Summary
Three-Judge Bench reference arising from the split in ACIT v. Micro Labs Ltd on the meaning of Section 80-IA(9) of the Income Tax Act, 1961. The Court held that sub-section (9) does not require the deduction allowed under Section 80-IA to be reduced from gross total income when computing a deduction under another provision of heading 'C' of Chapter VI-A (such as Section 80-HHC); it operates only at the stage of allowing the deduction, capping the aggregate of heading 'C' deductions at the profits and gains of the eligible business, approving the Bombay High Court in Associated Capsules and the view of Dipak Misra, J. in Micro Labs.
Issues
- Whether, once a deduction is claimed and allowed under Section 80-IA, Section 80-IA(9) requires the gross total income to be reduced by that deduction before computing the deduction under Section 80-HHC or any other provision under heading 'C' of Chapter VI-A.
- Whether Section 80-IA(9) affects the computation of deductions under heading 'C' or only their allowability, so that the aggregate does not exceed the profits and gains of the eligible business.
- Which of the two views expressed in ACIT v. Micro Labs Ltd (Anil R. Dave, J. or Dipak Misra, J.) is correct.
Provisions considered
- Section 80-IA(9), Income Tax Act, 1961On its plain reading, where profits and gains are claimed and allowed under Section 80-IA, a deduction to the extent of those profits is not allowed under any other heading 'C' provision, and total heading 'C' deductions cannot exceed the eligible business's profits. The sub-section restricts the allowance of the other deduction; it does not direct that the Section 80-IA deduction be subtracted from gross total income when computing the other deduction. (¶¶ 19, 20, 21)
- Section 80-HHC, Income Tax Act, 1961Grants exporters a deduction of a specified percentage of export profits in computing total income; the Court held its computation is made on gross total income before any heading 'C' deduction, the Section 80-IA(9) cap applying only when the computed deduction is allowed. (¶¶ 16, 23)
- Sections 80-IA(1) and 80-IB, Income Tax Act, 1961Described as providing deductions of a percentage of profits and gains of eligible industrial undertakings and enterprises for specified years; the deductions at issue were claimed under these provisions alongside Section 80-HHC. (¶¶ 17, 18)
- Sections 4, 80-A, 80-AB and 80-B(5), Income Tax Act, 1961Set out the scheme: tax is charged on total income; Chapter VI-A deductions are allowed from gross total income, which Section 80-B(5) defines as total income computed before any Chapter VI-A deduction; Section 80-AB fixes the amount of income of the relevant nature for heading 'C' deductions as the income computed before Chapter VI-A deductions. (¶¶ 12, 14, 15)
Held
- Gross total income is worked out by applying the provisions of the Act up to and including Chapter VI, and Chapter VI-A deductions (Sections 80-A to 80-U, under five headings) are made from that gross total income; Sections 80-A and 80-AB refer to gross total income, not the total income on which tax is charged under Section 4(1). (¶¶ 12, 13, 14, 15)
- On a plain reading of Section 80-IA(9), if a deduction of X is claimed and allowed under Section 80-IA out of gross total income Y, the assessee may still be entitled to compute a deduction of Y under another heading 'C' provision but will be allowed only Y minus X under that provision, and in no case may total heading 'C' deductions exceed the profits and gains of the eligible business. (¶ 20)
- Section 80-IA(9) does not provide that the deduction allowed under Section 80-IA should be deducted from gross total income when considering a claim under another heading 'C' provision; the restriction is not on computing gross total income but on the allowability of the other deduction to the extent of the Section 80-IA deduction. (¶ 21)
- The Bombay High Court's view in Associated Capsules (P) Ltd v. DCIT, that Section 80-IA(9) affects the allowability and not the computability of heading 'C' deductions so that the aggregate does not exceed 100 per cent of the business profits, is correct; the contrary views of the Delhi High Court in Great Eastern Exports and of the Punjab and Haryana High Court in the impugned judgment were not accepted. (¶¶ 7, 22, 23, 24)
- The opinion of Dipak Misra, J. in ACIT v. Micro Labs Ltd, approving Associated Capsules and distinguishing the words 'shall not be allowed' in Section 80-IA(9) from 'shall not qualify' used in Sections 80-HHB(5) and 80-HHD(7), is the correct view; reducing gross total income by the Section 80-IA deduction would render the Section 80-HHC(3) formula unworkable and produce anomalous results. (¶¶ 23, 24)
Result
Reference answered in favour of the interpretation adopted by the Bombay High Court in Associated Capsules and by Dipak Misra, J. in Micro Labs; Registry directed to place the appeals and petitions before the appropriate Bench for disposal.