A debate which has been going on for several years is whether the benefits are available on the actual income earned from eligible sources or whether they are restricted to the taxable income after adjusting losses under different heads for the same year or the earlier years. This debate has raged despite section 80-AB being introduced with effect from 1st April, 1981 which provides that deductions under the provisions of Chapter VI-A would be available only in respect of income of that nature which is available as computed in accordance with the provisions of the Act.

This would indicate that if there is a loss in one type of activity and profit in another, the loss would first have to be set-off against the profit and the net amount of profit would be eligible for the deduction. Likewise, if a person has an industrial undertaking, the benefit has to be allowed only on the net income of the undertaking as computed in accordance with the provisions of the Act.

The Supreme Court has reiterated this point in the case of Motilal Pesticides (I) Pvt.Ltd. v. C.I.T. (243 I.T.R. 26). In this case, the appellant had claimed relief under section 80-HH in respect of its liquid section which had been newly set up in a backward area. The assessee claimed that the relief should be available on the basis of the gross amount of income in view of the earlier decision of the Supreme Court in the case of Cloth Traders (P) Ltd.'s case had been overruled by a subsequent decision in Distributors (Baroda) P.Ltd. v. Union of India (155 I.T.R. 120). After the decision in Cloth Traders (P) Ltd.'s case, two sections 80-AA and 80-AB were introduced by the Finance (No.2) Act, 1980.

While section 80-AA was to have retrospective effect from April 1, 1968, section 80-AB was to have operation with effect from April 1, 1981. Section 80-AA had the effect of effacing the decision of the apex Court in Cloth Traders (P) Ltd.'s case, which had interpreted section 80-M. Section 80-AB was made applicable to all the sections in Chapter VI-A except section 80-M.

In Distributors (Baroda) P.Ltd.'s case, the Supreme Court specifically overruled its earlier decision in Cloth Traders (P) Ltd.'s case and held that deduction was to be allowed only on the net income and not on the gross income. With reference to section 80-AB, the Supreme Court held that it was merely of a clarificatory nature.

The counsel appearing for the appellant in the case of Motilal Pesticides (I) Pvt.Ltd. submitted that even though Cloth Traders (P) Ltd.'s case was overruled in Distributors (Baroda) P.Ltd.'s case, both the cases pertained to section 80-M only and the Court had no occasion to consider the application of section 80-AB with reference to section 80-HH of the Act.

He observed that section 80-AB was specifically introduced with effect from April 1, 1981, and it would have no application to the assessment years 1979-80 and 1980-81 which were involved in the present case.

The effect of section 80-AB was that deduction would have to be made from the net income and not from the gross income. However, the counsel also referred to another decision in H.H. Sir Rama Varma v. C.I.T. (205 I.T.R. 433), where the Court observed that on a parity of reasoning with section 80-AA as given in Distributors (Baroda) P.Ltd.'s case, it should be held that section 80-AB was enacted to declare the law as it always stood in relation to the deductions to be made in respect of the income specified under Chapter VI-A of the Act. Thus, the Supreme Court right held in Motilal Pesticides (I) Pvt.Ltd.'s case that the benefit of section 80-HH for the new industrial undertaking could only be allowed on the net income.

The same view has been taken by the Calcutta High Court while construing the provisions of section 80-O which earlier allowed exemption of income earned by Indian companies for provision of technical know-how. At present this benefit is confined to consideration earned by an Indian company for the use outside India of any patent, invention, design or registered trade mark.

In C.I.T. v. M.N. Dastur and Co. (P) Ltd. (243 I.T.R. 10), the assessee was engaged in the business of consulting and engineering in respect of a number of major engineering projects in India and abroad during the assessment years 1984-85 and 1985-86. In the assessment year 1984-85, the original assessment was completed on October 24, 1985.

The Assessing Officer allowed deduction under section 80-O of the Income-tax Act on the gross amount of convertible foreign exchange brought into India without taking into account the expenses incurred in India to earn the income. The High Court considered several decisions on this point and held that deductions allowed in respect of any type of income specified in the various provisions under Chapter VI-A, will be subject to the provisions of section 80-AB. The provision of section 80-AB starts with a non obstante clause.

Thus, despite anything contained in that particular section, the deduction shall be allowed on the income which is computed in accordance with the provisions of the Act. Therefore, income which is received by way of convertible foreign exchange shall be computed in accordance with the provisions of the Act and only the net income after computation shall be deemed to be the amount of income derived or received by the assessee for the purpose of deduction under section 80-O.

The same view has been taken by the Madras High Court in the case of Macmillan Co. of India Ltd. v. C.I.T. (243 I.T.R. 403). The facts in this case were that the assessee- company carried on the business of printing, publishing and trading. It maintained separate accounts in respect of the printing and publishing activity on the on hand and trading on the other. Printing and publishing being a priority industry, the assessee was entitled to claim the benefit of deduction of 20 percent of the income from its printing and publishing business under section 80-QQ.

The Assessing Officer, for the purpose of deciding the amount of deduction for which the assessee was eligible under section 80-QQ, first set-off the trading loss that had been incurred by the assessee in its trading business, against the profits earned by it from the printing and publishing business and, after doing so, allowed the benefit under section 80-QQ. The Madras HC held that the manner in which the gross total income had to be calculated was governed by the other provisions of the Act, including section 70.

Section 70 provides for the set-off of the loss from one source against the income from another source under the same head of income. In this case, the entire income of the assessee was under the "Business".

While the assessee had made profit in its business of printing and publishing, it had suffered a loss in its business of trading. The loss incurred in the latter business was, therefore, required to be set-off against the profit earned in the business of printing and publishing, before arriving at the gross total income of the assessee under the head "Business". These decisions should set at rest the debate which has been raging for the past two decades. Hence, the benefit of any deduction under Chapter VI-A will be subject to availability of taxable income as computed under the provisions of the Act.