Calculation of Section 80HH Deductions: Net Income After Depreciation and Investment Allowance

The court held that Section 80HH deductions are to be calculated on the net income after considering depreciation and investment allowance. The court ruled in favor of the Revenue and against the assessee, answering the questions referred in the affirmative. The case references were disposed of accordingly, following the precedent set by the Supreme Court.

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Issues involved:
1. Applicability of Section 80HH for assessment years 1979-80 and 1980-81.
2. Computation of deductions under Section 80HH in relation to profits and gains of an industrial undertaking.
3. Distinction between 'profits and gains' and 'income'.
4. Relevance of Section 80AB for the purpose of Sections 80HH and 80-I.
5. Interpretation of 'profits and gains' in the context of industrial undertakings.

Detailed Analysis:

1. Applicability of Section 80HH for assessment years 1979-80 and 1980-81:
The primary issue pressed by the assessee's counsel pertains to the applicability of Section 80HH for the assessment years 1979-80 and 1980-81. The questions referred to the court are:
- For 1979-80: Whether the deduction under Section 80HH should be out of income as computed under the Income-tax Act or out of the profits and gains of the industrial undertaking without deducting depreciation and investment allowance.
- For 1980-81: Whether the profits and gains of an industrial undertaking should consider unabsorbed depreciation, current depreciation, and investment allowance for deduction under Section 80HH.

2. Computation of deductions under Section 80HH in relation to profits and gains of an industrial undertaking:
The Tribunal's decision, influenced by the Supreme Court's ruling in Motilal Pesticides (I.) Pvt. Ltd. v. CIT, established that Section 80HH deductions are available only on net income, not gross income. The assessee's counsel argued that Section 80HH provides for a deduction of 20% of the profits and gains of an eligible industrial undertaking, distinct from the assessee's total income. The deduction should be made from the profits and gains of the eligible undertaking before computing the assessee's total income, emphasizing that the deduction should not be affected by the performance of other industrial undertakings owned by the assessee.

3. Distinction between 'profits and gains' and 'income':
The term 'profits and gains' is distinct from 'income'. 'Profits and gains' is not defined under the Income-tax Act but is understood in the commercial sense, whereas 'income' is defined under the Act. The computation of income from profits and gains involves statutory deductions under Sections 30 to 43A. The Supreme Court in CIT v. B.C. Srinivasa Setty clarified that 'profits and gains' and 'income' are computed entities, with 'profits and gains' being the gross amount from which statutory deductions are made to arrive at the computed income.

4. Relevance of Section 80AB for the purpose of Sections 80HH and 80-I:
Section 80AB stipulates that deductions under any section should be computed based on the income of that nature as computed under the provisions of the Act. The assessee argued that for Section 80HH, the term 'income of that nature' refers to 'profits and gains of business', which should be computed without deductions for depreciation and investment allowance. The Assessing Officer's reliance on Section 80AB to allow deductions on 'income from profits and gains' rather than 'profits and gains' was contested.

5. Interpretation of 'profits and gains' in the context of industrial undertakings:
The assessee's counsel cited multiple cases to support the interpretation that 'profits and gains' should be understood in the commercial sense and not as 'income' computed under the Act. Cases like CIT v. Vegetable Products Ltd., Cambay Electric Supply Industrial Co. Ltd. v. CIT, and CIT v. Canara Workshops (P.) Ltd. were referenced to argue that deductions should be based on 'profits and gains' of the eligible industrial undertaking without considering depreciation and investment allowance.

Conclusion:
The court, following the Supreme Court's decision in Motilal Pesticides (I.) Pvt. Ltd. v. CIT, concluded that Section 80HH deductions are to be computed on the net income after accounting for depreciation and investment allowance. The questions referred were answered in the affirmative, in favor of the Revenue and against the assessee. Both references were disposed of accordingly.

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