1. This appeal concerns the claim of the assessee for deduction under Section 80QQ of the Income-tax Act, 1961 ('the Act').
2. The assessee is a private limited company. For the assessment year 1979-80 corresponding to the previous year ended 31-3-1978, the assessee filed a return showing an income of Rs. 2,77,070. The assessee had taken into account interest payment of Rs. 16,592 in computing the total income. The ITO disallowed the deduction for the reasons stated in the assessment order of the earlier years which was that it represented expenditure incurred for acquisition of an asset of permanent character and could not, therefore, be regarded as of a revenue nature. On appeal the Commissioner (Appeals) found that for the earlier year 1974-75 such a deduction had been allowed. He accordingly allowed the deduction. The revenue is in appeal against the allowance of deduction but is faced with the decision of the Tribunal dated 12-2-1982 in the case of the same assessee for the earlier assessment years 1976-77 and 1977-78 in IT Appeal Nos. 530 and 531 (Mad.) of 1981, where it was held that such interest payments were only revenue expenditure and admissible deduction. The interest expenditure was incurred when the assessee took over the entire business of three concerns with all assets and liabilities and it was made on the unpaid purchase consideration. The Tribunal followed the decision of the Supreme Court in Bombay Steam Navigation Co. (1953) (P.) Ltd. v. CIT [1965] 56 ITR 52 and held that it was an allowable expenditure. Since the interest accruing for this assessment year arose out of the same transaction considered in the earlier assessment years, we cannot but confirm the order of the Commissioner (Appeals) on this point.
3. The fresh point which comes for consideration in this assessment year is the claim of the assessee under Section 80QQ. The assessee's business consists of two sections : one called Esvee Press which is engaged in the printing business and the other called Auanda Book Depot which is engaged in the publishing business. Admittedly the assessee does not maintain separate accounts. But in striking the profit and loss account the assessee had ascertained the gross receipts from the publishing business, Ananda Book Depot, at Rs. 6,66,752.85 and deducted therefrom certain expenditure in arriving at the net profit at Rs. 98,305.10. The ITO noted that the following expenses, namely, part of the car maintenance Rs. 384, donation and puja, Rs. 175 and charity, Rs. 3,450, disallowed in the computation for income-tax purposes was to be added back to the net profit to bring it to Rs. 1,02,614. At the same time he was of the opinion that the following expenses, namely, audit fees, lighting and sitting fees, managing director's remuneration and gratuity as well as interest on unpaid purchase consideration, which had been debited only in respect of Esvee Press should be treated as expenditure in common with the publishing business also and the proportionate amount of such expenditure amounting to Rs. 26,412 should be deducted from the net profit before ascertaining the profit of the business out of which 20 per cent could be given as a deduction under Section 80QQ. On appeal the Commissioner (Appeals) while allowing the deduction of interest referred to above as an admissible deduction in computing the income of the assessee, also held that there was no justification for deducting the sum of Rs. 26,412 from the net profit for the purpose of computing the deduction under Section 80QQ.4. The revenue is in appeal to contend that as a logical consequence of the order of the Commissioner (Appeals) allowing the deduction of interest, the Commissioner (Appeals) should have directed the deduction of the same amount as well as the other amounts referred to by the ITO from the net profit for the purpose of computing the deduction under Section 80QQ. Relying on the decision of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 it was submitted that the assessee could get a deduction of 20 per cent of only that amount of profits and gains of the publishing business which is included in the total income and since it is only the net profit after adjustment which forms part of the gross total income of the assessee, the deduction could be only a percentage of that adjusted net profit. It was further submitted that in making the adjustment the ITO was justified in apportioning the common expenses between the two businesses and thereby further reducing the net profit on which the percentage of deduction could be calculated.
5. On the other hand, the assessee contends relying on the decision of the Supreme Court in the case of Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243 and on a proper construction of Section 80QQ the deduction should be 20 per cent of the gross profit and not the net profit after deduction of expenses. In the alternative it was submitted that even if the net profit is taken, it should be only the net profit as shown by the assessee in his accounts after deducting the expenditure relating to each section of the assessee's business and not on the basis of any arbitrary apportionment of certain expenses treating them as common expenditure.
6. On a consideration of the rival submissions we are of the opinion that the order of the Commissioner (Appeals) had to be affirmed even though no reasons have been given by the Commissioner (Appeals) for arriving at his conclusion. Section 80QQ was inserted in the Income-tax Act by the Taxation Laws (Amendment) Act, 1970 with effect from 1-4-1971 and was intended originally to grant the benefit for the period of four assessment years. The section was amended by the Finance Act, 1975 with effect from 1-4-1975 to extend the benefit for a period of 9 assessment years. The wording of the section remains the same as it was introduced in the Taxation Laws (Amendment) Bill, 1969 : [1969] 72 ITR Statutes 69. We may now read the section which is as follows : 80QQ. Deduction in respect of profits and gains from business of publication of books.-(1) Where in the case of an assessee the gross total income of the previous year relevant to the assessment year commencing on the 1st day of April, 1971, or to any one of the nine assessment years next following that assessment year, includes any profits and gains derived from a business carried on in India of printing and publication of books or publication of books, 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) In a case where the assessee is entitled also to the deduction under Section 80HH or Section 80HHA or Section 80J or Section 80P, in relation to any part of the profits and gains referred to in Sub-section (1), the deduction under Sub-section (1) shall be allowed with reference to such profits and gains included in the gross total income as reduced by the deductions under Section 80HH, Section 80HHA, Section 80J and Section 80P. (3) for the purposes of this section, 'books' shall not include newspapers, journals, magazines, diaries, brochures, tracts, pamphlets and other publications of a similar nature, by whatever name called.
A reading of the section shows that 20 per cent of the profits and gains of the business of printing and publication of books is the measure of the deduction. The case of the revenue is that the profits and gains which has to be measured must be the profits and gains as computed in accordance with the Income-tax Act, whereas the case of the assessee is that it should be the gross profit before deduction of any expenditure.
7. In the case of Cambay Electric Supply Industrial Co. (supra) the Supreme Court had to consider the provisions of Section 80E as it stood at that time (prior to 1967). It was observed by the Supreme Court that three important steps are required to be taken before special deduction is allowed, namely : first, compute the total income in accordance with the provisions of the Act ; second, ascertain what part of the total income so computed represents profits attributable to the specified business ; and third, if there are such profits deduct a percentage thereof. On the same analogy in the present section also it would appear that only the net profit after deduction of expenditure and after adjustments required under the Income-tax Act would form part of the total income as computed under the Income-tax Act and, therefore, the deduction should be a percentage of that adjusted net profit.
8. But we find considerable difficulty in applying the formula of Cambay Electric Supply Industrial Company's case (supra) to Section 80QQ. 1. The provision of Section 80E, which was considered by the Supreme Court, was applicable annually and, therefore, in an year in which there was no profit from that business the assessee could neither get the deduction nor carry it forward. At the same time we must remember that in the converse case, where, though the profit from the particular business is a positive figure, the gross total income is a loss, Section 80A(2) now provides that the assessee shall not be entitled to the deduction as the aggregate amount of the deduction under Chapter VIA shall in no case exceed the gross total income of the assessee. It is pertinent to note that there was no similar provision prior to 1968 limiting the deduction available to the assessee in such a converse case. In contrast, the provisions of Section 80QQ suggest that the assessee is entitled to the deduction from the profit of the business irrespective of whether the net result of the business is a profit or loss as it was intended to encourage the publishing industry for aperiod of nine years and such encouragement may be required in a case of financial difficulty than in a case of a flourishing business. The provisions of Section 80A(2) limiting the deduction to the gross total income also suggest that the deduction is from the gross total income and not from the profit of the publishing business because the profit of particular business is only a measure for ascertaining the deduction available to the assessee. The position in the case of Section 80E considered by the Supreme Court in a sense was different because the deduction was from such profits of the specified industry alone without reference to the gross total income.
2. The Supreme Court has pointed out in the case of K.P. Varghese v. ITO [1981] 131 ITR 597 that the speeches made by the mover of the Bill explaining the reasons for its introduction can certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object and purpose for which the legislation was enacted. When Section 80E was originally introduced by the Finance Act, 1966, in Chapter VIA, the Finance Minister said : ...As a measure of simplification, however, I propose to modify the form of the concession. At present a special rebate on income-tax and surtax is granted to companies on their income from priority industries. I propose to replace this by a straight deduction of 8 per cent of the profits from priority industries in computing the total taxable income of the companies concerned. This direct manner of giving a rebate should greatly simplify the computation of the tax liability.
But the entire Chapter VIA was substituted by Section 33 of the Finance (No. 2) Act, 1967 and the Finance Minister stated : Some time back Government appointed Shri S. Bhoothalingam, formerly Secretary, Ministry of Finance, as a one-man committee for recommending measures for simplifying and rationalising the existing structure of direct and indirect taxation. Shri Bhoothalingam recently submitted his first interim report, which relates exclusively to direct taxes, particularly income-tax...
...It is my intention, however, to introduce even in the present Budget some of the measures of rationalisation and simplification which have been recommended in the interim report.
(iii) Another measure recommended for simplifying tax calculations is the elimination of most of the areas in which calculations of rebates and reliefs have to be made at present by applying the average rate of tax on the total income. In these areas, I propose to make provisions for allowing a straight deduction of the whole or a specified proportion of the income qualifying for the rebate on relief in computing the taxable income.-[1967] 64 ITR 104-105 (St.).
45. New provisions for deduction, in the computation of the total income, of a specified percentage of the incomes or payments qualifying for rebate of tax."-[1967] 64 ITR 204 (St.).
Ancillary provisions, consequential to the new provisions for deductions, in replacement of the existing provisions for full or partial rebates of tax on levy of tax at concessional rates : 66. Some of the main ancillary provisions referred to above are as follows :- (i) The total amount of the special deductions admissible to an assessee in the computation of his total income will be limited to the total amount of his income from all sources, as computed before making such deductions."-[1967] 64 ITR 207 (St.).
This refers to Section 80A(2). Section 80QQ was inserted by the Taxation Laws (Amendment) Bill, 1969. The Notes on Clauses is"as follows : Clause 24 seeks to insert a new Section 80QQ in Chapter VIA of the Income-tax Act with effect from 1-4-1970. Under the proposed new Section 80QQ any person carrying on a business, in India, of the printing and publication of books or publication of books without the activity of printing, will be entitled to a deduction, in the computation of his total income, of an amount equal to 20 per cent of the profits from such business included in his gross total income. The deduction will be admissible for the assessment years 1970-71, 1971-72, 1972-73, 1973-74 and 1974-75." -[1969] 72 ITR 101 (St.).
It is thus seen that Section 80E which was construed by the Supreme Court in the Case of Cambay Electric Co. (supra) was repealed (though it was rewarded in slightly different language in Section 80-1 in the new Chapter VIA).
3. In the case of Cloth Traders (P.) Ltd. (sujra) the Supreme Court had to consider the deduction allowable under Section 80M occurring in the new Chapter VIA which allows the deduction of the percentage of the intercorporate dividend. The wording in that Section (similar to Section 80QQ) is where the gross total income includes any income by way of dividends there shall be allowed a deduction from such income by way of dividends an amount equal to a percentage of such income. The Supreme Court held that the effect was to give a deduction from the gross dividend without deducting the expenditure therefrom. There is also an observation of the Supreme Court at page 260 referring to Sections 80K, 80MM, 80M and 80-O and pointing out that these sections use the same legislative formula as Section 80M and open with identical words 'where the gross total income of an assessee includes any income' and, therefore, on a plain reading of those sections the deduction admissible is in respect of the whole of the income received by the assessee and not in respect of income computed after making the deductions provided under the Act. As observed by the Supreme Court, we derive considerable support for our view from the analogy of these sections.
4. As seen earlier, the Finance Minister had said that the intention was to give a deduction of a proportion of the income qualifying for the relief. This shows, as held by the Supreme Court, that the measure is the gross income from which the deduction is to be made and not the net income. If the revenue had understood otherwise, one would have expected reliance on Cambay Electric's case (supra) while the subsequent case of Cloth Traders (supra) was argued. We may note that the decision in Cloth Traders (supra) was given on 4-5-1979, subsequent to the decision in the case of Cambay Electric Supply Industrial Co. (supra) dated 11-4-1978. But there is no reference to the earlier case in the judgment. Hence it must be taken that even the revenue was aware of the qualitative difference in the scheme of the new Chapter VIA which has been adumbrated by the Supreme Court in Cloth Traders' case (supra) thus giving up the formula of the Cambay Electric Supply Industrial Co.'s case (supra).
5. In Section 80E considered in Cambay Electric's case (supra) the wording was : 80E. (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...
The words in parenthesis were emphasised by the Supreme Court as under : ...As regards the first step mentioned above, the important words in Sub-section (1) are those that appear in parenthesis, namely, 'as computed in accordance with the other provisions of this Act' and these words clearly contain a mandate that the total income of the concerned assessee must be computed in accordance with the other provisions of the Act without reference to Section 80E and since in the instant case it is income from business the same as per Section 29 will have to be computed in accordance with Sections 30 to 43A which would include Section 41(2)..." (p. 91) Thus the measure was the component of the total income as computed under the Act and could not be the gross income of the particular business before making the statutory deductions under Sections 30 to 43A. It is pertinent to compare it with the wording of re-enacted Section 80-I which is as follows : 80-1. (1) In the case of a company to which this section applies, where the gross total income includes any profits and gains attributable to any priority industry ...
The words in parenthesis in Section 80E are missing. Of course, gross total income has now been defined in Section 8OB(5) as the total income computed in accordance with the provisions of the Act.
But it no longer qualifies the income from the business which is the measure of the deduction. Therefore, it cannot have the same meaning as before especially when the Supreme Court has said that the new Chapter VIA contains the same formula in all sections to the effect that the income referred to as a measure of deduction must be the income before any deduction.
6. There is another reason why the contention of the assessee that the gross income from the publishing business should be taken as the measure for ascertaining the deduction appeals to us. Sub-section (2) of Section 80QQ states that where the assessee is also entitled to deductions under Section 80HH, 80HHA, 80J or 80P, the deduction under Section 80QQ shall be allowed with reference to such profits and gains as reduced by the deductions given under those sections.
This confirms the view that the profits and gains of the publishing business is taken as a measure for calculating the deduction and not the amount from which the deduction is to be given since the deduction is to be given only from the gross total income under the main provisions of this Chapter. Under Section 80HH 20 per cent of the profits and gains of the undertaking established in a backward area, under Section 80HHA 20 per cent of the profits of a newly established small-scale industrial undertaking in a rural area and under Section 80P the whole of the amount of profits and gains of business attributable to certain activities of a co-operative society are to be allowed. Reference to Section 80J shows that the tax holiday in respect of this set of sections was intended to be with reference to a percentage of capital employed without reference to the net profit or loss because the deduction is allowed to be carried forward. Hence, the scheme of the sections in Chapter VIA shows that the deductions are from the gross total income and the profits and gains of the business is only a measure for finding out the amount of deduction allowable to the assessee and, therefore, the assessee could not be denied the deduction only because the net result of the computation of the income from the business with reference to the provisions of the Income-tax Act is a loss.
7. Another important point of significance is that in the case of Section 80M the measure is the income by way of the dividend which has been construed by the Supreme Court as referring to the class of income and not the income by way of dividend as computed under Section 56. On the other hand, the measure in Section 80QQ is the profits and gains derived from a business which prima facie cannot be the same as income from profits and gains which is to be computed under Section 29 of the Act. When the Supreme Court has said that even when the words 'income by way of dividend' has been used, it cannot refer to the income as computed under the Act after deduction of expenses, it stands to reason that when the word 'income' is not used but only 'profits and gains from business' is used, the expression cannot refer to the income from profits or gains as computed under the Income-tax Act but must refer only to gross profits and gains from which deductions are made by application of Section 29 to arrive at the income from the profits and gains of a business. In this view these deductions allowable are to be taken in the same manner as other expenses and deductions in computing the profits and gains of the business. For instance under Section 37 expenditure laid out for the purpose of business is a deduction from the gross profit. Similarly, the deduction under Section 80QQ will be the 20 per cent of the gross profit and a deduction just as a deduction under Section 37 in computing the profits and gains assessable under the head 'income from business'.
8. If the measure is taken as the net income from business as computed under the Income-tax Act, it may lead to haphazard results.
Firstly, the deduction will vary according to fluctuation ruled by earlier years loss and other deductions available. Secondly, in the case of cumulative deductions envisaged by Sub-section (2) the deductions will become progressively reduced, the measure being progressively reduced by consequential deductions. This could not have been the intention of Parliament as each Section 80QQ, 80HH, 80HHA and 80P refers to the same profit from business as the measure from which a proportion is given as a deduction.
9. From the speeches of the Finance Minister, the wording of section as well as the interpretation of similar sections in the same new Chapter VIA by the Supreme Court in Cloth Traders' case (supra), it is apparent that the profits and gains derived from the business of publication is only the measure from which a proportion of 20 per cent is ascertained as the deduction available to the assessee. If the intention of Parliament were otherwise, namely, to deduct 20 per cent of such profits and gains which form the component part of total income after all deductions, then the wording of the section would have been quite different to the effect that deduction shall be a proportion of the income from profits and gains of the business actually included in the total income of the assessee. In the absence of such a clear wording in the section, on the lines of the formula given in the decision of the Supreme Court in the case of Cambay Electric Supply (supra) and in view of the statement of the Finance Minister that the deduction is intended to be a proportion of the income qualifying for the rebate and in view of the general policy of the Chapter VIA to give incentive for specified industries, we are of the opinion that even if there be an ambiguity in the section it has to be resolved only in favour of the assessee by taking the profits and gains derived from the business referred to in the section as the gross profit being a measure for ascertaining the deduction rather than the profit being the actual component of the total income as computed in accordance with the provisions of the Act.
10. It is also the usual rule of precedents that a later judgment of the Supreme Court has to be followed in preference to the earlier judgment, especially when the earlier judgment has not been referred to in the later judgment. Moreover, we find that the decision in Cloth Traders' case (supra) was rendered by a larger Bench and as held by the Supreme Court in the case of Union of India v. Subramaniam AIR 1976 SC 2433 the decision of a larger Bench should always prevail. This fact has been noticed by the Calcutta, High Court also in the case of CIT v. Belliss & Morcom (I) Ltd. [1982] 136 ITR 481.
11. It is also significant that Section 80AB has been introduced by Section 12 of the Finance (No. 2) Act, 1980 with effect from 1-4-1981. This section states that the deductions in respect of certain incomes in Chapter VIA shall refer only to the net income computed under the provisions of the Act, that is, the net income from the business which is a component part of the total income and not the gross income from the business before making any deductions.
While, the Finance Minister in his Budget Speech for 1980-81 -[1980] 123 ITR 17 (St.)-mentioned "I also propose to make certain amendments in the Income-tax Act to counteract certain court decisions which have resulted in unintended benefit to taxpayers", there are no Notes on Clauses with reference to Section 80AB obviously because it did not form part of the Finance Bill as introduced. However, in the memo explaining the provision of the Bill it is stated as follows : 78. Under the existing provisions, in computing the total income of the taxpayer, the deductions specified in this behalf are allowed from the 'gross total income'. For this purpose, 'gross total income' means the total income computed in accordance with the provisions of the Income-tax Act, before making any deduction under Chapter VIA. The income by way of dividends computed in accordance with the provisions of the Income-tax Act, i.e., after allowing the necessary expenditure specified in the preceding paragraphs, forms part of the 'gross total income' of the taxpayer. It has accordingly all along been considered that any deduction in respect of inter-corporate dividends has necessarily to be calculated with reference to the amount of dividend which forms part of the 'gross total income'. In other words, it has always been the intention to grant the deduction at the specified percentage on the net amount of such dividends and not the gross amount thereof.
79. However, recently, the Supreme Court has held that the deduction admissible for the inter-corporate dividends has to be calculated with reference to the gross amount of dividends received by a domestic company from an Indian company and not with reference to the dividend income as computed in accordance with the provisions of the Income-tax Act, i.e., after making the deductions provided under the Act. The Supreme Court further held that if the gross total income of the taxpayer includes any particular category of income, whatever be the quantum of such income included, the taxpayer would be eligible for the deduction of the whole or, as the case may be, the specified percentage of such income.
81. Although the issue before the Supreme Court in this case was in respect of the concessional tax treatment of inter-corporate dividends the Supreme Court has specifically referred to the provisions of some of the other sections which occur in the same group of sections as the one dealing with the inter-corporate dividends. The Supreme Court has, in respect of these other sections, observed that on a plain reading of these sections, it appears that the deduction admissible is in respect of the gross amount of the income received by the taxpayer and not in respect of the net income computed after making the deduction provided under the Act " -[1980] 123 ITR (St.) 166.
The section which was introduced in the Bill was Section 80AA which amends the relief under Section 80M with retrospective effect from 1-4-1968. The fact that Parliament was aware of the decision of the Supreme Court but chose to amend the provision only with reference to Section 80M retrospectively indicates that the observations of the Supreme Court with regard to the other sections in Chapter VIA has been accepted by the Government. This in further affirmed by the Circular No. 281 dated 22-9-1980 of the CBDT at para 15.7 : 15.7 Although the issue before the Supreme Court in Cloth Traders case (supra) was in respect of concessional tax treatment of inter-corporate dividends only, the Supreme Court has specifically referred to the provisions of some of the other sections contained in Chapter VIA of the Income-tax Act. The Supreme Court has in respect of such other sections, observed that on a plain reading of these sections, it appears that the deduction admissible is in respect of the gross amount of income received by the assessee and not in respect of the net income computed after making the deductions provided in the Income-tax Act. The Finance Act has accordingly inserted another Section 80AB to provide that, for the purpose of calculating the deductions specified in Sections 80HH to 80TT the net income as computed in accordance with the provisions of the Income-tax Act (before making any deduction under Chapter VIA) shall alone be regarded as the income which is received by the assessee and which included in his gross total income. Accordingly, the deductions 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. 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."-[1980] 4 Taxman 441-442.
12. Last but not least we must keep in mind the policy of the Act.
The deductions under new Chapter VIA are no longer of the category of simple exemption from tax. They represent a new fiscal policy designed as a socio-economic measure to regulate the economy. The real object is to encourage certain industries in certain areas, to encourage co-operative movement, etc. Such a policy cannot be thwarted by applying any principle of strict construction based on orthodox considerations of loss of revenue. The section has to be viewed as an economic tool and must be given life to achieve its purpose. The maxim Ut res magis valeat quam pereat has to be invoked. The section has to be given a sensible meaning so as to make it effective. So we have to avoid a construction which may defeat the very object of the statute and adopt that which secures the attainment of that object.
9. It follows that on the facts of the present case the assessee would be entitled to a deduction of 20 per cent of the gross profit before deduction of expenditure laid out for the purpose of business and such other deductions necessary for computing the income from the business under the Act. In this view it is unnecessary to consider the objection of the revenue to the further deduction of certain expenses in finding out the profit which is to be taken as a measure for ascertaining the deduction under Section 80QQ, Since it is not in dispute that the deduction directed to be allowed by the Commissioner (Appeals) is in conformity with our conclusion that the assessee is entitled to the deduction of 20 per cent from the gross profit, we confirm his order.
Appeal is dismissed.