Commissioner of Income Tax vs R.B. Jodha Mal, Bishan Lal

S.K. Gupta, J.

By this reference u/s 256(1) of the Income Tax Act, 1961, the Income Tax Appellate Tribunal, Amritsar, has referred the following question of law

to this court for opinion, out of the order of the Tribunal:

Whether on the facts and in the circumstances of the case, the Tribunal has erred in directing the assessing officer to allow deduction u/s 80HH at

20 per cent of the profit arrived at before allowing deduction admissible to the assessee u/s 32AB of the Income Tax Act, 1961 ?

The assessee is a Forest Lessee. It has also commenced production of Oxygen Plant in January, 1987. It has filed its return of income and

claimed relief u/s 80HH to the extent of Rs. 20,61,706 on the total profit from various leases amounting to Rs. 1,03,08,533. The assessing officer,

however, noticed that the assessee has been allowed deduction u/s 32AB of the Act. The assessing authority allowed deduction u/s 80HH only on

the profit from various leases, as reduced by deduction u/s 80HH. According to the assessing authority, the relief u/s 80HH is provided on the

profits and gains of the business and these profits and gains were supposed to be calculated in terms of the provisions of Income Tax after allowing

the concessions to the assessee up to section 80 and thereafter only whatever the balance profit is there, deduction u/s 80HH is supposed to be

given thereon. Thereafter, deduction u/s 80HH is to be allowed. Therefore, while framing order for the year 1987-88, the assessing officer allowed

deduction u/s 80HH at Rs. 17,48,215 at 20% of the profit arrived at after allowing assessee's various claims under sections 29 to 43C including

deduction admissible u/s 32AB pertaining to the Investment Deposit Account.

Aggrieved by the assessment order of the assessing officer for the year 1987-88, the assessee preferred an appeal before the Commissioner,

Amritsar. The appellate authority allowed deduction u/s 80HH before deducting the amount admissible u/s 32AB. The revenue filed an appeal

before the Tribunal. The action of the Commissioner, Amritsar, stood confirmed by the Tribunal it) appeal, in holding that the deduction admissible

u/s 32AB of the Act cannot be reduced from the profits and gains of the business for claiming relief u/s 80HH.

We have heard the learned counsel appearing for the respective parties and considered their. rival contentions and perused the record.

Mr. D.S. Thakur, learned counsel appearing for the revenue, vehemently urged that the relief u/s 80HH is provided on the profits and gains of

the business and these profits and gains are supposed to be calculated after allowing the deduction concessions to the assessee up to section 80

and, thereafter, whatever is the balance amount of profit, the deduction u/s 80HH is supposed to be given thereon. Whereas, on the other hand,

the argument put forth by Mr. V.U. Eradi, learned counsel appearing for the assessee, is that the deduction u/s 80HH is to be given as per the

profit in the profit and loss account and, therefore, deduction u/s 32AB while computing relief u/s 80HH. In order to appreciate the rival

contentions of the learned counsel appearing for the respective parties, sub-section (1) of section 80HH so far as it is relevant, reads as under:

Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas.(1) Where the gross

total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, 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.

The aforesaid provision in its plain meaning connotes that the deduction (a) 20% has to be calculated with reference to the amount of profits and

gains derived from an industrial undertaking, forming part of the gross total income of the assessee. Sub-section (1) of section 80HH opens with

the words, ""where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking and further proceeds

to say that ""there shall be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to

20% thereon"". It is, thus, clear that the deduction required to be allowed under the provisions of section 80HH(1) is to be calculated with

reference to the amount of profits and gains derived from an industrial undertaking, computed in accordance with the provisions of the Act and

forming part of the gross total income, and not with reference to the gross profits and gains derived by the assessee from such business or industrial

undertaking. Further submission of the learned counsel is that under the provisions of section 32AB of the Act, if the total income of the assessee

included income chargeable to tax under the head 'profits and gains of the business' and had out of such income utilized any amount during the

previous year, for the purpose of new ship, new machinery or plant, without depositing any amount in the deposit account, such assessee was to

be allowed a deduction equal to 20% of the profit of eligible business or profession as computed in the account of the assessee.

The assessee, in this case, is admittedly carrying on two industries. It is urged by Mr. D.S. Thakur, learned counsel appearing for the revenue,

that on a true import of section 80HH, profit earned in one industry must be reduced including deductions admissible u/s 32AB on account of

Investment Deposit Account in Oxygen Plant. After giving our anxious consideration to the relevant provisions of the Income Tax Act and the

decisions cited, we do not find it possible to accept the contention.

The object of enacting the provisions would be properly served only by confining the applicability of the provisions of that section to the profits

and gains of a single industry. The co-existence of two industries in the common ownership was not intended by the provision to result in the

misfortune of one being visited on the other. In our opinion, each industry must be considered only one industry on its own working when

adjudging its title to the deduction u/s 80HH. To determine the benefit u/s 80HH on the basis of net result of all the industries owned by the

assessee, would evidently amount to shift the focus from the industry to such assessee. Support to the view is found from the decision of the Apex

Court in Commissioner of Income Tax (Central), Madras Vs. Canara Workshops (P) Ltd., Kodialball, Mangalore, , which held as under:

... It seems to us that the object in enacting section 80E is properly served only by confining the application of the provisions of that section to the

profits and gains of a single industry. The deduction of eight per cent is intended to be an index of recognition, that a priority industry has been set

up and is functioning efficiently. It was never intended that the merit earned by such industry should be lost or diminished because of a loss suffered

by some other industry. It makes no difference that the other industry is also a priority industry. The co-existence of two industries in common

ownership was not intended by Parliament to result in the misfortune of one being visited on the other. The legislative intention was to give to the

meritorious its full reward. To construe section 80E to mean that you must determine the net result of all the priority industries and then apply the

benefit of the deduction to the figure so obtained will be, in our opinion, to undermine the object of the section. An example will illustrate this. An

industry entitled to the benefit of section 80E could have its profits wholly wiped out on adjustment against a heavy loss suffered by another

industry, and, thus, be totally denied the relief which should have been its due by virtue of its profits. In our opinion, each industry must be

considered on its own working only when adjudging its title to the deduction u/s 80E. It cannot be allowed to suffer because it keeps company

with some other industry in the hands of the assessee. To determine the benefit u/s 80E on the basis of the net result of all the industries owned by

the assessee would be, moreover, to shift the focus from the industry to the assessee. We hold that in the application of section 80E, the profits

and gains earned by an industry mentioned in that section cannot be reduced by the loss suffered by any other industry or industries owned by the

assessee."" (p. 324)

That u/s 80HH of the Act, deduction has to be allowed to the extent of 20% of the profits and gains from industrial undertaking. Section 80HH

does not envisage to reduce the deduction allowable u/s 32AB, while working out the necessary relief u/s 80HH of the Act. Each unit has to be

treated as separate unit for the purpose of relief u/s 80HH. So, the deduction u/s 80HH has to be given as per the profit in the profit and loss

account of that industrial unit and hence deductions u/s 32AB should not be taken into consideration while computing relief u/s 80HH. In other

words, the deductions u/s 80HH at 20% of the profit arrived at are to be allowed before allowing deduction admissible to the assessee u/s 32AB

of the Act.

Therefore, the question of law formulated is answered in favour of the assessee and against the revenue.

Reference is disposed of accordingly.