2012 (4) TMI 371 - AT - Income Tax

Deduction u/s 10A/10B - Tribunal not allowed the deduction under sections 10A/10B on Rs. 14,31,96,372/- representing the amount of depreciation, which was not claimed but allowed by the AO while computing deduction - held that - all expenses and allowances, deductible or not deductible, covered under these sections starting from 30 and ending with 43D have to be necessarily given full effect to for the purposes of computing income from business under section 28. The income so determined, in the absence of any definition of profits of business given in section 10A, shall constitute profits of the business . As section 32 granting depreciation is included in sections 30 to 43D, there is no reason for excluding it for the purposes of computing the profits of the business of the undertaking. Assessee contended that the judgment of Indian Rayon Corpn. Ltd. (2003 -TMI - 11904 - BOMBAY High Court) should not be applied to section 10A because that judgment deals with deduction u/s 80HHC - held that - The contention of the assessee would have merited acceptance if cognizance of the judgment in Indian Rayon Corpn. Ltd. s (2003 -TMI - 11904 - BOMBAY High Court) had been taken while interpreting section 80HHC. Since we are concerned with sections 10A/10B having no definition of the expression profits of the business , there is no scope for arguing that the judgment in the case of Indian Rayon Corpn. Ltd. (supra) is not applicable which, in fact, has interpreted the expression profits of the business in the context of section 80HH without there being any specific definition of it. Clause (i) of sub-section (6) makes it clear that in computing the total income of the assessee for the eleventh year (i.e. after the expiry of the benefit u/s 10A for the first ten assessment years), depreciation u/s.32 shall be computed on the written down value of the fixed assets as reduced by the full amount of depreciation allowable for the ten relevant assessment years from the actual cost of the assets. Further, clause (iv) makes it clear that the written down value of any asset used for the business of the undertaking in the eleventh year shall be computed as if the assessee had claimed and had been actually allowed the deduction in respect of depreciation for each of the relevant assessment years. We are unable to either expressly find or infer from the language of subsection (6) that in the first ten relevant assessment years, the assessee has a choice to claim or skip depreciation and if he chooses to dispense with the depreciation, then to compute the profits of business and the resultant deduction on the amount of profit before depreciation. The profits of the business for all the years in the first block need to be computed by considering that any expenditure or allowance which contributed to the earning of income and is permissible u/ss 28 to 43D, must be allowed. If that is the position, then it is difficult to accept that the assessee should be allowed to compute profits of business during the currency of the years of deduction u/s 10A without reducing the amount of depreciation. - the ld. CIT(A) has taken an unimpeachable view in echoing the action of the AO in deducting depreciation of Rs. 14.31 crore and odd from the profits of business for the purposes of computing deduction under sections 10A/10B. - Decided against the assessee.

Summary

Issues Involved:
1. Applicability of the judgment in Indian Rayon Corpn. Ltd. v. CIT to the present case.
2. Whether depreciation must be allowed while computing eligible income for deduction under sections 10A/10B.

Issue-wise Detailed Analysis:

1. Applicability of the Judgment in Indian Rayon Corpn. Ltd. v. CIT:
The Tribunal initially did not allow the deduction under sections 10A/10B on Rs. 14,31,96,372/- representing the amount of depreciation, referencing the judgment in Indian Rayon Corpn. Ltd. v. CIT. The assessee contended that this judgment was not applicable as the facts differed, specifically noting that in Indian Rayon Corpn., the claim for depreciation was made after claiming deduction under section 80HH. The Tribunal recalled the order to give the assessee an opportunity to be heard on the applicability of this judgment.

The Tribunal noted that in Indian Rayon Corpn. Ltd., the Bombay High Court held that profits derived from a newly started undertaking must be computed according to sections 29 to 43A, including depreciation. The Tribunal found that this judgment was applicable to the present case as both involved the computation of profits for deduction purposes, and there was no specific definition of "profits of the business" in section 10A, similar to section 80HH.

2. Whether Depreciation Must Be Allowed While Computing Eligible Income for Deduction Under Sections 10A/10B:
The assessee argued that depreciation should not be mandatory for computing eligible income under sections 10A/10B, citing the Supreme Court's judgment in CIT v. Mahendra Mills, which held that an assessee cannot be forced to claim depreciation. However, the Tribunal noted that Explanation 5 to section 32, inserted by the Finance Act 2002, mandates that depreciation shall be allowed whether or not the assessee claims it.

The Tribunal examined the provisions of section 10A, particularly sub-section (6), which indicates that depreciation must be considered as if it had been claimed and allowed during the years of deduction. The Tribunal concluded that the profits of the business must be computed in a commercial sense, which includes allowing depreciation. The Tribunal held that the assessee's method of computing profits without depreciation was not permissible, as it would lead to higher profits and deductions, contrary to the statutory provisions.

The Tribunal upheld the CIT(A)'s decision to deduct Rs. 14.31 crore of depreciation from the profits of the business for computing the deduction under sections 10A/10B, finding the approach consistent with the judgment in Indian Rayon Corpn. Ltd. and statutory requirements.

Conclusion:
The Tribunal found that the judgment in Indian Rayon Corpn. Ltd. was applicable and that depreciation must be allowed while computing eligible income for deduction under sections 10A/10B. The appeal was partly allowed, upholding the CIT(A)'s order on the issue of depreciation.