- Bookmark
- Share
- CaseIQ
Vijay Industries v. Commissioner Of Income Tax .
Factual and Procedural Background
The appeals relate to Assessment Years 1979-1980 and 1980-1981. The High Court of Rajasthan, by judgment dated 17-5-2004 (2004) 270 ITR 175 (Raj), followed the Supreme Court decision in Motilal Pesticides (I) (P) Ltd. v. CIT (2000) 9 SCC 63 while construing Section 80-HH of the Income-tax Act, 1961. Dissatisfied, the assessees approached the Supreme Court. Justice Rohinton Fali Nariman authored the present order, which examines whether the earlier precedent in Motilal Pesticides was correctly decided and whether the matter should be referred to a larger Bench.
Legal Issues Presented
- Whether, for Assessment Year 1979-1980, deduction under Section 80-HH should be calculated on the gross profit of Rs 34,30,035 or on the net income therefrom.
- Whether the reasoning adopted in Motilal Pesticides (I) (P) Ltd. v. CIT (2000) 9 SCC 63, equating the language of Section 80-HH (“any profits and gains derived from”) with Section 80-M (“any income”), is correct in law.
Arguments of the Parties
Assessee’s Arguments (as recorded by the High Court)
- The expression “profits and gains” is broader than “income”. Profits and gains are computed after deducting actual expenses from sales and do not factor in depreciation or investment allowance.
- “Income”, by contrast, reflects statutory deductions such as depreciation and investment allowance; hence the two terms are not synonymous.
Appellant’s Submissions in Motilal Pesticides (referred to by the Court)
- Cloth Traders and Distributors (Baroda) dealt exclusively with Section 80-M and therefore had no bearing on Section 80-HH when read with Section 80-AB.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Motilal Pesticides (I) (P) Ltd. v. CIT (2000) 9 SCC 63 | Held that the language of Section 80-HH is the same as Section 80-M and allowed deduction on net income. | The present Bench questions the correctness of this view and directs referral to a larger Bench. |
| Cloth Traders (P) Ltd. v. Addl. CIT (1979) 3 SCC 538 | Interpreted “any income” in Section 80-M to permit deduction on gross total income. | Cited to show the earlier (now overruled) interpretation of “any income.” |
| Distributors (Baroda) (P) Ltd. v. Union of India (1986) 1 SCC 43 | Overruled Cloth Traders; held that “any income” refers to net income. | Used to demonstrate that the correct meaning of “any income” differs from “profits and gains”. |
| Cambay Electric Supply Industrial Co. Ltd. v. CIT (1978) 2 SCC 644 | Discussed Section 80-E, which explicitly refers to “total income (as computed…)”, linking computation provisions to deductions. | Relied on in Distributors (Baroda); contrasted with the absence of similar words in Section 80-HH. |
| Rama Varma v. CIT 1994 Supp (1) SCC 473 | Considered newly enacted Sections 80-AA and 80-AB, both dealing with “any income.” | Cited to illustrate that those provisions, like Section 80-M, concern “any income” and are conceptually distinct from “profits and gains.” |
Court's Reasoning and Analysis
Justice Nariman observed that although the Rajasthan High Court felt bound by Motilal Pesticides, significant conceptual differences exist between “any income” and “profits and gains” under the Income-tax Act.
- Section 80-HH employs the phrase “any profits and gains derived from,” whereas Section 80-M speaks of “any income.”
- Sections 80-AA, 80-AB, and 80-T—all using “any income”—confirm that Parliament treats “income” differently from “profits and gains.”
- Section 80-E, unlike Section 80-HH, expressly ties deductions to “total income (as computed…).” The absence of comparable language in Section 80-HH is significant.
- The statement in Motilal Pesticides that Sections 80-HH and 80-M share identical language was therefore described as “prima facie incorrect.”
- Given these doubts, and because Motilal Pesticides controls the field, the Court deemed it appropriate to place the matter before the Chief Justice of India for constitution of an appropriate Bench.
Holding and Implications
ORDER: The matters are directed to be placed before the Hon’ble Chief Justice of India for constitution of an appropriate Bench to consider the correctness of Motilal Pesticides (I) (P) Ltd. v. CIT (2000) 9 SCC 63.
Implications: The Supreme Court has not decided the substantive tax question but has questioned the validity of the prevailing precedent. Until a larger Bench rules, the legal position on deductions under Section 80-HH remains unsettled, potentially affecting numerous pending and future assessments that rely on Motilal Pesticides.
Rohinton Fali Nariman, J.— We are concerned in these cases with Assessment Years 1979-1980 and 1980-1981. The High Court of Rajasthan by the impugned judgment dated 17-5-2004 (2004) 270 ITR 175 (Raj) construed Section 80-HH of the Income Tax Act, 1961 following a judgment of this Court in Motilal Pesticides (I) (P) Ltd. v. CIT (2000) 9 SCC 63. The High Court noticed an argument made before it to the following effect: (Vijay Industries case (2004) 270 ITR 175 (Raj), ITR p. 185)
“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.
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’.”
However, the High Court correctly felt that it was bound by the judgment of this Court.
2. Motilal Pesticides (I) (P) Ltd. (2000) 9 SCC 63 is a judgment of this Court which affirmed the judgment (1994) 207 ITR 636 (Del) of the Delhi High Court concerning the interpretation of the very same Section 80-HH of the Income Tax Act. The assessment years also happened to be the same assessment years as involved in these appeals.
3. The question of law set out by this Court is, whether, on the facts and circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to deduction under Section 80-HH of the Income Tax Act, 1961 on the gross profit of Rs 34,30,035 (Liquid Section) but on the net income therefrom for Assessment Year 1979-1980?
4. Thereafter, this Court set out Section 80-HH in para 2 and Section 80-M in para 3 of the judgment. It will be noticed that whereas Section 80-HH uses the expression “any profits and gains derived from”, Section 80-M uses the expression “any income”. Section 80-M was held, in Cloth Traders (P) Ltd. v. CIT (1979) 3 SCC 538 to mean that for the purpose of that section, deduction is to be allowed on the gross total income and not on net income. This was overruled in Distributors (Baroda) (P) Ltd. v. Union of India (1986) 1 SCC 43.
5. Bhagwati, J. who was party to the earlier decision in the Cloth Traders case (1979) 3 SCC 538 delivered a judgment in the Distributors (Baroda) case (1986) 1 SCC 43 holding that the Cloth Traders case (1979) 3 SCC 538 was obviously incorrectly decided because the words “any income” cannot possibly refer to gross total income but referred only to “net income”. Further, Distributors (Baroda) case (1986) 1 SCC 43 followed the judgment of this Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT (1978) 2 SCC 644 which decision concerned itself with Section 80-E of the Income Tax Act. Section 80-E reads as follows:
“80-E. Deduction in respect of profits and gains from specified industries in the case of certain companies.—(1) In the case of a company to which this section applies, where the total income (as computed in accordance with the other provisions of this Act) includes any profits and gains attributable to the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule, there shall be allowed a deduction from such profits and gains of an amount equal to eight per cent, thereof, in computing the total income of the company.
(2) This section applies to—
(a) an Indian company; or
(b) any other company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India.,
but does not apply to any Indian company referred to in clause (a), or to any other company referred to in clause (b), if such Indian or other company is a company referred to in Section 108 and its total income as computed before applying the provisions of sub-section (1) does not exceed twenty-five thousand rupees.”
6. It will be noticed that in marked contrast to the section under consideration in this appeal i.e Section 80-HH, Section 80-E uses the expression “total income (as computed in accordance with the provisions of this Act)” and goes on to speak of any profits and gains, so computed, for the purpose of deduction under Section 80-E. It will be seen in the present case that the said words are conspicuous by their absence in Section 80-HH even though the expression “profits and gains” is the same expression used in Section 80-E.
7. The finding in para 4 in Motilal Pesticides (2000) 9 SCC 63 that the language of Section 80-HH and Section 80-M is the same is, with respect, prima facie, incorrect. Conceptually, “any income” and “profits and gains” are different under the Income Tax Act. (See Section 80-M read with Sections 80-AA and 80-AB, Section 80-T which speak of “any income” and Section 28 which speaks of “income from profits and gains” showing thereby that conceptually the two expressions are understood as distinct in law.)
8. In para 5 of the judgment in Motilal Pesticides (2000) 9 SCC 63, Shri Ramamurthi, learned Senior Counsel appearing for the appellant submitted that both Cloth Traders (1979) 3 SCC 538 and Distributors (Baroda) (1986) 1 SCC 43 were cases which pertained to Section 80-M only and this Court had no occasion to consider the application of Section 80-AB with reference to Section 80-HH of the Act. The Court in repelling this contention referred to another decision in Rama Varma v. CIT 1994 Supp (1) SCC 473, which judgment dealt with the then newly enacted Sections 80-AA and 80-AB. Both these sections again are relatable to deductions made under Section 80-M; and Section 80-T with which that judgment was concerned also uses the expression “any income” as opposed to “profits and gains”. It will be clear, therefore, that prima facie Varma case 1994 Supp (1) SCC 473 again has very little to do with the concept of “profits and gains” with which we are concerned here. For these reasons, the matters be placed before the Hon'ble the Chief Justice of India to constitute an appropriate Bench to consider the correctness of the judgment in Motilal Pesticides (2000) 9 SCC 63.
Alert