Deduction Under Section 80HH Income Tax Act Should

Be From 'Gross Profits & Gains' Instead Of 'Net Income' :

SC [Read Judgment]
BY: MANU SEBASTIAN
2 March 2019 10:54 AM

535
SHARES

Deduction under Section 80HH has to be from gross profits and

gains, i.e., before computing the income as specified in Sections 30
to 43D of the Ac
A three judges' bench of the Supreme Court has held that deduction under
Section 80HH of the Income Tax Act 1961 should be based on gross profits and
income instead of the net income from profits and gains computed as per Sections
28 to 44B of the Act.

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Section 80HH grants deduction from total income at the rate of 20% of the
"profits and gains" of an undertaking engaged in manufacturing or in the business
of the hotel for a period of ten assessment years.

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The assesse claimed that this deduction should be applied to gross profits and
gains. The tax department took the view that this deduction is applicable on the
net income from profits and gains computed in the manner provided under
Sections 28 to 44B, after allowing deductions for depreciation, unabsorbed
depreciation and investment allowance.

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A two judges bench of the SC had taken the view in favour of the department in
the case Motilal Pesticides (I) Pvt. Ltd. vs. Commissioner of Income Tax, Delhi-II
(2000) 9 SCC 63. Since this view was later doubted by another division bench, a
three judges bench of Justices A K Sikri, Abdul Nazeer and M R Shah was called
upon to settle the issue.

Sections 28 to 44B relating to income from profits and gains of business or

profession fall within Chapter IV of the Act, which deals with computation of
total income. This income is computed after giving deductions to factors like
depreciation, investment allowances etc.

Section 80HH falls within Chapter VIA, which deals with deductions to be made
in computing total income.

The bench had to decide whether the meaning of income under Chapter IV
should be applied to Chapter VIA. The bench noted that conceptually 'total
income' was different from 'profits and gains'. It noted that the reference order
had observed that 'profits and gains' was a wider concept than 'total income'. The
reference order had observed:

"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
535
bySH the assessee. However, the term income does take into consideration the
ARE S
deductions on account of depreciation and investment allowance. Therefore, the
term profits and gains are not synonymous with the term 'income'".

The deductions under Chapter IV are given to arrive at the figure of net income
under the head of "income from profits and gains of business or profession". "In
contrast, 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", said the judgment authored by Justice Sikri.

The bench also noted that Section 80A stated that deductions under Chapter VI
should be allowed from "gross total income". It observed :

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'.

Therefore, the bench observed :

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

On this basis, the bench overruled the decision in Motilal Pesticides.

Read Judgment
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 Page 1 of 22 WWW.LIVELAW.IN

REPORTABLE
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-
(ARISING OUT
2417 OFOF SLP (CIVIL) NO. 6326-
2019
6327ARISING
OF 2019)OUT OF DIARY NO.
39430
CIVILOF 2017 NO. 2420-2421
APPEAL
(ARISING
OF OUT OF SLP (CIVIL) NO. 6328-
2019
6329ARISING
OF 2019)OUT OF DIARY NO.
39436 OF 2017
CIVIL APPEAL NO. 2414-2415
(ARISING OUT OF SLP (CIVIL) NO. 6335-
OF 2019
6336 OF 2019)OUT OF DIARY NO.
ARISING
39424
CIVILOF 2017 NO. 2418-2419
APPEAL
(ARISING OUT OF SLP (CIVIL) NO. 6330-
OF 2019OUT
6331ARISING
OF 2019) OF DIARY NO.
39433 OF 2017
AND
CIVIL APPEAL NO. 2422-2423
(ARISING OUT OF SLP (CIVIL) NO. 6333-
OF 2019
6334ARISING
OF 2019)OUT OF DIARY NO.
39440 OF 2017
Civil Appeal Nos. 1581-1582 of 2005 a/w.
Connected matters Page 1 of 22

Page 2 of 22 WWW.LIVELAW.IN

JUDGMEN
T
A.K.
SIKRI, J.
Leave granted. Delay
condoned.
2) In all these appeals issue relates to the
interpretation
accorded to that is to be of Section 80HH of
the provisions
the Income Tax
Act, 1961 (hereinafter referred to as the ‘Act’).
Section 80HHprovisions,
other related and as it existed at the
relevant
be takentime,
note are to
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 while
limited, namely, is computing the
deduction whether it is toas
available out of ‘income’ becomputed under
the Act and
‘profits or out of without deducting
gains’,

Topics : Income Tax Act  |  Income from profit and gains  |  deductions on total income  |
 Justice A K Sikri  |  Justice M R Shah  |  Justice Abdul Nazeer  |  Section 80HH Income Tax Act

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