Note on Allowability of deduction u/s. 80HH to 80TT of the Act to the extent of Gross Total Income in light of provision of section 80AB and determined Judicial Pronouncements:
1.1 Section 80AB of the Act:
“Deductions to be made with reference to the income included in the gross total income.
80AB. Where any deduction is required to be made or allowed under any section 64 [* * *] included in this Chapter under the heading "C.—Deductions in respect of certain incomes" in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income.]”
1.2 Paragraph 15.7 of its Circular No. 281 dt. 22nd Sept., 1980 (clarification on section 80AB):
“15.7 Although the issue before the Supreme Court in Cloth Traders’ case (supra) was in respect of concessional tax treatment of inter-corporate dividends only, the Supreme Court has specifically referred to the provisions of some of the other sections contained in Chapter VIA of the Income-tax Act. The Supreme Court has in respect of such other sections observed that on a plain reading of these sections, it appears that the deduction admissible is in respect of the gross amount of income received by the assessee and not in respect of the net income computed after making the deductions provided in the Income-tax Act. The Finance Act has, accordingly, inserted another section 80AB to provide that, for the purpose of calculating the deductions specified in sections 80HH to 80TT the net income as computed in accordance with the provisions of the Income-tax Act (before making any deduction under Chapter VIA) shall alone be regarded as the income which is received by the assessee and which is included in his gross total income. Accordingly, the deductions specified in the aforesaid sections will be calculated with reference to the net income as computed in accordance with the provisions of the Act (before making any deduction under Chapter VIA) and not with reference to the gross amount of such income, subject, however, to the other requirements of the respective sections. The new section 80AB will take effect from 1st April, 1981 and will, accordingly, apply in relation to the assessment year 1981-82 and subsequent years. It should be carefully noted that the new section 80AB, unlike section 80AA, will not have any retrospective operation.”
2.0 JUDICIAL PRONOUNCEMENTS:
2.1 CIT vs. Agency Marketing Co- operative Society Ltd. (1993) 201 ITR 881 (Ori):
“The assessee admittedly was engaged in two activities of cottage industries and marketing of agricultural produces of its members which are eligible for deduction under s. 80P(2)(a). Both the activities come under the same heading and same Chapter VI-A of the Act. The restriction imposed in s. 80AB aims at ensuring that the deduction does not exceed the net income under a particular source and it does not appear to be the legislative intent that the deduction is to be brought down to net income in a particular head of income. Language of s. 80P(2)(a) makes it clear that profits attributable to cottage industry is to be deducted from the total gross income. The total deduction under Chapter VI-A is limited to the extent of gross total income. The object for which s. 80P appears to have been enacted is to encourage and promote growth of co-operative sector in the economic life of the country. The legislative intent is to give whole-hearted relief to the co-operative sector by an amount pre set up of profit from the activities specified in s. 80P(2)(a) from the gross total income. The expression "whole of the amount of profits and gains of business attributable to any one or more of such activities" indicates that the deduction under s. 80P(2)(a) is to be given to the extent of whole of the profit attributable to the cottage industry without deducting therefrom any loss arising in any other activity. It would not be proper to deduct loss incurred in any such activity from the net profit of another activity as the word used in s. 80P(2) is "or". Therefore, the analysis made by the first appellate authority and affirmed by the Tribunal appears to be in order.
For the purpose of deduction under s. 80P(2) profit and gains of each activity has to be separately considered and deduction has to be allowed of the profits attributable to each activity without deducting therefrom any loss arising in any other activity.”
2.2 CIT vs. Canara Workshops P. Ltd. (1986) 58 CTR (SC) 108:
“The object underlying the enactment of s. 80E and the terms in which it provides relief is that the intention of the Parliament in enacting the provision was to encourage the setting up of industries concerned with the generation or distribution of electrical or any other energy and the construction, manufacture or production of articles or things specified in the list in the Fifth Schedule. The intention goes further. By making a provision for a rebate year after year on the industry making profits and gains during the year, the intention also was to provide an incentive for promoting efficiency in the industry. It is clear that the benefit was directed to the setting up and also the efficient working of the priority industries.
The object in enacting s. 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 8% 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 the 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 s. 80E to mean that one 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 to undermine the object of the section. Each industry must be considered on its own working only when adjudging its title to the deduction under 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 under 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. Therefore, in the application of s. 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.
A distinction must be drawn between a case where the loss or unabsorbed depreciation pertains to the same industry whose profits and gains are the subject of relief under s. 80E and a case where the loss or unabsorbed depreciation relate to industries other than the one whose profits and gains constitute the subject of relief.—CIT vs. Belliss & Morcom (I) Ltd. (1982) 26 CTR (Cal) 76: (1982) 136 ITR 481 (Cal) : TC25R.434 and CIT vs. Balanoor Tea & Rubber Co. Ltd. (1974) 93 ITR 115 (Mys): TC25R.435 approved; CIT vs. English Electric Co. Ltd. (1980) 17 CTR (Mad) 312: (1981) 131 ITR 277 (Mad): TC25R.437 overruled; Decision dt. 21st Feb., 1974 of the Karnataka High Court in Tax Refs. Nos. 67 & 68 of 1972 affirmed”
Where assessee has more than one priority industries, loss in one need not be set off against profits of another for purposes of granting relief under s. 80E.
2.3 CIT v. M/s. J. B. Boda & Co. P. Ltd. (Bom.) (ITA No. 3224 of 2009 dated 18-10-2010. BCAJ)
The Assessing Officer determined the amount eligible for deduction u/s.80-O at Rs. 1,29,41,830 being 50% of the income so received or brought into India. However, he restricted the deduction u/s.80-O to Rs. 69,70,000, being the total income under the head ‘Business’, on the ground that allowing further deduction would amount to allowing the deduction from income under other heads. The Tribunal found that the gross total income exceeded Rs. 1,29,41,830 and therefore allowed the full claim of the assessee.
On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:
“(i) The only question sought to be canvassed is that out of these deductions the admissible deduction u/s.80-O ought to be limited to the extent of Rs. 69,70,127 which represents business income. In other words, income from interest and dividend shall not form part of the gross total income as defined u/s.80B(5) of the Act.
(ii) Considering the definition of the gross total income, it is difficult to hold that the interest income and the dividend income would not form part of the gross total income computed in accordance with the provisions of the Act.
(iii) The view taken by the Tribunal, in our considered view, is in consonance with what is stated herein.”
3.0 Analysis and Conclusion:
In view of the legislative intention of section 80AB & 80HH to 80TT and judicial pronouncements made on such matter, we can make the following observation:
3.1 As per plain reading of section 80AB and Circular 281 of 1980, the restriction imposed in section 80AB aims at ensuring that the deduction does not exceed the net income under a particular source and it does not appear to be the legislative intent that the deduction is to be brought down to net income in a particular head of income.
3.2 The above view is upheld by the Hon’ble Orissa High Court in CIT vs. Agency Marketing Co- operative Society Ltd. (1993) 201 ITR 881.
3.3 The view of section 80AB of the Act, does not affect the position of law under section 80A(2) at all, as it continues to allow the deduction u/c. VI-A to the extent of Gross Total Income.
3.4 Loss of the other entities or even the loss of one eligible entity can not adjusted again the profits of the other eligible undertaking under the provision of section 80HH to 80TT of the Act in view of decision of Hon’ble supreme court in CIT vs. Canara Workshops P. Ltd. (1986) 58 CTR (SC) 108.
In short, section 80AB do not provides the limit of deduction, but it provides about the computation of deduction u/s. 80HH to 80TT and deduction u/s. 80HH to 80TT is allowed to the extent of Gross Total Income.