A three judges’ bench of the Apex Court has decided that deduction under Section 80 HH of the Income Tax Act 1961 should be calculated based on gross profits and income instead of the net income from profits and gains computed as per Sections 28 to 44 B of the Act.
Section 80 HH of the Income Tax Act deals with deduction from total income @ 20% of the “profits and gains” of an undertaking engaged in manufacturing or in the business of hotel for a period of ten assessment years.
The assessee in this case claimed that deduction under section 80 HH should be given out of gross profits and gains While the tax department took a contrary view that this deduction is applicable on the net income from profits and gains computed in the manner provided under sections 28 to 44 B, after allowing deductions for depreciation, unabsorbed depreciation and investment allowance.
In Motilal Pesticides (I) Pvt. Ltd. Vs. Commissioner of Income Tax , Delhi- II (2000) 9 SCC 63 , a division bench decided in favour of the department on this issue. But this view was later doubted by another division bench. Hence the matter was referred to a three judge bench to settle the issue finally.
It is to be noted here that Sections 28 to 44B fall under Chapter IV of the Act and Section 80 HH fall under Chapter VI A of the Act relating to deductions. The question to be decided before the three judge bench was whether the meaning of income under chapter IV should be applied to chapter VI A.
The bench noted that “total income” is different from “profits and gains”. The Court observed that ‘profits and gains’ is a wider concept than ‘total income’ and therefore “profits and gains” are not synonymous with the term “income”.
The Apex Court clarified that 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 and profession”. In contrast certain deductions under Chapter VI A are given by way of incentives. Assessee may earn these deductions on fulfilling the eligibility criteria contained therein, even when they are not in the nature of any expenditure incurred by the assessee.
The bench observed that on a plain reading of Section 80 HH along with Section 80 A, it becomes clear 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 three judge bench overruled the ratio laid down in Motilal Pesticides case.
Courtesy/By: Sonali Tiwari
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03 Mar 2019
