Rajasthan High Court - Jaipur
Vijay Industries vs Commissioner Of Income Tax on 17 May, 2004
Equivalent citations: (2004)190CTR(RAJ)90, [2004]270ITR175(RAJ)
JUDGMENT
1. At the outset learned counsel for the assessee does not want to press the question Nos. 1 and 2 in DB IT Ref. No. 80/1987 & question Nos. 1, 3 and 4 in DB IT Ref. No. 7/1995. He wants to press the question only relating to Section 80HH in asst. yrs. 1979-80 and 1980-81.
2. On an application under Section 256(1) of the IT Act, the Tribunal has referred the following questions for the opinion of this Court:
For asst. yr. 1979-80 :
"Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that the deduction under Section 80HH would be available out of income as computed under the IT Act, and not out of the profits and gains of the industrial undertaking without deducting therefrom depreciation and investment allowance?"
For asst. yr. 1980-81 :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that for the purposes of allowing deduction under Section 80HH the profits and gains of an industrial undertaking should be computed by taking into consideration unabsorbed depreciation, current depreciation and investment allowance?"
3. Learned counsel for the Revenue brought to our notice that now the issue has been covered by their Lordships decision in the case of Motilal Pesticides (I) (P) Ltd. v. CIT (2000) 243 ITR 26 (SC) and as per the decision of their Lordships, Section 80HH is available only on the net income and not on gross income.
4. Mr. Kasliwal, learned counsel for the Revenue, has made the submissions and given his submissions in writing also. The submissions given in writing reads as under:
"Sections 80HH : Where the gross total income of assessee includes any profits and gains derived from an industrial undertaking be allowed in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to 20 per cent thereof." Thus, deduction under Section 80HH is available to an industrial undertaking, which fulfils the requirements of the section. Section 80HH provides for deduction from out of "profits and gains" of an industrial undertaking of the amount specified therein. Section 80HH provides for deduction of 20 per cent of profits and gains of an eligible industrial undertaking and that deduction is to be made out of the "profits and gains" of that industrial undertaking while computing the total income of the assessee. From a bare reading of Section 80HH, it will be noticed that the deduction as envisaged in Section 80HH is available only to an 'industrial undertaking' as distinct from an assessee and is to be allowed only out of the "profits and gains" of that industrial undertaking. Just to illustrate, if an assessee owns two industrial undertakings, one of which is eligible and qualified for the deduction under Section 80HH, whereas, the other does not qualify for the deduction under Section 80HH, in that case, the deduction @ 20 per cent of the "profits and gains" of that eligible industrial undertaking will be allowed and the profits and gains of such industrial undertaking will be reduced by the deduction as available to such industrial undertaking and thereafter, the balance will go for the purpose of computation of total income of the assessee. It is not that first the income of both the units will be clubbed and then deduction under Section 80HH is to be worked out. This would result in an absurd situation. There may be another situation where the profits of the industrial undertaking eligible for deduction under Section 80HH may be taken up by the losses of other industrial undertaking which is not eligible for the deduction. There may be an adverse situation where there may not be a profit with the industrial undertaking eligible for the deduction under Section 80HH and 80I but there may be a profit with an industrial undertaking not eligible for deduction under Sections 80HH and 80I and if both are taken together, the assessee may get the benefit of deduction under Sections 80HH and 80HH, which was not intended to be given by the legislature. It is, therefore, submitted that as per the legislative intention and keeping in view the language of Sections 80HH and 80I, the deduction ought to be made available to the industrial undertaking with reference to profits and gains of such industrial undertaking.
4. It is relevant to mention that Sections 80HH and 80I very categorically refer to and use the terminology 'profits and gains of industrial undertakings". It may please be noted that "profits and gains" and "income" are not same but are different. The term 'profits and gains' has not been defined under the provisions of IT Act whereas the term 'income' has been defined in the IT Act. It may also be noted that there are a number of provisions under Chapter VI-A, some of which refer to the term 'profit and gains' and some of them refer to the term 'income'. Thus, in some of the provisions of Chapter VI-A, the 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. Here it is relevant to draw your Lordship's kind attention to the provisions of Sections 28 and 29 of the IT Act. Section 29 provides for computation of income out of profits and gains. It says and provides that out of profits and gains, income will be computed by taking into consideration the provisions of Section 30 to Section 43D of the IT Act. It means the 'profits and gains' is the figure, out of which income is to be computed. It is, therefore, submitted that the term 'profits and gains' and 'income' are not synonymous and, therefore, the profits and gains has to be taken as understood in the commercial world.
5. Distinction between 'profits and gains' and 'business income'.
In order to distinguish between 'profits and gains' and 'business income', it is necessary to quote from the judgment of the Supreme Court in CIT v. B.C. Srinivasa Setty in regard to the scheme of computation of income under different heads, given in the IT Act, 1961, "There is an income chargeable to income-tax and income chargeable, being computed income, which is arrived at after making statutory deductions from income chargeable to income-tax. This inference flows from the general arrangement of the provisions in the IT Act, whereunder each head of income, the charging provision is accompanied by a set of provisions for computing the income, subject to charge. The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus, charging section and the computation provisions together constitute an integrated code. It must be borne in mind that the legislative intent is to be presumed to run uniformly through the entire conspectus of the provisions, pertaining to each head of income. No doubt, there is a qualitative difference between the charging provisions and a computation provision. ' It is obvious that the general arrangement of the scheme of computation of income, outlined by the Supreme Court, is applicable to each head of income, including 'profits and gains' of business or profession. Under this head, Section 28 provides for income chargeable to income-tax in general and particularly 'profits and gains' in Section 28(i) which is the gross amount from which statutory deductions have to be made to arrive at computed income. Such computed income is called business income as is clear from the heading of Sections 29 to 43A of Chapter IV, in respect of this head of income, i.e., computation of business income.
It may be pointed out that both, 'profits and gains' and 'business income' are computed entities worked out in accordance with the provisions contained in Sections 30 to 43A, as is clear from the language of Section 29 and its marginal note. Section 29 states thus: The income referred to in Section 28 shall be computed in accordance with the provisions contained in Sections 30 to 43A.' The income referred to in Section 28 is income chargeable to income-tax whereas Section 28 specifically refers to 'profits and gains'.
Sections 29 also specifically brings home the conceptual distinction between 'income' and 'profits and gains' of business or profession. It specifically provides for the computation/calculation of 'income' from out of 'profits and gains'.
Income from profits and gains is computed income or income chargeable under the head 'profits and gains' of business or profession or simply business income.
Some of the provisions from out of Sections 30 to 43A are meant for computation of 'profits and gains' and some are meant for computation of 'business income' from 'profits and gains'. For instance, Section 36 clearly states that the deductions specified therein are to be allowed for the purpose of determining the "income" referred to in Section 28, namely, 'profits and gains', being income chargeable to income tax, referred to in Section 28. It states as follows:
'Sections 36 : The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28' [particularly in Section 28].
Sections 32 (as it then was) stated as follows:
'Sections 32(1) : In respect of depreciation of--(i) buildings, machinery, plant or furniture owned by the assessee and used for the purpose of the business or profession, the following deductions shall, subject to the provisions of Section 34, be allowed.' It may be noted that Section 32(1) does not state, as to deduction in respect of depreciation of buildings, etc. shall be allowed in computing which type of income, 'profits and gains' or 'business income'. This section provides that deduction in respect of depreciation of building, etc., is an allowable deduction under certain conditions. From where such a deduction has to be made, the manner of deduction and what will happen if deduction in respect of depreciation cannot be made, is stated in Section 32(2). The relevant part of Section 32(2) which shows from where deduction in respect of depreciation has to be made, is as follows:
'Sections 320 : Where in the assessment of the assesses full effect cannot be given to any allowance under Clause (i) or Clause (ii) or Clause (iia) or Clause (iv) or Clause (v) or Clause (vi) of Sub-section (1a) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owning to the 'profits and gains' chargeable being less than the allowance then.... The allowance or part of the claim to which effect has not been given....,' As such, statutorily as well as by the application of principles of accountancy, profits and gains as well as business loss are computed in the same manner. One is a positive computed entity whereas the other is a negative computed entity. Such an interpretation of these computed entities, is also in accordance with the judgment of the Supreme Court in CIT v. Harprasad & Co. Ltd. (1975) 99 ITR 118 (SC) wherein it is stated: "From the charging provisions of the Act, it is discernible that the words 'income' or 'profits and gains' should be considered as including losses also, so that, in one sense, profits and gains represents 'plus' income whereas, losses represent 'minus' income. In other words, loss is negative profit. Both positive and negative profits are of the revenue character."
By taking into consideration provisions of Section 72(1) and Section 32(2) both, carried forward business loss and current depreciation allowance, have to be adjusted against profits and gains.
6. Relevance of Section 80AB for the purpose of Sections 80HH and 80I.:
Sections 80AB reads as: "Where any deduction is required to be made or allowed under any heading in respect of any income of the nature specified in the section which is included in the gross total income of the assessee, then, notwithstanding anything contained in the section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone 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."
The heading of Section 80HH reads as : "Deduction in respect of profits and gains from newly established industrial undertaking or hotel business in backward areas."
Sections 80HH(1) reads as: "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 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."
Thus, in case of income by way of dividend/royalty, assessee has to first compute, how much is the total amount of dividend/royalty and from this total amount the assessee has to work out the "income by way of dividend/royalty" under the provisions of IT Act, 1961, as required by Section 80AB.
6.1 Under Section 80RRA, where the gross total income of an assessee includes any remuneration received by him in foreign currency from any employer (being a foreign employer or an Indian concern) for any service rendered by him outside India, he will be allowed a deduction from such remuneration of an amount equal to 50 per cent of said remuneration. Here an assessee is not required to compute the income from salary. The IT Department allows such claim on gross remuneration, even after Section 80AB was inserted by the Finance (No. 2) Act, 1980, w.e.f. 1st April, 1981. It is pertinent to note that the phrase allowing deduction under above section is as under:
'A deduction from such remuneration of an amount equal to fifty per cent of the remuneration' which is similar to that used in Section 80HH.
6.2 Section 80HH, requires the computation of 'profits and gains' of business and not 'income from profit and gains of business'. Section 80AB requires 'income of that nature' to be computed in accordance with provisions of the IT Act. For the purpose of Section 80HH 'income of that nature' is 'profit and gains of business' and the IT Act, 1961, does not provide how 'profits and gains of business' shall be calculated.
6.3 The AO has erroneously relied on Section 80AB of the IT Act, 1961. He has allowed 'benefit or deduction on income from profit and gains' rather than on 'profit and gains', as he has deducted the amount of current year's depreciation, unabsorbed depreciation and brought forward investment allowance from profit and gains. The general arrangement of the deductions as obtained from the statute book and on the basis of above discussions emerges as under:
Profits and gains--
Less :
Current year's depreciation--
Unabsorbed depreciation --
Unabsorbed investment allowance --
Business income --
6.4 In this connection reliance is placed upon the following decisions:
(a) CIT v. Vegetable Products Ltd (1973) 88 ITR 192 (SC)--Held : Wherever two reasonable constructions of a provision of law upon its analysis, are available, a view which is favourable to the assessee should be adopted.
(b) CIT v. Balanoor Tea & Rubber Co. Ltd. (1974) 93 ITR 115 (Mys).-- Held: (proposition is exactly the same as above) (also a case of a priority industry where the deduction has been calculated (c) 8 per cent of the profits and gains).
(c) Cambay Electric Supply Industrial Co. Ltd. v. CIT (1978) 113 ITR 84 (SC)--Held: In computing the total income of the assessee carrying on the business of an industry as specified in Section 80E of the IT Act, 1961, for the purpose of the special deduction permissible thereunder, the balancing charge arising as a result of sale of the old machinery and buildings and worked in accordance with Section 41(2), irrespective of its real character, has to be taken into account and included as income of the business. In other words, the balancing charge will have to be taken into account before computing the deduction of 8 per cent under Section 80E.
(d) Distributors (Baroda) (P) Ltd. v. Union of India and Ors. (1985) 155 ITR 120 (SC)--Held: In this case the apex Court was concerned with the interpretation of Section 80M of the Act, 1961. Section 80M provides for deduction from taxable income of amounts earned by way of inter-corporate dividends and the issue coming up for determination was whether the relief was to be allowed on the gross amount of dividends or only on the net amount. In this regard it would suffice to state that the apex Court was constrained by the newly inserted provisions contained in Section 80AA. The Hon'ble apex Court was also more concerned with how the error and ghost of Cloth Traders (P) Ltd. v. CIT (1979) 118 ITR 243 (SC) was to be dealt with due to which the apex Court clarified the legal position relating the rule of stare decisis whereunder it became possible for it to overrule its own earlier decision.
(e) CIT v. Canara Workship (P) Ltd. (1987) 161 ITR 320 (SC)--Held: "In the application of Section 80E of the IT Act, 1961, the profits and gains earned by one priority industry (mentioned in that section) cannot be reduced by the loss in some other industry owned by the assessee. Each industry must be considered in its own working, when adjudging its title to the deduction under Section 80E. It cannot be allowed to suffer because it keeps company with some other industry in the hands of the assessee. It makes no difference that the other industry is also a priority industry." It thus follows that what is to be looked at is not income as computed under the Act but the profits and gains as ordinarily understood.
(f) CIT v. P.K. Jhaveri (1990) 181 ITR 79 (SC)--Held: It is a case concerned with the grant of a deduction under Section 80K to a shareholder-assessee from out of dividends received by it from a specified company and the issue was once again whether the deduction allowable was to be on the gross amount of dividend or on the net amount after reduction of interest on money borrowed specifically to earn such income and the Hon'ble Court ruled that the deduction would be allowable only on the net amount after deduction of interest.
(g) CIT v. Tarun Udyog (1991) 191 ITR 688 (Ori)--Held: Section 80HH of the IT Act, 1961, requires granting of deduction from the profits and gains derived from new industrial undertakings established in backward areas. According to the provisions of the IT Act, income is different from profits though the former includes the latter. Though an industrial undertaking may earn profits, its gross total income may be substantially less than the profit, and the taxable income may, in some cases, become nil. Hence, gross total income computed in accordance with the provisions contained in Sections 30 to 43A, would not be relevant, for the purpose of the deduction under Section 80HH.
(h) CIT v. Loonkar Tools (I) Ltd. -Held: Section 80HH is applicable where gross total income includes any profits and gains derived from an industrial undertaking--Sections 80AB mentions that amount of income of the nature for which deduction is to be given as computed in accordance with provisions of the Act shall alone be deemed to be the amount of income of that nature which is derived or received by assessee and which is included in his gross total income--Word 'such' in Section 80HH refers to profits and gains mentioned in first part of this section--Gross total income will not include something over and above the figure which is included in it by way of profits and gains on which deduction is available--Depreciation and investment allowance are, therefore, liable to be deducted before giving special deduction under Chapter VI-A. The dispute in this case relates to asst. yr. 1981-82 and the legal position examined by the Hon'ble Court is as it stood after the amendment made by the Finance Act, 1981, whereby Section 80AB was introduced.
(i) Motilal Pesticides (I) (P) Ltd. v. CIT (2000) 243 ITR 26 (SC)--New industrial undertaking in backward area--Special deduction-Computation of--Law applicable--Effect of insertion of Sections 80AA and 80AB--Special deduction to be allowed only on net income and not on gross income.
Here also the Hon'ble apex Court has considered the post amendment position only which is inapplicable to the facts of the present case.
6.5 It has been directed by the CBDT vide its Circular No. 26 (LXXIV-3) (F. No. 4(53) IT/54), dt. 7th July, 1955 that the Department should adopt that mode of set off of carried forward losses/allowances which will give the assessee the maximum benefits.
6.6 The Supreme Court has already held in the case of CIT v. Vegetable Products Ltd. (supra) that if two interpretations are possible, the one more favourable to the taxpayer has got to be restored to.
6.7 It was also held in Bajaj Tempo Ltd. v. CIT (1992) 196 ITR 188 (SC), a provision in the taxing statute granting incentive for promoting growth and development should be construed liberally. Since a provision intended for promoting economic growth has to be interpreted liberally the restriction on it too has to be construed so as to advance the objective of the provision and not to frustrate it. Sections 80HH and 80I are enacted for industrial development and economic growth of a particular region and area and should be used to advance the objective for which it was enacted.
6.8 It would be relevant to draw your Lordships' kind attention towards the sub-heading 'c' in Chapter VI of the IT Act, as 'deductions in respect of certain income', your Lordships' will observe that the legislature has used the word 'certain income' and not 'income', meaning thereby that there are different types of different income, comprised in gross total income and not to the income computed in accordance with the provisions of the Act.
To summarise, the applicant's case is that without doubt it is running an industrial activity in a backward area, which entitles it to a claim under Sections 80HH and 80I of the IT Act, 1961.
The provision contained in both of these provisions provide for computation of the amount of deduction based on a percentage of the "profits and gains" of the business as contra-distinguished from its income. It may thus be relevant to identify the precise terms relevant for this claim, viz., income, total income, gross total income, profits and gains, etc. Income is defined by Section 2(24) of the Act by way of an inclusive definition and is to include 'profits and gains'.
Total income is defined under Section 2(45) as the total amount of income referred to in Section 5, computed in the manner laid down under this Act. However, for our purposes Section 5 is not relevant as it deals with the 'scope of total income'.
The term 'profits and gains' is defined under Section 28 under the heading 'Profits and gains of business or profession' as the following income shall be chargeable , to income-tax under the head 'Profits and gains of business and profession' the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year.
Sections 29 provides that income referred to above shall be computed in accordance with provisions contained in Sections 30 to 43A.
Sections 32(2) deals with the carry forward of the depreciation owing to there being no or less profits and gains during the previous year to set it off against the profits and gains of any business or profession carried on by him and assessable for that assessment year.
Gross total income has been defined in Section 80B (Chapter VI-A) as the total income computed in accordance with the provisions of this Act before making any deduction under this chapter.
It is most humbly submitted that as 'total income' of an assessee will be calculated after making all the deduction under Chapter VI-A (deduction specified under Sections 80C to 80U).
It is most humbly submitted that the concept 'profits and gains' is of 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 ate 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'.
This finds support from the observations of the apex Court in CIT v. Orient Paper Mills (1983) 139 ITR 763 (Cal) at p. 769 where it has been observed that the term "profit" in the various sections of the IT Act had not got the same meaning. In the context, sometimes it meant the assessable profits and sometimes commercial profits. Further, at p. 770 it has taken the view:
Therefore, the language of the section makes it clear, in our opinion, the significant differences in the expressions "gross total income", "income" and "profits and gains attributable to priority industry" that profits and gains attributable to priority industry must be computed in the commercial sense and not in accordance with the provisions of the Indian IT Act, otherwise the legislature would not have used the expression "profits and gains attributable to priority industry" if not in contradiction to, at least differently from the expression "total income" and "gross total income"."
5. Considering the submissions and following the view taken by their Lordships in the case of Motilal Pesticides (I) (P) Ltd v. CIT (supra), we answer the question referred in both the references in the affirmative i.e., in favour of the Revenue and against the assessee.
Both the references stand disposed of accordingly.