2. Vijay
Industries vs. CIT (2019) 412 ITR 1 (SC)
Newly-established
industrial undertakings or hotel business in backward areas – Deduction u/s.
80HH – Prior to insertion of section 80AB from 01.04.1981 – Deduction to be out
of profits and gains without deducting therefrom depreciation and investment allowance
In the appeals before the
Supreme Court, the issue related to the interpretation to be accorded to the
provisions of section 80HH, as it existed at the relevant time, during the
Assessment Years 1979-80 and 1980-81. Section 80HH provides deduction from
income at specified rates in respect of certain industrial undertakings which
are covered by the said provision.
The Supreme Court noted the
provisions of section 80HH as it stood at the relevant time and observed that
the section grants deduction from profits and gains to an undertaking engaged
in manufacturing or in the business of a hotel. The deduction is admissible at
the rate of 20% of the profits and gains of the undertaking for 10 assessment
years. Certain conditions are to be fulfilled in order to be eligible for such
a deduction. According to the Supreme Court, the conflict in the appeals before
it was confined to one aspect, viz., 20% deduction of gross profits and gains
or net income. Whereas the Assessee wants deduction at the rate of 20% of
profits and gains, i.e., gross profits, the stand of the Income Tax Department
is that deduction at the rate of 20% is to be computed after taking into
account depreciation, unabsorbed depreciation and investment allowance.
To put it otherwise, as per
the Department, the income of the Assessee is to be computed in accordance with
the provisions contained in sections 28 to 44DB which are the provisions for
computation of “income” under the head “profits and gains of business or
profession”. Once income is arrived at after the application of the aforesaid
provisions, 20% thereof is allowable as deduction u/s. 80HH. The Assessee, on
the other hand, submits that section 80HH uses the expression “profits and
gains” which is different from “income”. Therefore, whatever profits and gains
are earned by an undertaking covered by section 80HH of the Act, 20% thereof is
admissible as deduction. As a corollary, from such profits and gains of the
industrial undertaking, depreciation or unabsorbed investment allowances, which
are the deductions admissible u/s. 32 and 32AB of the Act, cannot be taken into
consideration.
The Supreme Court noted that in the case of Motilal
Pesticides (I) Pvt. Ltd. vs. Commissioner of Income Tax (2000) 9 SCC 63 it
had taken the view which was favourable to the Department. This view was
followed by the High Court in the impugned judgement thereby dismissing the
appeals of the Appellants/Assessees herein. The Assessees in the present
appeals submitted that the aforesaid view taken in the Motilal Pesticides case
was not a correct view as it ignored certain earlier judgements on this very
issue. Therefore, according to them, the Motilal Pesticides case needed a
re-look. The Division Bench of the Supreme Court, after hearing the arguments
advanced by the counsel for the parties on the aforesaid lines, noted the
conflict and passed orders dated 05.11.2014, thereby referring the matter to a
larger Bench.
The Division Bench of the
Supreme Court had noted that sub-section (1) of section 80HH allows “a
deduction from such profits and gains of an amount equal to 20% thereof” in
computing the total income of the Assessee. Thus, so far as deduction
admissible under this provision is concerned, it is from the “profits and gains”.
In this context the first question would be: what meaning is to be assigned to
the expression “profits and gains”? According to the Supreme Court, the
reference order dated 05.11.2014 rightly made a distinction between “profits
and gains” and “income”, which captured the legal position lucidly and
succinctly. The High Court noted the argument of the Assessee that the concept
“profits and gains” is a wider concept than the concept of “income”. The
profits and gains/loss are arrived at after making actual expenses incurred
from the figure of sales by the Assessee. It does not include any depreciation
and investment allowance, as admittedly these are not the expenses actually
incurred by the Assessee. However, the term “income” does take into
consideration the deductions on account of depreciation and investment
allowance. Therefore, the term profits and gains is not synonymous with the
term “income”. The High Court, however, held that it was bound by the judgement
of the Supreme Court in Motilal Pesticides (I) Pvt. Limited (supra).
In that case, the Supreme
Court set out section 80HH in para 2 and section 80M in para 3 of the
judgement. It was noticed that whereas section 80HH uses the expression
“any profits and gains derived from”, section 80M uses the expression
“any income”. Section 80M was held, in the Cloth Traders (P) Ltd.
vs. CIT (1979) 118 ITR 243 (SC), to mean that for the purpose of that
section, deduction is to be allowed on the gross total income and not on net
income. This was overruled in Distributors (Baroda) Pvt. Ltd. vs. Union of
India (1985) 155 ITR 120 (SC).
The Division Bench of the
Supreme Court, which made a reference to the larger bench, in its order dated
05.11.2014 noted that Bhagwati, J. who was party to the earlier decision in the
Cloth Traders’ case, delivered a judgement in the Distributors (Baroda) case
holding that the cloth traders’ case was obviously incorrectly decided because
the words “any income” could not possibly refer to gross total income
but referred only to “net income”. Further, the Distributors (Baroda)
case followed the judgement of this Court (the Supreme Court) in Cambay
Electric Supply Industrial Co. Ltd. vs. CIT (1978) 113 ITR 84 (SC) which
decision concerned itself with section 80E of the Income-tax Act. The Supreme
Court noted that in marked contrast to the section under consideration in this
appeal, i.e. 80HH, section 80E uses the expression “total income [as
computed in accordance with the provisions of this Act]” and goes on to
speak of any profits and gains, so computed, for the purpose of deduction u/s.
80E. In the present case, the said words are conspicuous by their absence in
section 80HH even though the expression “profits and gains” is the
same expression used in section 80E.
According to the Division
Bench of the Supreme Court, therefore, the finding in paragraph 4 in Motilal
Pesticides (supra) that the language of section 80HH and section 80M is
the same was, with respect, prima facie, incorrect. Conceptually,
“any income” and “profits and gains” are different under
the Income-tax Act.
The Supreme Court also
noted that section 80M read with section 80AA and AB and section 80T which
speak of “any income” and section 28 which speaks of “income
from profits and gains”, showed that conceptually the two expressions were
understood as distinct in law.
The Division Bench of the
Supreme Court further noted that in paragraph 5 of the judgement in Motilal
Pesticides (supra), the learned senior counsel appearing for the
appellant had submitted that both Cloth Traders and Distributors (Baroda) were
cases which pertained to section 80M only and the Supreme Court had no occasion
to consider the application of section 80AB with reference to section 80HH of
the Act. The Court in repelling this contention referred to another decision in
H.H. Sir Rama Varma vs. CIT (1994) 205 ITR 433 (SC), which dealt with
the then newly-enacted section 80AA and 80AB. Both these sections again were
relatable to deductions made u/s. 80M; and section 80T with which that
judgement was concerned, also uses the expression “any income” as
opposed to “profits and gains”. According to the Division Bench of
the Supreme Court, therefore, prima facie Varma’s case again had very
little to do with the concept of “profits and gains” with which it
was concerned here.
The Supreme Court held that
reading of section 80HH along with section 80A would clearly signify that such
a deduction has to be of gross profits and gains, i.e., before computing the
income as specified in sections 30 to 43D of the Act. It was correctly pointed
out by the Division Bench in the reference order that in the Motilal Pesticides
case the Court followed the judgement rendered in the Cloth Traders (P) Ltd.
case, which was a case u/s. 80M of the Act, on the premise that the language of
section 80HH and section 80M were the same. This basis was clearly incorrect as
the language of two provisions is materially different. The judgement of
Motilal Pesticides was, therefore, erroneous. The Supreme Court overruled this
judgement.
The Supreme Court was also
unable to subscribe to the contention of the learned senior counsel for the
Revenue that section 80AB, which was inserted by Finance (No. 2) Act, 1980 with
effect from 01.04.1981 was clarificatory in nature. According to the Supreme
Court, it was a provision made with prospective effect as the very Amendment
Act said so. Therefore, it could not apply to the Assessment Years 1979-80 and
1980-81, when section 80AB was brought on the statute book after these
assessment years. This position became clear from the reading of Circular No.
281 dated 22.09.1980 issued by the Central Board of Direct Taxes itself. This
circular inter alia described the reasons for adding new section 80AA
and 80AB. It referred to the judgement in the M/s. Cloth Traders case and
mentioned that the directions specified in the aforesaid sections would 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. Notwithstanding the same, this
circular also categorically mentioned that it will take effect from 01.04.1981.
The Supreme Court allowed
all the appeals.
3. CIT
vs. Rashtradoot (HUF) (2019) 412 ITR 17 (SC)
Appeal to
the High Court – Section 260A – The High Court could not have dismissed the
appeal after hearing both parties without having framed question(s) and
answered them by assigning reasons – Matter remanded
Income tax proceedings were
initiated against the Respondent (Assessee) on the basis of a search operation
which was carried out by the Income-tax Department in the Assessee’s premises
on 04.09.1997. This gave rise to initiation of assessment proceedings for the
block period from 01.04.1987 to 04.09.1997 (Assessment Years 1987-88 to 1996-97
and 1997-98 up to 04.09.1997) against the Assessee to determine their tax
liability as a result of search operations carried out in their premises. The
matter, out of the block assessment proceedings, reached the Tribunal (ITAT) at
the instance of the Respondent against the order of the assessing authorities.
The Tribunal, however, decided the various issues arising in the case in favour
of the Respondent (Assessee) by allowing the Respondent’s appeal, which gave
rise to filing of the appeal by the Revenue before the High Court u/s. 260A of
the Income-tax Act, 1961.
The High Court by impugned
judgement dismissed the Revenue’s appeal, which gave rise to filing of the
appeal by way of special leave by the Revenue in the Supreme Court.
According to the Supreme
Court, the High Court neither discussed nor assigned any reason in support of
its conclusion for the dismissal of the appeal. Apart from the above, the High
Court while deciding the appeal heard the learned counsel for the parties and
yet did not frame any substantial question of law arising in the case.
According
to the Supreme Court, the High Court has jurisdiction to dismiss the appeal
filed u/s. 260A of the Act on the ground that it does not involve any
substantial question of law. Such dismissal is considered as a dismissal of the appeal in limine, i.e., dismissal without issuing any
notice of appeal to the Respondent and without hearing the Respondent. The High
Court also has the jurisdiction to dismiss the appeal by answering the
question(s) framed on merits or by dismissing the appeal on the ground that the
question(s) though framed, such question(s) does/do not arise in the appeal.
The High Court, although it may not have framed any particular question at the
time of admitting the appeal along with other questions, yet it has the
jurisdiction to frame additional questions at a later stage before final
hearing of the appeal by assigning reasons as provided in proviso to section
260A (4) and section 260A (5) of the Act; and lastly, the High Court has
jurisdiction to allow the appeal but this the High Court can do only after
framing the substantial question(s) of law and hearing the Respondent by
answering the question(s) framed in the Appellant’s favour.
However, in this case, the
Supreme Court found that the High Court did not dismiss the appeal in limine
but dismissed it after hearing both the parties. In such a situation, according
to the Supreme Court, the High Court should have framed the question(s) and
answered them by assigning the reasons accordingly one way or another by
exercising powers under sub-section (4) and (5) of section 260A of the Act.
In the absence of any
discussion and/or the reasoning/ground as to why the order of ITAT does not
suffer from any illegality and why the grounds of Revenue are not acceptable
and why the appeal does not involve any substantial question(s) of law, or
though framed cannot be answered in Revenue’s favour, the Supreme Court held
that the impugned order suffered from jurisdictional errors and, therefore, was
legally unsustainable for want of compliance of the requirements of sub-section
(4) and (5) of section 260A of the Act.
The Supreme Court thus
allowed the appeal, setting aside the impugned order and remanded the case to
the High Court with a request to decide the appeal filed by the Revenue
(Commissioner of Income Tax) afresh on merits in accordance with law.
4. Kakadia Builders Pvt. Ltd. and Ors. vs. ITO (2019)
412 ITR 128 (SC)
Settlement
Commission – Waiver of interest – The Commission does not have the power to
reduce or waive interest statutorily payable u/s. 234A, 234B and 234C except to
the extent of granting relief under the circulars issued by the Board u/s. 119
of the Act – The terminal point for the levy of interest u/s. 234B would be up
to the date of the order u/s. 245D (1) and not up to the date of the order of
settlement u/s. 245D (4) – Commission cannot reopen its concluded proceedings
by invoking section 154 of the Act so as to levy interest u/s. 234B
On 19.01.1994, a search and
seizure operation was carried out in the premises of the Appellants (Assessee)
under the Income-tax Act, 1961.
During pendency of the
assessment proceedings, which were initiated for determination of the tax
liability as a result of search and seizure operation, the Appellants on
12.03.1996 and 03.09.1996 filed the settlement applications before the
Settlement Commission and offered to settle their tax matter in accordance with
the procedure provided under Chapter XIXA of the Act.
On 11.08.2000, the
Settlement Commission passed an order u/s. 245D (4) of the Act. By the said
order, the Settlement Commission made certain additions and waived interest
chargeable u/s. 234A, 234B and 234C of the Act.
The Appellants (Assessee)
felt aggrieved and filed rectification applications before the Settlement
Commission on 29.12.2000 for amending its order dated 11.08.2000. The Revenue
(Commissioner of Income-tax) also felt aggrieved by the order dated 11.08.2000
and filed a rectification application u/s. 154 of the Act before the Settlement
Commission on 26.07.2002.
By order dated 11.10.2002,
the Settlement Commission dismissed the applications filed by the Appellants
(Assessee) and partly allowed the application filed by the Respondents
(Revenue) rectifying its order dated 11.08.2000 insofar as it pertained to
waiver of interest, which was granted to the Appellants (Assessee). The
Appellants (Assessee) felt aggrieved by the order dated 11.10.2002 passed by
the Settlement Commission and filed petitions in the High Court of Gujarat.
The High Court, by order
dated 03.03.2014, allowed the petitions and set aside the order dated
11.10.2002 passed by the Settlement Commission and granted liberty to the
Revenue to follow the remedies as may be available to it against the order
passed by the Settlement Commission dated 11.08.2000.
The Revenue, therefore,
felt aggrieved and filed petitions against the order dated 11.08.2000
questioning its legality. The High Court, although in the concluding paragraph
observed that the petitions are disposed of, yet in substance it allowed the
petitions and modified the order dated 11.08.2000 of the Settlement Commission
by reversing the waiver of interest in terms of the Settlement Commission’s
directions contained in its order dated 11.10.2002.
The Appellants (Assessee)
felt aggrieved by the said order and filed the appeals by way of special leave
in the Supreme Court.
The short question which
arose for consideration in the appeals before the Supreme Court was whether the
High Court was justified in allowing the petitions and thereby was justified in
modifying the order dated 11.08.2000 passed by the Settlement Commission.
At the outset, the Supreme
Court noted that the issue involved in the appeals was governed by the law laid
down by the decision of two Constitution Benches of the Supreme Court. One was
rendered on 18.10.2001 in Commissioner of Income-tax, Mumbai vs. Anjum M.H.
Ghaswala and Ors. (2001) 252 ITR 1 (SC) and the other was rendered on
21.10.2010 in Brij Lal and Ors. vs. Commissioner of Income-tax, Jalandhar
(2010) 328 ITR 477 (SC).
So far as the decision
rendered in Ghaswala (supra) is concerned, the question involved therein
was whether the Settlement Commission constituted u/s. 245B of the Act has the
jurisdiction to reduce or waive the interest chargeable u/s. 234A, 234B and
234C of the Act while passing the order of settlement u/s. 245D of the Act.
After examining the scheme of the Act in the context of the powers of the
Settlement Commission, it was held that the Commission in exercise of its power
u/s. 245D (4) and (6), does not have the power to reduce or waive interest
statutorily payable u/s. 234A, 234B and 234C except to the extent of granting
relief under the circulars issued by the Board u/s. 119 of the Act. So far as
the decision rendered in Brijlal (supra) is concerned, the Supreme Court
examined the following three questions:
(I) Whether section 234B
applies to proceedings of the Settlement Commission under Chapter XIX-A of the
said Act?
(II) If the answer to the
above question is in the affirmative, what is the terminal point for levy of
such interest – whether such interest should be computed up to the date of the
order u/s. 245D (1), or up to the date of the order of the Commission u/s. 245D
(4)?
(III) Whether the
Settlement Commission could reopen its concluded proceedings by invoking
section 154 of the said Act so as to levy interest u/s. 234B, though it was not
so done in the original proceedings?
After examining these
questions, the Supreme Court answered the questions as under:
(1) Sections 234A, 234B and
234C are applicable to the proceedings of the Settlement Commission under
Chapter XIX-A of the Act to the extent indicated hereinabove.
(2) Consequent upon
conclusion (1), the terminal point for the levy of interest u/s. 234B would be
up to the date of the order u/s. 245D (1) and not up to the date of the order
of settlement u/s. 245D (4).
(3) The Settlement
Commission cannot reopen its concluded proceedings by invoking section 154 of
the Act so as to levy interest u/s. 234B, particularly in view of section 245I.
The Supreme Court noted
that when the Settlement Commission passed the first order on 11.08.2000
disposing of the application of the Appellants (Assessee), the issue with
regard to the powers of the Settlement Commission was not settled by any
decision of this Court. These two decisions were rendered after the Settlement
Commission passed the order in this case. Therefore, the Settlement Commission
had no occasion to examine the issue in question in the context of law laid
down by this Court in these two decisions. However, the issue in question was,
at that time, pending before the High Court in the petitions.
According to the Supreme
Court, in a situation like the one arising in the case, the High Court instead
of going into the merits of the issue, should have set aside the order dated
11.08.2000 passed by the Settlement Commission and remanded the case to the
Settlement Commission for deciding the issue relating to waiver of interest
payable u/s. 234A, 234B, and 234C of the Act afresh keeping in view the scope
and the extent of powers of the Settlement Commissioner in relation to waiver
of interest as laid down in the said two decisions.
The
Supreme Court was of the view that the High Court had committed a
jurisdictional error when it observed that they (the High Court) adopted the
directions contained in the order of the Settlement Commission dated 11.10.2002
and then went on to make the said directions as a part of the impugned order in
relation to waiver of interest. This approach of the High Court was wholly
without jurisdiction.
The High Court failed to
see that the order dated 11.10.2002 of the Settlement Commission was already
set aside by the High Court itself in the first round vide order dated
03.03.2014 in the light of law laid down by this Court in Brijlal (supra)
wherein it is laid down that the Settlement Commission has no power to pass
orders u/s. 154.
The Supreme Court allowed the appeal setting aside the impugned
order and the order dated 11.08.2000 passed by the Settlement Commission to the
extent it decided the issue in relation to waiver of interest and remanded the
case to the Settlement Commission to decide the issue relating to waiver of
interest payable by the Assessee afresh keeping in view the law laid down by
this Court in Ghaswala (supra) and Brijlal (supra) after
affording an opportunity to the parties concerned.
