TMI Blog2009 (10) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... . Srivastava Mr. B.M. Chatterjee with Mr. P.S.Sahadevan i/b. Suresh Kumar, Advocates for the respondent. JUDGMENT The judgment of the court was delivered by J.P. Devadhar, J. - 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 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 Be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sted 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 60/- Income Chargeableto tax NIL 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 subsection 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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra 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. 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" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 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 mann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness 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, 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 subsection 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. 43. The Apex Court in the case of Distributors Baroda (P) Ltd. (supra) has quoted with approval the following passage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibutors 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 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/- on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X
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