2006 (10) TMI 75 - HC - Income Tax

Special Deduction - Revenue contended that for computing total income the depreciation will have to be deducted before making any deduction under Chapter VI-A of the ITA 1961 but assessee view is contrary to the revenue contention - Held that revenue contention was correct and allowed

Summary

Issues Involved:
1. Whether the Income Tax Appellate Tribunal was justified in law in confirming the order of the Assessing Officer thrusting the depreciation which was not claimed in the return of income and rejecting the claim of deduction under section 80IA.
2. Whether on the facts and in law, the Appellate Tribunal is right in holding that the deduction under Chapter VIA has to be allowed only after allowing the depreciation under section 32 of the Act which has not been claimed in the return of income.

Issue-wise Detailed Analysis:

1. Justification of Thrusting Depreciation Not Claimed in the Return of Income:

The appellant, a Private Limited Company engaged in manufacturing industrial gases, claimed a deduction under section 80IA for its profits but did not claim depreciation under section 32 in its return, relying on the Supreme Court decision in CIT v. Mahendra Mills [2000] 243 ITR 56 (SC). The Assessing Officer, however, thrust the depreciation upon the appellant, rejecting the claim under section 80IA. The Commissioner of Income-tax (Appeals) allowed the appellant's appeal, referring to the decision in CIT v. Mahendra Mills and the Punjab & Haryana High Court in Ram Nath Jindal v. CIT [2001] 252 ITR 590, which supported the appellant's discretion not to claim depreciation. However, the Appellate Tribunal reversed this decision, following the Special Bench decision in Vahid Paper Converters v. ITO [2007] 289 ITR (AT) 10 (Ahmedabad), holding that depreciation must be deducted when computing profits for Chapter VIA deductions.

2. Deduction Under Chapter VIA After Allowing Depreciation Under Section 32:

The appellant's counsel argued that under normal provisions of the Act, an assessee could choose not to claim depreciation, and this choice should extend to computations under Chapter VI-A. The counsel cited CIT v. Mahendra Mills and CIT v. Shri Someshwar Sahakari Sakhar Karkhana Ltd. to support this position, emphasizing that the Tribunal's interpretation forcing depreciation was incorrect. The respondent's counsel, however, relied on the Division Bench judgment in Indian Rayon Corporation Ltd. v. CIT [2003] 261 ITR 98, which held that Chapter VI-A constituted a separate code requiring profits to be computed per sections 29 to 43A, including section 32. This meant depreciation could not be disclaimed when calculating deductions under Chapter VI-A.

The court noted that the Division Bench judgment in Indian Rayon Corporation Ltd. explicitly required depreciation to be considered before granting deductions under Chapter VI-A, aligning with the Tribunal's decision. The court underscored that the logic behind this requirement was to prevent assessees from claiming higher deductions under Chapter VI-A by excluding depreciation, which would result in a double advantage: higher deductions and higher Written Down Value for future depreciation claims.

Conclusion:

The court concluded that the Division Bench judgment in Indian Rayon Corporation Ltd. v. CIT was definitive, requiring depreciation to be deducted before computing deductions under Chapter VI-A. Consequently, the court answered both substantial questions of law in the affirmative, in favor of the Revenue and against the Assessee, thereby disposing of the Income Tax Appeals accordingly.