M/S. Vijay Industries vs Commissioner Of Income Tax

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS. 1581-1582 OF 2005

M/S. VIJAY INDUSTRIES .....APPELLANT(S)

VERSUS

COMMISSIONER OF INCOME TAX .....RESPONDENT(S)

WITH

CIVIL APPEAL NO. 2878 OF 2015

CIVIL APPEAL NO. 2877 OF 2015

CIVIL APPEAL No. 2416-2417 OF 2019 (ARISING OUT OF SLP (CIVIL) NO. 6326-6327 OF 2019) ARISING OUT OF DIARY NO. 39430 OF 2017

CIVIL APPEAL NO. 2420-2421 OF 2019 (ARISING OUT OF SLP (CIVIL) NO. 6328-6329 OF 2019) ARISING OUT OF DIARY NO. 39436 OF 2017

CIVIL APPEAL NO. 2414-2415 OF 2019 (ARISING OUT OF SLP (CIVIL) NO. 6335-6336 OF 2019) ARISING OUT OF DIARY NO. 39424 OF 2017

CIVIL APPEAL NO. 2418-2419 OF 2019 (ARISING OUT OF SLP (CIVIL) NO. 6330-6331 OF 2019) ARISING OUT OF DIARY NO. 39433 OF 2017 Signature Not Verified

Digitally signed by AND MANISH SETHI Date: 2019.03.01 18:43:59 IST Reason: CIVIL APPEAL NO. 2422-2423 OF 2019 (ARISING OUT OF SLP (CIVIL) NO. 6333-6334 OF 2019) ARISING OUT OF DIARY NO. 39440 OF 2017

Civil Appeal Nos. 1581-1582 of 2005 a/w. Connected matters Page 1 of 22 JUDGMENT

A.K. SIKRI, J.

Leave granted. Delay condoned.

2) In all these appeals issue relates to the interpretation that is to be

accorded to the provisions of Section 80HH of the Income Tax

Act, 1961 (hereinafter referred to as the ‘Act’). Section 80HH and

other related provisions, as it existed at the relevant time, are to

be taken note of. since we are concerned with the Assessment

Years 1979-80 and 1980-81. Section 80HH provides deduction

from income at specified rates in respect of certain industrial

undertakings which are covered by the said provision. Issue is

limited, namely, while computing the deduction whether it is to be

available out of ‘income’ as computed under the Act or out of

‘profits and gains’, without deducting therefrom ‘depreciation’ and

‘investment allowance’. Language of sub-section (1) of Section

80HH will have to be seen, in order to comprehend the aforesaid

issue. It reads:

“80HH. Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas.

(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this

Civil Appeal Nos. 1581-1582 of 2005 a/w. Connected matters Page 2 of 22 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 twenty per cent thereof.”

3) As can be seen from the above, this Section grants deduction

from profits and gains to an undertaking engaged in

manufacturing or in the business of the hotel. The deduction is

admissible at the rate of 20% of the profits and gains of

undertaking for 10 assessment years. Certain conditions 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

profits and gains or net income. Whereas assessees want

deduction at the rate of 20% of profits and gains, i.e., gross

profits, the stand of the Income Tax Department is that deduction

at the rate of 20% is to be computed after taking into account

depreciation, unabsorbed depreciation and investment allowance.

To put it otherwise, as per the Department, the income of the

assessee is to computed in accordance with the provisions

contained in Sections 28 to 44DB which are the provisions for

computation of ‘income’ under the head ‘profits and gains of

business or profession’. Once income is arrived at after the

application of the aforesaid provisions, 20% thereof is allowable

Civil Appeal Nos. 1581-1582 of 2005 a/w. Connected matters Page 3 of 22 as deduction under Section 80HH. The assessees, on the other

hand, submit that Section 80HH uses the expression ‘profits and

gains’ which is different from ‘income’. Therefore, whatever profit

and gains are earned by an undertaking covered by Section

80HH of the Act, 20% thereof is admissible as deduction. As a

corollary, from such profits and gains of the industrial undertaking,

depreciation or unabsorbed investment allowances which are the

deductions admissible under Sections 32 and 32AB of the Act,

cannot be taken into consideration.

4) We may mention, at this stage, that this Court in the the case of

Motilal Pesticides (I) Pvt. Ltd. vs. Commissioner of Income

Tax, Delhi-II1 has taken the view which is favourable to the

Department. This view is followed by the High Court in the

impugned judgment thereby dismissing the appeals of the

appellants/assessees herein. The assessees in these appeals

submit that the aforesaid view taken in Motilal Pesticides case is

not a correct view as it ignores certain earlier judgments on this

very issue. Therefore, according to them, Motilal Pesticides

case needs a re-look.

5) These appeals had come up for hearing before a Devision Bench

of this Court. After hearing the arguments advanced by the

1 (2000) 9 SCC 63

Civil Appeal Nos. 1581-1582 of 2005 a/w. Connected matters Page 4 of 22 counsel for the parties on the aforesaid lines, the Division Bench

noted the conflict and passed orders dated 5 th November, 2014,

thereby referring the matter to a larger Bench. That is how the

matters have come up before this Bench.

6) In order to appreciate the controversy, we would have to go

through certain provisions of the Act in order to understand

broadly the scheme of taxation on the income of assessees.

7) Section 4 of the Act is a charging Section which makes total

income of the previous year of every person chargeable to tax at

the rates 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 the Annual Finance Act. Also the levy

is to be on the total income of the assessable entity, computed in

accordance with the provisions of the Act. Section 5 lays down

the scope of the total income. While computing the total income,

certain incomes are exempted which are not to be included and

these are mentioned in Section 10 of the Act.

8) Section 14 of the Act is the next provision which is relevant for

these appeals. It is the first provision in Chapter IV which is titled

‘computation of total income’ and, obviously, contains the

provision for computation of total income. Section 14 enumerates

Civil Appeal Nos. 1581-1582 of 2005 a/w. Connected matters Page 5 of 22 different heads of income, namely, salaries, income from house

property, profits and gains of business or profession, capital gains

and income from other sources. Insofar as income under the

head ‘profits and gains of business or professions’ is concerned,

provisions thereto are contained in Sections 28 to 44DB of the

Act. Section 28 specifies various incomes which shall be

chargeable to income tax under this head. Thereafter, Section 29

provides that income referred to in Section 28 shall be computed

in accordance with the provisions contained in Sections 30 to

43D. These sections provide for deductions of various kinds.

Among them, Section 32 relates to depreciation, Section 32AB

gives deductions in respect of certain investment allowance. After

providing for admissible deductions to an assessee, income

under this head is ascertained. In a similar way, as noted above,

income under the other heads is worked out. If a particular

assessee has income under more than one heads, in the income

tax returns, the said assessee would show the respective

incomes under the aforesaid heads thereby arriving at total

income on which the tax would become payable.

9) Chapter VIA also contains provisions in respect of certain

deductions which are to be made in computing total income.

Section 80A of this Chapter stipulates that in computing the total

Civil Appeal Nos. 1581-1582 of 2005 a/w. Connected matters Page 6 of 22 income of an assessee, there shall be allowed from ‘gross total

income’ the deductions specified in Section 80C to 80U. It is

relevant to point out that though Chapter VIA also allows certain

deductions in computing total income, these provisions are not

clubbed with the provisions of part of Chapter IV of the Act. There

is a reason for doing so. The provisions made in Chapter IV are

for the purposes of computing total income qua income under the

head ‘profits and gains’ from business or profession. Various

deductions which are specified to be given from the gross total

income are in the nature of expenses incurred or to be treated as

expenses. It may be rents paid, insurance premium paid for

building, expenditure incurred on scientific research, various

other kinds of expenditures etc. The purpose is to arrive at true

income after making such expenditure admissible for deduction.

Deductions provided under Chapter VIA, on the other hand, are

largely in the nature of incentives. For example, under Section

80CCA deductions provided is in respect of deposits under

National Savings Scheme or payment to a deferred annuity plan

purpose is to encourage the assessees to make deposits under

these Schemes. Likewise, under Section 80CCC, deduction is

given in respect of contribution to certain Pension funds. The

deductions are also given, inter alia, for donations for scientific

Civil Appeal Nos. 1581-1582 of 2005 a/w. Connected matters Page 7 of 22 research or rural development, to newly established industrial

undertakings or hotel business in backward areas, 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 whether

deductions under Section 80HH, which falls under Chapter VIA,

is to be given after applying the provisions for computation of

income as mentioned in Chapter IV of the Act. Once, we

examine the matter keeping in view the aforesaid nature of

scheme, answer becomes obvious. Chapter VIA, is a stand

alone chapter dehors Chapter IV. Therefore, provisions relating

to various kinds of deductions mentioned therein 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 are various heads of income and if an assessee is earning

income under more than one heads, all these are to be clubbed

together to arrive at total income. Profits and gains from the

business or profession is only one of the heads of income.

11) We are to examine and interpret the provisions of Section 80HH

of the Act keeping in view the aforesaid parameters. As noted

above, it mentions that in computing the total income of the

Civil Appeal Nos. 1581-1582 of 2005 a/w. Connected matters Page 8 of 22 assessee, a deduction from profits and gains of an amount

equals to 20% thereof shall be provided.

12) Argument of Mr. Bagaria, learned senior counsel appearing for

the appellant, is that in Motilal Pesticides’ case, this Court

missed the marked difference in the terms ‘Income’ and ‘Gross

Total Income’ as referred to in Section 80AB as against ‘Profits

and Gains of Business’ as appearing in Section 80HH and 80I. It

is argued that the restrictive clause in Section 80AB is applicable

only to the provisions based on Income/Gross Total Income/Net

Taxable Income and is wholly inapplicable to provisions like

80HH/80I/80IA/80J under which the deduction has been provided

for promoting a particular kind of activity and is accordingly

calculatable on the Profit and Gains of Business, i.e. such activity.

It is argued that Sections 80HH and 80I very categorically refer to

and use the terminology ‘profits and gains of Industrial

Undertakings’. The terms ‘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 Act whereas the term ‘income’

has been defined. It is further submitted that there are a number

of provisions under Chapter VIA, some of which refer to the term

‘profits and gains’. Whereas some other refer to the term

‘income’. Thus, in some of the provisions of Chapter VIA, the

Civil Appeal Nos. 1581-1582 of 2005 a/w. Connected matters Page 9 of 22 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.

13) The aforesaid arguments is countered by Ms. Vibha Datta

Makhija, learned senior counsel who appeared for the Revenue.

She argues that the judgment in Cambay Electric Supply

Industrial Co. Ltd. vs. CIT2, noted in the Reference Order, is on

Section 80E of the Act which has no bearing in the instant case

that pertains to Section 80HH. She also submits that legislative

intent would be clear from the fact that decision in M/s. Cloth

Traders (P) Ltd. v. Additional C.I.T., Gujarat-I3 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. Cloth Traders (P)

Ltd. According to her, Section 80AB makes it clear that

deductions to be made is with reference to Income included in the

Gross Total Income under the heading ‘C – Deduction in respect

of certain incomes’. It also makes it clear that the amount of

income of that nature is to be computed in accordance with the

2 (1978) 2 SCC 644 3 (1979) 3 SCC 538

Civil Appeal Nos. 1581-1582 of 2005 a/w. Connected matters Page 10 of 22 provisions of the Act (before making any deduction under this

Chapter). That alone shall 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.

14) Her submission is that though Section 80AB came to be inserted

by the Finance (No.2) Act, 1980 with effect from 01.04.1981, it is

clarificatory in nature. To read the provision in this manner, she

has relied upon the judgment in H.H. Sir Rama Varma (Dead)

By LRs. v. Commissioner of Income Tax, Kerala4. She has

also referred to the Constitution Bench judgment in Distributors

(Baroda) Pvt. Ltd. v. Union of 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 arose before the Gujarat High Court in Addl. CIT v. Cloth Traders Pvt. Ltd. whether on a true construction of that section, the permissible deduction is to be calculated with reference to the full amount of dividends received by the assessee from a domestic company or with reference to the dividend income computed in accordance with the provisions of the Act, that is, after deducting the interest paid on monies borrowed from earning such income. The Gujarat High Court in a judgment delivered on November 28, 1973, held that the deduction permissible under Section 80-M is liable to be calculated with reference to the dividend income computed in accordance with the provisions of the Act and not with reference to the full amount of dividends received by the assessee. The assessee being aggrieved by this judgment preferred an appeal to this Court and this appeal was allowed by the

4 1994 Supp (1) SCC 473 5 (1986) 1 SCC 43

Civil Appeal Nos. 1581-1582 of 2005 a/w. Connected matters Page 11 of 22 judgment delivered in Cloth Traders case. This Court overruled the view taken by the Gujarat High Court and held that the deduction required to be allowed under Section 80-M must be calculated “with reference to the full amount of dividends received from a domestic company and not with reference to the dividend income as computed in accordance with the provisions of the Act, that is, after making deductions provided under the Act”. This decision was given by the Court on May 4, 1979.”

13. Now, according to Parliament, this interpretation placed on Section 80-M by the summit court was not in conformity with the legislative intent and it resulted in considerable unjustified loss of revenue. Parliament therefore immediately proceeded to set right what according to it was an interpretation contrary to the legislative intent and with a view to setting at naught such interpretation. Parliament, by Section 12 of Finance (No.2) Act, 1980, introduced in the Income Tax Act, 1961, Section 80-AA with retrospective effect from April 1, 1968, that is, the date when Section 80-M was originally enacted, providing that the deduction required to be allowed under Section 80-M in respect of inter-corporate dividends “shall be computed with reference to the income by way of such dividends as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) and not with reference to the gross amount of such dividends”. It is the validity of this new Section 80-AA which is challenged in the present writ petition. But we may make it clear that what is challenged is not the prospective operation of Section 80-AA. That would clearly be unexceptionable because the Legislature can always impose a new tax burden or enhance an existing tax liability with prospective effect. But the complaint of the assessee was against retrospective effect being given to Section 80-AA, because that would have the effect of enhancing the tax burden on the assessee by setting at naught the interpretation placed on Section 80-M by the decision in Clothe Traders case and reducing the amount of deduction required to be allowed under Section 80-M. However, as pointed out at the commencement of this judgment, it would become necessary to examine this complaint against the constitutional validity of retrospective operation of Section 80-AA only if we affirm the interpretation placed on Section 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 Traders case and take

Civil Appeal Nos. 1581-1582 of 2005 a/w. Connected matters Page 12 of 22 the view that the Gujarat High Court was right in the interpretation placed by it on Section 80-M in Addl. CIT v. Cloth Traders Pvt. Ltd., no question of constitutional validity of the retrospective operation of Section 80-AA would remain to be considered, because in that event Section 80-AA in its retrospective operation would be merely clarificatory in nature and would not involve imposition of any new tax burden.”

15) Ms. Makhija also relied upon the judgment of this Court in

Commissioner of Income Tax, T.N.-V, Madras v. Kotagiri

Industrial Cooperative Tea Factory Ltd., Kotagiri 6 wherein

provisions of Section 80P of the Act are interpreted in the

following manner:

"1. … The Tribunal referred the following question for the opinion of the High Court:

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

xx xx xx

5. Reference may be made at this stage to the provisions of Section 80-P which falls in Chapter VI-A of the Act. Sub-

section (1) of Section 80-P, which is relevant for the purpose of the case, provides as follows:

“80-P. (1) Where in the case of an assessee being a cooperative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub- section (2), in computing the total income of the assessee.”

6 (1997) 9 SCC 537

Civil Appeal Nos. 1581-1582 of 2005 a/w. Connected matters Page 13 of 22

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

“ ‘gross total income’ means the total income computed in accordance with the provisions of this Act, before making any deduction 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 be held that for the purpose of making deduction under Section 80-P it is necessary to first determine the gross total income in accordance with the other provisions of the Act. This means that for the purposes of the present case the gross total income must be determined by setting off against the income the business losses of the earlier years as required under Section 72 of the Act.

xx xx xx

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

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

16) We have considered the aforesaid submissions. Civil Appeal Nos. 1581-1582 of 2005 a/w. Connected matters Page 14 of 22

17) At the outset, it needs to be pointed out that in these cases, the

Court is concerned with the provisions of Section 80HH of the Act

and, therefore, the language used in that particular provision is to

be kept in mind. As noted above, sub-section (1) of Section

80HH allows “a deduction from such profits and gains of an

amount equal to 20 per cent thereof”, in computing the total

income of the assessee. Thus, so far as deduction admissible

under this provision is concerned it is from the ‘profits and gains’.

In this context first question would be: what meaning is to be

assigned to the expression ‘profits and gains’? Here we find that

the reference order dated 5th November, 2014 rightly draws a

distinction between ‘profits and gains’ and ‘income’. We would

like to reproduce the said reference order in its entirety as we find

that it captures the legal position lucidly and succinctly:

"1. We are concerned in these cases with Assessment Year 1979-1980 and Assessment Year 1980-1981. The High Court of Rajasthan by the impugned judgment dated 17th May, 2004 construed Section 80-HH of the Income Tax Act, 1961 following a judgment of this Court in Motilal Pesticides(I) Pvt. Ltd. Vs. Commissioner of Income Tax, Delhi-II (2000) 9 SCC 63. The High Court noticed an argument made before it to the following effect:

“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 2 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'

Civil Appeal Nos. 1581-1582 of 2005 a/w. Connected matters Page 15 of 22 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) Pvt. Limited (Supra) is a Judgment of this Court which affirmed the Judgment 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 3 therefrom for Assessment Year 1979-80?

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 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 on net 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 Cloth Traders' 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 refer to gross total income but referred only to “net income”. Further, Distributors (Baroda) case followed the judgment of this Court in Cambay Electric Supply Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad (1978) 2 SCC 644 which decision concerned itself with Section 80-E of the Income Tax Act. Section 80 E reads as follows:-

Civil Appeal Nos. 1581-1582 of 2005 a/w. Connected matters Page 16 of 22

“80E – 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 (1), or to any other company referred to in clause (b), if such Indian or other company is a company referred to in Section 108 of 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. 80-HH, Section 80-E uses the expression “total income [as 5 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 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 paragraph 4 in Motilal Pesticides (supra) 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.

Civil Appeal Nos. 1581-1582 of 2005 a/w. Connected matters Page 17 of 22 (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 conceptually the two

expressions are understood as distinct in law).

8. In paragraph 5 of the judgment in Motilal Pesticides(Supra), Shri Ramamurthi, learned senior counsel appearing for the appellant submitted that both Cloth Traders and Distributors (Baroda) were cases which pertained to Section 80-M only and this Court had no occasion to consider the application of Section 80-AB with 6 reference to Section 80-HH of the Act. The Court in repelling this contention referred to another decision in H.H. Sir Rama Varma V.CIT (1994) Supp(1) SCC 473, which judgment dealt with the then newly enacted Section 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's case 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 Chief Justice of India to constitute an appropriate Bench to consider the correctness of the judgment in Motilal Pesticides (supra).”

18) We have already stated, in brief and broadly, the scheme of the

Act insofar as assessment of income is concerned, particularly,

with reference to computing the income as provided in Chapter IV

of the Act and contrasted it with the deductions that are allowable

under Chapter VI-A of the Act while computing total income. That

scheme itself draws distinction between the the concept ‘income’

on the one hand and ‘profits and gains’ on the other hand. Insofar

as computation of income under the head ‘profits and gains’ from

Civil Appeal Nos. 1581-1582 of 2005 a/w. Connected matters Page 18 of 22 business or profession is concerned, Section 28 of the Act

mentions various kinds of incomes which are chargeable under

this head. Therefore, all those incomes specifically mentioned in

that provision when earned by a particular assessee, are to be

aggregated to arrive at profits and gains of the assessee. Section

29 thereof mentions the method of arriving at ‘income’ which is to

be computed in accordance with the provisions contained in

Sections 30-43D of the Act. Sections 30-43D contain deductions

of various kinds which are in the nature of expenditure or the like

nature. After providing the deductions admissible in these

provisions, one arrives at the figure of net profits which would

become the net income under the head ‘profits and gains of

business or profession’. In contrast, as mentioned above, under

Chapter VI-A of the Act certain deductions are given by way of

incentives. Assessees may earn these deductions on fulfilling the

eligibility conditions contained therein, even when they are not in

the nature of any expenditure incurred by the assessee. Here,

Section 80A of the Act provides that in computing the total income

of 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 mentioned

above, Sections 80C to 80U contain different subject matters and

Civil Appeal Nos. 1581-1582 of 2005 a/w. Connected matters Page 19 of 22 also specify particular percentage of deductions for a particular

period. Significantly, Section 80A itself uses the expression ‘from

his gross total income’ as it states that deduction is to be allowed

to an assessee ‘from his gross total income’. Moreover, different

provisions from Sections 80C to 80U, while mentioning the

percentage at which and for which period a particular deduction is

allowable, also specifies as to how such a deduction is to be

worked out, namely, specific percentage of deduction of which

component. These sections provide different parameters. Insofar

as Section 80HH is concerned, it specifically mentions that

deduction @ 20% of ‘profits and gains’.

19) Reading of Section 80HH along with Section 80A would clearly

signify 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 the Act. It is correctly pointed out by Division Bench in the

reference order that in Motilal Pesticides case, the Court

followed the judgment rendered in the M/s. Cloth Traders (P)

Ltd. which was a case under Section 80M of the Act, on the

premise that language of Section 80HH and Section 80M is the

same. This basis is clearly incorrect as the language of two

provisions is materially different. We are, therefore, of the

Civil Appeal Nos. 1581-1582 of 2005 a/w. Connected matters Page 20 of 22 considered opinion that judgment of Motilal Pesticides is

erroneous. We, therefore, overrule this judgment.

20) We are unable to subscribe to the contention of the learned

senior counsel for the Revenue that Section 80AB, which was

inserted by Finance (No. 2) Act, 1980 with effect from 1 st April,

1981 is clarificatory in nature. It is a provision made with

prospective effect as the very Amendment Act says so. Therefore,

it cannot apply to the Assessment Years 1979-80 and 1980-81,

when Section 80AB was brought on the statute book after these

assessment years. This position becomes clear from the reading

of Circular No. 281 dated September 22, 1980 issued by the

Central Board of Direct Taxes itself. This circular inter alia

describes the reasons for adding new Sections 80AA and 80AB.

It refers to judgment in M/s. Cloth Traders case and mentions

that the directions specified in the aforesaid sections will be

calculated with reference to the net income as computed in

accordance with the provisions 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 that it will take

Civil Appeal Nos. 1581-1582 of 2005 a/w. Connected matters Page 21 of 22 effect from April 01, 1981. Following portion of this circular is

relevant:

"The new section 80AB will take effect from 1 st April, 1981, and will accordingly apply in relation to the assessment year 1981-82, and subsequent years. It should be carefuly noted that the new section 80AB, unlike section 80AA, will not have any retrospective operation.”

21) It is, thus, clear that change in legal position is brought about

only, with the insertion of Section 80AB and made applicable

from Assessment Year 1981-82. In view thereof, judgments in the

case of M/s. Cloth Traders relied by the Revenue will be of no

relevance. Likewise, judgment in Kotagiri Industrial

Cooperative Tea Factory Ltd. decided altogether different

question, which can be discerned from the passages extracted

therefrom and will have no application to the instant case.

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

.............................................J. (A.K. SIKRI)

.............................................J. (S. ABDUL NAZEER)

.............................................J. (M. R. SHAH)

NEW DELHI;

MARCH 01, 2019.

Civil Appeal Nos. 1581-1582 of 2005 a/w. Connected matters Page 22 of 22