TMI Blog2019 (3) TMI 171X X X X Extracts X X X X X X X X Extracts X X X X ..... e (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 is, thus, clear that change in legal position is brought about only, with the insertion of Section 80AB and made applicable from AY 1981-82. In view thereof, judgments in the case of M/s. Cloth Traders [1979 (5) TMI 2 - SUPREME COURT] relied by the Revenue will be of no relevance - CIVIL APPEAL NOS. 1581-1582 OF 2005 - - - Dated:- 1-3-2019 - 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 O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar 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 income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Constitution Bench judgment in Distributors (Baroda) Pvt. Ltd. v. Union of India Ors. (1986) 1 SCC 43, which has overruled 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 judgment delivered in Cloth Trade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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., Kotagiri (1997) 9 SCC 537 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ression differently in Section 80-P. 16) We have considered the aforesaid submissions. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds 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:- 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 effect from April 01, 1981. Following portion of this ci ..... X X X X Extracts X X X X X X X X Extracts X X X X
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