Motilal Pesticides (India) Pvt. Ltd. vs Commissioner of Income Tax

B.N. Kirpal J.

This is a reference u/s 256(1) of the Income Tax Act, 1961, and pertains to the interpretation of section 80HH of the said Act.

The assessed is a private limited company any it carries on the business of manufacture and sale of pesticides. The assessment years involved in this case are 1979-80 and 1980-81.

The assessed claimed relief u/s 80HH in respect of its liquid section which had been newly set up in a backward area. The contention of the assessed was that the relief should be allowed on the gross income and not on the net income. In this connection reliance was placed by the assessed on the decision of the Supreme Court in the case of Cloth Traders (P) Ltd. Vs. Additional Commissioner of Income Tax , Gujarat-I, .

The Income Tax Officer followed an earlier decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, and came to the conclusion that relief could be granted u/s 80HH only on the net income of the liquid section. This decision was upheld by the Commissioner of Income Tax (Appeals) and also by the Income Tax Tribunal. After the decision of the Tribunal an application u/s 256(1) was filed and the Tribunal has stated the case and referred the following question to this court :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessed was not entitled to deduction u/s 80HH of the Income Tax Act, 1961, on the gross profit of Rs. 34,30,035 (liquid section) but on the net income there from, for the assessment year 1979-80 ?"

The contention of learned counsel for the assessed before us is that the law before the introduction of section 80AB was that deduction had to be allowed on the basis of the gross income and not on the net income. It is submitted by Shri Bhatnagar that section 80AB has been inserted with effect from April 1, 1981, and the said provision does not apply and this court should follow the decision of the Supreme Court in the case of Cloth Traders (P) Ltd. Vs. Additional Commissioner of Income Tax , Gujarat-I, and allow deduction on the basis of the gross income.

Learned counsel for the assessed also relies upon the decisions in Additional Commissioner of Income Tax, Madras-I Vs. Isthmian India Maritime Private Ltd., ; Addl. Commissioner of Income Tax, Delhi-I Vs. Seth Vineet Virmani, ; Dr. T. Ramadas M. Pai Vs. Commissioner of Income Tax (No. 2), ; Commissioner of Income Tax Bombay City-III, Bombay Vs. B.M. Crover, and Commissioner of Income Tax (Central), Bombay Vs. Advance Insurance Co. Ltd., . In all these cases the High Courts had followed the decision of the Supreme Court in the case of Cloth Traders (P) Ltd. Vs. Additional Commissioner of Income Tax , Gujarat-I, and come to the conclusion that deduction was to be granted on the basis of gross income and not on the net income.

It is not necessary to discuss or consider the aforesaid decision in any great detail for the simple reason that the decision of the Supreme Court in Cloth Traders (P) Ltd. Vs. Additional Commissioner of Income Tax , Gujarat-I, , has been overruled by a Constitution Bench of that court in the case of Distributors (Baroda) Pvt. Ltd. Vs. Union of India (UOI) and Others, . It was held by the Supreme Court while dealing with the claim for deduction u/s 80M that deduction was to be granted to the assessed only on the net dividend income and not gross dividend income. The Supreme Court expressly overruled its earlier decision in Cloth Traders (P) Ltd. Vs. Additional Commissioner of Income Tax , Gujarat-I, and, by necessary implication, it must follow that the decisions of various High Courts, referred to above, can no longer be regarded as good law.

The Supreme Court in Commissioner of Income Tax, Bombay Vs. P.K. Jhaveri, , once again reiterated and followed its earlier decisions in the cases of Cambay Electric Supply Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, , and Distributors (Baroda) Pvt. Ltd. Vs. Union of India (UOI) and Others, , while dealing with the claim for deduction u/s 80K of the said Act.

The provisions of sections 80M, 80K and 80HH, with which we are concerned in the present case, are more or less identical. Section 80HH has to be read along with the provisions of section 80B(5) which defines gross total income as meaning the total income computed in accordance with the provisions of the Income Tax Act, before making any deduction under Chapter VI-A. The ratio of the decisions in Distributors (Baroda) Pvt. Ltd. Vs. Union of India (UOI) and Others, , Commissioner of Income Tax, Bombay Vs. P.K. Jhaveri, and Cambay Electric Supply Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, , being clearly applicable, as the said sections are more or less similarly worded, our answer to the question referred can only be in the affirmative and in favor of the Revenue. Ordered accordingly.

There will be no order as to costs.