1. Dispute concerning whether deduction under Section 80-HH of the Income-tax Act, 1961, is applicable to gross profit or net income. (Para 1 , 2 )
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2000 Supreme(SC) 361
SUPREME COURT OF INDIA
D.P.Wadhwa : N.Santosh Hegde
Motilal Pesticides India Private Limited
Versus
Commissioner Of Income-tax, Delhi
Case No. : 186 , 187 of 1995
Date of Decision : 2/15/00
Important Points
Deduction under Section 80-HH of the Income-tax Act, 1961, is allowed on the net income rather than the gross income, as Section 80-AB is clarificatory and declares the law as it always stood regarding deductions under Chapter VI-A.
Subject
Taxation Law - Income Tax
Act Referred
Headnote
(A) Income-tax Act, 1961 - Sections 80-HH, 80-M, 80-AA and 80-AB - Deduction in computing total income - Whether deduction is to be allowed on gross income or net income - It is held that deduction is to be allowed only on the net income and not on the gross income. (Paras 4, 5)
(B) Section 80-AB - Nature of provision - Provision is of clarificatory nature and was enacted to declare the law as it always stood in relation to the deductions to be made in respect of the income specified under Chapter VI-A of the Act. (Paras 4, 5)
Facts of the case:
The assessee claimed relief under Section 80-HH in respect of an industrial undertaking newly set up in a backward area. A dispute arose regarding whether the deduction should be allowed on the gross income or on the net income. The High Court had previously ruled in favor of the Revenue, holding that the deduction is applicable to the net income.
Findings of Court:
The court affirmed the judgment of the High Court, finding no merit in the appeals.
Issues: Whether the assessee was entitled to deduction under Section 80-HH of the Income-tax Act, 1961 on the gross profit or on the net income.
Ratio Decidendi: The court reasoned that judicial precedents had established that deductions under Chapter VI-A are to be allowed on net income. The introduction of Section 80-AB was clarificatory, declaring the law as it always stood. Consequently, the deduction must be calculated on the net income rather than the gross total income.
Result: Appeals dismissed.
(B) Section 80-AB - Nature of provision - Provision is of clarificatory nature and was enacted to declare the law as it always stood in relation to the deductions to be made in respect of the income specified under Chapter VI-A of the Act. (Paras 4, 5)
Facts of the case:
The assessee claimed relief under Section 80-HH in respect of an industrial undertaking newly set up in a backward area. A dispute arose regarding whether the deduction should be allowed on the gross income or on the net income. The High Court had previously ruled in favor of the Revenue, holding that the deduction is applicable to the net income.
Findings of Court:
The court affirmed the judgment of the High Court, finding no merit in the appeals.
Issues: Whether the assessee was entitled to deduction under Section 80-HH of the Income-tax Act, 1961 on the gross profit or on the net income.
Ratio Decidendi: The court reasoned that judicial precedents had established that deductions under Chapter VI-A are to be allowed on net income. The introduction of Section 80-AB was clarificatory, declaring the law as it always stood. Consequently, the deduction must be calculated on the net income rather than the gross total income.
Result: Appeals dismissed.
Legal Category Hierarchy
Table of Contents
2. Appellant contended that deduction under Section 80-HH should be allowed on gross income, whereas the Revenue maintained it is applicable only to net income. (Para 2 , 5 )
3. The court observed that the principle established in Distributors (Baroda) — that deductions are allowed on net income — applies to Chapter VI-A of the Act. (Para 4 , 5 )
4. Deductions under Chapter VI-A of the Income-tax Act, 1961, including Section 80-HH, are allowed on net income and not on gross income. (Para 4 , 5 )
5. Appeals dismissed and the judgment of the High Court affirmed. (Para 6 )
6. Whether deduction under Section 80-HH of the Income-tax Act, 1961, is allowed on gross income or net income?
The deduction is allowed only on the net income and not on the gross income. (Para 4 )
7. What is the nature and effect of Section 80-AB of the Income-tax Act, 1961?
Section 80-AB is clarificatory and was enacted to declare the law as it always stood regarding deductions to be made in respect of income specified under Chapter VI-A. (Para 4 , 5 )
8. Does the interpretation of Section 80-M regarding net income deductions extend to Section 80-HH?
Yes, as both sections fall under Chapter VI-A and share similar language, the principle that deductions are allowed on net income applies to both. (Para 4 )
(1) JUDGMENT of Delhi High Court in Motilal Pesticides (I) Pvt. Ltd. v. C.I.T., Delhi reported in 1994 (207) ITR 636 is assailed before us. It concerns interpretation of Section 80-HH of the Income- tax Act, 1961 (for short the Act) and pertains to Assessment Years 1979-1980 and 1980-81. The question of law which the High Court answered in affirmative and in favour of the Revenue and against the appellant is as under:
"Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to deduction u/S. 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 the Assessment Year 1979- 80?"
(2) APPELLANT had claimed relief under Section 80-HH in respect of its Liquid Section which had been newly set up in a backward area. It was the contention of the appellant that relief should be allowed on the gross income and not on the net income. Section 80-HH in relevant part is as under:
"80-HH. (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 section applies, there shall, in accordance with the 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) IN support of its submission in the High Court appellant placed reliance on a decision of this Court in Cloth Traders (P) Ltd. v. Addl. C.I. T. ((1979) 118 ITR 243.- (AIR 1979 SC 1691). This judgment was delivered on interpretation of Section 80-M of the Act. Relevant part of Section 80-M is as under:
"80-M. (1) Where the gross total income of a domestic company, in any previous year, includes any income by way of dividends from another domestic company, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of such domestic company, a deduction of an amount equal to..."
(4) BOTH Sections 80-HH and 80-M fall in Chapter VI-A relating to deductions to be made in computing total income. It will be seen that language of Sections 80-HH and 80-M is same. It was held in Cloth Traders case that deduction is to be allowed on the gross total income and not on the net income. But then decision in Cloth Traders case was overruled in Distributors (Baroda) P. Ltd. v. Union of India ((1985) 155 ITR 120 : (AIR 1985 SC 1585)). After the decision in Cloth Traders case two Sections 80-AA and 80- AB were introduced by Finance (No. 2) Act, 1980. While Section 80-AA was to have retrospective effect w.e.f. 1 -4-1968, Section 80-AB was to have operation w.e.f. 1-4- 1981. Section 80-AA had the effect of effacing the decision of this Court in Cloth Traders case, which had interpreted Section 80- M. Section 80-AB was made applicable to all the sections in Chapter VI-A except Section 80-M . In Distributors (Baroda) case, however, this Court specifically overturned its earlier decision in Cloth Traders case and held that deduction is to be allowed only on the net income and not on the gross income. With reference to Section 80-AB this Court said it was merely of clarificatory nature and decision of this Court in Distributors (Baroda) case is thus irrespective of Section 80-AB of the Act. High Court, therefore, relying on the decision of this Court in Distributors (Baroda) case answered the question in favour of the Revenue and against the assessee.
(5) MR. Ramamurti, learned senior counsel, appearing for the appellant, submitted mat even though Cloth Traders cases was overruled in Distributors (Baroda) case but both the case 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. He said Section 80-AB was specifically introduced w.e.f. 1-4-1981 and it would have
