Judgment on Tax deductions refers to larger bench

Supreme Court considering its own earlier decision in Vijay Industries v. Commissioner of Income Tax as prima facie incorrect referred the question raised in the case to a larger bench. The issue is whether the term ‘profits and gains’ is synonymous with the term ‘income’. Hence, the Supreme Court has doubted its own earlier decision in an income tax judgment on deductions and referred the question to a larger bench.

The earlier judgment of Motilal Pesticides Ltd., analysed sections 80-HH and 80-M and ruled that they have the same meaning. Both sections 80HH and 80M fall in Chapter VI-A relating to deductions to be made in computing total income. It will be seen that the language of sections 80HH and 80M is the same. It was held in Cloth Traders (P.) Ltd.’s case that; deduction is to be allowed on the gross total income and not on the net income.

But then, the decision in Cloth Traders (Pvt) Ltd.’s case was overruled in Distributors (Baroda) P. Ltd. v. Union of India. After the decision in Cloth Traders (P.) Ltd.’s case, two sections 80AA and 80AB were introduced by the Finance (No. 2) Act, 1980. While Section 80AA was to have retrospective effect with effect from April 1, 1968, Section 80AB was to have operation with effect from April 1, 1981.

Section 80AA had the effect of effacing the decision of this court in Cloth Traders (P.) Ltd.’s case, which had interpreted Section 80M. Section 80AB was made applicable to all the sections in Chapter VI-A except Section 80M. In Distributors (Baroda) P. Ltd.’s case, however, this court specifically overturned its earlier decision in Cloth Traders (P.) Ltd.’s case and held that deduction is to be allowed only on the net income and not on the gross income.

With reference to Section 80AB, this court said it was merely of a clarificatory nature and the decision of this court in Distributors (Baroda) Pvt. Ltd.’s case is thus irrespective of Section 80AB of the Act. The High Court, therefore, relying on the decision of this court in Distributors (Baroda) P. Ltd.’s case answered the question in favour of the Revenue and against the “assessee”.

This is prima facie incorrect, according to the thinking of the new bench. Therefore, the question raised in the appeal case Vijay Industries v. Commissioner of Income Tax has been referred to a larger bench to be set up by the Chief Justice.