JUDGMENT

1. At the outset learned counsel for the assessee does not want to press questions Nos. 1 and 2 in D.B.I.T Ref. No. 80 of 1987 and questions Nos. 1, 3 and 4 in D.B.I.T Ref. No. 7 of 1995. He pressed the question only relating to section 80HH in the assessment years 1979-80 and 1980-81.

2. On an application under section 256(1) of the Income-tax Act, 1961, the Tribunal has referred the following questions for the opinion of this court: For the assessment year 1979-80:

“Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the deduction under section 80HH would be available out of income as computed under the Income-tax Act, and not out of the profits and gains of the industrial undertaking without deducting therefrom depreciation and investment allowance?”

For the assessment year 1980-81:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that for the purposes of allowing deduction under section 80HH the profits and gains of an industrial undertaking should be computed by taking into consideration unabsorbed depreciation, current depreciation and investment allowance?”

3. Learned counsel for the Revenue brought to our notice that now the issue has been covered by their Lordships' decision in the case of Motilal Pesticides (I.) (Pvt.) Ltd. v. CIT, [2000] 243 ITR 26 (SC) and as per the decision of their Lordships, section 80HH is available only on the net income and not on gross income. Mr. Kasliwal, learned counsel for the assessee, has made the submissions and given his submissions in writing also. The submissions given in writing read as under:

“80HH. Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking 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. Thus, deduction under section 80HH is available to an industrial undertaking, which fulfills the requirements of the section. Section 80HH provides for deduction from out of ‘profits and gains’ of an industrial undertaking of the amount specified therein. Section 80HH provides for deduction of 20 per cent, of the profits and gains of an eligible industrial undertaking and that deduction is to be made out of the ‘profits and gains’ of that industrial undertaking while computing the total income of the assessee. From a bare reading of section 80HH, it will be noticed that the deduction as envisaged in section 80HH is available only to an ‘industrial undertaking’ as distinct from an assessee and is to be allowed only out of the ‘profits and gains’ of that industrial undertaking. Just to illustrate, if an assessee owns two industrial undertakings, one of which is eligible and qualified for the deduction under section 80HH, whereas the other does not qualify for the deduction under section 80HH, in that case, the deduction at 20 per cent, of the ‘profits and gains’ of that eligible industrial undertaking will be allowed and the profits and gains of such industrial undertaking will be reduced by the deduction as available to such industrial undertaking and thereafter, the balance will go for the purpose of computation of the total income of the assessee. It is not that first the income of both the units will be clubbed and then deduction under section 80HH is to be worked out. This would result in an absurd situation. There may be another situation where the profits of the industrial undertaking eligible for deduction under section 80HH may be taken up by the losses of another industrial undertaking which is not eligible for the deduction. There may be an adverse situation where there may not be a profit with the industrial undertaking eligible for the deduction under sections 80HH and 80-I but there may be a profit with an industrial undertaking not eligible for deduction under sections 80HH and 80-I and if both are taken together, the assessee may get the benefit of deduction under sections 80HH and 80-I, which was not intended to be given by the Legislature. It is, therefore, submitted that as per the legislative intention and keeping in view the language of sections 80HH and 80-I, the deduction ought to be made available to the industrial undertaking with reference to profits and gains of such industrial undertaking.

4. It is relevant to mention that sections 80HH and 80-I very categorically refer to and use the terminology ‘profits and gains of industrial undertakings’. It may please be noted that ‘profits and gains’ and ‘income’ are not same but are different. The term ‘profits and gains’ has not been defined under the provisions of the Income-tax Act whereas the term ‘income’ has been defined in the Income-tax Act. It may also be noted that there are a number of provisions under Chapter VI-A, some of which refer to the term ‘profits and gains’ and some of them refer to the term ‘income’. Thus, in some of the provisions of Chapter VI-A, the deduction is intended to be given out of profits and gains, whereas in some other sections, the deduction has been provided to be given out of ‘income’. When the term ‘profits and gains’ has not been defined under the Act, in that case, its meaning has to be understood as is being understood in commercial world. Here it is relevant to draw your Lordships' kind attention to the provisions of sections 28 and 29 of the Income-tax Act. Section 29 provides for computation of income out of profits and gains. It says and provides that out of profits and gains, income will be computed by taking into consideration the provisions of section 30 to section 43D of the Income-tax Act. It means the ‘profits and gains’ is the figure, out of which income is to be computed. It is, therefore, submitted that the term ‘profits and gains’ and income are not synonymous and, therefore, the profits and gains has to be taken as understood in the commercial world.

5. Distinction between ‘profits and gains’ and ‘business income’.

4. In order to distinguish between ‘profits and gains’ and ‘business income’, it is necessary to quote from the judgment of the Supreme Court in CIT v. B.C Srinivasa Setty, [1981] 128 ITR 294 in regard to the scheme of computation of income under different heads, given in the Income-tax Act, 1961. “There is an income chargeable to income-tax and income chargeable, being computed income, which is arrived at after making statutory deductions from income chargeable to income-tax. This inference flows from the general arrangement of the provisions in the Income-tax Act, whereunder each head of income, the charging provision is accompanied by a set of provisions for computing the income, subject to charge. The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus, the charging section and the computation provisions together constitute an integrated code…. It must be borne in mind that the legislative intent is to be presumed to run uniformly through the entire conspectus of the provisions, pertaining to each head of income. No doubt, there is a qualitative difference between the charging provision and a computation provision’.

5. It is obvious that the general arrangement of the scheme of computation of income, outlined by the Supreme Court, is applicable to each head of income, including ‘profits and gains’ of business or profession. Under this head, section 28 provides for income chargeable to income-tax in general and particularly ‘profits and gains’ in section 28(i) which is the gross amount from which statutory deductions have to be made to arrive at the computed income. Such computed income is called business income as is clear from the heading of sections 29 to 43A of Chapter IV, in respect of this head of income, i.e, computation of business income.

6. It may be pointed out that both, ‘profits and gains’ and ‘business income’ are computed entities worked out in accordance with the provisions contained in sections 30 to 43A, as is clear from the language of section 29 and its marginal note. Section 29 states thus: The income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43A. The income referred to in section 28 is income chargeable to income-tax whereas section 28(i) specifically refers to ‘profits and gains’.

7. Section 29 also specifically brings home the conceptual distinction between ‘income’ and ‘profits and gains’ of business or profession. It specifically provides for the computation/calculation of ‘income’ from out of ‘profits and gains’.

8. Income from profits and gains is computed income or income chargeable under the head ‘Profits and gains’ of business or profession or simply business income.

9. Some of the provisions from out of sections 30 to 43A are meant for computation of ‘profits and gains’ and some are meant for computation of ‘business income’ from ‘profits and gains’. For instance, section 36 clearly states that the deductions specified therein are to be allowed for the purpose of determining the ‘income’ referred to in section 28, namely, ‘profits and gains’, being income chargeable to income tax, referred to in section 28(i). It states as follows:

Section 36(1): The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 (particularly in section 28(i)).

Section 32 (as it then was) stated as follows: Section 32. (1) In respect of depreciation of—(i) buildings, machinery, plant or furniture owned by the assessee and used for the purpose of the business or profession, the following deductions shall, subject to the provisions of section 34, be allowed.

It may be noted that section 32(1) does not state, as to deduction in respect of depreciation of buildings, etc., shall be allowed in computing which type of income, ‘profits and gains’ or ‘business income’. This section provides that deduction in respect of depreciation of building, etc., is an allowable deduction under certain conditions. From where such a deduction has to be made, the manner of deduction and what will happen if deduction in respect of depreciation cannot be made, is stated in section 32(2). The relevant part of section 32(2) which shows from where deduction in respect of depreciation has to be made, is as follows:

Section 32(2): Where in the assessment of the assessee full effect cannot be given to any allowance under clause (i) or clause (ii) or clause (iia) or clause (iv) or clause (v) or clause (vi) of sub-section (la) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the ‘profits and gains’ chargeable being less than the allowance, then,… the allowance or part of the allowance to which effect has not been given….

As such, statutorily as well as by the application of principles of accountancy, profits and gains as well as business loss are computed in the same manner. One is a positive computed entity whereas the other is a negative computed entity. As such an interpretation of these computed entities, is also in accordance with the judgment of the Supreme Court in CIT v. Harprasad and Co. (P.) Ltd., [1975] 99 ITR 118, 124 wherein it is stated: “From the charging provisions of the Act, it is discernible that the words ‘income’ or ‘profits and gains’ should be understood as including losses also, so that, in one sense, profits and gains represent ‘plus’ income whereas, losses represent ‘minus’ income1. In other words, loss is negative profit. Both positive and negative profits are of a revenue character.”

10. By taking into consideration the provisions of section 72(1) and section 32(2) both, carried forward business loss and current depreciation allowance, have to be adjusted against profits and gains.

6. Relevance of section 80AB for the purpose of sections 80HH and 80-I:

‘Section 80AB reads as: Where any deduction is required to be made or allowed under any section… 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.

The heading of section 80HH reads as: “Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas”.’

Section 80HH(1) reads as: ‘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 T. CIT v. Karamchand Prem Chand Ltd., [1960] 40 ITR 106 : [1960] 3 SCR 727 (SC) and CIT v. Elphinstone Spg. and Wvg. Mills Co. Ltd., [1960] 40 ITR 142 : [1960] 3 SCR 953 (SC). 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.’

Thus, in the case of income by way of dividend/royalty, the assessee has to first compute, how much is the total amount of dividend/royalty and from this total amount the assessee has to work out the “income by way of dividend/royalty” under the provisions of the Income-tax Act, 1961, as required by section 80AB.

6.1 Under section 80RRA, where the gross total income of an assessee includes any remuneration received by him in foreign currency from any employer (being a foreign employer or an Indian concern) for any service rendered by him outside India, he will be allowed a deduction from such remuneration of an amount equal to 50 per cent, of the said remuneration. Here an assessee is not required to compute the income from salary. The Income-tax Department allows such claim on gross remuneration, even after section 80AB was inserted by the Finance (No. 2) Act, 1980, with effect from April 1, 1981. It is pertinent to note that the phrase allowing deduction under the above section is as under:

‘A deduction from such remuneration of an amount equal to fifty per cent, of the remuneration’ which is similar to that used in section 80HH.

6.2 Section 80HH, requires the computation of ‘profits and gains’ of business and not ‘income from profit and gains of business’. Section 80AB requires ‘income of that nature’ to be computed in accordance with provisions of the Income-tax Act. For the purpose of section 80HH ‘income of that nature’ is ‘profits and gains of business’ and the Income-tax Act, 1961, does not provide how ‘profits and gains of business’ shall be calculated.

6.3 The Assessing Officer has erroneously relied on section 80AB of the Income-tax Act, 1961. He has allowed ‘benefit or deduction on income from profit and gains’ rather than on ‘profits and gains’, as he has deducted the amount of current year's depreciation, unabsorbed depreciation and brought forward investment allowance from profit and gains. The general arrangement of the deductions as obtained from the statute book and on the basis of the above discussions emerges as under:

Profits and gains

Current year's depreciation:

Unabsorbed depreciation:

Unabsorbed investment allowance:

Business income.

6.4 In this connection reliance is placed upon the following decisions:

(a) CIT v. Vegetable Products Ltd., [1973] 88 ITR 192 (SC)—Held: Wherever two reasonable constructions of a provision of law upon its analysis, are available, a view which is favourable to the assessee should be adopted.

(b) CIT v. Balanoor Tea and Rubber Co. Ltd., [1974] 93 ITR 115 (Mys) — Held: (proposition is exactly the same as above) (also a case of a priority industry where the deduction has been calculated at 8 per cent, of the profits and gains).

(c) Cambay Electric Supply Industrial Co. Ltd. v. Cit , [1978] 113 ITR 84 (SC)—Held: In computing the total income of the assessee carrying on the business of an industry as specified in section 80E of the Income-tax Act, 1961, for the purpose of the special deduction permissible thereunder, the balancing charge arising as a result of sale of the old machinery and buildings and worked out in accordance with section 41(2), irrespective of its real character, has to be taken into account and included as income of the business. In other words, the balancing charge will have to be taken into account before computing the deduction of 8 per cent, under section 80E.

(d) Distributors (Baroda) (P.) Ltd. v. Union of India, [1985] 155 ITR 120 (SC)—Held: In this case the apex court was concerned with the interpretation of section 80M of the Act, 1961. Section 80M provides for deduction from taxable income of amounts earned by way of intercorporate dividends and the issue coming up for determination was whether the relief was to be allowed on the gross amount of dividends or only on the net amount. In this regard it would suffice to state that the apex court was constrained by the newly inserted provisions contained in section 80AA. The hon'ble apex court was also more concerned with how the error and ghost of Cloth Traders (P) Ltd. v. Additional Cit, Gujarat-I, [1979] 118 ITR 243 was to be dealt with due to which the apex court clarified the legal position relating to the rule of stare decisis whereunder it became possible for it to overrule its own earlier decision.

(e) Cit (Central), Madras v. Canara Workshops (P) Ltd., Kodialball, Mangalore., [1986] 161 ITR 320 (SC)-Held: “In the application of section 80E of the Income-tax Act, 1961, the profits and gains earned by one priority industry (mentioned in that section) cannot be reduced by the loss in some other industry owned by the assessee. Each industry must be considered on its own working only, when adjudging its title to the deduction under section 80E. It cannot be allowed to suffer because it keeps company with some other industry in the hands of the assessee. It makes no difference that the other industry is also a priority industry.” It thus follows that what is to be looked at is not income as computed under the Act but the profits and gains as ordinarily understood.

(f) Cit v. P.K Jhaveri, [1990] 181 ITR 79 (SC)-Held: It is a case concerned with the grant of a deduction under section 80K to a share holder-assessee from out of dividends received by it from a specified company and the issue was once again whether the deduction allowable was to be on the gross amount of dividend or on the net amount after reduction of interest on money borrowed specifically to earn such income and the hon'ble court ruled that the deduction would be allowable only on the net amount after deduction of interest.

(g) CIT v. Tarun Udyog, [1991] 191 ITR 688 (Orissa)-Held: (head note) Section 80HH of the Income-tax Act, 1961, requires granting of deduction from the profits and gains derived from new industrial undertakings established in backward areas. According to the provisions of the Income-tax Act, income is, different from profits though the former includes the latter. Though an industrial undertaking may earn profit, its gross total income may be substantially less than the profit, and the taxable income may in some cases, become nil. Hence, 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.

(h) CIT v. Loonkar Tools (Pvt.) Ltd., [1995] 213 ITR 721-Held: Section 80HH is applicable where gross total income includes any profits and gains derived from an industrial undertaking—Section 80AB mentions that the amount of income of the nature for which deduction is to be given as computed in accordance with provisions of the 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. The word “such” in section 80HH refers to profits and gains mentioned in the first part of this section. The gross total income will not include something over and above the figure which is included in it by way of profits and gains on which deduction is available. Depreciation and investment allowance are therefore liable to be deducted before giving special deduction under Chapter VI-A.

11. The dispute in this case relates to the assessment year 1981-82 and the legal position examined by the hon'ble court is as it stood after the amendment made by the Finance (No. 2) Act, 1980, whereby section 80AB was introduced.

(i) Motilal Pesticides (I.) Pvt. Ltd. v. CIT, [2000] 243 ITR 26 (SC)-New industrial undertaking in backward area—Special deduction— Computation—Law applicable—Effect of insertion of sections 80AA and 80AB— Special deduction to be allowed only on net income and not on gross income.

12. Here also the hon'ble apex court has considered the post amendment position only which is inapplicable to the facts of the present case.

6.5 It has been directed by the Central Board of Direct Taxes vide its Circular No. 26 (Lxxiv-3) (F. No. 4(53) IT/54) dated July 7, 1955, that the Department should adopt that mode of set off of carried forward losses/allowances which will give the assessee the maximum benefits.

6.6 The Supreme Court has already held in the case of CIT v. Vegetable Products Ltd., [1973] 88 ITR 192 that if two interpretations are possible, the one more favorable to the taxpayer has got to be resorted to.

6.7 It was also held in Bajaj Tempo Ltd. v. CIT, [1992] 196 ITR 188 (SC)— a provision in the taxing statute granting incentive for promoting growth and development should be construed liberally. Since a provision intended for promoting economic growth has to be interpreted liberally the restriction on it too has to be construed so as to advance the objective of the provision and not to frustrate it. Sections 80HH and 80-I are enacted for industrial development and economic growth of a particular region and area and should be used to advance the objective for which it was enacted.

6.8 It would be relevant to draw your Lordships' kind attention towards the sub-heading ‘C in Chapter VI-A of the Income-tax Act, as ‘deduction in respect of certain income’. Your Lordships will observe that the Legislature has used the word ‘certain income’ and not ‘income’, meaning thereby that there are different types of different income, comprised in the gross total income and not to the income computed in accordance with the provisions of the Act.

13. To summarise, the applicant's case is that without doubt it is running an industrial activity in a backward area, which entitles it to a claim under sections 80HH and 80-I of the Income-tax Act, 1961.

14. The provision contained in both these provisions provide for computation of the amount of deduction based on a percentage of the ‘profits and gains’ of the business as contra distinguished from its income. It may thus be relevant to identify the precise terms relevant for this claim, viz., income, total income, gross total income, profits and gains, etc.

15. ‘Income’ is defined by section 2(24) of the Act by way of an inclusive definition and is to include, ‘profits and gains’.

‘Total income, is defined under section 2(45) as the total amount of income referred to in section 5, computed in the manner laid down under this Act. However for our purposes section 5 is not relevant as it deals with the ‘scope of total income’.

16. The term ‘profits and gains’ is defined under section 28 under the heading ‘Profits and gains of business or profession’ as the following income shall be chargeable to income-tax under the head ‘Profits and gains of business or profession’—the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year.

17. Section 29 provides that income referred to above shall be computed in accordance with the provisions contained in sections 30 to 43A.

18. Section 32(2) deals with the carry forward of the depreciation owing to there being more or less profits and gains during the previous year to set it off against the profits and gains of any business or profession carried on by him and assessable for that assessment year.

‘Gross total income’ has been defined in section 80B (Chapter VI-A) as the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter.

19. It is most humbly submitted that the ‘total income’ of an assessee will be calculated after making all the deductions under Chapter VI-A (deductions specified under sections 80C to 80U).

20. It is most humbly submitted that the concept ‘profits and gains’ is a wider concept than the concept of ‘income’. The profits and gains/loss are arrived at after making actual expenses incurred from the figure of sales by the assessee. It does not include any depreciation and investment allowance, as admittedly these are not the expenses actually incurred by the assessee.

21. However, the term ‘income’ does take into consideration the deductions on account of depreciation and investment allowance. Therefore, the term ‘profits and gains’ are not synonymous with the term ‘income’. This finds support from the observations of the Calcutta High Court in Commissioner Of Income-Tax, Central v. Orient Paper Mills Ltd., [1983] 139 ITR 763, at page 769, where it has been observed that the term ‘profits’ in the various sections of the Income-tax Act had not got the same meaning. In the context, sometimes it meant the assessable profits and sometimes it meant commercial profits. Further, at page 770 it has taken the view:

‘Therefore, the language of the section makes it clear, in our opinion, the significant differences in the expressions ‘gross total income’, ‘income’ and ‘profits and gains attributable to priority industry’ that ‘the profits and gains attributable to priority industry’ must be computed in the commercial sense and not in accordance with the provisions of the Indian Income-tax Act, otherwise the Legislature would not have used the expression ‘profits and gains attributable to priority industry’ if not in contradistinction to, at least differently from the expression ‘total income’ in ‘gross total income’.”

22. Considering the submissions and following the view taken by their Lordships in the case of Motilal Pesticides (I.) Pvt. Ltd. v. CIT, [2000] 243 ITR 26 (SC), we answer the question referred in both the references in the affirmative, i.e, in favour of the Revenue and against the assessee.

23. Both the references stand disposed of accordingly.