in the high court of judicature at bombay …...linking road, andheri (west), mumbai – 400 058...

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IN THE HIGH COURT OF JUDICATURE AT BOMBAY

ORDINARY ORIGINAL CIVIL JURISDICTION

INCOME TAX APPEAL NO.1282 OF 2007

Plastiblends India Limited, a company

incorporated under the Companies Act,

1956 and having its registered office

at B-45, Mahashree Compound, New

Linking Road, Andheri (West),

Mumbai – 400 058 ..Appellant.

Versus

1. Additional Commissioner of Income-

Tax, Range-8(2) (formerly Joint

Commissioner of Income Tax,

Special Range – 6, Mumbai)

having his address at Room No.216A,

2nd Floor, Aayakar Bhavan, M.K. Road,

Mumbai – 400 020

2. Commissioner of Income-tax,

City – 8(2) having his address at

2nd Floor, Aayakar Bhavan,

M.K. Road, Mumbai – 400 020 ......Respondents.

http://www.itatonline.org

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Mr. S.E. Dastur, Mr. P.J. Pardiwala, Senior Advocates with Mr. Joshi and Mr. Atul K. Jasani and Mr. N.S. Joshi i/b. A.K. Jasani for the appellant.

Mr. G.C. Srivastava & Mr. B.M.Chatterjee with Mr. P.S.Sahadevan i/b. Suresh Kumar, Advocates for the respondent.

CORAM : SMT. RANJANA DESAI, J.P. DEVADHAR, &

R.V. MORE, JJJ.

JUDGMENT RESERVED ON : 14TH OCTOBER, 2009

JUDGMENT DELIVERED ON : 16TH OCTOBER, 2009

JUDGMENT (Per J.P. Devadhar, J.)

1. This appeal filed under Section 260 A of the Income Tax Act,

1961 (`Act’ for short) was initially heard by a Division Bench of this Court and

by an order dated 19-12-2008, the said Division Bench requested the

learned Chief Justice to constitute a Larger Bench to consider the following

question of law:

“Whether, in the facts and circumstances of the case, for the purposes of availing allowable special deduction under Chapter VI-A of the Income-tax Act, the gross total income is required to be computed by deducting allowable depreciation even though the assessee had disclaimed the same for the purposes of regular assessment ?”

2. On the above question of law, the Division Bench observed that

there are conflicting decisions rendered by the two Division Benches of this

Court in the case of Grasim Industries Limited V/s. C.I.T. reported in 245


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I.T.R. 677 (Bom) and in the case of M/s. Scoop Industries (P) Limited V/s.

Income Tax Officer reported in 289 I.T.R. 195 (Bom). The Division Bench

further observed that since the above two decisions do not go hand-in-hand,

and run counter to each other, the issue ought to be resolved by a Larger

Bench. Accordingly, the learned Chief Justice has constituted this Full

Bench for resolving the above controversy.

3. Facts relevant to the present case are that the Respondent

[hereinafter referred to as `the assessee’] is a Company incorporated under

the Companies Act, 1956 and is engaged in the manufacture of master

batches and compounds at its units situated at Daman.

4. The assessment year [`AY’ for short] involved herein is AY

1997-1998.

5. In the assessment year in question, the assessee filed its

return of income without claiming depreciation. For that purpose, the

assessee in its return of income, added back depreciation (as per books) to

the net business profit, because, the net business profit under the Profit and

Loss Account (`P & L A/c.’ for short) was arrived at after deducting

depreciation (as per books). Thus, in the return of income, the assessee

computed total income (under Chapter IV) without claiming depreciation.

After making deductions and additions as per claims that are allowable and

disallowable under the Act, the assessee determined the gross total income,

on which 100% deduction was claimed under Section 80-IA of the Act.


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6. The above return of income was processed under Section 143

(1) of the Act and intimation of acceptance of the return of income was

issued under Section 143 (1) of the Act without any adjustment.

7. Subsequently, the above assessment was reopened by the

assessing officer [`A.O.’ for short] on the ground that 100% deduction under

Section 80-IA of the Act was liable to be determined on the gross total

income computed after deducting all deductions allowable under Section 30

to 43D of the Act including current depreciation allowable under Section 32

of the Act. As the assessee had computed the gross total income without

deducting depreciation allowable under the Act, the assessment was sought

to be reopened. The assessee in its reply, relying upon the decision of the

tribunal in the case of the assessee for AY 1996-1997 contended that the

assessee had the option to claim or not to claim current depreciation and in

the present case, the assessee had opted not to claim current depreciation

and, therefore, the current depreciation cannot be thrusted upon the

assessee when not claimed. However, the AO rejected the contention of the

assessee and passed a reassessment order by computing the gross total

income after deducting the current depreciation allowable under Section 32

of the Act and after setting off the brought forward loss of AY 1996-1997.

The gross total income so computed being loss, as per Section 80A(2), no

deduction was allowable under Section 80-IA of the Act.

8. Being aggrieved by the above reassessment order, the

assessee filed an appeal before the Commissioner of Income Tax (Appeals)

[`CIT (A)’ for short], who allowed the appeal and directed the AO not to http://www.itatonline.org

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deduct current depreciation in computing the gross total income.

9. Being aggrieved by the aforesaid order, the Revenue filed an

appeal before the Income Tax Appellate Tribunal [`ITAT’ for short] and the

ITAT allowed the appeal by following the decision of this Court in the case of

Scoop Industries (P) Limited (supra). The decision of this Court in the case

of Scoop Industries Ltd. (supra) is based on the decision of this Court in the

case of Indian Rayon Corporation Ltd. V/s. CIT reported in 261 ITR 98

(Bom) wherein it was held that Chapter VIA is a separate Code by itself and

if an assessee claims relief under Chapter VIA of the Act, then it is not open

to that assessee to disclaim depreciation allowance. In other words, what is

held in the case of Indian Rayon Ltd. (supra) is that, one cannot exclude

depreciation allowance while computing profits derived from a newly

established undertaking for computing deductions under Chapter VIA.

Accordingly, the Tribunal set aside the order of CIT (A) and restored the

reassessment order passed by the A.O.

10. Challenging the aforesaid order of the Tribunal, the present

appeal is filed by the assessee. As noted earlier, the said Appeal was

initially heard by a Division Bench of this Court and the said Division Bench

opined that the decision of this Court in the case of Scoop Industries (P)

Limited (supra) is in conflict with the dictum laid down by another Bench of

this Court in the case of Grasim Industries Limited (supra). Therefore, the

appeal is placed before this Full Bench for resolving the controversy set out

in the opening para of this judgment.


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11. The above controversy between the assessee and the revenue

can be easily understood by the following illustration. Suppose, the

assessee in the year in question had only one source of income, namely,

income from business. Suppose, the gross business profit in that year was

Rs.100/-, depreciation allowable as per books as also under the Act was Rs.

80/-, brought forward loss from earlier year that could be set off was Rs.40/-

and the assessee was entitled to 100% deduction under Section 80-IA of the

Act. Assuming that there were no other claims that were allowable or

disallowable under the Act, then, the computation of business profits /

deduction under Chapter VI A, according to the assessee as well as the

revenue would be as follows :-

P & L A/c maintained by the assessee

Gross business profit.. .. .. .. .. Rs.100/-less current depreciation allowable u/s.32 Rs. 80/-

----------------net business profit .. .. .. .. Rs. 20/-

=========

Return of income filed by the Assessee :

Net business profit.. .. .. .. .. Rs. 20/-add current depreciation which is not claimed

by the assessee .. .. .. .. .. Rs. 80/- ----------------

Total Income .. .. .. .. .. Rs.100/-

less brought forward loss of earlier year .. Rs. 40/-

Gross Total Income .. Rs. 60/-

less 100% deduction under Section 80-IA Rs. 60/- ----------------

Income Chargeable to tax .. .. .. .. NIL =========


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Reassessment order by the A.O.

Gross total income as per return of income .. Rs.100/-less current depreciation under section

32 of the Act .. .. .. .. Rs. 80/- --------------

Total income .. .. .. .. Rs. 20/-

less Set off of carried forward loss of AY 1996-97 (-) Rs. 40/- ---------------

Gross total income .. .. (-) Rs. 20/- =========

As the gross total income was in the negative, according to the

revenue, no deduction was allowable under section 80-IA of the Act as per

Section 80A(2) of the Act.

12. Thus, it is the contention of the assessee that by disclaiming

the current depreciation allowable under section 32 of the Act and setting off

the brought forward loss of earlier year, the assessee is entitled to deduction

under section 80-IA at Rs.60/- (as per the above illustration) whereas,

according to the AO, the gross total income computed after deducting the

depreciation allowable under the Act (though not claimed by the assessee)

results in loss and, therefore, as per Section 80A(2) no deduction was

allowable under section 80-IA of the Act.

13. The basic controversy, therefore, is, whether the assessee had

an option not to claim current depreciation and if so, whether the same

would have any bearing in computing the deduction allowable under Section

80IA of the Act ?


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14. Before dealing with the rival contentions on the above question,

we may quote some of the provisions of the Act as they stood at the relevant

time.

15. Section 2 (45) of the Act defines `total income’ as follows :

“Definitions.

2. In this Act, unless the context otherwise requires, -

1 to 44 ---------------

45. “total income” means the total amount of income referred to in section 5, computed in the manner laid down in this Act;”

16. Section 5 of the Act (to the extent relevant) reads as follows :-

“Scope of total income.

5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which -

(a) is received or is deemed to be received in India in such year by or on behalf of such person; or

(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or

(c) accrues or arises to him outside India during such year:

Provided .........

17. Chapter IV of the Act deals with the computation of total

income under various heads of income.

Section 14 in Chapter IV of the Act reads as follows :-

“Heads of income.http://www.itatonline.org

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14. Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income :-

A.- Salaries.B.- [*******]C.- Income from house property.D.- Profits and gains of business or profession.E.- Capital gains.F.- Income from other sources.”

18. Section 28 in Chapter IV of the Act sets out various incomes

that are chargeable to income-tax under the head `Profits & gains of

business or profession’. Section 29 in Chapter IV of the Act provides for the

computation of income from profits & gains of business or profession as

follows:-

“ Income from profits and gains of business or profession, how computed.

29. The income referred to in section 28 shall be computed in accordance with the provisions contained in Section 30 to 43D.”

19. Thus, computation of business income chargeable to income

tax under the head `profits and gains of business or profession’ in Chapter IV

of the Act has to be made by deducting from the business income specified

in Section 28, various deductions allowable under Section 30 to 43D of the

Act. Section 32(1) of the Act with which we are concerned in the present

case, to the extent relevant, reads as follows :

“Depreciation.

32.(1) In respect of depreciation of buildings, machinery, plant http://www.itatonline.org

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or furniture owned [wholly or partly,] by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of section 34, be allowed -

(i) [***]

(ii) [in the case of any block of assets, such percentage on the written down value thereof as may be prescribed]:

20. Chapter VI of the Act (sections 66 to 80) provides for

aggregation of income falling under different heads of income and also

provision for set off or carry forward of loss.

21. Chapter VI-A of the Act provides for special deductions in

cases specified in Sections 80-C to 80-U. Chapter VI-A is divided in to four

sub-headings, namely A – General (Sections 80A to 80B), B – deductions in

respect of certain payments (Section 80C to 80GGA), C – Deductions in

respect of certain incomes (Section 80H to 80RRA) and D – Other

deductions (Section 80U).

22. In the present case, the dispute relates to the special deduction

allowable under Section 80-IA contained in Chapter VI-A. Relevant

provisions contained in Chapter VI-A including Section 80-IA (to the extent

relevant), read as follows :-

“ CHAPTER VI-A

DEDUCTIONS TO BE MADE IN COMPUTING TOTAL INCOME

A-General

Deductions to be made in computing total income.


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80-A (1) In computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with

and subject to the provisions of this Chapter, the deductions specified in sections 80C to [80U].

(2) The aggregate amount of the deductions under this Chapter shall not, in any case, exceed the gross total income of the

assessee. “

Deduction 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 [(except section 80M)] included in thisChapter 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 come of the assessee, then, notwithstanding anything contained in that section, for the purpose ofcomputing 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. “

Definitions.

80B. In this Chapter-

(1) ******(2) ******(3) ******(4) ******(5) “gross total income” means the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter.

“C. - Deductions in respect of certain incomes

..................... ..................... ................... ..................... ............

.............. .............. ................ .................... ................... ..........

Deductions in respect of profits and gains from industrial undertakings, etc., in certain cases:


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80-IA (1) Where the gross total income of an assessee includes any profits and gains derived from any business of an industrial undertaking or a hotel or operation of a shop or developing, maintaining and operating any infrastructure facility or scientific and industrial research and development or providing telecommunication services whether basic or cellular or operating an industrial park or commercial production of mineral oil in the North Eastern Region (such business being hereinafter referred to as the eligible business), 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 the percentage specified in sub-section (5) and for such number of assessment years as is specified in sub-section (6).

(2) to (6) ...........

(7) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under sub-section (5) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year upto and including the assessment year for which the determination is to be made. “

(emphasis supplied)

23. Thus, Chapter II of the Act contains provisions relating to the

basic charge of income tax. Chapter IV contains provisions relating to the

computation of total income under various heads of income as also the

deductions that are allowable under each head. Chapter VI contains

provisions relating to the aggregation of income and set off or carry forward

of loss and Chapter VI-A of the Act provides for special deductions that are

allowed at such rates that are specified in the respective provisions on the

gross total income of the assessee.http://www.itatonline.org

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24. The basic argument of Mr. Dastur, learned Senior Advocate

appearing on behalf of the assessee is that, in the assessment year in

question (AY 1997-1998) the assessee had an option to claim or not to claim

current depreciation allowable under Section 32 of the Act and the assessee

had chosen not to claim current depreciation. In such a case, it is

contended that income chargeable to tax had to be computed without

allowing current depreciation and, therefore, the AO was not justified in

thrusting current depreciation upon the assessee while computing the

income chargeable to tax.

25. In support of the above argument, Mr.Dastur strongly relied

upon the decision of the Apex Court in the case of C.I.T. V/s. Mahendra

Mills reported in 243 ITR 56 (S.C.), wherein the Apex Court on interpretation

of Section 32 and 34 of the Act (as they were applicable to AY 1974-75) and

considering the Board Circular dated 31-8-1965 held that the current

depreciation can be allowed only if, firstly, it is claimed by the assessee and

secondly, the required particulars have been furnished by the assessee. It is

contended by the counsel for the assessee that unless the above two

conditions (which are mutually exclusive) are satisfied current depreciation

cannot be allowed. In the present case, it is contended that the current

depreciation is not claimed by the assessee and, therefore, thrusting current

depreciation upon the assessee in computing the taxable income is contrary

to the law laid down by the Apex Court.

26. Mr. Dastur further contended that in view of the deletion of http://www.itatonline.org

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Section 34(1) and (2) of the Act with effect from 1-4-1988, no doubt, the

second condition would not survive, however, the first condition would still

survive. Therefore, as per the decision of the Apex Court in the case of

Mahendra Mills (Supra) unless the first condition is satisfied, that is, unless

the assessee has claimed current depreciation, the same cannot be allowed

or thrust upon the assessee. In the present case, admittedly the assessee

has not claimed current depreciation and, therefore, irrespective of the

deletion of Section 34(1) and (2), the current depreciation could not be thrust

upon the assessee when not claimed by the assessee.

27. Mr.Dastur referred to Explanation 5 to Section 32 (1) inserted

by Finance Act 2001 with effect from 1-4-2002, which reads thus :-

“Explanation 5. - For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income;

Mr. Dastur submitted that since Explanation 5 to Section 32(1)

has been expressly made operative with effect from 1-4-2002, it is clear that

the said Explanation applies prospectively and not retrospectively and,

therefore, in view of the clear legislative intent, current depreciation cannot

be thrust upon the assessee till 1-4-2002 if not claimed by the assessee.

The submission is that, when the legislature has expressly made it clear that

the current depreciation has to be mandatorily allowed (even if not claimed

by the assessee) with effect from 1-4-2002, the AO was not justified in

thrusting current depreciation upon the assessee in the assessment year in http://www.itatonline.org

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question (AY 1997-98) even though the assessee had opted not to claim

current depreciation.

28. In support of the above argument, Mr. Dastur relied upon a

decision of the Kerala High Court in the case of C.I.T. V/s. Kerala Electric

Lamp Works Limited reported in 261 ITR 721 (Ker), decision of the Madras

High Court in the case of C.I.T. V/s. Sree Senhavalli Textiles P. Limited

reported in 259 ITR 77 (Mad), decision of the Punjab and Haryana High

Court in the case of Ram Nath Jindal V/s. C.I.T. reported in 252 I.T.R. 590

(P & H) wherein it is held that the Explanation 5 to section 32(1) is

prospective in nature and even after deletion of section 34(1) & (2) of the Act

if the assessee does not wish to claim depreciation, the same cannot be

thrusted upon the assessee. He has also relied upon a decision of the Apex

Court in the case of DCIT V/s. Core Health Care Limited reported in 298

ITR 194 (SC), where it is held that the proviso inserted to Section 36(1)(iii) by

Finance Act, 2003 with effect from 1-4-2004 has to be read prospectively

with effect from 1-4-2004. Accordingly, Mr.Dastur submitted that

notwithstanding the deletion of Section 34(1) and (2) with effect from

1-4-1988 and notwithstanding the insertion of Explanation 5 to Section 32(1)

with effect from 1-4-2002, in the assessment year in question (AY 1997-98)

the assessee in the light of the decision of the Apex Court in the case of

Mahendra Mills (supra) had the option to claim or not to claim current

depreciation and since the assessee in the present case had opted not to

claim current depreciation, the same could not be thrusted upon the

assessee, either in determining the total income under Chapter IV or in

determining the gross total income for the purpose of computing deduction http://www.itatonline.org

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under section 80-IA of the Act.

29. Mr.Dastur further submitted that the deduction under Section

80-IA of the Act is at a percentage of the profits of the assessee’s industrial

undertaking. As per section 80AB, the profits of an industrial undertaking to

which the percentage is to be applied has to be computed in accordance

with the provisions of the Act before making any deduction under Chapter

VIA. Profits of an industrial undertaking as per section 29 of the Act is to be

computed in accordance with the provisions contained in sections 30 to 43D

of the Act. Therefore, the expression “income.... computed in accordance

with the provisions of this Act” in section 80AB must mean business profits

computed as per the provisions contained in sections 30 to 43D of the Act

and if in computing the business profits under Section 30 to 43D of the Act,

the claim for depreciation as per the decision of the Apex Court in the case

of Mahendra Mills (supra) is optional, then, it would also be so for the

purposes of section 80AB of the Act. The submission is that once the total

income under Chapter IV is computed in accordance with the provisions

contained in Section 30 to 43D of the Act without deducting the allowable

current depreciation (on account of the assessee not claiming it), then the

gross total income for the purpose of deduction under Chapter VI-A would

also have to be computed without deducting current depreciation. In other

words, the submission is that, where the assessee chooses not to claim

current depreciation, then the total income under Chapter IV as well as the

gross total income under Chapter VI-A have to be computed without

deducting from the business profits the current depreciation allowable under

the Act.http://www.itatonline.org

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30. We see no merit in the above contentions. As rightly

contended by Mr. Srivastav, learned counsel for the revenue, the decision of

the Apex Court in the case of Mahendra Mills (supra) has to be understood

in the context in which the said decision was rendered. In that case, the

Apex Court on interpretation of Section 32 and Section 34(1) and (2) of the

Act (as they stood at the relevant time) held that the current depreciation

can be allowed only when, firstly, the assessee has claimed current

depreciation under section 32 and secondly, the assessee has furnished

requisite particulars under section 34. The Apex Court in the Mahendra

Mills (supra) has further held that the deduction by way of current

depreciation is a benefit conferred upon the assessee and if the assessee

does not wish to avail that benefit for some reason, then the current

depreciation cannot be forced upon the assessee.

31. However, it is pertinent to note that firstly, the decision of the

Apex Court in the case of Mahendra Mills (supra) was rendered in the

context of determining total income of an industrial undertaking under

Chapter IV of the Act and not in the context of determining the deduction

under Chapter VIA of the Act. Secondly, what is held by the Apex Court in

the case of Mahendra Mills (supra) is that, when there are two provisions

under which an assessee can claim some benefit, it is for the assessee to

choose one and that the consequence of the assessee not claiming

deprecation in the current year would be that the written down value would

remain the same for the following year (see 243 ITR 56 at Page 62). Thirdly,

the Apex Court in the case of Mahendra Mills (supra) has not laid down any http://www.itatonline.org

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proposition of law that by disclaiming depreciation, the assessee can claim

enhanced deduction allowable under any other provision in the Act.

32. The choice or the option available to an assessee to claim or

not to claim current depreciation as per the decision of the Apex Court in the

case of Mahendra Mills (supra) can be elucidated by an illustration.

Suppose an assessee is carrying business in scientific research. That

assessee would be entitled to deduction under section 32 (current

depreciation on the plant and machinery used for that business) as well as

deduction under Section 35(1)(iv) (capital expenditure on the scientific

research business). In such a case, it cannot be said that the legislature

intended to give double deduction in respect of the same business outgoing

and the assessee would have to choose one out of the above two

deductions and cannot claim both the deductions. In these circumstances,

the Apex Court in the case of Mahendra Mills (supra) has observed that the

assessee has an option to disclaim depreciation and that the consequence

of disclaiming depreciation would be that the written down value of the asset

would remain the same for the following year. Thus, even according to the

Apex Court, disclaiming of depreciation cannot result in enhancement in the

quantum of deduction that is allowable under any other provision in the Act.

33. Although it is contended on behalf of the revenue that the

decision of the Apex Court in the case of Mahendra Mills (supra) is rendered

ineffective by the subsequent amendments, we do not consider it necessary

to deal with that argument, because, in our opinion, even assuming that in

the year in question the assessee had an option to disclaim current http://www.itatonline.org

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depreciation in computing the total income under Chapter IV of the Act, the

question is, whether the quantum of deduction allowable under section 80-

IA of the Act is dependent upon the assessee claiming or not claiming

current depreciation allowable under the Act ? To illustrate, suppose in the

assessment year in question, the only source of income of the assessee

was the business income. Suppose the gross business profit of the

assessee in that year was Rs.100/-, and the assessee was entitled to

current depreciation under Section 32 at Rs.80/- and 100% deduction under

Section 80-IA. Assuming that there were no other claims that were to be

allowed to disallowed, then the computation of income,

as per the Assessee

Gross business profit.. .. .. .. Rs.100/-less

depreciation allowable under the ..Act (not claimed).. .. .. .. .. ----

-----------Gross Total Income.. .. Rs.100/-

less100% deduction under Section 80-IA.. .. Rs.100/-

-----------Taxable Income.. .. NIL

======

as per the AO

Gross business profit.. .. .. .. Rs.100/-less

depreciation allowable under the Act.. .. Rs. 80/-------------

Gross Total Income.. .. Rs. 20/-less

100% deduction under Section 80-IA.. .. Rs. 20/------------

Taxable Income.. .. NIL======


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Thus, as per the above illustration, where the depreciation is

disclaimed by the assessee, the quantum of deduction under Section 80IA

comes to Rs.100/- and where depreciation is claimed by the assessee, the

deduction under Section 80-IA (as per the above illustration) comes to Rs.

20/-. The question, therefore, to be considered is, whether the quantum of

deduction under Section 80IA is dependent upon the assessee claiming or

not claiming depreciation ?

34. As noted earlier, the Apex Court in the case of Mahendra Mills

(supra) has neither considered the scope of deduction under Chapter VI-A

nor the said decision can be read to mean that by disclaiming current

depreciation the assessee can claim enhanced deduction under any other

provision in the Act. Therefore, reliance placed on the decision of the Apex

Court in the case of Mahendra Mills (supra) in computing the quantum of

deduction under section 80-IA of the Act is wholly misplaced.

35. The question then to be considered is, whether on a plain

reading of Section 80IA read with other relevant provisions in Chapter VI-A,

can it be said that the quantum of deduction allowable under Section 80IA

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 80IA of the

Act ?

36. In our opinion, the above question is no longer res-integra. http://www.itatonline.org

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The Apex Court in the case of M/s.Liberty India V/s. Commissioner of

Income Tax reported in 2009 (12) SCALE 61, held as under :

“13. Before analyzing Section 80-IB, 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-IA / 80-IB is the generation of profits (operational profits). For example, an assessee company located in 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-IB (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 sub-sections (3) to (11A) [as they stood at the relevant time]. One more aspect needs to be highlighted. Each of the eligible business in sub-sections (3) to (11A) constitutes a stand-alone item in the matter of computation of profits. That is the reason why the concent of “Segment Reporting” stands introduced in the Indian Accounting Standards (IAS) by the Institute of Chartered Accountants of India (ICAI).

14. Analysing Chapter VI-A, we find that Sections 80-IB / 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-IB 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”,


22

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 / Duty drawback receipt comes within the first degree sources ? According to the assessee(s), DEPB credit / duty drawback receipt reduces the value of purchases (cost 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-IB provides for applicability of the provisions of sub-section (5) and sub-sections (7) to (12) to Section 80-IA, so far as may be, applicable to the eligible business under Section 80-IB. Therefore, at the outset, we stated that one needs to read Sections 80I, 80-IA and 80-IB 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, such 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 80-IB. [see Section 80-IB(13)]. We may reiterate that Sections 80I, 80-IA and 80-IB have a common scheme and if so read it is clear 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 sub-section (1)


23

only to the extent of profits derived from such industrial undertaking after specified date(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”.”

(emphasis supplied)

37. In the case of CIT V/s. Williamson Financial Services & Ors.

reported in [2008] 297 ITR 17 (SC), the Apex Court inter alia held thus:-

" In this connection, it is also important to note that section 80A which falls in Chapter VI-A, deductions are allowed only from 'gross total income". The object for making such provision is to limit the amount of the amount of the section 80HHC deduction. It is true that section 80HHC provides for deduction of a percentage of the export profits. The percentage is calculated with reference to the export profits, but the deduction is only from "gross total income" as defined under section under section 80B(5) of the 1961 Act. Therefore, the very scheme of the 1961 Act is to treat the deductions under Chapter VI-A as deductions only from "gross total income" in order to arrive at the "total income". In other cases falling under section 28 where computation of income falls under the head "Business", allowances are deductible from the income but not from "gross total income". It is, therefore, not possible to accept the contention that section 80HHC is part of the provisions for computation of business income. Section 80 HHC does not have any direct impact on the computation of business income in the manner in which, for example, section 72 affects the computation of business income. "

38. In the case of CIT V/s. Doom Dooma India Ltd. reported in/

(2009) 310 ITR 392 (SC), the Apex Court has held as follows:-

"Chapter VI-A refers to special deductions. It is a separate code by itself. There is a distinction between "deductions / allowances in Section 30 to 43-D and "deductions admissible under Chapter VI-A". Deductions / allowances provided in Sections 30 to 43-D are allowed in determining gross total income and are not chargeable to tax because the same constitute charge on profit,


24

whereas, deductions under Chapter VI-A are allowed from gross total income chargeable to tax. Therefore, the judgments rendered in the context of Section 80-HHC of the 1961 Act, both by this Court and by the Kerala High Court stand on different footing. "

(emphasis supplied)

39. In the light of the aforesaid decisions of the Apex Court, it is

clear that Section 80IA is a Code by itself and the deduction allowable under

Section 80IA is a special deduction which is linked to profits, unlike

deductions contained in Chapter IV of the Act which are linked to

investments. The deduction under Section 80IA is allowed at a percentage

of the business profits computed in the manner specified in that Section and

other provisions contained in Chapter VIA. The Apex Court has held that

section 80-IA contains both substantive and procedural provisions for

computation of the special deduction and any device adopted to reduce or

inflate the profits, of eligible business has to be rejected. In the present

case, the assessee by not claiming current depreciation seeks to inflate the

profit linked incentives provided under Section 80-IA of the Act which is not

permissible as per the law laid down by the Apex Court.

40. Strong reliance was placed by the counsel for the assessee on

the Constitution Bench decision of the Apex Court in the case of

Distributors (Baroda) P. Ltd. V/s. Union of India reported in 155 ITR 120

(S.C.) in support of his contention that where the business income of the

assessee is computed under Chapter IV by disclaiming current depreciation,

then, deduction under Chapter VIA has also got to be computed by

disregarding the current depreciation. It is contended that the deduction


25

under Chapter VIA has to be computed by determining the gross total

income and according to the Apex Court what is included in the gross total

income is not only the category of income [income of the industrial

undertaking under section 80-IA(2) (iv)(b)] but also the quantum of income

[profits and gains as computed under section 30 to 40D]. The argument is

that as per the decision of the Apex Court in the case of Distributors Baroda

P. Limited (supra), for computing deduction under Chapter VI-A, what is

relevant is that, there must be business income (category of income) and

total income from business (quantum of income) must be computed in

accordance with the provisions contained in sections 30 to 43D of the Act

(which includes section 32). As per the Apex Court in the case of Mahindra

Mills (supra) the assessee has a choice to claim or not to claim current

depreciation allowable under section 32 of the Act. Accordingly, it is

contended that where the total income under Chapter IV is computed by

disclaiming current depreciation, then, as per the decision of the Apex Court

in the case of Distributors Baroda (supra) the category of income and the

quantum of income computed under Chapter IV would alone be the basis for

determining the quantum of deduction under Chapter VIA of the Act (in the

present case section 80-IA). In this connection, reliance is placed on the

decisions of this Court in the case of Grasim Industries Ltd. (supra), CIT V/s.

Asian Cable Corporation Ltd. reported in 262 ITR 537 (Bom) and CIT V/s.

Albright Morarji & Pandit Ltd. reported in 236 ITR 914 (Bom).

41. We see no merit in the above contention. The question before

the Apex Court in the case of Distributors Baroda (P) Ltd. (supra) was,

where the gross total income of an assessee includes any income by way of http://www.itatonline.org

26

dividends received from a domestic company, whether deduction under

section 80M contained in Chapter VIA of the Act has to be computed after

deducting the interest payable on monies borrowed for earning such

dividend income ? The Apex Court after reviewing the entire case law and

after reversing its own judgment in the case of Cloth Traders (P) Ltd. V/s.

ACIT reported in 118 ITR 243 (S.C.) held (see 155 ITR 120 at page 134) as

follows:-

“...... Now when an amount by way of dividend is received by the assessee from the paying company, the full amount of such dividend would have suffered tax in the assessment of the paying company and it is obvious, that, in order to encourage inter-company investments, the Legislature intended that this amount should not bear tax once again in the hands of the assessee either in its entirety or to a specified extend. But the amount by way of dividend which would otherwise suffer tax in the hands of the assessee would be the amount computed in accordance with the provisions of the Act and not the full amount received from paying company. Therefore, it is reasonable to assume that in enacting S.80M, the Legislature intended to grant relief with reference to the amount of dividend computed in accordance with the provisions of the Act and not with reference to the full amount of dividend received from the paying company. It is difficult to imagine any reason why the Legislature should have intended to give relief with reference to the full amount of dividend received from the paying company when that is not the amount which is liable to suffer tax once again in the hands of the assessee. The Legislature could certainly be attributed with the intention to prevent double taxation but not to provide an additional benefit which would go beyond what is required for saving the amount of dividend from taxation once again in the hands of the assessee.....

..... Income by way of dividends from a domestic company included in the gross total income would, therefore, obviously be income computed in accordance with the provisions of the Act, that is, after deducting interest on monies borrowed for


27

earning such income. If income by way of dividends from a domestic company computed in accordance with the provisions of the Act is included in the gross total income, or, in other words, forms part of the gross total income, the condition specified in the opening part of sub-s.(1) of S. 80M would be fulfilled and the provision enacted in that sub-section would be attracted.”

(emphasis supplied)

42. Thus, in the case of Distributors (Baroda) P. Ltd. (supra) the

Apex Court has held that the deduction under section 80M relating to certain

inter-corporate dividends has to be allowed after deducting the interest

payable on monies borrowed for earning such dividend income. The Apex

Court has also held that section 80M cannot be interpreted in a manner so

as to confer additional benefit which would go beyond what is required for

saving the amount of dividend from taxation once again in the hands of the

assessee. Therefore, even in the case of Distributors Baroda (P) Ltd. (supra)

the Apex Court has held that the computation of deduction under VIA

cannot be done in a manner which gives additional benefit to the assessee

than what is contemplated under Chapter VIA of the Act. Similar view has

been taken by the Apex Court in the case of Liberty India (supra) wherein it

is held that any device 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-IB [similar to section 80IA(7)]. Therefore, in the light

of the aforesaid decisions of the Apex Court, it is clear that the quantum of

deduction under section 80-IA would not be dependent upon the assessee

claiming or not claiming current depreciation, because, the quantum

deduction under section 80-IA has to be computed on the profits determined

after deducting all deductions allowable under the Act.http://www.itatonline.org

28

43. The Apex Court in the case of Distributors Baroda (P) Ltd.

(supra) has quoted with approval the following passage from the decision of

the Apex Court in the case of Cambay Electric Supply Industrial Co. Ltd.

V/s. CIT reported in 113 ITR 84 (SC):-

“ On reading sub-section (1), it will become clear that three important steps are required to be taken before the special deduction permissible thereunder is allowed and the net total income exigible to tax is determined. First, compute the total income of the concerned assessee in accordance with the other provisions of the Act i.e. in accordance with all the provisions except section 80E; secondly, ascertain what part of the total income so computed represents the profits and gains attributable to the business of the specified industry (here generation and distribution of electricity); and, thirdly, if there be profits and gains so attributable, deduct 8% thereof from such profits and gains and then arrive at the net total income exigible to tax. “

[see 155 ITR 120 139]

Thus, in all the aforesaid decisions of the Apex Court the

consistent view taken is that, the deduction under Chapter VIA is a special

deduction and the quantum of deduction thereunder has to be computed by

ascertaining that part of the total income which represents the profits and

gains derived by an undertaking after deducting all the deductions allowable

under section 30 to 43D of the Act. Therefore, assuming that in the

assessment year in question the assessee has an option to disclaim

depreciation, the same would not have any bearing on the computation of

quantum deduction under section 80-IA of the Act.


29

44. To summarise, firstly, the Apex Court decision in the case of

Mahendra Mills (supra) cannot be construed to mean that by disclaiming

depreciation, the assessee can claim enhanced quantum of deduction under

Section 80IA. Secondly, the Apex Court in the case of Distributors (Baroda)

P. Ltd. (supra) and in the case of Liberty India (supra) has clearly held that

the special deduction under Chapter VIA has to be computed on the gross

total income determined after deducting all deductions allowable under

section 30 to 43D of the Act and any device adopted to reduce or inflate the

profits of eligible business has got to be rejected. Thirdly, this Court in the

case of Albright Morarji & Pandit Ltd. (supra), Grasim Industries Ltd. (supra)

and Asian Cable Corporation Ltd. (supra) has only followed the decisions of

the Apex Court in the case of Distributors Baroda (supra). Thus, on analysis

of all the decisions referred hereinabove, it is seen that the quantum of

deduction allowable under section 80-IA of the Act has to be determined by

computing the gross total income from business, after taking into

consideration all the deductions allowable under section 30 to 43D of the

Act. Therefore, whether the assessee has claimed the deductions allowable

under Sections 30 to 43D of the Act or not, the quantum of deduction under

Section 80IA has to be determined on the total income computed after

deducting all deductions allowable under Sections 30 to 43D of the Act.

45. Apart from the above, in the present case, as fairly stated by

Mr. Dastur, the assessee is disclaiming depreciation neither with a view to

be charitable nor with a view to pay more tax than what is legally payable. In

the present case, the assessee by disclaiming depreciation, seeks deduction

under section 80-IA at Rs.100/- instead of Rs.20/- which is legally http://www.itatonline.org

30

permissible as per the illustration at para 33 above. Once it is held that the

quantum of deduction allowable under section 80-IA after deducting all

deductions allowable under Sections 30 to 43D is Rs.20/- only (as per the

illustration at para 33), then, by disclaiming current depreciation, the

assessee would be worse off, because by disclaiming depreciation the

assessee would have to pay tax on Rs.80/- and if depreciation is allowed,

then there would be no tax liability. In these circumstances, disclaiming

depreciation being not in the interest of the assessee, the A.O. was justified

in allowing depreciation to the assessee, so that no tax liability is fastened

upon the assessee by disclaiming depreciation.

46. Now, let us consider the argument as to whether the

observations made by this Court in the case of Indian Rayon (supra) which

is followed in the case of Scoop Industries Ltd. (supra) are contrary to the

dictum laid down by the Apex Court in the case of Mahendra Mills (supra)

and Distributors Baroda (P) Ltd. (supra). It is true that in the case of Indian

Rayon (supra) the assessee therein had claimed depreciation and the

observations of this Court relating to cases where the assessee has not

claimed depreciations were only general observations. Considerable

argument was advanced by the Counsel for the assessee on the binding

nature of such general observations. However, we do not consider it

necessary to deal with those arguments, because in our opinion, those

general observations are in consonance with the ratio laid down by the Apex

Court in the case of Distributors Baroda (P) Ltd. (supra) and reiterated again

in the case of Liberty India (supra). Even in the case of Grasim Industries

Ltd. (supra), this Court has held that deduction under section 80HH in http://www.itatonline.org

31

Chapter VI-A has to be computed after deducting development rebate

allowable under section 33 of the Act. Thus, in our opinion, there is no

conflict whatsoever in the decisions of this Court in the case of Grasim

Industries Ltd. (supra) and Indian Rayon Ltd. (supra) and the ratio laid down

in both the above cases are in consonance with the ratio laid down by the

Apex Court in the case of Distributors Baroda (P) Ltd. (supra) and other

cases referred to herein above.

47. Thus, the common thread passing through the above decisions

of the Apex Court as well as the decisions of this Court including the

decision in the case of Indian Rayon (supra) is that the deductions under

Chapter VI-A are linked to profits and the profits for the purposes of

deduction under Chapter VI-A have to be determined after considering all

deductions allowable under the Act (except deductions allowable under

Chapter VI-A). Therefore, whether the assessee has claimed current

depreciation or not has no bearing in determining the quantum of deduction

allowable under Section 80IA of the Act and once it is found that disclaiming

depreciation is not in the interest of the assessee, the AO was justified in

allowing current depreciation to the assessee.

48. For all the aforesaid reasons, we hold that the quantum of

deduction under Section 80IA is not dependent upon the assessee claiming

or not claiming depreciation, because, under Section 80IA the quantum of

deduction has to be determined by computing total income from business

after deducting all deductions allowable under Section 30 to 43D of the Act.


32

49. In the result, we answer the question referred to us set out at

para 1 above in the affirmative, that is, for the purposes of deduction under

Chapter VIA, the gross total income has to be computed inter alia by

deducting the deductions allowable under section 30 to 43D of the Act,

including depreciation allowable under section 32 of the Act, even though

the assessee has computed the total income under Chapter IV by

disclaiming the current depreciation.

50. The reference is accordingly disposed of with no order as to

costs.

(SMT. RANJANA DESAI, J.)

(J.P. DEVADHAR, J.)

(R.V. MORE, J.)


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