Supreme Court Rules on Section 80HH: Deduction to Be Computed on Gross Profits

The case of M/S Vijay Industries v. Commissioner of Income Tax revolves around the interpretation of Section 80HH of the Income Tax Act, 1961. The Supreme Court, in its judgment dated March 1, 2019, overruled the previous decision in Motilal Pesticides (I) Pvt. Ltd. v. CIT and held that deductions under Section 80HH must be computed on the gross profits of an industrial undertaking rather than after deducting depreciation and investment allowance.

This case clarifies an important aspect of tax incentives provided to industrial units in backward areas and ensures consistency in the application of deductions.

Case Background

The case concerns the computation of deductions under Section 80HH, which grants tax relief to industrial undertakings and hotels in designated backward areas. The dispute was whether the deduction should be applied to gross profits before considering depreciation and investment allowance or after considering these deductions.

The Income Tax Department had interpreted that:

Deductions should be computed after applying depreciation and investment allowance.
The income must be computed as per Sections 28 to 44DB of the Income Tax Act before applying the 80HH deduction.

The assessee, M/S Vijay Industries, argued that the deduction should be calculated based on gross profits and gains, without considering depreciation and investment allowance.

High Court’s Decision

The High Court of Rajasthan, relying on the Supreme Court’s earlier ruling in Motilal Pesticides (I) Pvt. Ltd. v. CIT, ruled in favor of the Income Tax Department. The assessee challenged this interpretation before the Supreme Court.

Petitioner’s Arguments

The appellant, represented by Senior Advocate Vikram Bagaria, contended:

Section 80HH allows deductions on “profits and gains” and not “income.”
The term “profits and gains” differs from “total income,” which is determined after applying various deductions.
Legislative intent shows that deductions should be computed based on gross profits.
The Motilal Pesticides judgment was erroneous and needed reconsideration.

Respondent’s Arguments

The Income Tax Department, represented by Senior Advocate Vibha Datta Makhija, argued:

Section 80AB, introduced in 1980, clarified that deductions under Chapter VIA should be computed after applying all other provisions of the Act.
The term “profits and gains” must be read in conjunction with computation provisions under Sections 28 to 44DB.
The decision in Motilal Pesticides had correctly interpreted the law.

Supreme Court’s Observations and Ruling

The Supreme Court ruled in favor of the assessee, holding that deductions under Section 80HH must be computed on gross profits, not after depreciation and investment allowance.

On the meaning of “profits and gains”:

“The language of Section 80HH grants deductions from ‘profits and gains,’ which is different from ‘income.’ The interpretation of the Income Tax Department is incorrect.”

On the applicability of Section 80AB:

“Section 80AB, introduced in 1980, does not apply retrospectively to assessment years before 1981. The claim for deductions in this case pertains to assessment years 1979-80 and 1980-81.”

On overruling Motilal Pesticides:

“The decision in Motilal Pesticides was based on an incorrect premise that ‘profits and gains’ and ‘income’ are the same. We overrule that judgment.”

As a result, the Supreme Court:

Set aside the Rajasthan High Court’s ruling.
Ruled that deductions under Section 80HH must be computed on gross profits.
Held that depreciation and investment allowance should not be deducted before applying Section 80HH.

Conclusion

This judgment clarifies the proper method of computing deductions under Section 80HH. Key takeaways include:

Deductions under Section 80HH apply to gross profits, not net income.
The term “profits and gains” is distinct from “income” in tax laws.
Retrospective application of new provisions (such as Section 80AB) cannot override existing provisions for earlier assessment years.
Incorrect judicial interpretations can be overruled to uphold legislative intent.

By overruling Motilal Pesticides, the Supreme Court reaffirmed the principle that tax incentives for industrial undertakings should be computed on gross profits, ensuring a fair and uniform interpretation of tax laws.

Petitioner Name: M/S Vijay Industries.
Respondent Name: Commissioner of Income Tax.
Judgment By: Justice A.K. Sikri, Justice S. Abdul Nazeer, Justice M.R. Shah.
Place Of Incident: India.
Judgment Date: 01-03-2019.

Don’t miss out on the full details! Download the complete judgment in PDF format below and gain valuable insights instantly!

Download Judgment: MS Vijay Industries vs Commissioner of Inco Supreme Court of India Judgment Dated 01-03-2019.pdf

Direct Downlaod Judgment: Direct downlaod this Judgment

See all petitions in Income Tax Disputes
See all petitions in Tax Refund Disputes
See all petitions in Banking Regulations
See all petitions in Judgment by A.K. Sikri
See all petitions in Judgment by S. Abdul Nazeer
See all petitions in Judgment by Mukeshkumar Rasikbhai Shah
See all petitions in allowed
See all petitions in Modified
See all petitions in supreme court of India judgments March 2019
See all petitions in 2019 judgments

See all posts in Taxation and Financial Cases Category
See all allowed petitions in Taxation and Financial Cases Category
See all Dismissed petitions in Taxation and Financial Cases Category
See all partially allowed petitions in Taxation and Financial Cases Category