JUDGMENT
Bhargav D. Karia, J.- Heard learned advocate Mr.B.S.Soparkar for the appellants in the aforesaid Tax Appeals and learned Senior Standing Counsel Mr.Dev Patel in Tax Appeal No.378 of 1999 and Income Tax Reference No.1 of 2000 and learned Senior Standing Counsel Mr.Aaditya Bhatt for the respondents in Tax Appeal Nos.558 of 1999, 559 of 1999 and 469 of 2000.
2. These appeals are pending in view of the order dated 21.8.2025 passed by the Honourable Supreme Court in Nirma Industries Ltd. v. Asstt. CIT (SC)/Civil Appeal No.13477 of 2024 with Civil Appeal Nos.13478 – 13480 of 2024 and Civil Appeal No. 13481 of 2024 whereby the Honourable Supreme Court set aside the order dated 27.8.2007 passed by the Court in Tax appeal No.378 of 1999 with Tax Appeal Nos.558 of 1999 and 559 of 1999 and the order dated 20.11.2007 passed in Tax Appeal No.469 of 2000 and remanded the matters for fresh consideration in accordance with law keeping in mind the judgment of the Honourable Supreme Court in the case of Vijay Industries v. CIT 412 ITR 1 (SC).
3. The common question which is arising in these appeals which are admitted for consideration is as under.
“Whether in law and in facts and circumstances of the appellant’s case, the Tribunal was justified in rejecting the appellant’s contention that deduction under Section 80-I of the I.T.Act should allowed on profit of Industrial Undertaking without reducing the claim of Investment Deposit under Section 32AB of I.T.Act?”
4. The brief facts of the case are that the appellant assessee is engaged in manufacturing of Nirma detergent cake. For the years under consideration, the assessee filed original return of income followed by revised income tax return claiming deduction under Section 32AB of the Income Tax Act 1961 (“the Act” for short) on account of deposits with IDBI and purchase of new plant and machinery fulfilling the terms and conditions of the said section. The assessee also claimed deduction under Section 80-I of the Act in respect of profits of industrial undertaking.
5. The Assessing Officer while dealing with the deduction claimed by the assessee under Section 80-I of the Act held that the assessee is not entitled to deduction and disallowed the claim on the basis that similar claims had been disallowed in earlier Assessment Years on the ground that all conditions of Section 80-I(2) of the Act were not fulfilled.
6. It is pertinent to note that as the Assessing Officer had disallowed the entire claim of the assessee under Section 80-I of the Act, the issue of reducing the same by deduction under Section 32AB of the Act did not arise.
7. The CIT (Appeals) also while considering the claim under Section 80-I of the Act in the appeal filed by the assessee allowed the same after detailed discussion holding that all the conditions of the provisons of Section 80-I of the Act were fulfilled by the assessee industrial undertaking. The CIT (Appeals) also referred to the appellate order of CIT (Appeals) for Assessment Year 1987-88 holding that the assessee is entitled to claim under Section 80-I of the Act. The CIT (Appeals) also had no occasion to consider the issue of deduction under Section 32AB of the Act while computing deduction under Section 80-I of the Act as the CIT (Appeals) has only referred to eligibility of the assessee to claim deduction under Section 80-I of the Act.
8. Being aggrieved by the order of the CIT (Appeals), the Revenue preferred the appeal before the Tribunal.
9. In some of the appeals, the assessee raised additional ground with regard to the question of law as to whether the computation under Section 80-I of the Act be made with deduction under Section 32AB of the Act or without deduction under Section 32AB of the Act. The Tribunal admitted additional ground in the appeals where it is raised being a pure question of law and decided the same against the assessee on merits. The Tribunal in I.T.A.No.5665 of 1991 in paragraphs 13, 20 and 21, it is observed as under.
“13. For the purposes of computing the deduction u/s 80 the provisions of sec 80AB and 80B(5) of the Act are relevant. Sec 80AB refers to deduction to be made with reference to the income included in the gross total income. The expression Gross total income has been defined u/s 80B(5) to mean the total income computed in accordance with the provisions of this Act before making any deductions under chapter VI-A. On a fair reading of the entire scheme for computation of deductions as enumerated in chapter – VI C it is clear that deduction is to be calculated with reference to the income arrived at as per the provisions of the Act i.e. after making deduction u/s 32AB. The additional ground of appeal raised by the assessee is therefore without merit and is dismissed. Since the issue is covered by the supreme Court decisions as cited above, we do not consider it necessary to discuss the decisions of the Ahmedabad Tribunal as well as other cases cited by the ld. Counsel. The additional ground is therefore dismissed. With regard to the quantum of deduction u/s 32AB which is to be deducted for arriving at the eligible figure of income for working out the relief u/s 80-I is the subject matter of ground No.1 & 2 in the departmental appeal and would therefore be considered while adjudicating the said ground.” “20. In so far as the quantification of deduction u/s 80-I is concerned we have already held, while disposing of additional ground in assess’s appeal above, that deduction u/s 80-I on the income of the manufacturing unit arrived at after deducting the amount of relief u/s 32AB. On the issue of the profits of the industrial undertaking eligible for relief u/s 80-I the representatives of both the sides concurred with the basic proposition, as set out in the deciison of Madras High Court in CIT v. Pandians Chemicals Ltd
233 ITR 497 and in the Kerala High Court decision in Bharat Sea Foods v. CIT 224 ITR 785 that there should be a direct nexus of the profit with the business activity of the industrial undertaking and the said activity should be an immediate and effective source of the said profit or gain. The entire issue of deduction u/s 80-I is hereby set aside to the file of the A.O. for recomputation of deduction in the light of the aforesaid directions and observations made by us. Group No.2 in revenue’s appeal is thus treated as allowed.
21. Group No.3 is against the action of the CIT *A) in deleting the addition of Rs.65,88,089 on account of unutilised balance in the excise duty MODVAT account. The issue is covered by the decision of the Gujarat High Court in the case of Norma detergents Pvt Ltd in ITA No.70/97 for A.Y. 88-89. Paper book Vol.I contains a copy of the judgment at pages 69 to 72. Further in the case of Nirma Chemical Works Ltd. The Tribunal vide its order in para 27 for A.Y. 87-88 has deleted a similar addition. Respectfully following these decisions we uphold the order of the CIT (A) and reject this ground of appeal.”
10. In order to answer the question, it would be germane to refer to the relevant provisions of the Income Tax Act 1961 as it existed in the statute for the relevant Assessment Year 1988-89. Section 32AB, Section 80AB and Section 80-I read as under.
“Section 32AB. Investment deposit account.—(1) Subject to the other provisions of this section, where an assessee, whose total income includes income chargeable to tax under the head “Profits and gains of business or profession”, has, out of such income,—
(a) deposited any amount in an account (hereafter in this section referred to as deposit account) maintained by him with the Development Bank before the expiry of six months from the end of the previous year or before furnishing the return of his income, whichever is earlier; or
(b) utilised any amount during the previous year for the purchase of any new ship, new aircraft, new machinery or plant, without depositing any amount in the deposit account under clause (a),
in accordance with, and for the purposes specified in, a scheme (hereafter in this section referred to as the scheme) to be framed by the Central Government, or if the assessee is carrying on the business of growing and manufacturing tea in India, to be approved in this behalf by the Tea Board, the assessee shall be allowed a 2[deduction (such deduction being allowed before the loss, if any, brought forward from earlier years is set off under section 72) of]—
(i) a sum equal to the amount, or the aggregate of the amounts, so deposited and any amount so utilised; or
(ii) a sum equal to twenty per cent. of the profits of [***] business or profession as computed in the accounts of the assessee audited in accordance with sub-section (5),
whichever is less
[Provided that where such assessee is a firm, or any association of persons or any body of individuals, the deduction under this section shall not be allowed in the computation of the income of any partner, or as the case may be, any member of such firm, association of persons or body of individuals:]
[Provided further that no such deduction shall be allowed in relation to the assessment year commencing on the 1st day of April, 1991, or any subsequent assessment year.]
(2) For the purposes of this section,—
(i) [***]
[(ii) “new ship” or “new aircraft” includes a ship or aircraft which before the date of acquisition by the assessee was used by any other person, if it was not at any time previous to the date of such acquisition owned by any person resident in India;
(iii) “new machinery or plant” includes machinery or plant which before its installation by the assessee was used outside India by any other person, if the following conditions are fulfilled, namely :—
(a) such machinery or plant was not, at any time previous to the date of such installation by the assessee, used in India;
(b) such machinery or plant is imported into India from any country outside India; and
(c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee;
(iv) “Tea Board” means the Tea Board established under section 4 of the Tea Act, 1953 (29 of 1953).]
(3) [The profits of business or profession of an assessee for the purposes of sub-section (1) shall] be an amount arrived at after deducting an amount equal to the depreciation computed in accordance with the provisions of sub-section (1) of section 32 from the amounts of profits computed in accordance with the requirements of Parts II and III of the [Schedule VI] to the Companies Act, 1956 (1 of 1956), [as increased by the aggregate of—
(i) the amount of depreciation;
(ii) the amount of income-tax paid or payable, and provision therefor;
(iii) the amount of surtax paid or payable under the Companies (Profits) Surtax Act, 1964 (7 of 1964);
(iv) the amounts carried to any reserves, by whatever name called;
(v) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities;
(vi) the amount by way of provision for losses of subsidiary companies; and
(vii) the amount or amounts of dividends paid or proposed,
if any debited to the profit and loss account; and as reduced by any amount or amounts withdrawn from reserves or provisions, if such amounts are credited to the profit and loss account [***.] [***]
(4) No deduction under sub-section (1) shall be allowed in respect of any amount utilised for the purchase of—
(a) any machinery or plant to be installed in any office premises or residential accommodation, including any accommodation in the nature of a guest-house;
(b) any office appliances (not being computers);
(c) any road transport vehicles;
(d) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head “Profits and gains of business or profession” of any one previous year;
[(e) any new machinery or plant to be installed in an industrial undertaking, other than a small-scale industrial undertaking, as defined in section 80HHA, for the purposes of business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule.]
(5) The deduction under sub-section (1) shall not be admissible unless the accounts of the business or profession of the assessee for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant as defined in the Explanation below sub-section (2) of section 288 [before the specified date referred to in section 44AB and the assessee furnishes, by that date] the report of such audit in the prescribed form duly signed and verified by such accountant :
Provided that in a case where the assessee is required by or under any other law to get his accounts audited, it shall be sufficient compliance with the provisions of this subsection if such assessee gets the accounts of such business or profession audited under such law and furnishes the report of the audit as required under such other law and a further report in the form prescribed under this subsection.
[(5A) Any amount standing to the credit of the assessee in the deposit account shall not be allowed to be withdrawn before the expiry of a period of five years from the date of deposit except for the purposes specified in the [scheme or] in the circumstances specified below :—
(a) closure of business;
(b) death of an assessee;
(c) partition of a Hindu undivided family;
(d) dissolution of a firm;
(e) liquidation of a company.
[Explanation.—For the removal of doubts, it is hereby declared that nothing contained in this sub-section shall affect the operation of the provisions of sub-section (5AA) or sub-section (6) in relation to any withdrawals made from the deposit account either before or after the expiry of a period of five years from the date of deposit.]
[(5AA) Where any amount, standing to the credit of the assessee in the deposit account, is withdrawn during any previous year by the assessee in the circumstance specified in clause (a) or clause (d) of sub-section (5A), the whole of such amount shall be deemed to be the profits and gains of business or profession of that previous year and shall accordingly be chargeable to income-tax as the income of that previous year, as if the business had not closed or, as the case may be, the firm had not been dissolved.]
(5B) Where any amount standing to the credit of the assessee in the deposit account is utilised by the assessee for the purposes of any expenditure in connection with the [***] business or profession in accordance with the scheme, such expenditure shall not be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.]
(6) Where any amount, standing to the credit of the assessee in the deposit account, released during any previous year by the Development Bank for being utilised by the assessee for the purposes specified in the scheme or at the closure of the account [in circumstances other than the circumstances specified in clauses (b), (c) and (e) of sub-section (5A)], [is not utilised in accordance with and within the time specified in, the scheme], either wholly or in part, [***] the whole of such amount or, as the case may be, part thereof which is not so utilised shall be deemed to be the profits and gains of business or profession of that previous year and shall accordingly be chargeable to income-tax as the income of that previous year.
(7) Where any asset acquired in accordance with the scheme is sold or otherwise transferred in any previous year by the assessee to any person at any time before the expiry of eight years from the end of the previous year in which it was acquired, such part of the cost of such asset as is relatable to the deductions allowed under sub-section (1) shall be deemed to be the profits and gains of business or profession of the previous year in which the asset is sold or otherwise transferred and shall accordingly be chargeable to income-tax as the income of that previous year:
Provided that nothing in this sub-section shall apply—
(i) where the asset is sold or otherwise transferred by the assessee to Government, a local authority, a corporation established by or under a Central, State or Provincial Act or a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956); or
(ii) where the sale or transfer of the asset is made in connection with the succession of a firm by a company in the business or profession carried on by the firm as a result of which the firm sells or otherwise transfers to the company any asset and the scheme continues to apply to the company in the manner applicable to the firm.
Explanation.—The provisions of clause (ii) of the proviso shall apply only where—
(i) all the properties of the firm relating to the business or profession immediately before the succession become the properties of the company;
(ii) all the liabilities of the firm relating to the business or profession immediately before the succession become the liabilities of the company; and
(iii) all the shareholders of the company were partners of the firm immediately before the succession.
(8) The Central Government may, if it considers it necessary or expedient so to do, by notification in the Official Gazette, omit any article or thing from the list of articles or things specified in the Eleventh Schedule.
(9) The Central Government may, after making such inquiry as it may think fit, direct, by notification in the Official Gazette, that the provisions of this section shall not apply to any class of assessees, with effect from such date as it may specify in the notification.
[(10) Where a deduction has been allowed to an assessee under this section in any assessment year, no deduction shall be allowed to the assessee under sub-section (1) of section 32A in the said assessment year (hereinafter referred to as the initial assessment year) and a block of further period of four years beginning with the assessment year immediately succeeding the initial assessment year.]
Explanation.—In this section,—
(a) “computers” does not include calculating machines and calculating devices;
(b) “Development Bank” means—
(i) in the case of an assessee carrying on business of growing and manufacturing tea in India, the National Bank for Agriculture and Rural Development established under section 3 of the National Bank for Agriculture and Rural Development Act, 1981 (61 of 1981);
(ii) in the case of other assessees, the Industrial Development Bank of India established under the Industrial Development Bank of India Act, 1964 (18 of 1964) and includes such bank or institution as may be specified in the scheme in this behalf.
Section 80AB :
Deductions to be made with reference to the income included in the gross total income.
Where any deduction is required to be made or allowed under any section [***] included in this Chapter under the heading “C.—Deductions in respect of certain incomes” in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that 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.]
Section 80-I.
Deduction in respect of profits and gains from industrial undertakings after a certain date, etc.—
(1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel [or the business of repairs to ocean-going vessels or other powered craft], 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:
Provided that in the case of an assessee, being a company, the provisions of this sub-section [shall have effect in relation to profits and gains derived from an industrial undertaking or a ship or the business of a hotel] as if for the words “twenty per cent.”, the words “twenty-five per cent.” had been substituted.
[(1A) Notwithstanding anything contained in sub-section (1), in relation to any profits and gains derived by an assessee from—
(i) an industrial undertaking which begins to manufacture or produce articles or things or to operate its cold storage plant or plants; or
(ii) a ship which is first brought into use; or
(iii) the business of a hotel which starts functioning, on or after the 1st day of April, 1990, 5[but before the 1st day of April, 1991], 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-five per cent thereof:
Provided that in the case of an assessee, being a company, the provisions of this sub-section shall have effect in relation to profits and gains derived from an industrial undertaking or a ship or the business of a hotel as if for the words “twenty-five per cent.”, the words “thirty per cent.” had been substituted.]
(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely:—
(i) it is not formed by the splitting up, or the reconstruction, of a business already in existence;
(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose;
(iii) it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India, and begins to manufacture or produce articles or things or to operate such plant or plants, at any time within the period of [ten years] next following the 31st day of March, 1981, or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular industrial undertaking;
(iv) in a case where the industrial undertaking manufactures or produces articles or things, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power:
Provided that the condition in clause (i) shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section:
Provided further that the condition in clause (iii) shall, in relation to a small-scale industrial undertaking, apply as if the words “not being any article or thing specified in the list in the Eleventh Schedule” had been omitted.
Explanation 1.—For the purposes of clause (ii) of this subsection, any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely:—
(a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India;
(b) such machinery or plant is imported into India from any country outside India; and
(c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee.
Explanation 2.—Where in the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or plant used in the business, then, for the purposes of clause (ii) of this sub-section, the condition specified therein shall be deemed to have been complied with.
Explanation 3.—For the purposes of this sub-section, “small-scale industrial undertaking” shall have the same meaning as in clause (b) of the Explanation below subsection (8) of section 80HHA.
(3) This section applies to any ship, where all the following conditions are fulfilled, namely:—
(i) it is owned by an Indian company and is wholly used for the purposes of the business carried on by it;
(ii) it was not, previous to the date of its acquisition by the Indian company, owned or used in Indian territorial waters by a person resident in India; and
(iii) it is brought into use by the Indian company at any time within the period of 1[ten years] next following the 1st day of April, 1981.
(4) This section applies to the business of any hotel, where all the following conditions are fulfilled, namely:—
(i) the business of the hotel is not formed by the splitting up, or the reconstruction, of a business already in existence or by the transfer to a new business of a building previously used as a hotel or of any machinery or plant previously used for any purpose;
(ii) the business of the hotel is owned and carried on by a company registered in India with a paid-up capital of not less than five hundred thousand rupees;
(iii) the hotel is for the time being approved for the purposes of this sub-section by the Central Government;
(iv) the business of the hotel starts functioning after the 31st day of March, 1981, but [before the 1st day of April, [1991].
(4A) This section applies to the business of repairs to ocean-going vessels or other powered craft which fulfils all the following conditions, namely:—
(i) the business is not formed by the splitting up, or the reconstruction, of a business already in existence;
(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose;
(iii) it is carried on by an Indian company and the work by way of repairs to ocean-going vessels or other powered craft has been commenced by such company after the 31st day of March, 1983, but before the 1st day of April, 1988; and
(iv) it is for the time being approved for the purposes of this sub-section by the Central Government.]
(5) The deduction specified in sub-section (1) shall be allowed in computing the total income in respect of the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things, or to operate its cold storage plant or plants or the ship is first brought into use or the business of the hotel starts functioning [or the company commences work by way of repairs to ocean-going vessels or other powered craft] (such assessment year being hereafter in this section referred to as the initial assessment year) and each of the seven assessment years immediately succeeding the initial assessment year:
Provided that in the case of an assessee, being a cooperative society, the provisions of this sub-section shall have effect as if for the words “seven assessment years”, the words “nine assessment years” had been substituted:
[Provided further that in the case of an assessee carrying on the business of repairs to ocean-going vessels or other powered craft, the provisions of this sub-section shall have effect as if for the words “seven assessment years”, the words “four assessment years” had been substituted]:
[Provided also that in the case of—
(i) an industrial undertaking which begins to manufacture or produce articles or things or to operate its cold storage plant or plants; or
(ii) a ship which is first brought into use; or
(iii) the business of a hotel which starts functioning, on or after the 1st day of April, 1990 3[but before the 1st day of April, 1991], provisions of this sub-section shall have effect as if for the words “seven assessment years”, the words “nine assessment years” had been substituted:
Provided also that in the case of an assessee, being a cooperative society, deriving profits and gains from an industrial undertaking or a ship or a hotel referred to in the third proviso, the provisions of that proviso shall have effect as if for the words “nine assessment years”, the words “eleven assessment years” had been substituted.]
(6) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an industrial undertaking or a ship or the business of a hotel [or the business of repairs to ocean-going vessels or other powered craft] to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under sub-section (1) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such industrial undertaking or ship or the business of the hotel [or the business of repairs to ocean-going vessels or other powered craft] were the only source of income of the assessee during the previous years relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made.
(7) Where the assessee is a person other than a company or a co-operative society, the deduction under sub-section (1) from profits and gains derived from an industrial undertaking shall not be admissible unless the accounts of the industrial undertaking for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant, as defined in the Explanation below sub-section (2) of section 288, and the assessee furnishes, along with his return of income, the report of such audit in the prescribed form duly signed and verified by such accountant.
(8) Where any goods held for the purposes of the business of the industrial undertaking or the hotel or the operation of the ship [or the business of repairs to ocean-going vessels or other powered craft] are transferred to any other business carried on by the assessee, or where any goods held for the purposes of any other business carried on by the assessee are transferred to the business of the industrial undertaking or the hotel or the operation of the ship 1[or the business of repairs to ocean-going vessels or other powered craft] and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the business of the industrial undertaking or the hotel or the operation of the ship 1[or the business of repairs to oceangoing vessels or other powered craft] does not correspond to the market value of such goods as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of the industrial undertaking or the business of the hotel or the operation of the ship [or the business of repairs to ocean-going vessels or other powered craft shall be computed as if the transfer, in either case, had been made at the market value of such goods as on that date:
Provided that where, in the opinion of the [Assessing Officer], the computation of the profits and gains of the industrial undertaking or the business of the hotel or the operation of the ship [or the business of repairs to oceangoing vessels or other powered craft] in the manner hereinbefore specified presents exceptional difficulties, the [Assessing Officer] may compute such profits and gains on such reasonable basis as he may deem fit.
Explanation.—In this sub-section, “market value”, in relation to any goods, means the price that such goods would ordinarily fetch on sale in the open market.
(9) Where it appears to the [Assessing Officer] that, owing to the close connection between the assessee carrying on the business of the industrial undertaking or the hotel or the operation of the ship [or the business of repairs to ocean-going vessels or other powered craft] to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in the business of the industrial undertaking or the hotel or the operation of the ship [or the business of repairs to ocean-going vessels or other powered craft], the [Assessing Officer] shall, in computing the profits and gains of the industrial undertaking or the hotel or the ship 1[or the business of repairs to ocean-going vessels or other powered craft] for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom.
(10) The Central Government may, after making such inquiry as it may think fit, direct, by notification in the Official Gazette, that the exemption conferred by this section shall not apply to any class of industrial undertakings with effect from such date as it may specify in the notification.]”
11. On perusal of the above provisions and the scheme of the Income Tax Act, it is to be decided as to whether the assessee is entitled to deduction under Section 80-I of the Act after reducing deduction under Section 32AB of the Act or not ?
12. The issue is no more res integra in view of the decision of the Honourable Supreme Court in the case of Vijay Industries (supra) wherein the similar issue had been dealt with by the Honourable Supreme Court while considering the provision of Section 80-HH of the Act which is pari-materia to Section 80-I of the Act as under.
“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. v. 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’ 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. v. 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 overruled in Distributors (Baroda) Pvt. Ltd. v. 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. v. 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:-
“8 0E – 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.
(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 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 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 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 1 st 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 effect from April 01, 1981. Following portion of this circular is relevant:
“The new section 80AB will take effect from 1 st 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.”
13. In view of the above conspectus of law, more particularly, as discussed by the Honourable Supreme Court in paragraph 18 of the aforesaid judgment that deduction under Chapter VI-A of the Act is allowable while computing the total income and deduction under Section 80-I of the Act is to be computed on 20% of profits and gains and not the net income from the profit and gain in accordance with the provisions contained under Section 3043D of the Act which would form part of gross total income as per Section 80AB. As held by the Honourable Supreme Court the deduction under Chapter VI-A of the Act which includes Section 80-IA of the Act has to be computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A and not with reference to the gross amount of such income which includes net profit and gains to be computed under Chapter IV of the Act comprising of Sections 28-43D of the Act.
14. In view of the above facts and the settled legal position, we answer the question in favour of the assessee and against the Revenue by allowing all the appeals and the appeals are accordingly allowed.
