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Judgment
Vijay C. Daga, J.—Heard. Perused appeal.
At the behest of the Assessee, the present Appeal is filed u/s 260-A of the Income Tax Act, 1961 (hereinafter referred to as "the Act" for short), arising from the order of the Income Tax Appellate Tribunal ("the Tribunal" for short) dated 30.3.2007 raising the following substantial question of law.
Whether on the facts and in the circumstances of the case, the Tribunal was justified in coming to the conclusion that depreciation allowance ought to be deducted while computing the total income for the purposes of deduction u/s 80HH?
Factual Panorama:
The Appellant is a Company incorporated under the Companies Act, 1956. The appeal is concerned with assessment year 1997-98 for which the previous year was the financial year ending on March 31, 1997. The Appellant, since previous year relevant to assessment year 1994-95, is engaged in the business of manufacture of Masterbatches and compounds. For this purpose it has its manufacturing Units at Daman. Units I and II at Daman commenced its operation in the previous years relevant to assessment years 1994-95 and 1995-96, respectively. The income derived from these undertakings qualify for deduction u/s 80-IA of the Act. In the previous years relevant to assessment years 1995-96 and 1996-97, the Appellant did not claim deduction for depreciation in respect of the assets at the aforesaid undertakings at Daman. This position has been accepted by the Respondent No. 1 for assessment year 1995-96 under an intimation passed by him u/s 143(1)(a) of the Act. In other words, the Appellant''s stand of exercising the option to not claim depreciation has been upheld by the Tribunal for assessment year 1996-97.
For the year under consideration, the Appellant filed its return of income on November, 26, 1997 declaring total income in the sum of Rs. Nil under the Act. This had been arrived at after claiming deduction of interalia Rs. 2,45,04,962/- u/s 80-IA of the Act in respect of the undertakings I and II at Daman. In the said return while computing the income under the head Profits and gains of business or profession the Appellant did not claim any depreciation u/s 32 of the Act in respect of the assets of the said undertakings. Consequent thereto, the income which qualified for deduction u/s 80-IA of the Act was also worked out on the basis that depreciation had not been claimed as a deduction.
The respondent No. 1 initiated reassessment proceedings for this year and passed an order u/s 143(3) read with Section 147 of the Act on March 04, 2005 determining the Appellants total income under the Act at Rs. 32,15,583/-. Though the Appellant had not claimed depreciation on the assets at the said undertakings at Daman in its computation of income, the Respondent No. 1 allowed a deduction in respect of the same in the sum of Rs. 2,13,89,379 for the reasons as mentioned in the assessment order. He thereby reduced the written down value of the block of assets to be carried forward to the subsequent year. Consequent thereto, he also reduced the Appellant�s claim for deduction u/s 80-IA of the Act in respect of the said undertakings by reducing the income of the eligible undertakings by the amount of depreciation.
Aggrieved by the aforesaid assessment order the Appellant filed an appeal before the Commissioner of Income Tax (Appeals) pleading that under the scheme of the Act the claim for depreciation cannot be allowed unless claimed by the assessee, and that an assessee had an option not to claim the same. The Commissioner of Income Tax (Appeals) allowed the appeal following the Tribunals order for assessment year 1996-97. He has thereby also allowed the appellants claim for deduction u/s 80-IA of the Act without reducing the eligible income by the amount of depreciation.
Aggrieved by this order of the Commissioner of Income Tax (Appeals) the Respondent No. 1 filed an appeal before the Tribunal. The only ground raised in appeal was relating to the optional nature of claim for depreciation and consequent computation of deduction u/s 80-IA without deducting the admissible depreciation from the eligible profit.
As there was a conflict of view between the various Benches of the Tribunal, the President of the Tribunal had constituted a Special Bench in the case of (2006) 98 ITD 165 to resolve the conflict. The issue framed for reference was as under:
Whether the depreciation which is though allowable but not claimed in the return for the normal computation of income has to be allowed while computing the deductions under Chapter VI-A viz. Sections 80HH, 80-IA, 80-IB etc. of an industrial undertaking?
The Special Bench by its order dated 9th November, 2005 disposed of the appeals and held that when one wants to compute the profits derived from an undertaking for the purpose of allowing a deduction under Chapter VI-A one had to make an artificial computation and in making that computation depreciation was a necessary charge which had to be taken into account. According to the Tribunal the provisions of Sub-sections (6) and (7) of Section 80HH, Sub-sections (5), (8) and (10) of Section 80-IA, Sub-section (13) of Section 80-IB and the provisions of Section 80AB indicate that it is not the choice of the assessee to show a larger profit than what is reasonable and the eligible income is to be arrived at in accordance with the provisions of the Act. The Tribunal held that the profits derived from the undertaking for the purposes of claiming a deduction under Chapter VI-A of the Act had to be arrived at after setting-off the current years depreciation as well as the unabsorbed depreciation and the unabsorbed development rebate irrespective of whether depreciation allowance was claimed as a deduction u/s 32 of the Act in arriving at the business income. The Tribunal also held that there is no provision in the Act for disclaimer of depreciation. Omission of Section 34(1) by the Taxation Laws (Amendment & Miscellaneous Provisions) Act, 1986 leads to the conclusion that assessee has no option to not to claim depreciation. According to the Tribunal the judgment of the Supreme Court in Mahendra Mills was to be restricted to assessment years commencing prior to 1.4.1988 and in any event was not applicable to a case where deduction under Chapter VI-A was being claimed. The Tribunal held that in view of the judgment of the Supreme Court in Commissioner of Income Tax, Delhi Vs. Mahalaxmi Sugar Mills Co. Ltd., , a duty was cast upon the Assessing officer to apply the relevant provisions of the Act for the purposes of determining the true figure of the eligible income whilst computing the deduction under Chapter VI-A. The Tribunal also rejected the contention that if there were two possible views, the view in favour of the assessee should be preferred.
This Court in Scoop Industries (P) Ltd. and Others Vs. Income Tax Officer and Others, has also an occasion to consider the very same issue, wherein it has also concluded that depreciation is to be allowed as a necessary deduction while allowing deduction under chapter VI-A of the Act.
The Tribunal in its impugned order dated March 30, 2007 has allowed the appeal of the Respondent No. 1. In this regard the Tribunal followed the decisions of this Court in Scoop Industries Pvt. Ltd. and the Special Bench of the Tribunal in the case of Vahid Paper Converters (cited supra) referred to supra. Consequently, the profits eligible for deduction u/s 80-IA of the Act as determined by the Respondent No. 1 has also been upheld. 12. Being aggrieved by the above order of the Tribunal the Assessee is before this Court in appeal raising an issue framed in the form of substantial question of law in the opening part of this order.
Submissions:
Mr Dastur, learned senior Counsel appearing for the Appellant urged that the Supreme Court had categorically held in Commissioner of Income Tax Vs. Mahendra Mills, that the assessee had an option to disclaim deduction in respect of the depreciation while computing its income under the head "profits and gains of business or profession". Hence, thrusting depreciation u/s 32 of the Act is illegal and bad in law.
He further submits that the right of the assessee to disclaim depreciation is based on the interpretation of provisions of Section 32(1) and 43A of the Act which continued till the assessment year 2002-2003, when explanation to Section 5 was inserted by the Finance Act 2001 with effect from 1.4.2002 and, therefore, the Tribunal erred in holding that omission of Section 34(1) by Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 changed the legal complexion. He further reiterated that Explanation 5 to Section 32 of the Act as inserted by the Finance Act, 2001 with effect from 1st April, 2002 clearly demonstrates that prior thereto depreciation could not be thrusted on an assessee. He placed reliance on number of judgments in support of his submissions to which no reference at this stage is necessary since the same are being referred in later part of the order.
Per contra, Mr Suresh Kumar, learned Counsel appearing for the Revenue urged that case of the Commissioner of Income Tax, Delhi Vs. Mahalaxmi Sugar Mills Co. Ltd., on which heavy reliance was placed by the assessee was considered by the Division Bench of this Court in the case of Indian Rayon Corporation Ltd. Vs. Commissioner of Income Tax, , wherein the Division Bench of this Court while dealing with deduction u/s 80HH had an occasion to rule that an assessee is free not to claim depreciation in view of the judgment of the Supreme Court in the case of CIT v. Mahendra Mills 2002 243 ITR 56, if he is not seeking benefit of special deduction under Chapter VI-A of the Act but if the assessee claims special deductions, then such depreciation will be set off as any other expenses against gross income. In other words, if an assessee claims deduction under Chapter VI-A, then to calculate profits and gains of newly established undertaking, depreciation allowance has got to be set off against the gross income of newly established undertaking to arrive at the profits computed in accordance with the provisions of the Act, which profits would form part of the gross total income and which would be eligible to 20% deduction. According to Mr. Suresh Kumar reason being the Chapter VI-A deals with special type of income. The underlying purpose is that the assessee should not be allowed to claim more than one to which he is entitled to.
Mr Suresh Kumar also relied upon the judgment of another Division Bench of this Court delivered at Panaji Bench in the case of Scoop Industries (P) Ltd. and Others Vs. Income Tax Officer and Others, Bombay to which one of us (Dr S. Radhakrishnan J.) is a party, wherein while dealing with the question raised the Division Bench placed reliance on the judgment of (2002) 75 TTJ 511 of this Court wherein it was held that when any deduction under Chapter VI-A of the Income Tax Act is claimed, then while computing the total income, the depreciation has to be deducted before making any deduction under Chapter VI-A. By not claiming depreciation in the years in which the assessee is entitled to deduction under Chapter VI-A, the assessee claims a double advantage (i) claiming a higher deduction under Chapter VI-A, than its entitlement, (ii) keeping the written down value of assets high resulting in higher claim of depreciation in the subsequent years. Hence depreciation will have to be taken into account while computing a special deduction under Chapter VI-A.
Mr Suresh Kumar also placed heavy reliance on the judgment of Synco Industries Ltd. Vs. Assessing Officer, Income Tax, Mumbai and Another, and pressed into service the interpretation put by the Apex Court on Sections 80A, 80AB, 80B(5), 80HH, 80-I falling in Chapter VI-A of the Act.
Mr Suresh Kumar also brought to our notice judgment of the Delhi High Court in the case of Dabur India Limited v. CIT (unreported) in I.T.A. No. 579 of 2007 decided on 1.9.2008 and that of Rajasthan High Court in the case of Vijay Industries Vs. Commissioner of Income Tax, to contend that the view taken by this Court has been followed by the two different High Courts. He thus, submits that this court is bound by the view of the earlier Division Benches of this court warrants dismissal of appeal in hand.
In rejoinder, Mr Dastur learned senior Counsel submits that so far as decision in the case of Synco Industries Ltd. (cited supra) is concerned, the assessee had an oil division and a chemical division both of which had made a profit in the subject year. Profits of the chemical division qualified for deduction under Sections 80HH and 80-I of the Income Tax Act. The assessee had suffered losses in the oil division in the earlier years which were brought forward to the year under consideration. There was no question relating to current or brought forward depreciation allowance. After setting off u/s 72 of the Act profits of the chemical and oil divisions against the brought forward losses of the oil division, the gross total income of the assessee was determined at nil. Affirming the decision of the High Court the Supreme Court held that for determining the gross total income, brought forward loss relating to the oil division was required to be set off against the profits of the chemical division and since the gross total income was nil the assessee was not entitled to claim deduction under Sections 80HH and 80-I of the Act. According to Mr. Dastur, the Supreme Court was concerned with a case where the issue was relating to brought forward losses and had nothing to do with current depreciation which is the issue under consideration. Further, on the peculiar facts before the Supreme Court the gross total income was determined at nil and, therefore, there was no question of allowing any deduction under chapter VI-A of the Act.
So far as the case of Cambay Electric Supply Industrial Co. Ltd. Vs. The Commissioner of Income Tax, Gujarat-II, Ahmedabad, is concerned, Mr Dastur submits that the court was concerned with the issue (i) whether the balancing charge would qualify for deduction u/s 80E and the court had concluded that such income would be attributable to the eligible business and hence qualify for deduction under that Section and whether development rebate and unabsorbed depreciation which was claimed as a deduction in computing income under the regular provisions of the Act was to be reduced from the income qualifying for deduction u/s 80E. According to Mr Dastur the issue raised in the present case viz. the impact on computation of Section 80-IA profit when there was a disclaimer of depreciation in computing the regular business income did not arise.
Mr Dastur further urged that so far as the case of Vijay Industries Vs. Commissioner of Income Tax, , the Rajasthan High Court was concerned with a case where the assessee was claiming that deduction u/s 80HH of the Act was available as a percentage of ''profits and gains'' of business. That the Act provides for the manner of computation of ''income'' but, is silent on the manner of computation of ''profits and gains''. In that case the assessee was further claiming that the concept of ''profits and gains'' is wider than the concept of �income� and that depreciation is not to be allowed as a deduction in computing the profits and gains. This argument of the assessee was turned down by the High Court relying on decision of the Supreme Court in Motilal Pesticides (I.) Pvt. Ltd. Vs. Commissioner of Income Tax, which laid down that deduction u/s 80HH was to be allowed only on net income and not gross income. This was based on the provisions of Section 80AB of the Act. Mr Dastur submits that in the present case assessee is not claiming that there is any such distinction, between "profits and gains" and "income". On the contrary, the appellant is relying on the provisions of Section 80AB of the Act to plead that since depreciation has been rightly disclaimed while computing income under Chapter IV-D of the Act, such profits computed in accordance with Sections 29 to 43A should be the basis for allowing deduction u/s 80-IA of the Act.
Mr Dastur tried to distinguish the Indian Rayon Corporation Ltd. Vs. Commissioner of Income Tax, contending that the Division Bench of this Court was concerned with the case where the assessee had claimed depreciation in arriving at its business profits but stated that in arriving at the quantum of profits exigible for deduction u/s 80HH the depreciation so claimed ought not to be deducted. In his submission the stand of Indian Rayon Corporation Ltd. case was that after having quantified the deduction available u/s 80HH, deduction must be allowed u/s 32(1) for the current year�s depreciation from the business income arrived at after allowing for deduction u/s 80HH of the Act. In that case the assessee had not disclaimed depreciation. Mr. Dastur, thus, tried to distinguish this judgment on facts.
Mr. Dastur did concede that so far as the case of Scoop Industries Pvt. Ltd. (cited supra) is concerned, the said case has dealt with the identical question involved in the case in hand. In his submission the case of Scoop Industries Pvt. Ltd., the Division Bench of this Court relied upon the case of Indian Rayon Corporation to hold that if "newly established undertaking" claims deduction under Chapter VI of the Act then the total income ought to be computed as per Sections 29 to 43A of the Act which includes Section 32 i.e. before granting any deduction under Chapter VI-A the depreciation u/s 32 of the Act has to be granted.
Mr Dastur submits that in the case of Mahendra Mills (cited supra) the Supreme Court having declared the law as to the scope and ambit of Section 32, it must be equally applied for the purposes of Chapter VI-A. It cannot be that the provisions of Section 32 are to be interpreted differently where Section 32 is to be applied for the purposes of arriving at the business income under Chapter IV-D and where it is to be applied to arrive at profit of a newly established industrial undertaking.
Mr Dastur submits that the conclusion reached in the Scoop Industries (Cited supra) is based only on the earlier decision in the case of the Indian Rayon Industries which can be distinguished on facts. However, he went on to contend that the judgment of the Division Bench in the case of Scoop Industries Ltd. needs reconsideration contending that there is conflict of view between two Division Benches of this Court, one in the case of Grasim Industries Ltd. Vs. Assistant Commissioner of Income Tax and Others, and Scoop Industries Pvt. Ltd. (cited supra).
This Court in the case of Grasim Industries Ltd (cited supra) has observed as under:
Section 80HH of the Income Tax Act, 1961 begins with the words "where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking" The expression "gross total income" is defined u/s 80B(5) to mean the total income computed in accordance with the provisions of the Act, before making any deduction under Chapter VI-A. Therefore, what is included in the gross total income in such a case is not only the category of such income included in the gross total income but also the quantum of income so included. In the case of Distributors (Baroda) Pvt. Ltd. Vs. Union of India (UOI) and Others, , the Supreme Court has categorically laid down that the expression "gross total income" in Section 80B(5) would mean total income computed in accordance with the provisions of the Act before making any deductions under Chapter VI-A and what is included in the gross total income is a particular quantum of income belonging to the specified category. Therefore, the words "such income by way of profits and gains derived from an industrial undertaking referred to in Section 80HH" must be referable not only to the category of income but also to the quantum of income included in the gross total income and, therefore, such income belonging to a specified category and forming part of the gross total income is required to be computed in accordance with the provisions of the Act. On a bare reading of the provisions of Section 80HH along with Section 80B(5), it is clear that even prior to the Finance No. 2 Act of 1980, Parliament had clearly intended to say that what is included in the gross total income is not only a specified category of income but also a particular quantum of income belonging to that specified category. The Finance (No. 2) Act of 1980, has merely made the position which was implicit explicit. Section 80AB is clearly declaratory in nature like Section 80AA and it merely declares what the correct position has always been. In the case of H.H. Sir Rama Varma Vs. Commissioner of Income Tax, Kerala, , the Supreme Court has held that Section 80AB 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. Therefore, in any view of the matter, it is clear that even without Section 80AB, the profits and gains derived from an industrial undertaking referred to in Section 80HH have to be computed in accordance with the provisions of Sections 30 to 43A.
Whereas,the Division Bench in the case of Scoop Industries Limited (cited supra), has observed as under:
The logic behind the deductibility of depreciation while computing the eligible profits for Chapter VI-A, is because if the depreciation is not reduced while computing the income, the assessee would claim deduction on the gross amount of income and that would amount to making more deduction under Chapter VI-A, that what the assessee is entitled to. It may be also noted that by not claiming depreciation, the assessee is in fact claiming higher deduction under Chapter VI-A, and at the same time keeping the written down value of its assets high) because if depreciation is claimed, the written down value would be reduced by the amount of depreciation actually allowed). The assessee would claim depreciation on such high written down value in the subsequent year. Thus, by not claiming depreciation in the years in which the assessee is entitled to deduction under Chapter VI-A, the assessee claims a double advantage (i) claiming a higher deduction under Chapter VI-A, than its entitlement, (ii) keeping the written down value of assets high resulting in higher claim of depreciation in the subsequent years.
According to Mr Dastur both the above judgments do not go hand in hand and the conflict needs to be resolved by making reference to a Larger Bench.
Consideration:
Having heard both parties before going to the merits of the controversy, let us first examine whether any conflict exists between two views, one taken in Grasim Industries Limited and another Scoop Industries Limited by two Judge Benches of this Court.
If one turns to the judgment of Grasim Industries Limited, this Court in the context of Section 80AB and 80HH has observed at page 682, "in the case of Distributors (Baroda) Pvt. Ltd. Vs. Union of India (UOI) and Others, has categorically laid down that the expression "gross total income" in Section 80B(5) would mean the total income computed in accordance with the provisions of the Act before making any deductions under Chapter VI-A and what is included in the gross total income is a particular quantum of income belonging to the specified category. Therefore, the words "such income by way of profits and gains derived from an industrial undertaking referred to in Section 80HH" is referable not only to the category of income but also to the quantum of income included in the gross total income and, therefore, such income belonging to a specified category and forming part of the total income is required to be computed in accordance with the provisions of the Act."
At another place on the same page while referring to Section 80AB this Court observed "profits and gains derived from an industrial undertaking referred in Section 80HH have to be computed in accordance with the provisions of the Sections 30 to 43A of the Act". In other words, the income of Section 80HH undertaking included in the gross total income is the quantum of income eligible for deduction u/s 80HH where depreciation is not claimed, then, such income included in the gross total income will be larger figure i.e. larger to the extent of depreciation disclaimed and it is this larger income included in the gross total income which would qualify for deduction u/s 80HH of the Act. To illustrate, if the figure of income is Rs. 100/- and allowable depreciation claimed is Rs. 20/- then for the purpose of allowable special deduction under Chapter VI-A of the Act, the gross total income would be Rs. 80/-. In case of disclaimer of depreciation for the purpose of allowable special deduction under Chapter VI-A, the gross total income would be Rs. 100/- as per Grasim Industries. Because as per this judgment the category of income and quantum thereof included in the gross total income has to be one and the same.
In Scoop Industries Ltd. the assessee for the purposes of Chapter IV-D has an option to disclaim depreciation but not for the purposes of Chapter VI-A of the Act. Now, one has to understand the judgment of Scoop Industries Ltd. with the help of the same illustration. In the event, the income is Rs. 100/- and allowable depreciation is Rs. 20/- then notwithstanding disclaimer of depreciation by the assessee for the purpose of regular assessment, he will be entitle to claim allowable special deduction under Chapter VI-A only after deducting the element of depreciation i.e. Rs. 100/- minus Rs. 20/- = Rs. 80/-. He will be entitled to claim Rs. 80/-only by way of allowable special deduction under Chapter VI-A of the Act. The quantum of income as per Scoop Industries case, for regular assessment and allowable special deduction would be different and not one and the same as ruled in Grasim Industries case.
Having understood the judgments of the two coordinate Benches of this Court in their proper perspective i.e. in the case of Grasim Industries Limited and also in the case of Scoop Industries Ltd., this Court has no hesitation to hold that Mr Dastur could successfully demonstrate that both the judgments of this Court do not go hand-in- hand. They run counter to each other warranting reference to a Larger Bench for authoritative to pronouncement on the issue framed hereinbelow.
The Issue Referred:
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?
Registry is directed to place the papers before the Hon''ble Chief Justice for appropriate orders.