The IT department has been insisting that the deduction under Section 80I is to be allowed on the amount of gross profits arrived after reducing the deduction allowed under Section 80HH of the Act. The department stand has not been reviewed in spite of the various tribunal judgements and despite the High Court deciding in favour of the assessee. The department relied on the following provisions of the ITA:

Sub-Section (9) of Section 80HH

``In a case where the assessee is entitled also to the deduction under Sections 80I or 80J in relation to the profits and gains of an industrial undertaking, or the business of a hotel to which this section applies, effectshall first be given to the provisions of this section.''

The above law lays down the manner in which deduction under the various provisions, to which the assessee is entitled to deduction under 80I, 80HH, 80J, have to be allowed. For instance, the first deduction under Section 80HH will be allowed and only then will deduction under 80I be allowed. But it does not define a method of calculating the deduction, and does not state whether the deduction under Section 80I is to be allowed after reducing the profits of deduction under Section 80HH.

The correct interpretation of the law is as decided by the Madhya Pradesh High Court in the case of JP Tobacco Products P Ltd vs CIT 1998. The relevant excerpts are:

``The relevant law is, therefore, clear that insofar as the benefit of Section 80I is concerned, it has to be granted on the gross total income and on the income reduced by the amount allowed under Section 80HH.''Apart from the abovementioned judgement, there are the following judgements of theTribunal, wherein it has been held consistently that the deductions under Section 80I are to be allowed on the gross total income and not on the reduced amount:

(i) Purolator P Ltd vs Dy CIT IT Appeal No. 2833, Delhi, 1992
(ii) Ram Nath Exports P Ltd vs IAC 42 TTJ 331, Delhi
(iii) Ram Nath Co. vs IAC IT appeal 3569, Delhi, 1991

Further in the case of Samir Diamond Mfg P Ltd decided by the Ahmedabad bench, there is reference to the letter dated January 13, 1995, of the Commissioner Surat to the Officer-in-Charge conveying the decision of the Ministry of Finance addressed to the Director, New Delhi, with a copy endorsed to the Commissioner Surat about an objection on the issue involved which is reproduced under:

``The audit objection in the above case of the M/S Himson Textile Industries Ltd has not been accepted by the Ministry of Finance on the ground that the provision of Section 80HH and 80I are independent provisions referable to gross total income. The Act nowhere provides that thededuction under Section 80 HH is to be deducted from gross total income for the purpose of working out deduction admissible under Section 80I. Wherever such a course is to be adopted, the act has made a specific mention of it in Section 80J (1) Section 80P (1)''.

Also the Supreme Court, in the K P Varghese case, 1981, has made it clear that ``a statutory provision must be so construed if possible absurdity and mischief may be avoided where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result, which could never have been intended by the legislature, the court may modify the language used by the legislature or even do some violence to it, so as achieve the obvious intention of the legislature and produce a rational construction''

Thus, in the light of the judicial decisions given above and the stand taken by the Ministry of Finance, the interpretation in favour of the assessee should be accepted.

The Jindals are Delhi-based chartered accountants.