- All the above numbered income-tax references are decided by one common order as an identical question is involved in all of them. For the purpose of disposal of all the above numbered income-tax reference, the facts of Reference No. 29 of 1987 are being taken into consideration.

The Income-tax Appellate Tribunal has referred the following question of law arising out of its order dated November 19, 1986, in respect of the assessment year 1981-82 under section 256(1) of the Income-tax Act, 1961 :

"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was legally justified in coming to the conclusion that deduction under section 80HH be computed on commercial profits and in computing the commercial profits the assessee is entitled to require the addition of the provision for taxes, depreciation and investment allowance reserve to the net profit as per profit and loss account to arrive at commercial profits ?"

The brief facts of the case are that the assessed is a manufacturer of cables and conductors and claimed deduction under section 80HH to the extent of Rs. 85,156. The Income-tax Officer passed an order under section 154 on January 23, 1985, and allowed the deduction to the extent of 20 per cent. on the net income of Rs. 1,25,236 and had given relief of Rs. 24,527. The assessee challenged this order of rectification before the Commissioner of Income-tax (Appeals) an contended that the net profit under the profit and loss account was Rs. 4,09,029, a sum of Rs. 16,682 in respect of inadmissible disallowance of investment allowance reserve, interest, donations and subscription is to be added and, therefore, the calculation should have been made at a figure of Rs. 4,25,711. It was found that the Income-tax Officer has reduced the brought forward business loss unabsorbed depreciation, investment allowance reserve and the brought forward deduction under section 80J of the Act. The Commissioner of Income-tax (Appeals) had taken into consideration the provisions of section 80AB which were introduce by the Finance (No. 2) Act No. 44 of 1980 with effect from April 1, 1981. On the basis of this provision, it was considered that this section was introduced to provide for the propose purpose of calculating deduction specified in section 80HH to 80TT, the net income has to be computed in accordance with the provisions of the Income-tax Act before making any deduction under Chapter VI-A which shall alone be regarded as income which is received by the assessee and which is included in his gross total income. For the purpose of computing the deduction under this section, the amount of income of that nature has to be computed in accordance with the provisions of the Act and is deemed to be the amount of income of the nature, which is derived or received by the assessee and which is included in his gross total income. The appeal was accordingly dismissed.

In the second appeal before the Income-tax Appellate Tribunal, it was observed that the deduction is with reference to the profits and gains derived from the industrial undertaking and the various deductions which are given are only for the purpose of assessment. The provision of section 80AB does not prevent the assessee from getting the deduction which is more than the amount include in the total income and, as such, for computing the commercial profits, the assessee is entitled to require the additions in respect of provisions of tax, depreciation and investment allowance reserve to the net profit as per profit and loss amount to arrive at the commercial profits.

The provisions of section 80HH(1) are as under :

"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 20 per cent. thereof."

This section has referred to the profits and gains derived from an industrial undertaking which should have been included in the gross total income of an assessee. The calculation thereof has to be made on the profits and gains derived from an industrial undertaking.

Section 80AB is as under :

"Where any deduction is required to be made or allowed under any section (except section 80M) included in this Chapter under the heading C. - Deductions in respect of certain incomes in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, Then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income."

In accordance with the scheme of the Act, the income has to be computed. Section 2(24) defines income which includes profits and gains. Under section 2(45) total income has been defined to mean the total amount of income referred to in section 5 computed in the manner laid down in this Act. Section 5 contains the scope of total income which includes all income from whatever source derived which is received or is deemed to be received in India in such year by or on behalf of such person. Section 28 of the Act refers to taxing of profits and gains of business or profession The computation has been provided of the income in accordance with the provisions of section 29 which prescribes that the income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43A. Various deduction which are provided under sections 30 and 43A, therefore, have to be considered in order to arrive at the gross total income. In the income of the individual, the income of the spouse minor child etc., are computed in accordance with section 64 of Chapter V. From the gross total income Chapter VI-A has been added to arrive at the total income. Section 80A provides that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of this Chapter, the deductions specified in sections 80c to 80u. sub-section (2) of section 80a provides that the aggregate amount of deductions in this Chapter shall not, in any case, exceed the gross total income of the assessee. Sub-section (3) makes it clear that in computing the total income of a firm association or body of individuals, no deduction under the same section is admissible in respect of the various sections mentioned therein, in computing the total income of a partner or member of the association of persons or body of individuals in relation to the share of such partner in the income of the firm or the share of such member in the income of the association reasons or body of individuals. In other words, while computing the income of the firm, association of persons or body of individuals, the deduction in accordance with section 80hh, the provisions of section 80a are made applicable. According to this section, no deduction is available under this Chapter if the gross income is a loss or the amount of the deduction in any case shall not exceed the gross total income. The words "gross total income" have been defined under section 80B(5) to mean the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter. The "total income" therefore which has to be arrived at from the gross total income, refers to the taxable income which is included in the gross total income and from which the deductions under Chapter VI-A are to be given. Section 80AB provides that where any deduction is requires to be made or allowed under any section (except section 80M) included under this Chapter under the heading "C. - Deductions in respect of certain incomes" in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then notwithstanding anything contained in that section for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under their Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income. This section makes it clear that in the gross total income, the amount of income of that nature for which the deduction is to be computed alone is to be considered. Section 80HH is one of the sections under the heading "C. - Deductions in respect of certain incomes". The provisions of section 80HH as reproduced above makes it clear that where the gross total income of the assessee includes any profits and gains derived from an industrial undertaking then this section is applicable. The gross total income which has been referred to in the first part of this section includes the profits and gains derived from an industrial undertaking. Section 80AB mentions that the amount of income of the nature as computed in accordance with the provisions of this Act shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income. Section 80AB contemplates computation of the income in accordance with the provisions of this Act and thereafter the deductions to be made under Chapter VI-A. The income which is derived from an industrial undertaking alone is liable other deduction in section 80HH. The later part of section 80HH provides that the deduction equal to 20 per cent. From such profits and gains is available to the assessee. The word "such" refers to the profits and gains which are mentioned in the first part of this section and are included in the gross total income. In other words, from the gross total income of an industrial undertaking, the deduction is available to 20 per cent. of such profits and gains in computing the total income. The gross total income will not include something over and above the fights which is included in it by way of profits and gains derived from an industrial undertaking. To illustrate it nor clearly, suppose an assessee is having and industrial undertaking and the profits and gains of such industrial undertaking are Rs. 1 crore. After computation of the income in accordance with the provisions of section 29 by giving the deduction as available under section 30 to 43c, the remaining amount comes to Rs. 20 lakhs. This amount will be considered to be the gross total income and deduction is available on this 20 lakhs of rupees. The gross total income as it is computed before giving deduction under Chapter VI-A, means after the deduction under Chapter IV is given. If the gross total income is Rs. 20 lakhs, then it cannot be considered that the profits and gains of the industrial undertaking are Rs. 1 crors and, therefore, the deduction should be given at 20 per cent. of this Rs, 1 crore. The amounts which are included in the gross total income may be from different sources of income and the profits and gains derived from an industrial undertaking is one of such to which the deduction under section 80HH is available. If a person is having five different sources of income, then the total of the income computed in accordance with the provisions of the Act from all the sources would be considered to be the gross total income and since the benefit is available only for the profits and gains derived from an industrial undertaking, that part of the profits and gains which is computed in accordance with the provisions of the Act alone has to be allowed for deduction.

In Cambay Electric Supply Industrial Co. Ltd. CIT [1978] 113 ITR 84 (SC) for the purpose of computation of deduction under section 80E, it was observed by the apex court as under (at page 91) :

"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 tall the provisions except section 80E; secondly, ascertain what part of the total income so computed represents the profits and gains attributable to the nuisance of the specified industry (here generation and distribution of electricity); and thirdly, if there be profits and gains so attributable, deduct eight 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, the important words in sub-section (1) are those that appear in parenthesis, namely, as computed in accordance with the other provisions of this Act and these words clearly contain a mandate that the total income of the concerned assessee must be computed in accordance with the other provisions of the Act without reference to section 80E and since in the instant case, it is income from business the same as per section 29 will have to be computed in accordance with section 30 to 43a which would include section 41(2). It is also clear that under the second step the profits and gains attributable to the business of the specified industry (here generation and distribution of electricity) forms a component of the total income spoken of in the first step. Reading these two steps together, therefore, it is obvious that in computing the total income of the concerned assessee the balancing charge arising as a result of the sale or old machinery and buildings and worked out as per section 41(2), irrespective or its real character, will have to be taken into account and included as income of the business. In other words, the balancing charge as worked out under section 41(2) will have to be taken into account before computing the deduction of eight per cent. under the third step. On a proper construction of sub-section (1) and having regard to the legislative mandate contained in the three steps that are required to be taken in the manner indicated above we are clearly of the view that the item of Rs. 7,55,807 will have to the taken into account before computing the eight per cent. deduction contemplated by the said provision."

In the case to Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120 (SC), the earlier decision of the court in Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243 (SC) was overruled and whole interpreting the provisions of section 80M, it was observed as under (at page 135) :

"The opening words described the condition which must be fulfiled in order to attract the applicability of the provision contained in sub-section (1) of section 80m. The condition is that the gross total income of the assessee must include income by way of dividends from a domestic company. Gross total income is defined in section 80B, clause (5), to mean the total income computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A or under section 280-O. Income by way of dividends from a domestic company included in the gross total income would, therefore, obviously be income computed in accordance with the provisions of the Act, that is, after deducting interest on monies borrowed for earning such income. If income by way of dividends from domestic company computed in accordance with the provisions of the Act is included in the gross total income, or, in other words, forms part of the gross total income, the condition specified in the opening part of subsection (1) of section 80M would be fulfilled and the provisions enacted in that sub-section would be attracted."

It was further observed as under (at page 139) :

"As indicated earlier, sub-section (1) contemplates three steps being taken for computing the special deduction permissible there under and arriving at the net income exigible to tax and the first two steps read together contain the legislative mandate as to how the total income - of which the profits and gains attributable to the business of the specified industry forms a part - of the concerned assessee is to be computed and according to the parenthetical clause, which contains the key words, the same is to be computed in accordance with the provisions of Act except section 80E an since in this case it is income from business, the same will have to be computed in accordance with section 30 to 43a which would include section 32(2) (which provides for carry forward of depreciation) and section 33(2) (which provides for carry forward of development rebate for eight years). In other words, in computing the total income of the concerned assessee, items of unabsorbed depreciation and unabsorbed development rebate will have to be deducted before arriving at the figure that will become exigible to the deduction of eight per cent. contemplated by section 80E(1).

It will thus be seen that, according to this decision, the words such profits and gains in the latter part of sub-section (1) section 80E were referable to the quantum of the profits and gains attributable to the specified business included in the total income as referred to in the earlier part of the provision. If this decision lays down the correct interpretation of sub-section (1) of section 80e, the same interpretation must also govern the language of sub-section (1) of section 80m. Structurally, the re is hardly any difference between section 80E, sub-section (1), and section 80M, sub-section (1), and the reasoning which appalled to the court in the interpretation of sub-section (1) of section 80e must apply equally in the interpretation of sub-section (1) of section 80m. We find ourselves wholly in agreement with the view taken by this court in Cambay Electric Supply Co.s case [1978] 113 ITR 84 and we must, therefore, dissent from the interpretation placed on sub-section (1) of section 80m by the decision in Cloth Traders case [1979] 118 ITR 243 (SC)."

The words "all such income by way of dividends" was considered to be referring only to the category of income included in the gross total income and also the quantum of income so included and it was considered that what is included in the gross total income would be considered as the income which has to be considered for the purpose of section 83M.

The Madras High Court in the case of CIT v. Rambal (P.) Ltd. [1988] 169 ITR 50, while considering the relief under section 80I by taking into consideration the provisions of section 80a and 80b(5) came to the conclusion that the assessee is not entitled to relief under section 80I as the total income computed by the Income-tax officer under section 80B(5) was nil. His total income was computed by the Income-tax Officer after setting off carried forward loss and unabsorbed depreciation of earlier assessment years, the net taxable income was determined at nil. It was considered that the restrictions as placed under section 80A have to be complied with before giving the deduction under the Chapter.

The Bombay High Court in the case to Asian Cables Corporation Ltd. v. CIT [1981] 132 ITR 34 has also taken the definition as given under section 80B(5) and came to the conclusion that before making any deduction under Chapter VI-A, the unabsorbed depreciation has to be first taken into account before the gross total income for the purposes of Chapter VI-A, is considered.

The Karnataka High Court in the case of CIT v. HMT Ltd. (No. 1) [1993] 203 ITR 811 has also held that for the purpose of computation under section 80J and 80HH, profits and gains of new under takings are not commercial profits but only such profits as are computed in the manner laid down under section 80AB.

The apex court in the case of Cit v. P.K Jhaveri [1990] 181 ITR 79, while considering the deductions under section 80K has also taken into consideration the provisions of section 80B(5) and followed the decision of Cambay Electric Supply Industrial Co. Ltd. v. Cit . [1978] 113 ITR 84 (SC) and Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120 (SC) referred to above.

In CIT v. S. S. Sivan Pillai [1970] 77 ITR 354, the Supreme Court while considering the provisions of section 15c came to the conclusion that the assessee was not entitled to the exemption under section 15C(4) in relation to dividends received from the company since owing to the unabsorbed depreciation of earlier years admissible under section 10(2) (iv) and (via) the company had no taxable profits in the relevant years. This also shows that the unabsorbed depreciation of the earlier yeas has to be taken into consideration before giving deduction under section 15C.

This court in the case of Jaipur Udyog Ltd. v. CIT [1992] 198 ITR 282, while considering the provisions of section 84 of the Act interpreted the words "profits" under rule 19(5) to mean taxable profits, i.e., profits arrived at in accordance it the provisions of the Act. The decision of the apex court in CIT v. S. S. Sivan Pillai [1970] 77 ITR 354 referred to above was relied upon.

The Kerala High Court in the case of CIT v. Kerala Solvent Extractions Ltd. [1987] ITR 174 had dealt with the matter with regard to deduction under section 80HH and came to the conclusion that the earlier years losses, unabsorbed depreciation and unabsorbed development rebate have to be deducted before giving the deductions under section 80HH and the decision to he apex court in Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120 was relied upon.

In CIT v. Canara Workshops P. Ltd. [1986] 161 ITR 320 (SC), a distinction was drawn between the case where the loss or unabsorbed depreciation pertains to the same industry whose profits and gains are 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 constitute the subject of relief. It was a case where it was held that profits and gains earned by one priority industry cannot be reduced by the loss suffered by any other industry or industries own by the assessee. While holding so the apex court has made a distinction which makes it clear that the loss or unabsorbed depreciation of the same industry which is entitled to the relief under section 80E can be deducted and not of other industries which are not so entitled. The word "such income" in section 80T was interpreted by the apex court in the case of Commissioner Of Income Tax v. V. Venkatachalam. [1993] 201 ITR 737 and it was held that the words "such income" in the main part of section 80T meant and referred to the capital gains and not to the total income of the assessee.

It may be seen that the language which has been used cannot be widended by any interpretation. The interpretation should be a reasonable one which is on the plain language of the section. The subsection that the words "profits and gains" should be considered to be without giving deduction in accordance with Chapter IV is contrary to he language used under sections 80AB and 80B(5) and, therefore, the interpretation which is not based on the plain grammatical language of the section cannot be accepted. The deductions which are available under Chapter VI are special deductions and the provisions of earlier sections of this Chapter which puts restrictions on claiming the deduction cannot be ignored.

The decision of the Orissa High Court in the case of CIT v. Tarun Udyog [1991] 191 ITR 688 has been relief upon by learned counsel for the assessee in which it has been held that the relief under section 80HH has to allowed on the profits of the industrial undertaking before deducting the investment allowance allowed under section 32A. It was objected that the deduction has to be allowed on profits an gains and, therefore, section 30 to 43a are not relevant. We are afraid that the view taken by the Orissa High Court is contrary to the plain language of the section 80a read with sections 80ab and 80b(5) besides the interpretation given by the apex court and the other High Courts. The words "gross total income" which have been offend under section 80B(5) are for the purpose of Chapter VI-A and, therefore wherever the words "gross total income" have been used, it cannot have a different meaning than what has been defined in the said section.

In view of the above discussion, we are of the view that the depreciation and investment allowance have to be deducted before giving the special deduction as provided under Chapter VI-A and the "profits and gains" which are alleged to be equivalent to commercial profits have to be restricted only to the extent of such profits and gains which are included in the gross total income on which the deduction is available. In these circumstances, we are of the view that the Income-tax Appellate Tribunal was not justified in coming to the conclusion, that the deduction under section 80HH is to be computed on the commercial profits and in computing the commercial profits the assessee is entitled to require addition of the provision, for tax, depreciation and investment allowance reserve to the net profit as pert the profit and loss account to arrive at the commercial profits.