M/S. VIJAY INDUSTRIES versus COMMISSIONER OF INCOME TAX on 1 March 2019

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[2019] 4 S.C.R. 928SUPREME COURT REPORTS

SUPREME COURT REPORTS

[2019] 4 S.C.R.

M/S. VIJAY INDUSTRIES

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v.

COMMISSIONER OF INCOME TAX

(Civil Appeal Nos.1581-1582 of 2005)

BMARCH 01, 2019

[A. K. SIKRI, S. ABDUL NAZEER AND M. R. SHAH, JJ.]

Income Tax Act, 1961 – ss. 80HH(1), 80A, 80AB and ss. 30 to43D – Assessees claimed deduction u/s. 80HH @ 20% of profitsand gains, i.e. gross profits – Whereas, the stand of the Income TaxCDepartment was that deduction @ 20% is to be computed aftertaking into account depreciation, unabsorbed depreciation andinvestment allowance – In other words, as per Department, theincome of the assessee is to be computed in accordance with theprovisions contained in ss.28 to 44DB which are the provisions forDcomputation of ‘income’ under the head ‘profits and gains ofbusiness or Professions’ and once income is arrived at, 20% thereofis allowable as deduction u/s. 80HH – Further, the Revenue soughtthe application of s.80AB – Held: In the instant case, AssessmentYears 1979-1980 and 1980-1981 were under consideration –s.80HH specifically mentions that deduction @ 20% of ‘profit andEgains’ – Reading of s. 80HH along with s. 80A would clearly signifythat such a deduction has to be of gross profits and gains i.e. beforecomputing the income as specified in ss. 30 to 43D of the Act –Insofar as s.80AB is concerned, the said section was inserted byFinance (No.2) Act, 1980 with effect from 1[st] April, 1981 – Clearly,Fs.80AB is a provision made with prospective effect – Therefore, itcannot apply to the Assessment years 1979-80 and 1980-81 –Finance (No.2) Act, 1980.

Allowing the appeals, the Court

HELD: 1. The scheme of the Income Tax Act, 1961 insofarGas assessment of income is concerned, particularly, with referenceto computing the income as provided in Chapter IV of the Actand contrasted it with the deductions that are allowable underChapter VI-A of the Act while computing total income. Thatscheme itself draws distinction between the concept ‘income’ on H

Conclusion

the one hand and ‘profits and gains’ on the other hand. Insofar ascomputation of income under the head ‘profits and gains’ frombusiness or profession is concerned, Section 28 of the Actmentions various kinds of incomes which are chargeable underthis head. Therefore, all those incomes specifically mentionedin that provision when earned by a particular assessee, are to beaggregated to arrive at profits and gains of the assessee. Section29 thereof mentions the method of arriving at ‘income’ which isto be computed in accordance with the provisions contained inSections 30-43D of the Act. Sections 30-43D contain deductionsof various kinds which are in the nature of expenditure or thelike nature. After providing the deductions admissible in theseprovisions, one arrives at the figure of net profits which wouldbecome the net income under the head ‘profits and gains ofbusiness or profession’. In contrast, as mentioned above, underChapter VI-A of the Act certain deductions are given by way ofincentives. Assessees may earn these deductions on fulfilling theeligibility conditions contained therein, even when they are notin the nature of any expenditure incurred by the assessee. Here,Section 80A of the Act provides that in computing the total incomeof assessee, there shall be allowed from his gross total income,in accordance with the subject of the provisions of this Chapter,the deductions specified in Sections 80C to 80U. As mentionedabove, Sections 80C to 80U contain different subject matters andalso specify particular percentage of deductions for a particularperiod. Significantly, Section 80A itself uses the expression ‘fromhis gross total income’ as it states that deduction is to be allowedto an assessee ‘from his gross total income’. Moreover, differentprovisions from Sections 80C to 80U, while mentioning thepercentage at which and for which period a particular deductionis allowable, also specifies as to how such a deduction is to beworked out, namely, specific percentage of deduction of whichcomponent. These sections provide different parameters. Insofaras Section 80HH is concerned, it specifically mentions thatdeduction @ 20% of ‘profits and gains’. Reading of Section 80HHalong with Section 80A would clearly signify that such a deductionhas to be of gross profits and gains, i.e., before computing theincome as specified in Sections 30 to 43D of the Act. [Paras 18and 19] [942-F-H; 943-A-F]

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AMotilal Pesticides (I) Pvt. Ltd. v. Commissioner ofIncome Tax, Delhi-II (2000) 9 SCC 63 – overruled.

M/s. Cloth Traders (P) Ltd. v. Additional C.I.T.,Gujarat-I (1979) 3 SCC 538 : [1979] 3 SCR 984;Commissioner of Income Tax, T.N.-V, Madras v. KotagiriBIndustrial Cooperative Tea Factory Ltd., Kotagiri(1997) 9 SCC 537 : [1997] 2 SCR 738 – inapplicable.

Cambay Electric Supply Industrial Co. Ltd. v.CIT(1978) 2 SCC 644 : [1978] 3 SCR 660;H.H. Sir RamaVarma (Dead) By LRs. v.Commissioner of Income Tax,CKerala[1994] 1 Suppl. SCC 473; Distributors (Baroda)Pvt. Ltd. v.Union of India & Ors.(1986) 1 SCC 43 :[1985] 1 Suppl. SCR 778 – referred to.

Case Law Reference

From the Judgment and Order dated 17.05.2004 of the HighFCourt of Rajasthan at Jaipur in D.B.L.T. No.80/87 and D.B.I.T.No.7/1995

With

Civil Appeal Nos.2875 and 2877 of 2015

GCivil Appeal Nos.2416-2417, 2420-2421, 2414-2415, 2418-2419and 2422-2423 of 2019.

S.K. Bagaria, Sr. Adv., K. Ajit Singh, Bhargava V. Desai, AkshatMalpani, Sanjay Jhanwar, Tarun Gupta, E.C. Agrawala, P.S. Sudheer,Advs. for the Appellant.

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M/S. VIJAY INDUSTRIES v. COMMISSIONER OF

Ms. Vibha Datta Makhija, Sr. Adv., Arijit Prasad, SayoojMohandas M., Praveen, Mrs. Anil Katiyar, B.V. Balaram Das, Advs.for the Respondent.

The Judgment of the Court was delivered by A.K. SIKRI, J. Leave granted. Delay condoned.

2. In all these appeals issue relates to the interpretation that is tobe accorded to the provisions of Section 80HH of the Income Tax Act,1961 (hereinafter referred to as the ‘Act’). Section 80HH and otherrelated provisions, as it existed at the relevant time, are to be taken noteof. since we are concerned with the Assessment Years 1979-80 and1980-81. Section 80HH provides deduction from income at specifiedrates in respect of certain industrial undertakings which are covered bythe said provision. Issue is limited, namely, while computing the deductionwhether it is to be available out of ‘income’ as computed under the Actor out of ‘profits and gains’, without deducting therefrom ‘depreciation’and ‘investment allowance’. Language of sub-section (1) of Section80HH will have to be seen, in order to comprehend the aforesaid issue.It reads:

“80HH. Deduction in respect of profits and gains from newlyestablished industrial undertakings or hotel business in backwardareas.

(1) Where the gross total income of an assessee includes anyprofits and gains derived from an industrial undertaking, or thebusiness of a hotel, to which this section applies, there shall, inaccordance with and subject to the provisions of this section, beallowed, in computing the total income of the assessee, a deductionfrom such profits and gains of an amount equal to twenty per centthereof.”

3. As can be seen from the above, this Section grants deductionfrom profits and gains to an undertaking engaged in manufacturing or inthe business of the hotel. The deduction is admissible at the rate of 20%of the profits and gains of undertaking for 10 assessment years. Certainconditions are to be fulfilled in order to be eligible for such a deduction,about which there is no dispute insofar as these appeals are concerned.Conflict is confined to one aspect viz. 20% deduction of gross profitsand gains or net income. Whereas assessees want deduction at the rate A

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Aof 20% of profits and gains, i.e., gross profits, the stand of the IncomeTax Department is that deduction at the rate of 20% is to be computedafter taking into account depreciation, unabsorbed depreciation andinvestment allowance. To put it otherwise, as per the Department, theincome of the assessee is to computed in accordance with the provisionscontained in Sections 28 to 44DB which are the provisions forBcomputation of ‘income’ under the head ‘profits and gains of business orprofession’. Once income is arrived at after the application of theaforesaid provisions, 20% thereof is allowable as deduction under Section80HH. The assessees, on the other hand, submit that Section 80HHuses the expression ‘profits and gains’ which is different from ‘income’.CTherefore, whatever profit and gains are earned by an undertakingcovered by Section 80HH of the Act, 20% thereof is admissible asdeduction. As a corollary, from such profits and gains of the industrialundertaking, depreciation or unabsorbed investment allowances whichare the deductions admissible under Sections 32 and 32AB of the Act,cannot be taken into consideration.D

4. We may mention, at this stage, that this Court in the the case ofMotilal Pesticides (I) Pvt. Ltd. vs. Commissioner of Income Tax,Delhi-II[1] has taken the view which is favourable to the Department.This view is followed by the High Court in the impugned judgment therebydismissing the appeals of the appellants/assessees herein. The assesseesEin these appeals submit that the aforesaid view taken in MotilalPesticides case is not a correct view as it ignores certain earlier judgmentson this very issue. Therefore, according to them, Motilal Pesticidescase needs a re-look.

5. These appeals had come up for hearing before a Devision BenchFof this Court. After hearing the arguments advanced by the counsel forthe parties on the aforesaid lines, the Division Bench noted the conflictand passed orders dated 5[th] November, 2014, thereby referring the matterto a larger Bench. That is how the matters have come up before thisBench.G

6. In order to appreciate the controversy, we would have to gothrough certain provisions of the Act in order to understand broadly thescheme of taxation on the income of assessees.

1(2000) 9 SCC 63H

7. Section 4 of the Act is a charging Section which makes totalincome of the previous year of every person chargeable to tax at therates which may be specified from time to time. The said Section, thus,imposes income tax upon a person in respect of his income. Of course,income is to be charged at the rate or rates fixed for the year by theAnnual Finance Act. Also the levy is to be on the total income of theassessable entity, computed in accordance with the provisions of theAct. Section 5 lays down the scope of the total income. While computingthe total income, certain incomes are exempted which are not to beincluded and these are mentioned in Section 10 of the Act.

8. Section 14 of the Act is the next provision which is relevant forthese appeals. It is the first provision in Chapter IV which is titled‘computation of total income’ and, obviously, contains the provision forcomputation of total income. Section 14 enumerates different heads ofincome, namely, salaries, income from house property, profits and gainsof business or profession, capital gains and income from other sources.Insofar as income under the head ‘profits and gains of business orprofessions’ is concerned, provisions thereto are contained in Sections28 to 44DB of the Act. Section 28 specifies various incomes whichshall be chargeable to income tax under this head. Thereafter, Section29 provides that income referred to in Section 28 shall be computed inaccordance with the provisions contained in Sections 30 to 43D. Thesesections provide for deductions of various kinds. Among them, Section32 relates to depreciation, Section 32AB gives deductions in respect ofcertain investment allowance. After providing for admissible deductionsto an assessee, income under this head is ascertained. In a similar way,as noted above, income under the other heads is worked out. If aparticular assessee has income under more than one heads, in the incometax returns, the said assessee would show the respective incomes underthe aforesaid heads thereby arriving at total income on which the taxwould become payable.

9. Chapter VIA also contains provisions in respect of certaindeductions which are to be made in computing total income. Section80A of this Chapter stipulates that in computing the total income of anassessee, there shall be allowed from ‘gross total income’ the deductionsspecified in Section 80C to 80U. It is relevant to point out that though A

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AChapter VIA also allows certain deductions in computing total income,these provisions are not clubbed with the provisions of part of ChapterIV of the Act. There is a reason for doing so. The provisions made inChapter IV are for the purposes of computing total income qua incomeunder the head ‘profits and gains’ from business or profession. Variousdeductions which are specified to be given from the gross total incomeBare in the nature of expenses incurred or to be treated as expenses. Itmay be rents paid, insurance premium paid for building, expenditureincurred on scientific research, various other kinds of expenditures etc.The purpose is to arrive at true income after making such expenditureadmissible for deduction. Deductions provided under Chapter VIA, onCthe other hand, are largely in the nature of incentives. For example,under Section 80CCA deductions provided is in respect of deposits underNational Savings Scheme or payment to a deferred annuity plan purposeis to encourage the assessees to make deposits under these Schemes.Likewise, under Section 80CCC, deduction is given in respect ofcontribution to certain Pension funds. The deductions are also given,Dinter alia, for donations for scientific research or rural development, tonewly established industrial undertakings or hotel business in backwardareas, small scale industrial undertakings, housing projects, export business,businesses earning convertible foreign exchange etc.

10. It is in the aforesaid scheme, one has to consider whetherEdeductions under Section 80HH, which falls under Chapter VIA, is tobe given after applying the provisions for computation of income asmentioned in Chapter IV of the Act. Once, we examine the matterkeeping in view the aforesaid nature of scheme, answer becomesobvious. Chapter VIA, is a stand alone chapter dehors Chapter IV.FTherefore, provisions relating to various kinds of deductions mentionedtherein have to be construed independent of Chapter IV of the Act.Another pertinent aspect which is to be borne in mind is that conceptually‘income or total income’ is different from ‘profits and gains’. There arevarious heads of income and if an assessee is earning income undermore than one heads, all these are to be clubbed together to arrive atGtotal income. Profits and gains from the business or profession is onlyone of the heads of income.

11. We are to examine and interpret the provisions of Section80HH of the Act keeping in view the aforesaid parameters. As notedabove, it mentions that in computing the total income of the assessee, aH

deduction from profits and gains of an amount equals to 20% thereofshall be provided.

12. Argument of Mr. Bagaria, learned senior counsel appearingfor the appellant, is that in Motilal Pesticides’ case, this Court missedthe marked difference in the terms ‘Income’ and ‘Gross Total Income’as referred to in Section 80AB as against ‘Profits and Gains ofBusiness’ as appearing in Section 80HH and 80I. It is argued that therestrictive clause in Section 80AB is applicable only to the provisionsbased on Income/Gross Total Income/Net Taxable Income and is whollyinapplicable to provisions like 80HH/80I/80IA/80J under which thededuction has been provided for promoting a particular kind of activityand is accordingly calculatable on the Profit and Gains of Business,i.e. such activity. It is argued that Sections 80HH and 80I verycategorically refer to and use the terminology ‘profits and gains ofIndustrial Undertakings’. The terms ‘profits and gains’ and ‘income’are not same but are different. The term ‘profits and gains’ has notbeen defined under the provisions of the Act whereas the term ‘income’has been defined. It is further submitted that there are a number ofprovisions under Chapter VIA, some of which refer to the term ‘profitsand gains’. Whereas some other refer to the term ‘income’. Thus, insome of the provisions of Chapter VIA, the deduction is intended to begiven out of ‘profits and gains’, whereas in some other sections, thededuction has been provided to be given out of ‘income’. When theterm ‘profits and gains’ has not been defined under the Act, in thatcase, its meaning has to be understood as is being understood incommercial world.

13. The aforesaid arguments is countered by Ms. Vibha DattaMakhija, learned senior counsel who appeared for the Revenue. Sheargues that the judgment in Cambay Electric Supply Industrial Co.Ltd. vs. CIT[2], noted in the Reference Order, is on Section 80E of theAct which has no bearing in the instant case that pertains to Section80HH. She also submits that legislative intent would be clear from thefact that decision in M/s. Cloth Traders (P) Ltd. v. Additional C.I.T.,Gujarat-I[3] led to the insertion of Section 80AB in the Act. The purpose,therefore, was to take away the effect of the judgment in M/s. ClothTraders (P) Ltd. According to her, Section 80AB makes it clear thatdeductions to be made is with reference to Income included in the Gross 2(1978) 2 SCC 644

3(1979) 3 SCC 538

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ATotal Income under the heading ‘C – Deduction in respect of certainincomes’. It also makes it clear that the amount of income of thatnature is to be computed in accordance with the provisions of the Act(before making any deduction under this Chapter). That alone shall bedeemed to be the amount of income of that nature which is derived orreceived by the assessee and which is included in his Gross Total Income.B

14. Her submission is that though Section 80AB came to beinserted by the Finance (No.2) Act, 1980 with effect from 01.04.1981, itis clarificatory in nature. To read the provision in this manner, she hasrelied upon the judgment in H.H. Sir Rama Varma (Dead) By LRs. v.Commissioner of Income Tax, Kerala[4]. She has also referred to theCConstitution Bench judgment in Distributors (Baroda) Pvt. Ltd. v. Unionof India & Ors.[5], which has over-ruled M/s. Cloth Traders (P) Ltd.,and in particular paragraph 12 thereof which reads as under:

“12. Soon after the enactment of Section 80-M a question arosebefore the Gujarat High Court in Addl. CIT v. Cloth Traders Pvt.DLtd. whether on a true construction of that section, the permissiblededuction is to be calculated with reference to the full amount ofdividends received by the assessee from a domestic company orwith reference to the dividend income computed in accordancewith the provisions of the Act, that is, after deducting the interestEpaid on monies borrowed from earning such income. The GujaratHigh Court in a judgment delivered on November 28, 1973, heldthat the deduction permissible under Section 80-M is liable to becalculated with reference to the dividend income computed inaccordance with the provisions of the Act and not with referenceto the full amount of dividends received by the assessee. TheFassessee being aggrieved by this judgment preferred an appeal tothis Court and this appeal was allowed by the judgment deliveredin Cloth Traders case. This Court overruled the view taken bythe Gujarat High Court and held that the deduction required to beallowed under Section 80-M must be calculated “with referenceGto the full amount of dividends received from a domestic companyand not with reference to the dividend income as computed inaccordance with the provisions of the Act, that is, after makingdeductions provided under the Act”. This decision was given bythe Court on May 4, 1979.”

41994 Supp (1) SCC 473H5(1986) 1 SCC 43

5(1986) 1 SCC 43

13. Now, according to Parliament, this interpretation placed onSection 80-M by the summit court was not in conformity with thelegislative intent and it resulted in considerable unjustified loss ofrevenue. Parliament therefore immediately proceeded to set rightwhat according to it was an interpretation contrary to the legislativeintent and with a view to setting at naught such interpretation.Parliament, by Section 12 of Finance (No.2) Act, 1980, introducedin the Income Tax Act, 1961, Section 80-AA with retrospectiveeffect from April 1, 1968, that is, the date when Section 80-Mwas originally enacted, providing that the deduction required to beallowed under Section 80-M in respect of inter-corporate dividends“shall be computed with reference to the income by way of suchdividends as computed in accordance with the provisions of thisAct (before making any deduction under this Chapter) and notwith reference to the gross amount of such dividends”. It is thevalidity of this new Section 80-AA which is challenged in thepresent writ petition. But we may make it clear that what ischallenged is not the prospective operation of Section 80-AA.That would clearly be unexceptionable because the Legislaturecan always impose a new tax burden or enhance an existing taxliability with prospective effect. But the complaint of the assesseewas against retrospective effect being given to Section 80-AA,because that would have the effect of enhancing the tax burdenon the assessee by setting at naught the interpretation placed onSection 80-M by the decision in Clothe Traders case and reducingthe amount of deduction required to be allowed under Section 80-M. However, as pointed out at the commencement of thisjudgment, it would become necessary to examine this complaintagainst the constitutional validity of retrospective operation ofSection 80-AA only if we affirm the interpretation placed onSection 80-M by the decision of this Court in Cloth Traders case.If we do not agree with the decision of this Court in Cloth Traderscase and take the view that the Gujarat High Court was right inthe interpretation placed by it on Section 80-M in Addl. CIT v.Cloth Traders Pvt. Ltd., no question of constitutional validity ofthe retrospective operation of Section 80-AA would remain to beconsidered, because in that event Section 80-AA in itsretrospective operation would be merely clarificatory in natureand would not involve imposition of any new tax burden.”

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A15. Ms. Makhija also relied upon the judgment of this Court inCommissioner of Income Tax, T.N.-V, Madras v. Kotagiri IndustrialCooperative Tea Factory Ltd., Kotagiri[6] wherein provisions of Section80P of the Act are interpreted in the following manner:

“1. … The Tribunal referred the following question for the opinionBof the High Court:

“Whether, on the facts and in the circumstances of the case,the Appellate Tribunal was right in law in holding that thededuction under Section 80-P of the Income Tax Act should beallowed before set-off of unabsorbed losses of earlier year?”

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5. Reference may be made at this stage to the provisions of Section80-P which falls in Chapter VI-A of the Act. Sub-section (1) ofSection 80-P, which is relevant for the purpose of the case, providesas follows:

D“80-P. (1) Where in the case of an assessee being a cooperativesociety, the gross total income includes any income referred toin sub-section (2), there shall be deducted, in accordance withand subject to the provisions of this section, the sums specifiedin sub-section (2), in computing the total income of theassessee.”

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6. For the purpose of Chapter VI-A the expression “gross totalincome” is defined in clause (5) of Section 80-B in the followingterms:

“ ‘gross total income’ means the total income computed inaccordance with the provisions of this Act, before making anyFdeduction under this Chapter.”

7. If Section 80-P(1) is read with the definition of the expression“gross total income” contained in Section 80-B(5), it has to beheld that for the purpose of making deduction under Section 80-Pit is necessary to first determine the gross total income inGaccordance with the other provisions of the Act. This means thatfor the purposes of the present case the gross total income mustbe determined by setting off against the income the business lossesof the earlier years as required under Section 72 of the Act.

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12. Having regard to the law as laid down by this Court inDistributors (Baroda) (P) Ltd. [(1986) 1 SCC 43 : 1986 SCC(Tax) 159 : (1985) 155 ITR 120] and H.H. Sir Rama Varma [1994Supp (1) SCC 473 : (1994) 205 ITR 433] , it must be held thatbefore considering the matter of deduction under Section 80-P(2)the Income Tax Officer had rightly set off the carried-forwardlosses of the earlier years in accordance with Section 72 of theAct and on finding that the said losses exceeded the income, herightly did not allow any deduction under Section 80-P(2) and theAppellate Assistant Commissioner as well as the Tribunal and theHigh Court were in error in taking a contrary view.

13. The principle of statutory construction invoked by MsRamachandran has no application in construing the expression“gross total income” in sub-section (1) of Section 80-P. In view ofthe express provision defining the said expression in Section 80-B(5) for the purpose of Chapter VI-A, there is no scope forconstruing the said expression differently in Section 80-P.”

16. We have considered the aforesaid submissions.

17. At the outset, it needs to be pointed out that in these cases, theCourt is concerned with the provisions of Section 80HH of the Act and,therefore, the language used in that particular provision is to be kept inmind. As noted above, sub-section (1) of Section 80HH allows “adeduction from such profits and gains of an amount equal to 20 per centthereof”, in computing the total income of the assessee. Thus, so far asdeduction admissible under this provision is concerned it is from the‘profits and gains’. In this context first question would be: what meaningis to be assigned to the expression ‘profits and gains’? Here we find thatthe reference order dated 5[th] November, 2014 rightly draws a distinctionbetween ‘profits and gains’ and ‘income’. We would like to reproducethe said reference order in its entirety as we find that it captures thelegal position lucidly and succinctly:

“1. We are concerned in these cases with Assessment Year 1979-1980 and Assessment Year 1980-1981. The High Court ofRajasthan by the impugned judgment dated 17th May, 2004construed Section 80-HH of the Income Tax Act, 1961 followinga judgment of this Court in Motilal Pesticides(I) Pvt. Ltd. Vs.Commissioner of Income Tax, Delhi-II (2000) 9 SCC 63. The AB

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High Court noticed an argument made before it to the followingeffect:

“It is most humbly submitted that the concept ‘profits and gains’is a wider concept than the concept of ‘income’. The profitsand gains/loss are arrived at after making actual expensesincurred 2 from the figure of sales by the assessee. It does notinclude any depreciation and investment allowance, as admittedlythese are not the expenses actually incurred by the assessee.However, the term ‘income’ does take into consideration thedeductions on account of depreciation and investmentallowance. Therefore, the term profits and gains are not synonymous with the term ‘income’.

However, the High Court correctly felt that it was bound by thejudgment of this Court.

2. Motilal Pesticides(I) Pvt. Limited (Supra) is a Judgment of thisCourt which affirmed the Judgment of the Delhi High Courtconcerning the interpretation of the very same Section 80-HH ofthe Income Tax Act. The assessment years also happened to bethe same assessment years as involved in these appeals.

3. The question of law set out by this Court is, whether, on thefacts and circumstances of the case, the Tribunal was right inholding that the assessee was not entitled to deduction underSection 80-HH of the Income Tax Act, 1961 on the gross profit ofRs.34,30,035 (Liquid Section) but on the net income 3 therefromfor Assessment Year 1979-80?

4. Thereafter, this Court set out Section 80-HH in para 2 andSection 80-M in para 3 of the Judgment. It will be noticed thatwhereas Section 80-HH uses the expression “any profits and gainsderived from”, Section 80-M uses the expression “any income”.Section 80-M was held, in the Cloth Traders (P) Ltd. Vs. 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 onnet income. This was over-ruled in Distributors (Baroda) Pvt.Ltd. Vs. Union of India (1986) 1 SCC 43.

5. Bhagwati,J. who was party to the earlier decision in the ClothTraders’ case delivered a judgment in the Distributors( Baroda)case holding that the Cloth traders’ case was obviously incorrectly decided because the words “any income” cannot possibly referto gross total income but referred only to “net income”. Further,Distributors (Baroda) case followed the judgment of this Court inCambay Electric Supply Industrial Co. Ltd. Vs. The Commissionerof Income Tax, Gujarat-II, Ahmedabad (1978) 2 SCC 644 whichdecision concerned itself with Section 80-E of the Income TaxAct. Section 80 E reads as follows:- “80E – Deduction in respect of profits and gains from specifiedindustries in the case of certain companies- (1) In the case of acompany to which this section applies, where the total income(as computed in accordance with the other provisions of thisAct) includes any profits and gains attributable to the businessof generation or distribution of electricity or any other form ofpower or of construction, manufacture or production of anyone or more of the articles or things specified in the list in theFifth Schedule, there shall be allowed a deduction from suchprofits and gains of an amount equal to eight per cent, thereof,in computing the total income of the company.

(2) This section applies to

(2) This section applies to

(a) an Indian Company; or (b) any other company which hasmade the prescribed arrangements for the declaration andpayment of dividends (including dividends on preference shares)within India. But does not apply to any Indian Company referredto in Clause (1), or to any other company referred to in clause(b), if such Indian or other company is a company referred toin Section 108 of its total income as computed before applyingthe provisions of sub-section (1) does not exceed twenty-fivethousand rupees”.

6. It will be noticed that in marked contrast to the Section underconsideration in this appeal i.e. 80-HH, Section 80-E uses theexpression “total income [as 5 computed in accordance with theprovisions of this Act]” and goes on to speak of any profits andgains, so computed, for the purpose of deduction under Section80-E. It will be seen in the present case the said words areconspicuous by their absence in Section 80-HH even though theexpression “profits and gains” is the same expression used insection 80-E.

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7. The finding in paragraph 4 in Motilal Pesticides (supra) that thelanguage of Section 80-HH and Section 80-M is the same is, withrespect, prima facie, incorrect. Conceptually, “any income” and“profits and gains” are different under the Income Tax Act.

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(See Section 80-M read with Sections 80-AA & AB, Section 80-T which speak of “any income” and Section 28 which speaks of“income from profits and gains” showing thereby that conceptuallythe two expressions are understood as distinct in law).

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8. In paragraph 5 of the judgment in Motilal Pesticides(Supra),Shri Ramamurthi, learned senior counsel appearing for theappellant submitted that both Cloth Traders and Distributors(Baroda) were cases which pertained to Section 80-M only andthis Court had no occasion to consider the application of Section80-AB with 6 reference to Section 80-HH of the Act. The Courtin repelling this contention referred to another decision in H.H.Sir Rama Varma V.CIT (1994) Supp(1) SCC 473, which judgmentdealt with the then newly enacted Section 80-AA and 80-AB.Both these sections again are relatable to deductions made underSection 80-M; and Section 80-T with which that judgment wasconcerned also uses the expression “ any income” as opposed to“profits and gains”. It will be clear, therefore, that prima facieVarma’s case again has very little to do with the concept of “profitsand gains” with which we are concerned here. For these reasons,the matters be placed before the Hon’ble Chief Justice of India toconstitute an appropriate Bench to consider the correctness ofthe judgment in Motilal Pesticides (supra).”

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F18. We have already stated, in brief and broadly, the scheme ofthe Act insofar as assessment of income is concerned, particularly, withreference to computing the income as provided in Chapter IV of the Actand contrasted it with the deductions that are allowable under ChapterVI-A of the Act while computing total income. That scheme itself drawsdistinction between the the concept ‘income’ on the one hand and ‘profitsGand gains’ on the other hand. Insofar as computation of income underthe head ‘profits and gains’ from business or profession is concerned,Section 28 of the Act mentions various kinds of incomes which arechargeable under this head. Therefore, all those incomes specificallymentioned in that provision when earned by a particular assessee, are toHbe aggregated to arrive at profits and gains of the assessee. Section 29

thereof mentions the method of arriving at ‘income’ which is to becomputed in accordance with the provisions contained in Sections 30-43D of the Act. Sections 30-43D contain deductions of various kindswhich are in the nature of expenditure or the like nature. After providingthe deductions admissible in these provisions, one arrives at the figureof net profits which would become the net income under the head ‘profitsand gains of business or profession’. In contrast, as mentioned above,under Chapter VI-A of the Act certain deductions are given by way ofincentives. Assessees may earn these deductions on fulfilling the eligibilityconditions contained therein, even when they are not in the nature ofany expenditure incurred by the assessee. Here, Section 80A of the Actprovides that in computing the total income of assessee, there shall beallowed from his gross total income, in accordance with the subject ofthe provisions of this Chapter, the deductions specified in Sections 80Cto 80U. As mentioned above, Sections 80C to 80U contain differentsubject matters and also specify particular percentage of deductions fora particular period. Significantly, Section 80A itself uses the expression‘from his gross total income’ as it states that deduction is to be allowedto an assessee ‘from his gross total income’. Moreover, differentprovisions from Sections 80C to 80U, while mentioning the percentageat which and for which period a particular deduction is allowable, alsospecifies as to how such a deduction is to be worked out, namely, specificpercentage of deduction of which component. These sections providedifferent parameters. Insofar as Section 80HH is concerned, itspecifically mentions that deduction @ 20% of ‘profits and gains’.

19. Reading of Section 80HH along with Section 80A would clearlysignify that such a deduction has to be of gross profits and gains, i.e.,before computing the income as specified in Sections 30 to 43D of theAct. It is correctly pointed out by Division Bench in the reference orderthat in Motilal Pesticides case, the Court followed the judgment renderedin the M/s. Cloth Traders (P) Ltd. which was a case under Section80M of the Act, on the premise that language of Section 80HH andSection 80M is the same. This basis is clearly incorrect as the languageof two provisions is materially different. We are, therefore, of theconsidered opinion that judgment of Motilal Pesticides is erroneous.We, therefore, overrule this judgment.

20. We are unable to subscribe to the contention of the learnedsenior counsel for the Revenue that Section 80AB, which was inserted AB

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Aby Finance (No. 2) Act, 1980 with effect from 1[st] April, 1981 isclarificatory in nature. It is a provision made with prospective effect asthe very Amendment Act says so. Therefore, it cannot apply to theAssessment Years 1979-80 and 1980-81, when Section 80AB wasbrought on the statute book after these assessment years. This positionbecomes clear from the reading of Circular No. 281 dated SeptemberB22, 1980 issued by the Central Board of Direct Taxes itself. This circularinter alia describes the reasons for adding new Sections 80AA and80AB. It refers to judgment in M/s. Cloth Traders case and mentionsthat the directions specified in the aforesaid sections will be calculatedwith reference to the net income as computed in accordance with theCprovisions of the Act (before making any deduction under Chapter VIA)and not with reference to the gross amount of such income, subject,however, to the other requirements of the respective sections.Notwithstanding the same, this circular also categorically mentions thatit will take effect from April 01, 1981. Following portion of this circularis relevant:D“The new section 80AB will take effect from 1[st] April, 1981, andwill accordingly apply in relation to the assessment year 1981-82,and subsequent years. It should be carefuly noted that the newsection 80AB, unlike section 80AA, will not have any retrospectiveoperation.”E

21. It is, thus, clear that change in legal position is brought aboutonly, with the insertion of Section 80AB and made applicable fromAssessment Year 1981-82. In view thereof, judgments in the case ofM/s. Cloth Traders relied by the Revenue will be of no relevance.Likewise, judgment in Kotagiri Industrial Cooperative Tea FactoryFLtd. decided altogether different question, which can be discerned fromthe passages extracted therefrom and will have no application to theinstant case.

22. As a result, all these appeals are allowed.

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Ankit Gyan

Appeals allowed.

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