TATA ELXSI LIMITED ,BANGALORE vs. DEPUTY COMMISIONER INCOMER TAX, CIRCLE-7(1)(1), BANGALORE

Prayer 3.1 In view of the above and other grounds to be adduced at the time of hearing, the appellant prays that the orders passed under section 250 of the Act by the learned CIT(A), NFAC to the extent prejudicial to the appellant be quashed or in the alternative the addition of Rs.1,09,55,534/- made under section 10AA and consequential levy of tax including interest thereon be deleted. The Appellant submits that each of the above grounds / sub-grounds are independent and without prejudice to one another. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal

Aggrieved from the above order, the assessee filed appeal before the Income Tax Appellate Tribunal.

Considering the rival submissions, we note that allocation of common expenses has been decided by the Coordinate Bench of this Tribunal in assessee’s own case for A.Ys. 2016-17, 2017-18 and 2020-21 (supra) and the issue is similar in which it has been held as under: “3. After hearing both the parties, we are of the opinion that similar issue came for consideration before the Coordinate Bench Mumbai Tribunal in the case of Reliance Industries Ltd. in for the assessment year 2013-14, the Tribunal vide order dated 10.11.2020 observed as under: “105 Additional ground 5 "5. The learned CIT(A) Mumbai erred in allowing the deduction in respect of export profits of SEZ unit u/s 10AA of the Act with reference to the income computed under the head 'profits and gains of business or profession' of the SEZ unit instead of 'gross profits and gains' of SEZ unit, as interpreted by Supreme Court in the recent judgement in the case of Vijay Industries. The Apex court while interpreting the provisions of section 80HH relevant to AY 1979-80 and 1980-81 has held that phrase "profits and gains" means gross profits of the business i.e. before computing income as specified in section 30 to 43D of the Act in para (18) and (19) as under:- "It is most humbly submitted 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 assesses. 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'..... 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."

Thus, it has been urged by the assessee by way of the additional ground that the ld. CIT(A), Mumbai erred in allowing the deduction in respect of export profits of SEZ units u/s.10AA of the Act with reference to the income computed under the head ‘profits and gains of business’ or profession of the SEZ unit instead of gross profit and gains of SEZ unit as interpreted by the Hon’ble Supreme Court in the recent judgment in the case of Vijay Industries vs. CIT(SC) in Civil Appeal No.1581/1582 of 2005. Referring to the above additional ground, ld. Counsel of the assessee contended Page 6 of that the above is a pure legal ground and the assessee seeks the same to be admitted as it does not require investigation of any new fact. He submitted that the ground has been raised in view of the interpretation of the term ‘profit and gains’ in the recent decision of the Hon’ble Supreme Court in the case of Vijay Industries Ltd. vs CIT supra. Therefore, the assessee contends that in view of the Hon’ble Supreme Court decision in the case of National Thermal Power Corporation 229 ITR 383, the additional ground ought to be admitted and adjudicated.

The ld. Counsel of the assessee submitted that assessee has set up a refinery at Motikhavadi, P.O. Digvijayagram, Jamnagar in the Special Economic Zone (SEZ) area for refining of mineral oil. Since the assessee had complied with the conditions as specified u/s.10AA of the Act, he claimed 100% deduction of profit and gains erred in respect of export turn over from its refinery at SEZ u/s.10AA of the Act. It has been further submitted that since the refinery began refining of mineral oil on or after the first day of October 1998, and since the assessee has complied with the conditions as specified u/s.80IB(9) of the Act, he claimed deduction of the balance profits and gains u/s.80IB(9) of the Act. Though both the AO and CIT(A) had disallowed the deduction u/s.80IB(9) of the Act for A.Y. 2013-14, similar claims in earlier year was decided in favour of the assessee by the ITAT for A.Y.2012-13 and hence, the appeal raised by the assessee for A.Y.2013-14 on this ground i.e. ground No.4 in is covered.

Now, the assessee contends that in light of the Apex Court decision in the case of Vijay Industries, dated 01/03/2019 the term ‘profit and gains’ in respect of export profit u/s.10AA of the Act ought to be interpreted as gross profit and gains of SEZ units i.e. before computing income as specified in Section 30 to 43 D of the Act. Since it is purely a legal ground we admit the same.

The elaborate submission of the assessee in this regard reads as under:- “The issue before the Apex Court relates to the interpretation to section 80HH relevant to AY 1979-80 and 1980-81. The relevant section is reproduced hereunder:- "80HH. Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas. (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, he allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof." The assessee in that case claimed deduction on gross profits (without depreciation and investment allowance) of the undertaking stating that "profits and gains" is not the same as "income", whereas revenue claimed that deduction is allowable only on net profits as computed under sections 28 to 43D of the Act. The full bench of the Apex court reproduced the reference order dated 5-11-2014 (referring the matter to full bench) highlighting the observation of Rajasthan High court as under: "It is most humbly submitted 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 Page 7 of 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 Apex Court overruled its earlier judgement in the case of Motilal Pesticides (2000) 243 ITR 83 (SC), holding that language of section 80HH and 80M are materially different as section 80HH uses the expression "profits and gains" whereas section 80M refers to "income". Therefore, the decision in the context of section 80M ought not have been relied on by the Supreme Court in the context of section 80HH. The Supreme Court after discussing all the earlier judgements of the Supreme Court i.e. Cambay Electric Supply [1978] 113 ITR 84 (SC), Cloth Traders [1979] 118 ITR 243 (SC), Distributor Baroda [1085] 155 ITR 120 (SC), HH Sir Ram Verma [1994] 205 ITR 433 (SC), Kotagiri Industrial Co-operative Tea Factory Ltd [1997] 224 ITR 604 (SC) concluded as under: "19) 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 is correctly pointed out by Division Bench in the reference order that in Mali/al Pesticides case, the Court followed Me judgment rendered in the M/s. ('b/h Traders (P) Lid. which was a case under Section 80M of the Act, on the premise that language of Section 80HH and Section 80M is the come. This basis is clearly incorrect as the language of two provisions is materially different. We are, therefore, of the considered opinion that judgment of Motilal Pesticides is erroneous. We, therefore, overrule this judgment The Apex Court also held that provisions of section 80AB, which is a deeming fiction to provide that for the purposes of deduction under Chapter VIA (heading C deduction in respect of certain income), only income as computed under the provisions of the Act shall be deemed to income eligible for deduction, are not clarificatory in nature and the provisions of section 80AB are applicable prospectively. Hence the same would not apply to AY 1979-80 and 1980-81. Finally, the Apex Court allowed the appeal of the assessee holding that the phrase "profits and gains" means gross profits of the business in (19) as under: "19) 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." The appellant submits that the wording "profits and gains" used in section 80HH is pari materia with the wording in section 1OAA and, hence, the ratio laid down by the Hon'ble Apex Court in the case of Vijay Industries squarely applies to the case of the assessee. Section 1OAA of the Act, reads as under: Section 10AA of the Income-tax Act provides for tax incentive in respect of profits and gains of a unit set up in a SEZ as under: Special Provisions in respect of newly established Units in Special Economic Zones 10AA (1) Subject to the provisions of this section, in computing the total income of an assessee, being an entrepreneur as referred to in clause 0) of section 2 of the Special Economic Zones Act, 2005, from his Unit, who begins Page 8 of to manufacture or produce articles or things or provide any services during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2006, but before the first day of April, 2021, the following deduction shall be allowed- (i)hundred per cent of profits and gains derived from the export, of such articles or things or from services for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the Unit begins to manufacture or produce such articles or things or provide services, as the case may be, and fifty per cent of such profits and gains for further five assessment years and thereafter; (ii) for the next five consecutive assessment years, so much of the amount not exceeding fifty per cent of the profit as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the "Special Economic Zone Re- investment Reserve Account") to be created and utilized for the purposes of the business of the assessee in the manner laid down in sub-section (2). [Explanation - For the removal of doubts, it is hereby declared that the amount of deduction under this section shall be allowed from the total income of the assessee computed in accordance with the provisions of this Act, before giving effect to the provisions of this section and the deduction under this section shall not exceed such total income of the assessee.] Thus, on perusal of section 1OAA read in light with the recent Apex Court decision in the case of Vijay Industries, it is submitted that (1) Section 10AA provides tax incentives equal to 100% / 50% of "profits and gains" derived from exports from a unit set up in a SEZ. (2) The term "profits and gains" has not been defined under the Act. The full bench of the Apex court has held that the terms "profits and Gains" (3) and "income" are different and hence are to be assigned different meaning. The term "profits and gains" mean gross profits i.e. gross revenue receipts less actual expenses. The depreciation and investment allowance, etc are not actual expense, hence need to be excluded. The provision of section 80AB (i.e. deeming fiction to provide deduction only (4) from income irrespective of language used) is applicable only to sections included in Chapter VIA under the heading "C- deduction in respect of certain income'. It is not applicable to section 10AA as the said section does not come within Part 'C' of Chapter VI-A of the Act. The appellant submits that section 80AB was inserted by the Finance (No2) Act 1980 w.e.f 01 04.1981. Further section 10A was originally inserted w.e.f 01 .04.1981 by the Finance Act 1981. The legislature in its wisdom has not made 80AB applicable to section 10A/10AA/113A5/10B of the Act, even though the said section provide for deduction to be granted to an assessee. Therefore, the appellant submits that section 80AB cannot be applied in the present case to determine the amount of deduction to be allowed under section 10AA of the Act. The appellant submits that as section 80AB is not applicable to section 10AA, the interpretation given by the Supreme Court to the term "profits and gains" must be applied to section 10AA as well. It is further submitted that a deeming fiction should be given a stricter interpretation. Moreover, the Apex Court in Vijay Industries (supra) has held that provision of this section is not clarificatory in nature.

Per contra, the ld. departmental representative elaborately argued that the said decision of Vijay Industries (supra) is not applicable in the facts of the present case. The submissions of the ld. DR in this regard are reproduced as under:- “(ii) This issue was discussed at length during the hearing. In the appellant's case the issue is deduction under section 10AA falling under chapter III of the Act, while in the case of Vijay industries, the issue is deduction under section 80HH falling under chapter VIA of the Act .However the appellant contends that the language of section 80HH is parimateria with the language used in section 10AA.This argument is totally fallacious and the crucial points of departure in the language used in these two sections and the difference in applicability of the provisions of these two section subsequent to the decision in the case of Vijay Industries are discussed hereunder based on the language used in the act, case laws etc. iii) The decision in the case of Vijay Industries Ltd. is rendered on the allowability of deduction u/s. 80HH of the Act, overruling the apex court decision in the case of Motilal Pesticides [243 ITR 26 (SC)]. The decision in the case of Motilal Pesticides (in respect of section 80HH) was rendered in turn relying on the decision in the case of Distributors Baroda Pvt. Ltd. vs. Union of India (1985) AIR 1585 (SC) dated 1/7/1985. The subject matter of discussion in the case of Distributors Baroda Pvt. Ltd. was Sec. 80M and in this decision, the earlier decision on Sec. 80M in the case of Page 10 of Cloth Traders vs. Addl. CIT was overruled. In the case of Distributors Baroda Pvt. Ltd. (supra.),it was held that the deduction under the relevant section 80M is to be allowed from the net income. It was also held that Sec. 80AA (which pertains to section 80M of the Act (introduced wr.e.f 1/4/1968 vide Finance Act (No. 2) ,1980 and since omitted w.e.f 1/4/1998) in its retrospective operation is merely clarificatory of the law as it always was since 1/4/1968 and no complaint can validly be made against it. Thereafter in the case of Motilal Pesticides (supra) pertaining to A.Y 1979- 80 and 1980-81 on the issue of deduction u/s 80HH , Hon'ble Apex court held that section 80AB applicable to all sections under chapter VIA except section 80M and introduced w.e.f 1/4/1981) is merely clarificatory and the decision in the case of Distributor's Baroda (supra) (pertaining to assessment year 1979-80 and 1980-81) is irrespective of section 80AB of the act. Therefore, in the case of Motilal Pesticides, the Hon'ble Supreme Court relied on its decision in the case of Distributors Baroda Pvt. Ltd. and held that same principles are applicable for deduction u/s.80HH. It was also held that Sec.80M and Sec.80HH are similar in nature and deduction is to allowed from the net income. iv)In the recent judgement in the case of Vijay Industries Ltd.( A.Y 1979-90 and 1980- 81), however, the judgement in the case of Motilal Pesticides is overruled. It has been held that the language of Sec.80HH and the language of Sec.80M are not similar. It has been further held that Sec. 80AB (which pertains to all sections in chapter VI A except section 80M) is not clarificatory but prospective in nature and operative from A.Y. 1981-82. The Hon'ble apex court has, therefore, held that reading of Sec.80HH along with Sec.80AB would clearly signify that the deduction u/s.80HH has to be of the gross profits and gains, i.e., before computing the income as specified in Sec. 30 to 43D of the Act. It is in this background that the Appellant has preferred the ground on the basis of the latest decision of the Hon'ble Supreme Court in the case of Vijay Industries Ltd. and contended that the deduction of profits and gains derived from export u/s. 10AA of the Act also would mean gross profits and gains, i.e. before computing the income as specified in Sec. 30 to 43D of the Act. It is contended by the Appellant that the language of Sec. 80HH and the language of Sec. 10AA are identical and, therefore, the decision is applicable to Sec. 10AA also pertaining to "deduction provisions". v) The first contention of the Appellant is that the decision rendered by the Hon'ble apex court in the case of Vijay Industries Ltd. pertaining to deduction allowable u/s. 80HH is applicable to Sec.10AA also. The assessment year in the case of the appellant is AY 2013-14. The relevant section 10AA, 80HH and also section 801A as applicable to the year under consideration needs to be discussed. In this connection, firstly, the relevant part of Sec. 80HH is reproduced as under: "80HH. (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof" Same provision was there in AY 1979-80/ 1980-81 also which was the year under consideration in the case of Vijay Industries. It is clear from a bare reading of the above section that the deduction u/s 80HH is allowable from the "profits and gains" of the industries. In the case of Vijay Industries Ltd. relied upon by the Appellant, only the words "profits and gains" are referred. In fact, the words "profits and gains"

The question then to be considered is, whether on a plain reading of Section 801A read with other relevant provisions in Chapter V/-A, can it be said that the quantum of deduction allowable under Section 80/A depends upon the assessee claiming or not claiming current depreciation ? To be specific, the question is, whether the choice, if any, vested in the assessee in claiming or not claiming current depreciation has any bearing in determining the quantum of deduction allowable under Section 80/A of the Act? 36. In our opinion, the above question is no longer res-integra. The Apex Court in the case of M/s.Liberty India V/s. Commissioner of Income Tax reported in 2009 (12) SCALE 51, held as under : "13 Before analyzing Section 80-/B, as a prefatory note, it needs to be mentioned that the 1961 Act broadly provides for two types of tax incentives, namely, investment linked incentives and profit linked incentives. Chapter VI-A which provides for incentives in the form of tax deductions essentially belong to the category of "profit linked incentives". Therefore, when Section 80-IA/80-IB refers to profits derived from eligible business, it is not the ownership of that business which attracts the incentives. What attracts the incentives under Section 80-/A/80- /B is the generation of profits (operational profits). For example, an assessee Page 13 of Mumbai may have a business of building housing projects or a ship in Nava Sheva. Ownership of a ship per se will not attract Section 80-/B (6). It is the profits arising from the business of a ship which attracts sub-section (6). In other words, deduction under sub-section (6) at the specified rate has linkage to the profits derived from the shipping operations. This what we mean in drawing the distinction between profit linked tax incentives and investment linked tax incentives. It is for this reason that Parliament has confined deduction to profits derived from eligible businesses mentioned in subsections (3) to (11A) [as they stood at the relevant time]. One more aspect needs to be highlighted. Each of the eligible business in subsections (3) to (11A) constitutes a stand-alone item in the matter of computation of profits. That is the reason why the consent of "Segment Reporting" stands introduced in the Indian Accounting Standards (AS) by the Institute of Chartered Accountants of India (ICAI).

Analysing Chapter V/-A, we find that Sections 80-lB I 80-IA are the Code by themselves as they contain both substantive as well as procedural provisions. Therefore, we need to examine what these provisions prescribe for ''computation of profits of the eligible business". It is evident that Section 80-lB provides for allowing of deduction in respect of profits and gains derived from the eligible business. The words “derived from" in narrower in connotation as compared to the words "attributable to". In other words, by using the expression "derived from" Parliament intended to cover sources not beyond the first degree. In the present batch of cases, the controversy which arises for determination is: whether the DEPB credit I Duty drawback receipt comes within the first degree sources ? According to the assessee(s), DEPB credit/duty drawback receipt reduces the value of purchases (cast neutralization), hence, it comes within first degree source as it increases the net profit proportionately. On the other hand, according to the Department, DEPB credit, duty drawback receipt do not come within first degree source as the said incentives flow from Incentive Schemes enacted by the Government of India or from Section 75 of the Customs Act, 1962. Hence, according to the Department, in the present cases, the first degree source is the incentive scheme/ provisions of the Customs Act. In this connection, Department places heavy reliance on the judgment of this Court in Sterling Food (supra). Therefore, in the present cases, in which we are required to examine the eligible business of an industrial undertaking, we need to trace the source of the profits to manufacture (see CIT v. Kirloskar Oil Engines Ltd., reported in [1986] 157 ITR 762) 15. Continuing our analysis of Sections 80- IA/80-IB it may be mentioned that sub-section (13) of Section 80-lB provides for applicability of the provisions of sub-section (5) and sub-sections (7) to (12) to Section 80-IA, so for as may be, applicable to the eligible business under Section 804B. Therefore, at the outset, we stated that one needs to read Sections 801, 80-IA and 80-lB as having a common Scheme. On perusal of sub-section (5) of Section 80- IA, it is noticed that it provides for manner of computation of profits of an eligible business. Accordingly, profits are to be computed as if such eligible business is the only source of income of the assessee therefore, the devices adopted to reduce or inflate the profits of eligible business has got to be rejected in view of the overriding provisions of sub-section (5) of Section 80-IA, which are also required to be read into Section 804B. [see Section 80-18(13)]. We may reiterate that Sections 801, 80-IA and 80-lB have a common scheme and if so read it is clear Page 14 of that the said sections provide for incentives in the form of deduction(s) which are linked to profits and not to investment. On analysis of Sections 80-IA and 80-IB it becomes clear that any industrial undertaking, which becomes eligible on satisfying sub-section (2), would be entitled to deduction under subsection (1) only to the extent of profits derived from such industrial undertaking after specified dote(s). Hence, apart from eligibility, sub-section (1) purports to restrict the quantum of deduction to a specified percentage of profits. This is the importance of the words "derived from industrial undertaking" as against "profits attributable to industrial undertaking". Thus even for the A.Y 1997-98, in the case of Plastiblend (supra) and without reference to section 80AB, Hon'ble High court rendered the decision after discussing the scope of profits and gains derived and held that the quantum of deduction u/ s.801A has to be determined on the total income computed after deducting all deductions allowable u/s.30 to 43D of the Act. Thereafter, the Hon'ble apex court confirmed the jurisdictional High Court decision and held (in para 18) that "the assessees/appellants want 100% deduction, without taking into consideration depreciation which they want to utilise in the subsequent years. This would be anathema to the scheme under Section 80-IA of the Act which is linked to profits and if the contention of the assessees is accepted, it would allow them to inflate the profits linked incentives provided under Section 80-IA of the Act which cannot be permitted." The decision in the case of plastiblends is apparently not referred in the decision rendered in the case of Vijay industries. In the case of Vijay Industries Ltd.7 the issue involved was deduction u/s. 80HH as applicable to AN 1979-80,1980-81.The assessment year concerned is 2013-14 and for this year the language of Sec. 10AA is parimateria with Sec. 801A of the Act (and not section 80HH)and therefore decision in the case of Vijay Industries is not applicable as the deduction is now allowable from the profits and gains profits and gain derived from the undertaking in the case of 10AA/801A for the year under consideration, unlike from profits and gains as in section 80HH. Moreover, relying on the decision in the case of Plastiblends India Ltd. (supra) on the issue of "derived from the undertaking", the ground raised

The rejoinder of the learned Counsel of the assessee in this regard with respect to the arguments raised by the ld. DR are as under:- “Further, the Learned DR made the following submissions: a. The decision in the case of Vijay Industries is rendered in the context of section 80HH r.w.s 80AB, which is a deduction section under Chapter VI-A and therefore cannot be applied to section 10AA. b. The provisions of section 80AB are pari-materia with the Explanation below section 1OAA(1). c. The Explanation below section 10AA being clarificatory in nature, will apply retrospectively and, hence, deduction u/s 10AA for AY 2013-14 will be computed only w.r.t the amount of income as computed in accordance with the provisions of the Act. d. The depreciation is compulsory as per Explanation 5 to section 32 and hence ought to be applied while computing profits u/s 10AA. The appellant submits that the arguments of the Revenue are not sustainable for the following reasons:-

Further contention of the assessee Counsel is that the judgment of Hon’ble Supreme Court in the case of Plastiblends India Ltd., 398 ITR 568 is not applicable to the facts of the present case for the following reasons:- “Firstly the said judgement deals with deduction under section 80IA which falls under Chapter VI-A and is therefore covered by provisions of section 80AB (i.e. the deeming fiction to provide deduction only from income as included in the gross total income of the assessee). In the appellant's case the deduction is claimed under section IOAA of the Act which is not covered in section 80AB. The legislature in its wisdom has not made 80AB applicable to section 10A/10AA/10B/10BA/10C of the Act, even though the said sections provide for deduction to be granted to an assessee. Secondly, deduction under section 10AA of the Act (prior to the amendment made by Finance Act 2017 by way of insertion of Explanation) was to be given at the stage of computing the gross total income of the eligible undertaking under Chapter IV of the Act i.e. prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income. This has been held by the Supreme Court in the case of CTT v. Yokogawa India Ltd 391 ITR 274 (SC) in the context of section 10A of the Act. Plastiblends India deals with a situation of computation of deduction under Chapter VIA of the Act i.e. after computing the gross total income of the eligible undertaking under Chapter IV of the Act. (7) There is clear evidence in the Act that whenever the legislature wanted to allow a deduction as a percentage or fraction of the income computed under the head 'Profits and Gains from Business or Profession' it has specifically provided for the same. Thus section 33ABA reads, inter alia as follows: "33ABA. (1) Where an assessee is carrying on business consisting of the prospecting for, or extraction or production of, petroleum or natural gas or both in India and in relation to which the Central Government has entered into an agreement with such assessee for such business, has before the end of the previous year— deposited with the State Bank of India any amount or amounts in an (a) account (hereafter in this section referred to as the special account) maintained by the assessee with that Bank in accordance with, and for the Page 18 of (hereafter in this section referred to as the scheme) approved in this behalf by the Government of India in the Ministry of Petroleum and Natural Gas: or (b) deposited any amount in an account (hereafter in this section referred to as the Site Restoration Account) opened by the assessee in accordance with, and for the purposes specified in, a scheme framed by the Ministry referred to in clause (a) (hereafter in this section referred to as the deposit scheme), the assessee shall, subject to the provisions of this section, be allowed a deduction (such deduction being allowed before the loss, if any, brought forward from earlier years is set off under section 12) of— a sum equal to the amount or the aggregate of the amounts so (i) deposited; or a sum equal to twenty per cent of the profits of such business (ii) (computed under the head "Profits and gains of business or profession" before making any deduction under this section), whichever is less.... " Similarly section 80HHC provides, inter alia as follows :- (3) For the purposes of sub-section (1),— (a) where the export out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee... Explanation.—For the purposes of this section, (a)... (b).... (baa) "profits of the business " means the profits of the business as computed under the head "Profits and gains of business or profession" as reduced by... The above shows that a computation under the head 'Profits and Gains from Business or Profession is quite different from a phrase 'profits and gain" simplictor. (8) The Explanation to section 10AA introduced by the Finance Act, 2017 with effect from 1.4.2018 makes it clear that its purpose is to allow deduction under section 10AA from the total income of the assessee and not the total income of the undertaking. The memorandum explaining the provisions of the Finance Bill 2017 at 391 1TR 1 (St) at page 214 state as follows:- "Rationalisation of provisions of Section 10AA Under the existing provisions of the section 10AA, deduction is allowed from the total income of an assessee, in respect of profits and gains from his Unit operating in SEZ. Subject to fulfillment of certain conditions. Section 10AA allows deduction in computing the total income of the assessee, hence the deduction is to be allowed for the total income of the assessee as computed in accordance with the provision of the Act before giving effect to the provisions of Page 19 of 10AA. However, courts have taken a view (while deciding the matter pertaining to section 10A which also contains similar provision) that the deduction is to be allowed from the total income of the undertaking and not from the total income of the assessee. In view of the above, it is proposed to clarify that the amount of deduction referred to in section 10AA shall be allowed from the total income of the assessee computed in accordance with the provisions of the Act before giving effect to the provisions of the section 10AA and the deduction under section IOAA in no case shall exceed the said total income. This amendment will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent assessment years. [Clause 7]" Hence as long as the assessee has a positive total income the deduction under section 10AA must be granted. It does not deal with the method by which the deduction is to be computed.”

The assessee has made further submission that in alternative and without prejudice to the above arguments, the assessee submits that 100% profit and gains derived from export appearing in Section 10AA(1)(i) of the Act should be interpreted as 100% of profits and gains based on commercial principles. Thus, without prejudice to the aforesaid submission and arguments, in arriving at the commercial profit of the SEZ unit eligible for deduction 10AA of the Act, depreciation charged in the books as per the Companies Act 1956 may be deducted, instead of the depreciation allowance as computed u/s.32 of the Income Tax Act.

The ld. counsel of the assessee contends that Hon'ble Apex Court in the case of Vijay Industries (supra) has also referred to profit and gains on commercial principles. That profit and gains on commercial principles envisage allowance of deprecation as per Companies Act and not depreciation as per Income Tax Act. The ld. counsel submits that the Hon'ble Supreme Court and Hon'ble High Courts have already dealt with this proposition that commercial profits mean profits without adjustment of depreciation as per income tax act earlier also. In this regard, he referred to the following case laws:-

P.K. Badianiv. CIT(SC) 105 ITR 642 115. We have carefully considered the submissions and perused the records. Before proceeding further it may be gainful here to refer to the decision of Hon'ble Supreme Court in the case of Vjay Industries (supra) which read as under :- “ JUDGMENT A.K. Sikri, J. - Leave granted. Delay condoned. 2. In all these appeals issue relates to the interpretation that is to be accorded to the provisions of Section 80HH of the Income Tax Act, 1961 (hereinafter referred to as the 'Act'). Section 80HH and other related provisions, as it existed at the relevant time, are to be taken note of since we are concerned with 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. Issue is limited, namely, while computing the deduction whether it is to be available out of 'income' as computed under the Act or out of 'profits and gains', without deducting therefrom 'depreciation' and 'investment allowance'. Language of sub-section (1) of Section 80HH will have to be seen, in order to comprehend the aforesaid issue. It reads: "80HH. Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas. (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof." As can be seen from the above, this Section grants deduction from profits 3. and gains to an undertaking engaged in manufacturing or in the business of the hotel. The deduction is admissible at the rate of 20% of the profits and gains of undertaking for 10 assessment years. Certain conditions are to be fulfilled in order to be eligible for such a deduction, about which there is no dispute insofar as these appeals are concerned. Conflict is confined to one aspect viz. 20% deduction of gross profits and gains or net income. Whereas assessees want 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 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 under Section 80HH. The assessees, on the other hand, submit that Section 80HH uses the expression 'profits and gains' which is different from 'income'. Therefore, whatever profit 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 under Sections 32 and 32AB of the Act, cannot be taken into consideration.

These appeals had come up for hearing before a Devision Bench of this Court. After hearing the arguments advanced by the counsel for the parties on the aforesaid lines, the Division Bench noted the conflict and passed orders dated 5th November, 2014, thereby referring the matter to a larger Bench. That is how the matters have come up before this Bench.

In order to appreciate the controversy, we would have to go through certain provisions of the Act in order to understand broadly the scheme of taxation on the income of assessees. Section 4 of the Act is a charging Section which makes total income of the 7. previous year of every person chargeable to tax at the rates which may be specified from time to time. The said Section, thus, imposes income tax upon a person in respect of his income. Of course, income is to be charged at the rate or rates fixed for the year by the Annual Finance Act. Also the levy is to be on the total income of the assessable entity, computed in accordance with the provisions of the Act. Section 5 lays down the scope of the total income. While computing the total income, certain incomes are exempted which are not to be included and these are mentioned in Section 10 of the Act. Section 14 of the Act is the next provision which is relevant for these 8. appeals. It is the first provision in Chapter IV which is titled 'computation of total income' and, obviously, contains the provision for computation of total income. Section 14 enumerates different heads of income, namely, salaries, income from house property, profits and gains of business or profession, capital gains and income from other sources. Insofar as income under the head 'profits and gains of business or professions' is concerned, provisions thereto are contained in Sections 28 to 44DB of the Act. Section 28 specifies various incomes which shall be chargeable to income tax under this head. Thereafter, Section 29 provides that income referred to in Section 28 shall be computed in accordance with the provisions contained in Sections 30 to 43D. These sections provide for deductions of various kinds. Among them, Section 32 relates to depreciation, Section 32AB gives deductions in respect of certain investment allowance. After providing for admissible deductions to an assessee, income under this head is ascertained. In a similar way, as noted above, income under the other heads is worked out. If a particular assessee has income under more than one heads, in the income tax returns, the said assessee would show the respective incomes under the aforesaid heads thereby arriving at total income on which the tax would become payable.

Chapter VIA also contains provisions in respect of certain deductions which are to be made in computing total income. Section 80A of this Chapter stipulates that in computing the total income of an assessee, there shall be allowed from 'gross total income' the deductions specified in Section 80C to 80U. It is relevant to point out that though Chapter VIA also allows certain deductions in computing total income, these provisions are not clubbed with the provisions of part of Chapter IV Page 22 of Act. There is a reason for doing so. The provisions made in Chapter IV are for the purposes of computing total income qua income under the head 'profits and gains' from business or profession. Various deductions which are specified to be given from the gross total income are in the nature of expenses incurred or to be treated as expenses. It may be rents paid, insurance premium paid for building, expenditure incurred on scientific research, various other kinds of expenditures etc. The purpose is to arrive at true income after making such expenditure admissible for deduction. Deductions provided under Chapter VIA, on the other hand, are largely in the nature of incentives. For example, under Section 80CCA deductions provided is in respect of deposits under National Savings Scheme or payment to a deferred annuity plan purpose is to encourage the assessees to make deposits under these Schemes. Likewise, under Section 80CCC, deduction is given in respect of contribution to certain Pension funds. The deductions are also given, inter alia, for donations for scientific research or rural development, to newly established industrial undertakings or hotel business in backward areas, small scale industrial undertakings, housing projects, export business, businesses earning convertible foreign exchange etc. It is in the aforesaid scheme, one has to consider whether deductions under 10. Section 80HH, which falls under Chapter VIA, is to be given after applying the provisions for computation of income as mentioned in Chapter IV of the Act. Once, we examine the matter keeping in view the aforesaid nature of scheme, answer becomes obvious. Chapter VIA, is a stand alone chapter dehors Chapter IV. Therefore, provisions relating to various kinds of deductions mentioned therein have to be construed independent of Chapter IV of the Act. Another pertinent aspect which is to be borne in mind is that conceptually 'income or total income' is different from 'profits and gains'. There are various heads of income and if an assessee is earning income under more than one heads, all these are to be clubbed together to arrive at total income. Profits and gains from the business or profession is only one of the heads of income. We are to examine and interpret the provisions of Section 80HH of the Act 11. keeping in view the aforesaid parameters. As noted above, it mentions that in computing the total income of the assessee, a deduction from profits and gains of an amount equals to 20% thereof shall be provided.

Having regard to the law as laid down by this Court in Distributors (Baroda) (P) Ltd. [(1986) 1 SCC 43 : 1986 SCC (Tax) 159 : (1985) 155 ITR 120] and H.H. Sir Rama Varma [1994 Supp (1) SCC 473 : (1994) 205 ITR 433] , it must be held that before considering the matter of deduction under Section 80-P(2) the Income Tax Officer had rightly set off the carried-forward losses of the earlier years in accordance with Section 72 of the Act and on finding that the said losses exceeded the income, he rightly did not allow any deduction under Section 80-P(2) and the Appellate Assistant Commissioner as well as the Tribunal and the High Court were in error in taking a contrary view.

The principle of statutory construction invoked by Ms Ramachandran has no application in construing the expression "gross total income" in subsection (1) of Section 80-P. In view of the express provision defining the said expression in Section 80-B(5) for the purpose of Chapter VI-A, there is no scope for construing the said expression differently in Section 80-P.' 16. We have considered the aforesaid submissions.

At the outset, it needs to be pointed out that in these cases, the Court is concerned with the provisions of Section 80HH of the Act and, therefore, the language used in that particular provision is to be kept in mind. As noted above, sub-section (1) of Section 80HH allows "a deduction from such profits and gains of an amount equal to 20 per cent 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 first question would be: what meaning is to be assigned to the expression 'profits and gains'? Here we find that the reference order dated 5th November, 2014 rightly draws a distinction between 'profits and gains' and 'income'. We would like to reproduce the said reference order in its entirety as we find that it captures the legal position lucidly and succinctly: '1. We are concerned in these cases with Assessment Year 1979-1980 and Assessment Year 1980-1981. The High Court of Rajasthan by the impugned judgment dated 17th May, 2004 construed Section 80-HH of the Income Tax Act, 1961 following a judgment of this Court in Motilal Pesticides(I) Pvt. Ltd. v. Commissioner of Income Tax, Delhi-II [2000] 9 SCC 63. The High Court noticed an argument made before it to the following effect: "It is most humbly submitted 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 2 from the figure of sales by the assessee. It does not include any depreciation and investment allowance, as admittedly these are not the Page 26 of 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'." However, the High Court correctly felt that it was bound by the judgment of this Court. Motilal Pesticides(I) Pvt. Limited (Supra) is a Judgment of this Court which 2. affirmed the Judgment of the Delhi High Court concerning the interpretation of the very same Section 80-HH of the Income Tax Act. The assessment years also happened to be the same assessment years as involved in these appeals. The question of law set out by this Court is, whether, on the facts and 3. circumstances of the case, the Tribunal was right in holding that the assessee was not entitled to deduction under Section 80-HH of the Income Tax Act, 1961 on the gross profit of Rs.34,30,035 (Liquid Section) but on the net income 3 therefrom for Assessment Year 1979-80? Thereafter, this Court set out Section 80-HH in para 2 and Section 80-M in 4. para 3 of the Judgment. It will be noticed that whereas Section 80-HH uses the expression "any profits and gains derived from", Section 80-M uses the expression "any income". Section 80-M was held, in the Cloth Traders (P) Ltd. Vs. CIT (1979) 3 SCC 538, 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 over-ruled in Distributors (Baroda) Pvt. Ltd. Vs. Union of India (1986) 1 SCC 43. Bhagwati, J. who was party to the earlier decision in the Cloth Traders' case 5. delivered a judgment in the Distributors( Baroda) case holding that the Cloth traders' case was obviously incorrectly decided because the words "any income" cannot possibly refer to gross total income but referred only to "net income". Further, Distributors (Baroda) case followed the judgment of this Court in Cambay Electric Supply Industrial Co. Ltd. v. The Commissioner of Income Tax, Gujarat-II, Ahmedabad [1978] 2 SCC 644 which decision concerned itself with Section 80-E of the Income Tax Act. Section 80 E reads as follows:— "80E – Deduction in respect of profits and gains from specified industries in the case of certain companies-(1) In the case of a company to which this section applies, where the total income (as computed in accordance with the other provisions of this Act) includes any profits and gains attributable to the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule, there shall be allowed a deduction from such profits and gains of an amount equal to eight per cent, thereof, in computing the total income of the company. (2) This section applies to (a) an Indian Company; or (b) any other company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India. But does not apply to any Indian Company referred to in Clause (1), or to any other company referred to in clause (b), if such Indian or other company is a company referred to in Section 108 of its total income as computed before applying the provisions of sub-section (1) does not exceed twenty-five thousand rupees".

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 is correctly pointed out by Division Bench in the reference order that in Motilal Pesticides (I.) (P.) Ltd. case (supra), the Court followed the judgment rendered in the Cloth Traders (P) Ltd. case (supra) which was a case under Section 80M of the Act, on the premise that language of Section 80HH and Section 80M is the same. This basis is clearly incorrect as the language of two provisions is materially different. We are, therefore, of the considered opinion that judgment of Motilal Pesticides (I.) (P.) Ltd. case (supra) is erroneous. We, therefore, overrule this judgment.

We are 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 1st April, 1981 is clarificatory in nature. It is a provision made with prospective effect as the very Amendment Act says so. Therefore, it cannot 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 becomes clear from the reading of Circular No. 281 dated September 22, 1980 issued by the Central Board of Direct Taxes itself. This circular inter alia describes the reasons for adding new Sections 80AA and 80AB. It refers to judgment in Cloth Traders (P.) Ltd. case (supra) and mentions that the directions 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. Notwithstanding the same, this circular also categorically mentions that it will take effect from April 01,1981. Following portion of this circular is relevant: "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."

It is, thus, clear that change in legal position is brought about only, with the insertion of Section 80AB and made applicable from Assessment Year 1981-82. In view thereof, judgments in the case of Cloth Traders (P.) Ltd. (supra) relied by the Revenue will be of no relevance. Likewise, judgment in Kotagiri Industrial Co- Operative Tea Factory Ltd. case (supra) decided altogether different question, Page 29 of which can be discerned from the passages extracted therefrom and will have no application to the instant case.

As a result, all these appeals are allowed.

A reading of the above said makes it clear that while expounding upon the provisions of section 80 HH, the Hon'ble Court was considering as to whether while computing the deduction whether it is to be available out of income as computed under the act or out of profit and gains without deducting therefrom depreciation u/s. 32 and investment allowance u/s. 32AB of the Act.

After elaborating upon the language of the section and the arguments of the parties honourable court in paragraph 17 of the above order noted that subsection 1 of section 80 HH allows a deduction from such profits and gains of an amount equal to 20% thereof in computing the total income of the assessee. Further Hon’ble Apex Court observed that the so far as deduction admissible under this provision is concerned it is from the profits and gains. That in this context the 1st question would be; what meaning is to be assigned to the expression profits and gains.

After reproducing the reference order in this regard honourable supreme court expounded that the scheme of the act insofar as assessment of income is concerned particularly with reference to computing the income as provided in chapter IV of the act and contrasted it with the deduction that are allowable under chapter VIA of the act while computing total income. That the scheme itself draws distinction between the concept of income on the one hand and profits and gains on the other hand. That insofar as computation of income under the head profits and gains from business or profession is concerned section 28 of the act mentions various kinds of income to be chargeable under this Act. That therefore all those incomes specifically mentioned in that provision when earned by a particular assessee are to be aggregated to arrive at profits and gains of business. Section 29 thereof mentions the method of arriving at income which is to be computed in accordance with the provisions contained in section 30-43D of the act. Section 30-43D contains deductions of various kinds which are in the nature of expenditure of the likenature. After providing the deductions admissible under these provisions one arrives at the figure of the profit which would become the net income under the head profits and gains of business or profession. In contrast as mentioned above under chapter VI A of the Act certain deductions are given by way of incentives. Assessee’s may earn this deductions on fulfilling the eligibility conditions contained therein, even when they were not in the nature of expenditure incurred by the assessee. Here section 80A of the act provides that in computing the total income of assessee there shall be allowed from his gross total income in accordance with the subject of the provisions of this chapter the deductions as specified in section 80C to U. As mentioned above section 80 C to 80 U contain different subject matters.

The Hon’ble Apex Court expounded that reading section 80 HH along with section 80A would clearly signify that deduction has to be of gross profits and gains that is before computing the income as a specified in section 30 to 43D. Thereafter honourable court held that the judgement of Motilal pesticides is erroneous in as much as the language of 80 M and 80H are materially different and hence the same Page 30 of was overruled. Thereafter the honourable court held that provisions of section 80 AB are perspective.

From the above exposition it is amply clear that honourable Supreme Court significantly brought out difference between computation of income i.e. profit which becomes the net income under the head profits and gains of business and profession in contradiction to profit and gains with reference to which the deduction is to be allowed. The exposition that emerges from the above said order is that the profit and gains of business with reference to which the assessee is eligible to get the deduction is to be computed before deduction of the depreciation and investment allowance as per the income tax act.

Now by way of this additional ground the assessee contends that it had been granted deduction under section 10 AA on the profit which is the net income under the head profits and gains of business after the depreciation as per Income Tax Act, and in view of the above said exposition it deserves that the deduction be granted with reference to profit and gain as expounded in the above said decision.

Now in this regard assessee’s contention is that provisions of section 80HH and section 10AA are pari materia. This has been disputed by the Revenue.

The provisions of section 80 HH reads as under :- Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas. 80HH. (1) Where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking, or the business of a hotel, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty per cent thereof. (2) This section applies to any industrial undertaking which fulfils all the following conditions, namely :— (i) it has begun or begins to manufacture or produce articles after the 31st day of December, 1970 but before the 1st day of April, 1990, in any backward area; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence in any backward area : Provided that this condition shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section; (iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose in any backward area; (iv) it employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of power. Explanation.—Where any machinery or plant or any part thereof previously used for any purpose in any backward area is transferred to a new business in that area or in any other backward area and the total value of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the machinery or Page 31 of (iii) of this sub-section, the condition specified therein shall be deemed to have been fulfilled. (3) This section applies to the business of any hotel, where all the following conditions are fulfilled, namely :— (i) the business of the hotel has started or starts functioning after the 31st day of December, 1970 but before the 1st day of April, 1990, in any backward area; (ii) the business of the hotel is not formed by the splitting up, or the reconstruction, of a business already in existence; (iii) the hotel is for the time being approved for the purposes of this subsection by the Central Government. (4) The deduction specified in sub-section (1) shall be allowed in computing the total income in respect of each of the ten assessment years beginning with the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or the business of the hotel starts functioning: Provided that,— (i) in the case of an industrial undertaking which has begun to manufacture or produce articles, and (ii) in the case of the business of a hotel which has started functioning, after the 31st day of December, 1970, but before the 1st day of April, 1973, this sub- section shall have effect as if the reference to ten assessment years were a reference to ten assessment years as reduced by the number of assessment years which expired before the 1st day of April, 1974. (5) Where the assessee is a person other than a company or a co-operative society, the deduction under sub-section (1) shall not be admissible unless the accounts of the industrial undertaking or the business of the hotel for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant as defined in the Explanation below sub-section (2) of section 288 and the assessee furnishes, along with his return of income, the report of such audit in the prescribed form duly signed and verified by such accountant. (6) Where any goods held for the purposes of the business of the industrial undertaking or the hotel are transferred to any other business carried on by the assessee, or where any goods held for the purposes of any other business carried on by the assessee are transferred to the business of the industrial undertaking or the hotel and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the business of the industrial undertaking or the hotel does not correspond to the market value of such goods as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of the industrial undertaking or the business of the hotel shall be computed as if the transfer, in either case, had been made at the market value of such goods as on that date : Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the industrial undertaking or the business of the hotel in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit. Explanation.—In this sub-section, "market value" in relation to any goods means the price that such goods would ordinarily fetch on sale in the open market.

The provision of section 10AA reads as under: Special provisions in respect of newly established Units in Special Economic Zones. 10AA. (1) Subject to the provisions of this section, in computing the total income of an assessee, being an entrepreneur as referred to in clause (j) of section 2 of the Special Economic Zones Act, 2005, from his Unit, who begins to manufacture or produce articles or things or provide any services during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2006, but before the first day of April, 2021, the following deduction shall be allowed— (i) hundred per cent of profits and gains derived from the export, of such articles or things or from services for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the Unit begins to manufacture or produce such articles or things or provide services, as the case may be, and fifty per cent of such profits and gains for further five assessment years and thereafter; (ii) for the next five consecutive assessment years, so much of the amount not exceeding fifty per cent of the profit as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the "Special Economic Zone Re- investment Reserve Account") to be created and utilized for the purposes of the business of the assessee in the manner laid down in sub-section (2).

In this regard we note that section 80HH with which the honourable Supreme Court was concerned with, provided that where the gross total income of the assessee includes any profits and gains derived from an industrial undertaking, or the business of the hotel to which this section applies, there shall in accordance with an subject to the provisions of this section be allowed in computing the total income of the assessee deduction from such profits and gains of an amount equal to 20% thereof.

The provision of section 10 AA provides that in computing the total income of an assessee following deduction shall be allowed –..... Percent of profits and gains derived from exports.

From the above it is amply clear that the language of section 80 HH and 10 AA are pari materia in as much as both the section provides that in computing the total Page 36 of income of the assessee deduction shall be allowed at certain percentage of profit and gains derived from....

Now it was the meaning of above referred “profit and gains” derived that honourable Supreme Court expounded that the same refers to profits which are commercial profit and without deducting the depreciation and investment allowance as per the income tax act.

Thus the contention of the learned counsel of the assessee that languages of both the above section are pari materia is to be accepted. The submission of the learned departmental representative that the languages are different is not at all sustainable in light of the above said discussion. The distinction brought out by the learned departmental representative is not based upon a proper and full reading of the concerned section. The suggestion of the learned departmental representative that section 80 HH does not deal with profit and gains derived is totally fallacious. The term derived has been very much used and the same in facts controls the provision of section 80 HH. Hence learned departmental representative submission in this regard is not sustainable.

The submission of the learned departmental representative and the stand of the revenue will succeed only when the explanation below section 10 AA is considered as clarificatory. The said explanation inserted by Finance Act 2017 with effect from 1/4/18 provides that “For the removal of doubts, it is hereby declared that the amount of deduction under this section shall be allowed from the total income of the assessee computed in accordance with the provisions of this act, before giving effect to the provisions of this section and the deduction under this section shall not exceed such total income of the assessee”.

In this regard it is noted that the provisions of section 80 AB are pari matereia with the provisions of this explanation. Section 80 AB reads as under: “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 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.”

This section was introduced by Finance Act 1980 with effect from 1.4.1981.

A bare reading of the above makes it clear that the explanation below section 10 AA and provision of section 80 AB are pari materia. Honourable Supreme Court in the case of Vijaya industries (supra) has expounded that provision of section 80 AB are Page 37 of prospective. In our considered opinion the ratio from the above honourable Supreme Court decision also applies here and accordingly the explanation below 10 AA has to be construed to be prospective. Hence the same cannot be invoked in determining the amount of deduction in the present assessment year. The learned departmental representative submission that the same is clarificatory accordingly fails.

Furthermore learned departmental representative submission that the decision of Vijaya industries was rendered without considering other decisions in this regard is not at all sustainable. This decision of honourable Supreme Court in the case of Vijaya Industries (supra) is a recent decision rendered by the larger bench of 3 of their Lordships from the honourable court. By no stretch of imagination it can be said that the subject dealt with by the elaborate speaking and reasoned recent order by this larger bench of the honourable Supreme Court is to be overlooked by referring to other decisions of lesser strength in judicial hierarchy. Hence the learned departmental representative submission that while rendering this decision other decisions were not referred is not at all acceptable. It is settled law that decision rendered by the honourable Supreme Court is the law of the land and is totally binding upon all the other courts and tribunals. Furthermore the submission of learned Departmental Representative that other decisions have not been considered by the Hon'ble Supreme Court is without any substance. Moreover, as cogently brought by learned Counsel of the assessee in para 9 of his submisison, the reference to decision of Plastibends India Ltd. (supra) here is not applicable. Suffice is to reiterate here that it dealt with a deduction provision under section 80IA, which falls under Chapter VI-A and is therefore covered by provisions of section 80AB (i.e. the deeming fiction to provide deduction only from income as included in the gross total income of the assessee). In the appellant's case the deduction is claimed under section 1OAA of the Act which is not covered in section 80AB. That the legislature in its wisdom has not made 80AB applicable to section 10A/10AA/10B/10BA/ 10C of the Act, even though the said sections provide for deduction to be granted to an assessee. Secondly, deduction under section 10AA of the Act (prior to the amendment made by Finance Act 2017 by way of insertion of Explanation) was to be given at the stage of computing the gross total income of the eligible undertaking under Chapter IV of the Act i.e. prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income. This has been held by the Supreme Court in the case of CTT v. Yokogawa India Ltd 391 ITR 274 (SC) in the context of section 10A of the Act. Plastiblends India deals with a situation of computation of deduction under Chapter VIA of the Act i.e. after computing the gross total income of the eligible undertaking under Chapter IV of the Act.

The other submission of the learned departmental representative is that section 10 AA is a part of chapter 3 and is essentially an exemption section. This the learned departmental representative himself contradicts by submitting that though post- amendment such an exemption is available in form of deduction from profit and gains derived from the undertaking. The reading of section 10AA clearly shows that the section itself provides that the same is a deduction provision. Honourable Supreme Court in the case of CIT versus Yokogawa India Ltd civil appeal No. 8498 of 2013 another’s had the occasion to consider this aspect. The honourable Supreme Court settled the issue by holding that the amendment in section 10A has altered the Page 38 of nature of the provision from providing exemption to providing for deductions. The deductions under section 10A are prior to the commencement of the exercise to be undertaking under chapter VI of the Act i.e aggregation of income and set off of loss. The above exposition is applicable on all fours here. Hence the submission of learned departmental representative year also doesn’t succeed. The last claim of The learned departmental representatives submission is that decision of honourable Supreme Court in the case of Commissioner of Customs (Import) versus Dilip Kumar and company and others Civil Appeal No. 3327 of 2007 dated 30/7/2018 provides that interpretation needs to be done strictly and in case of ambiguity the same needs to be interpreted in favour of the revenue. Here we find that it cannot be said that after the elaborate and well reasoned and speaking order rendered by the recent larger bench of three of their Lordships of the honourable Supreme Court there can be any scope of ambiguity in the interpretation of the meaning of word profit and gains with reference to which the discussion is being made here. Accordingly the submission of the learned departmental representative does not oxygenate the revenue’s stand.

Accordingly in the background of aforesaid discussion and the precedent from the Hon'ble Supreme Court we direct the assessing officer to grant the deduction under section 10 AA with reference to the profit and gains as determined by the honourable Supreme Court in the case of Vijay Industries (supra).”

Ground no. 3: Since we have decided the ground no. 2 in the above paras, therefore, ground no. 3 taken by the assessee becomes infructuous. The ground No. 01 is general in nature.