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. 2416-2417  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

AND

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

J U D G M E N T

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

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counsel for the parties on the aforesaid lines, the Division Bench

noted the conflict and passed orders dated 5th 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.,  Kotagiri6 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'

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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:-

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“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.

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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  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

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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

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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

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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 1st 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

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effect  from April  01,  1981.  Following portion of  this circular  is

relevant:

"The new section 80AB will take effect from 1st 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.

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