Section 80HH

Section 80HH — the law in short

What the courts have decided on section 80HH, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Vijay Industries v CIT Supreme CourtHelps taxpayer
  Is my section 80HH deduction 20 per cent of the undertaking's gross profits and gains, or of the income left after depreciation?
  Of gross profits and gains, for the years before section 80AB applied. A three judge bench of the Supreme Court held that section 80HH allows a deduction of 20 per cent of profits and gains, and that profits and gains is conceptually different from income; read with section 80A the deduction is of gross profits and gains, before computing income under sections 30 to 43D, so depreciation and investment allowance are not first deducted. Motilal Pesticides, which had equated the language of section 80HH with that of section 80M, was held erroneous and overruled. Section 80AB is prospective from 1 April 1981 and did not apply to assessment years 1979-80 and 1980-81.
• Vijay Ship Breaking Corpn v CIT Supreme CourtHelps taxpayerValidity unconfirmed
  Does breaking up ships count as production for the section 80HH and 80-I deduction, and must I deduct tax at source on usance interest paid abroad on the vessel I bought?
  Yes to the deduction, and no tax was deductible. The Supreme Court held that ship breaking gives rise to the production of a distinct and different article, so the deduction under sections 80HH and 80-I was rightly allowed. Production is wider than manufacture, the two words are used disjunctively, and nothing in the ordinary meaning of produce requires the article to be new. On the second question, Explanation 2 to section 10(15)(iv)(c), inserted on 18 September 2003 with effect from 1 April 1983, exempts usance interest payable outside India by a ship breaking undertaking on the purchase of a ship. Since the sum was not assessable in India, no obligation to deduct under section 195(1) arose.
• Synco Industries Ltd v Assessing Officer Supreme CourtHelps department
  My eligible unit made a profit but brought-forward losses of my other division wipe out my income. Can I still claim the Chapter VI-A deduction on the profitable unit?
  No. The Supreme Court held that gross total income must first be worked out under the Act, after intra-head and inter-head set off and after setting off brought-forward business losses and unabsorbed depreciation. Chapter VI-A deductions come out of that figure. If it is nil or a loss, section 80A(2) leaves nothing for the deduction to be given from, and none can be allowed. The non obstante clause in section 80-I(6), which treats the eligible undertaking as the only source of income, fixes the quantum of the deduction only; it does not decide eligibility.
• Pandian Chemicals Ltd v CIT Supreme CourtHelps department
  I had to place a deposit with the electricity board before it would supply power to my factory. Is the interest on that deposit profit derived from my industrial undertaking?
  No. The Supreme Court held that derived from requires a direct or immediate nexus with the industrial undertaking. Electricity may be essential and the deposit may be a statutory precondition of supply, but the deposit is a step removed from the business of the undertaking, and interest on it does not flow directly from the undertaking itself. The Court applied Cambay Electric Supply, where derived from was held narrower than attributable to, and the Privy Council's rule that the enquiry into the genealogy of a receipt stops as soon as the effective source is found. Section 80HH relief was refused.
• CIT v Sterling Foods Supreme CourtHelps department
  I sold the import entitlements my exports earned me under a government scheme. Do those sale proceeds count as profits derived from my industrial undertaking for the incentive deduction?
  No. The Supreme Court held that the source of an import entitlement is the Central Government's export promotion scheme, not the assessee's industrial undertaking. Derived from requires a direct nexus between the profits and the undertaking, and here the nexus is only incidental: the undertaking exports processed sea food, the scheme applies because of that export, the entitlement follows from the scheme, and the sale proceeds follow from the entitlement. The Court also held that the insertion of clauses (iiia) and (iiib) in section 28 made no difference, since taxing such receipts as business income says nothing about their source.
• Ranbaxy Laboratories Ltd v CIT High CourtHelps taxpayerValidity unconfirmed
  Same point, in Delhi: if the recorded grounds fail, can the officer still tax an unrelated item?
  No. Once the officer accepts that the recorded items did not escape assessment, it means he had no reason to believe, and the notice becomes invalid. Every new issue needs a fresh s.148 notice.
• CIT v Hemsons Industries High CourtHelps taxpayerValidity unconfirmed
  My industrial land was compulsorily acquired and I put up a new factory on land I took on lease rather than buying. The Assessing Officer says s.54D needs a purchase. Does the lease sink the claim?
  Not on this Andhra Pradesh decision. Section 54D(1) offers three alternatives — purchase of land or a building, purchase of a right in land or a building, or CONSTRUCTION of another building — and where the assessee constructed a new factory on leased land within three years and installed new machinery there, the Court held the department's reason for refusal, that the land had not been purchased, untenable. It also adopted the wide, popular meaning of 'industrial undertaking' and held it need not be engaged in manufacture or production.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.