Deduction Under Section 80HH Income Tax Act Should Be From 'Gross Profits & Gains' Instead Of 'Net Income'

In Vijay Industries v. Commissioner of Income Tax, the question before the Supreme Court was whether the deduction allowed under Section 80HH(1) of the IT act was on the gross profits and gains as claimed by the assessed or on net income from profits and gains in the manner provided under Sections 28 to 44B, after allowing deductions for depreciation, unabsorbed depreciation and investment allowance.as claimed by the tax department. 

The Supreme Court agreeing with the department said that Sections 28 to 44B relating to income from profits and gains of business or profession fall within Chapter IV of the Act, which deals with computation of total income. This income is computed after giving deductions to factors like depreciation, investment allowances etc.

Section 80HH falls within Chapter VIA, which deals with deductions to be made in computing total income. So the bench had to decide whether the meaning of income under Chapter IV should be applied to Chapter VIA. The bench noted that conceptually 'total income' was different from 'profits and gains'. It noted that the reference order had observed that 'profits and gains' was a wider concept than 'total 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 are not synonymous with the term 'income. The deductions under Chapter IV are given to arrive at the figure of net income under the head of "income from profits and gains of business or profession". In contrast, under Chapter VI-A of the Act certain deductions are given by way of incentives. Assessees may earn these deductions on fulfilling the eligibility conditions contained therein, even when they are not in the nature of any expenditure incurred by the assessee.