Deduction Under Section 80HH Income Tax Act Should Be From 'Gross Profits & Gains' Instead Of 'Net Income' : SC [Read Judgment]

A three judges' bench of the Supreme Court has held that deduction under Section 80HH of the Income Tax Act 1961 should be based on gross profits and income instead of the net income from profits and gains computed as per Sections 28 to 44B of the Act.

Section 80HH grants deduction from total income at the rate of 20% of the "profits and gains" of an undertaking engaged in manufacturing or in the business of the hotel for a period of ten assessment years.

The assesse claimed that this deduction should be applied to gross profits and gains. The tax department took the view that this deduction is applicable on the net income from profits and gains computed in the manner provided under Sections 28 to 44B, after allowing deductions for depreciation, unabsorbed depreciation and investment allowance.

A two judges bench of the SC had taken the view in favour of the department in the case Motilal Pesticides (I) Pvt. Ltd. vs. Commissioner of Income Tax, Delhi-II (2000) 9 SCC 63.  Since this view was later doubted by another division bench, a three judges bench of Justices A K Sikri, Abdul Nazeer and M R Shah was called upon to settle the issue.

Sections 28 to 44B relating to income from profits and gains of business or profession fall within Chapter IV of the Act, which deals with computation of total income. This income is computed after giving deductions to factors like depreciation, investment allowances etc.

Section 80HH falls within Chapter VIA, which deals with deductions to be made in computing total income. 

The bench had to decide whether the meaning of income under Chapter IV should be applied to Chapter VIA. The bench noted that conceptually 'total income' was different from 'profits and gains'. It noted that the reference order had observed that 'profits and gains' was a wider concept than 'total income'. The reference order had observed:

"The profits and gains/loss are arrived at after making actual expenses incurred  from the figure of sales by the assessee. It does not include any depreciation and investment allowance, as admittedly these 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'".  

The 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 or profession".  "In contrast, 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", said the judgment authored by Justice Sikri.

The bench also noted that Section 80A stated that deductions under Chapter VI should be allowed from "gross total income". It observed :

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'.

Therefore, the bench observed :

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

On this basis, the bench overruled the decision in Motilal Pesticides. 

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