Motilal Pesticides v. Commissioner of Income Tax, Delhi (2000) - Deductions u/s 80HH, 80U and 80C IT Act, 1961

BRIEF: This case deals with the deductions made under the provisions of Sec.80HH in addition to Sec. 80C to 80U of the Income Tax Act, 1961.

DATE OF JUDGMENT: 15^th February, 2000.

JUDGES: D.P. Wadhwa, N. Santosh Hegde.

PARTIES: Motilal Pesticides (India) Pvt. Ltd (Plaintiff) and Commissioner of Income Tax- Delhi (Respondent)

SUMMARY

The following judgment deals with the provisions of Sec. 80HH of Income Tax Act, 1961, in addition to the provisions of Sec. 80C to 80U of the act, which deal with the deductions made from gross income a company earns from the assessment year.

OVERVIEW

1. The appellant approached the tribunal to avail deductions on gross profit of Rs.34,30,035 respect of its liquid section which had been newly set up in a backward area. The tribunal held that the assessee was not entitled to deduction under Sec.80HHbut was entitled to deduction on net income from the assessment year 1979-80.
2. After the pronouncement of the judgment by the tribunal, the appellant approached the Delhi High Court seeking deductions on gross income.
3. In its submissions to the Delhi High Court, the appellant placed reliance in the decision given in the case of Cloth Traders Pvt. Ltd. v. CIT[1], which was concerned with the provisions of Sec.80M of the act.
4. The court in the Cloth Traders Pvt. Ltd case held that deductions were to be done on the gross income and not on the net income.
5. The case of Distributors (Baroda) P. Ltd. v. Union of India overruled the aforementioned decision on the grounds that net income was to be deducted and not gross income[2].
6. The High Court dismissed the appeal of the appellant and held that net income should be charged for deductions instead of gross income.
7. The Supreme Court affirmed the view of the High Court and dismissed the appeal of the appellant.
8. The decision was overruled in the case of Vijay Industries v. Commissioner of Income Tax[3].

ISSUES

The following were the issues analyzed by the Supreme Court

• Whether the arguments in the Cloth Traders Pvt. Ltd. case applies here.
• Whether deductions can be made on the gross income earned or on the net income earned.
• Whether the ruling of the tribunal is valid as per the provisions of the Income Tax Act or not.

IMPORTANT PROVISIONS

Income Tax Act, 1961

• 80C to 80U: Deductions under the Income Tax Act.
• 80HH- Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas.
• 80AA- Computation of deduction under Sec. 80M.
• 80AB- Deductions to be made with reference to the income included in the gross total income.
• 80M- Deduction of dividends earned by a domestic company.

ANALYSIS OF THE JUDGMENT

1. The arguments made by the appellant were derived from the judgment given in the Cloth Traders Pvt. Ltd. case.After the said decision, two sections, Sec.80AA and 80AB were introduced, which had allowed for application of all sections given in Chapter VI-A except Sec.80M.
2. With regards to Sec. 80M, the court interpreted it as follows:

“Where the gross total income of a domestic company, in any previous year, includes any income by way of dividends from another domestic company, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of such domestic company, a deduction of a certain amount is allowed.”

3. The case of Distributors (Baroda) P. Ltd. v. Union of India overruled the aforementioned decision on the grounds that net income was to be deducted and not gross income[4]. This case overruled the aforementioned case on the ground that deduction is to be allowed only in the net income and not the gross income. With reference to Sec. 80AB, the court held that it was merely of a clarificatory nature and that decision of the court is thus irrespective of the provisions of Sec. 80AB of the act.The High Court, therefore, relying on the decision of this court in Distributors (Baroda) P. Ltd.'s case answered the question in favour of the Revenue and against the assessee. The counsel for the appellant held that even though the case was overruled, both cases pertained to Sec.80M only and the court need not have to deal with Sec.80HH and 80AB. He had argued that Sec.80AB was brought into effect in the year 1981 and that it would have no application in the assessment year 1979-80.
4. The counsel for the appellant had argued that Sec.80AB was brought into effect in the year 1981 and that it would have no application in the assessment year 1979-80. He was of the opinion that Section 80ABwas specifically introduced with effect from April 1, 1981, and it would have no application to the assessment years 1979-80 and 1980-81 which were involved in the present case. The effect of Section 80AB was now that deduction would have to be made from the net income and not from the gross income.
5. The counsel for the appellant also quoted the judgment given in the case of H.H. Sir Rama Varma v. CIT[5], which held that Section 80AB was enacted to declare the law as it always stood in relation to the deductions being made in respect to the income specified under "C" of Chapter VI-A of the Act. The counsel for the appellant also referred to a circular dated May 10, 1982, issued by the Central Board of Direct Taxes in support of his submission. But then this circular has since been withdrawn.
6. The respondent’s contentions were in line with the decision given in the High Court. They argued that the effect of Sec.80AB was now that deduction was to be made from the net income and not the gross income. They argued that the High Court had held that the decision given in the Distributors (Baroda) case with regards to Sec. 80AB was merely of a clarificatory nature and, therefore, irrespective of the provisions of the section.
7. The court took the side of the respondent in the present case. The court affirmed the decision of the High Court and dismissed the appeal of the appellant. The court took cognizance of the decision given in the High Court and allowed for net income to be deducted rather than gross income and ruled in favour of the respondent. The court held that the decision of the High Court is satisfactory enough and also held that net income is to be charged as deductions earned under the provision of the Income Tax Act, and not gross income. The court held that the language of the section makes it clear, with the significant differences in the expressions "gross total income", "income" and "profits and gains attributable to priority industry” that profits and gains earned must be computed in the commercial sense, otherwise the legislation will neither have use for the provisions of the section or the expression “profits and gains attributable to priority industry if it is not in contradiction to the definitions of the expressions “total income” and “gross total income”.

CONCLUSION

The crux of this case is the provision of Sec.80HH of the act and what income is eligible to be deducted. The substantial question of law that this case deals with is whether gross income should be deducted or net income should be deducted. As the aforementioned judgment had stated, only net income had been deemed to be eligible for deductions under Sec.80HH of the act and not gross income.

However, the judgment was overruled in the case of Vijay Industries v. Commissioner of Income Tax[6]. The court overruled the judgment stating that the decision had missed the marking of difference between the definitions of “income” and “gross total income”. The court held that under Chapter VI-A of the act, certain deductions are given by way of incentives. The assessees may earn these deductions by fulfilling the eligibility conditions therein, even when they are not in the nature of any expenditure incurred by the assessee. The court held that "profits and gains" and "income" are not same but are different. The court also held that in some of the provisions of Chapter VI-A, the 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.

The rules specified in the provisions of Sec.80C to 80U provide for the deductions that are to be allowed. The said deductions were allowed from the gross total income and not the net income. This is in direct contradiction to the judgment given in the earlier case which called for deductions to be allowed from net income and not the gross income. Section 80A uses the expression of “gross total income” as it states that deduction of an assessee’s income is to be allowed from his gross total income and not the net income he earns. The ground on which the aforementioned case was overruled was based on the provisions of Sec.80C to 80U of the act, which called for explicit deduction of gross income and not the net income, which was not followed in the case. Therefore, using the provisions of the previously mentioned sections, the grounds for overruling the judgment can be ascertained.

• [1] 1979 3 S.C.C. 538
• [2] 1985 A.I.R. 1585
• [3] 2004 270 I.T.R. 175 Raj
• [4] 1985 A.I.R. 1585
• [5]1994 AIR 1904
• [6] 2004 270 I.T.R. 175 Raj

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