictly reflects the content of the provided opinion and does not add facts or conclusions beyond those expressly stated by the Court in the opinion excerpt supplied.

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Commissioner Of Income-Tax, Andhra Pradesh-I, Hyderabad v. M/S. Venkateswara Transmission Limited, Hyderabad

Syed Shah Mohammed Quadri, J.:— Pursuant to the direction of this Court in I.T.C No. 6 of 1964, the Income-Tax Appellate Tribunal, Hyderabad referred for the opinion of this Court the following question of law under Section 256(2) of the Income Tax Act:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law in allowing relief under Section 80HH?”

2. For answering the reference, it would be useful to refer to the facts which gave rise to this question. The assessee - Company is engaged in the business of manufacturer of various diesel Locomotives. For the Assessment year 1978-1979, the Assesse Company claimed deduction under section 80HH of the Income-tax Act (for short “The Act”). The Income of the Assessee for that year was computed at Rs. 57,882/- before setting off past business loss and unabsorbed depreciation, if these items are set off, the income of the assessee in that year would become ‘nil’. The Income-tax Officer, however, did not grant any relief under Section 80HH of the Act. On appeal, the Appellate Commissioner of Income-Tax confirmed the assessment. The assessee then carried the matter to the Income tax Appellate Tribunal. On October 14, 1982, the Tribunal allowed the appeal, taking the view that having regard to the judgment of the Supreme Court in Cloth Traders (P) Ltd. v. Addl. C.I.T (1) (1979) 118 ITR 243, relief should be given under Section 80HH of the Act; it further held that, since Section 80AB has come into force with effect from 1-4-1981, it would not come in the way of the assessee getting the relief as that Section was applicable from the Assessment year 1981-1982. Out of the said order of the Tribunal, the above question of law arises. Sri S.R Ashok, the learned Standing Counsel for the Revenue, contends that on a proper construction of Section 80HH of the Act, the irresistible conclusion is that the relief granted thereunder has to be calculated on the net income of the assessee from the industrial undertaking. Sri M.J Swamy, the learned counsel for the Assessee, on the other hand, contends that the expression used in Section 80HH is “profits and gains” and not “income”, therefore, deduction has to be given on the gross, profits and gains of the Assessee from the industrial undertaking.

3. With effect from 1-4-1974, the Assessees are allowed deductions in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas under Section 80HH. There is no dispute as to the entitlement of the assessee to the deduction allowed under this Section. The controversy centres round the method of calculation. For arriving at the quantum of the amount which could be allowed as “deduction” under this Section, it would be useful to note here Sub-section (1) of Section 80HH of the Act in so far as it is relevant for our purpose:

“(1) 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 the 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) xxxxxxxxx.”

4. From a careful reading and analysis of the section, extracted above, the position that emerges is: in computing the total income of the assessee, where Section 80HH applies, from out of the gross total income of the assessee which includes the profits and gains derived from an industrial undertaking or business of a hotel, a deduction equal to twenty per cent of the profits and gains of an industrial undertaking or business of a hotel is allowed and the deduction is in accordance with and subject to the provisions of this section. Thus, it is clear that the allowable deduction is twenty per cent of the profits and gains derived from an industrial undertaking or the business of a hotel. The question is what stage should be permissible deduction be made? Whereas the assessee contends that the gross profits and gains derived from an industrial undertaking should form the basis for deduction, the Revenue's contention is that the allowable deduction should be worked out on the net income of the assesses. Strictly speaking the question as referred, is not in these terms though that has been the bone of contention before the Tribunal.

5. The expression “gross total income” is defined in Sub-section (5) of Section 80B of the Act, to mean, the total income computed in accordance with the provisions of the Act before making any deduction under this Chapter. It may be pointed out that Section 14 of the Act classifies all income, for the purpose of charge of income-tax and computation of total income into six heads of income. Head ‘D’ relates to ‘Profits and gains of business or profession’. The ‘Profits and gains of business or profession’, as computed in accordance with the provisions of the Act, form part of income both for charge of income tax as well as for computation of total income. The learned counsel for Revenue argues that on the language of Section 80HH, what is relevant is ‘the profits and gains’ but not income from the profits and gains of business or profession. In our view, the distinction sought to be made by the learned counsel lacks substance. The expression ‘profits and gains’ cannotes income from business or profession computed in accordance with the provisions of the Act. For purposes of arriving at the income under the said Head, permissible deductions are provided in Sections 30 to 43-D of the Act. Chapter VI-A, which was substituted with effect from 1-4-1968, allows certain further deductions; we shall refer to them as “Special Deductions”. Section 80HH fells in this Chapter. Section 80HH provides for deduction of twenty per cent of the profits and gains derived from an industrial undertaking or the business of a hotel, which would mean twenty per cent of the profits and gains arrived at de hors the deductions allowed by Chapter VI-A.

6. It may be relevant to note here that similar deductions were allowed under Sections 80E (now Section 801) and 80M (as it stood on 1-4-1968) of the Act, which were included in the same Chapter. Section 80M provides for special deduction in respect of certain inter corporate dividends. The Supreme Court was called upon to consider whether the deductions required to be allowed under that provision had to be calculated with reference to the net amount of divident computed in accordance with the provisions of the Act which formed part of the gross total income or with reference to the full amount of dividend received by the Assessee in Cloth Traders (P) Ltd. v. Addl. C.I.T (1 Supra). It was laid down that the deduction permissible under Section 80M should be calculated with reference to the full amount of dividends received from domestic company and not with reference to the net dividend after making deductions provided in the Act in other words not as computed in accordance with the provisions of the Act.

7. The judgment in that case led to insertion of Section 80AA (by Finance (No. 12) Act, 1980) retrospectively with effect from 1-4-1968. That section prescribes the mode for computation of deduction under Section 80M. In respect of deduction allowed under other provisions of Chapter VI-A by the said Act, Section 80AB was inserted. We shall refer to this provision presently.

8. In Combay Electric Supply Industrial Co. v. C.I.T (2) (1978) 113 ITR 84, the question which fell for consideration of the Supreme Court, was whether in granting relief under Section 80E of the Act, the development rebate, depreciation, unabsorbed development rebate and depreciation carried forward from earlier years had to be deducted to arrive at the profits for the purpose of exemption. The Supreme Court analysed Section 80E and pointed out the steps that must be kept in mind before the special deduction, permissible under Section 80E, was allowed. They are as follows:—

“On reading. Sub-section (1) it will become clear that three important steps are required to be taken before the special deduction permissible thereunder is allowed and the net total income exigible to tax is determined. 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% thereof from such profits and gains and then arrive at the net total income exigible to tax.”

9. From the pronouncement of the Supreme Court in the said case, it follows that in arriving at the profits and gains attributable to the business, income has to be calculated in accordance with the provisions of the Act.

10. That judgment was approved by the Constitution Bench of the Supreme Court in Distributors (Baroda) P. Ltd. v. Union of India (3) (1985) 155 ITR 120, wherein the special deduction allowed by Section 80M fell for consideration of the Supreme Court.

11. It may also be pointed out that the newly added Section 80AA was questioned before the Supreme Court in Distributors Baroda P. Ltd. v. Union of India (3 Supra). In that case the Supreme Court over-ruled the decision reported in Cloth Traders (P) Ltd. v. Addl. C.I.T (1 Supra) and ruled that in enacting Section 80M the Legislature intended to grant relief with reference to the amount of dividend computed in accordance with the provisions of the Act and not with reference to the full amount of dividend received from the paying company. It is observed that it is difficult to imagine any reason why the Legislature should have intended to give relief with reference to the full amount of dividend received from the paying company when that is not the amount which is liable to suffer tax once again in the hands of the assessee and that the legislature be certainly attributed the intention to prevent double taxation but not to provide an additional benefit which would go beyond what is required for saving the amount of dividend from taxation once again in the hands of the assessee. It was explained that as the dividend received by the assessee would not be included in the gross total income and that only net dividend, as computed in accordance with the provisions of the Act will form part of the gross total income, the deduction required to be made for computing the gross total income could only be the net dividend.

12. Having thus interpreted Section 80M, their Lordships felt it unnecessary to consider the question of constitutional validity of retrospective operation of Section 80AA, as in their Lordships' view, the retrospective operation is only declaratory of the law as it always had been since April 1, 1968 and concluded that no complaint could validly be made against it.

13. We may refer to a recent judgment of the Supreme Court in SIR v. C.I.T (4) (1984) 205 ITR 433, which further clarifies the position. In that case the deduction allowed under Section 80T fell for consideration of the Supreme Court. It was held that long-term capital losses brought forward from earlier assessment years had to be first set off against the long-term capital gains of the current assessment year before the deduction contemplated under Section 80T of the Act could be allowed. With reference to Section 80AB it was held that on a parity of reasoning it must be held that Section 80AB was enacted to declare the law as it always stood in relation to the deductions to be made in respect of the income specified under the head ‘C’ of Chapter VI-A and the manner of deduction as specified under that section was in accordance with interpretation that was placed on Section 80T, read independently.

14. The decision of the Supreme Court, referred to above the issues before us. However learned counsel for the Asessee relied on the following judgments to persuade us to come to the conclusion that the basis of allowing deduction is not the net income but the gross income from profits and gains of the business.

15. In C.I.T v. Canara Workshops P. Ltd. (5) (1986) 161 ITR 320, the assessee was carrying on two industries - one in respect of which special deduction under Section 80E was allowed and another to which that provision had no application. The question that fell for consideration of the Supreme Court was whether the profits and gains earned by the assessee in respect of the industry to which Section 80E applied, could be reduced by the loss suffered by the other industry or industries owned by the same assessee to which Section 80E had no application. It was held that a distinction must be drawn between a case where the loss or unabsorbed depreciation pertains to the same industry whose profits and gains were the subject of relief under Section 80E and a case where the loss or unabsorbed depreciation related to industries other than the one whose profits and gains constituted the subject of relief and it was laid down that the assessee was entitled to a deduction of eight per cent on the entire profits of the industry without deducting the losses in another industry run by the same assessee.

16. Relying on the ratio of that judgment of the Supreme Court, Sri M.J Swamy argues that if the losses of entire industry cannot be set off against the income of the industry to which the special provision is applicable, so also the loss in respect of earlier year should not be allowed to be set off. We find no substance in this contention. The submission losses sight of the fact that the loss that was brought forward is of the same industry and could be set off under the provisions of the Act in the subsequent year. Further in view of the clear pronouncement of the Supreme Court in the cases referred to above, namely, Distributors (Baroda) Pvt. Ltd. v. Union of India (3 Supra) and Cambay Electric Supply Industrial Co. v. C.I.T (2 Supra), this submission cannot be accepted.

17. Next, the learned counsel relied on the judgment of the Madras High Court in C.I.T v. Madras Motor & General Ins. Co. Ltd. (6) (1986) 159 ITR 601. The scope of special deduction, allowed under Section 80K, was the subject matter of decision of the Madras High Court. The revenue contended that the addition of amount representing the appreciation in the value of share investments held by the assessee, was wrongly deleted by the Tribunal. The High Court took the view that in view of the decision of the Supreme Court in Distributors (Baroda) P. Ltd. v. Union of India (3 Supra), the Tribunal was not correct in holding that the benefit under Section 80M should be granted on the gross dividend income without deducting the proportionate management expenses. The judgment in this case, in our view, does not help the assessee.

18. In C.I.T v. Tarun Udyog (7) (1991) 191 ITR 688, the Income-tax Officer first determined the profits of the industrial undertaking before deducting investment allowance; he then deducted investment allowance and thus reduced the income and on the income so determined granted relief under Section 80HH. The Tribunal held that for granting relief under Section 80HH, investment allowance ought not to. We been deducted. On reference, the Division Bench of the Orissa High Court held that the relief under Section 80HH was to be allowed on the profits of the industrial undertaking before deducting investment allowance under Section 32A and that according to the provisions of the Income-tax Act, income was different from profits though the former included the latter and though an industrial undertaking might earn profit, its gross total income might be substantially less than the profit and the taxable income might, in some cases, become nil. Therefore, the gross total income computed in accordance with the provisions contained in Sections 30 to 43A, would not be relevant for the purpose of the deduction under Section 80HH.

19. Though the judgment in Cambay Electric Supply Industrial Co. v. C.I.T (2 Supra) was referred to it appears, the judgment of the Supreme Court in Distributors (Baroda) P. Ltd. v. Union of India (3 Supra) was not brought to the notice of the Division Bench. In view of the pronouncement of the Supreme Court referred to above, we are unable to agree with the view expressed by the learned judges. In our view, the said Judgment does not correctly represent the law, having regard to the pronouncement of the Supreme Court in Distributors (Baroda) P. Ltd. v. Union of India (3 Supra).

20. From the above discussion it follows that deduction allowed under Section 80HH has to be calculated at 20% of net profits and gains from the industrial undertaking arrived at after deductions in accordance with the provisions of the Income-tax Act but not at 20% of the gross profits and gains of the industrial undertaking. We would like to clarify that the question referred to us was so worded because there was no income but the Tribunal directed allowing of relief under Section 80HH. Indeed the question, if understood in the light of the facts and circumstances of the case, only deals with the controversy as to whether the relief under Section 80HH has to be granted on the profits and gains of the industrial undertaking before allowing deduction under Sections 30 to 43A of the Act or after allowing such deductions.

21. For the aforesaid reasons, we answer the question in negative, i.e, in favour of the Revenue and against the Assessee.

Commissioner Of Inco... v. M/S. Venkateswara Tr...