2009 (10) TMI 39 - HC - Income Tax

Computation of gross total income manner of claiming special deduction under chapter VI-A deduction of depreciation allowance held that - 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 - 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

Summary

Issues Involved:
1. Whether the gross total income for availing special deduction under Chapter VI-A of the Income-tax Act should be computed by deducting allowable depreciation even if the assessee disclaimed it for regular assessment.

Detailed Analysis:

Background and Facts:
The case revolves around the interpretation of Section 80-IA of the Income Tax Act, 1961, particularly whether depreciation must be deducted when computing gross total income for special deductions under Chapter VI-A, even if the assessee disclaimed it. The assessee, a company involved in manufacturing, did not claim depreciation in its return for AY 1997-1998. The AO reopened the assessment, arguing that gross total income should include depreciation, leading to a reassessment order that resulted in no deduction under Section 80-IA due to a computed loss.

Legal Provisions and Arguments:
1. Sections Involved:
- Section 32: Depreciation
- Section 34: Conditions for depreciation (deleted w.e.f. 1-4-1988)
- Section 80-IA: Special deduction for certain incomes
- Section 80A(2): Aggregate deductions not to exceed gross total income
- Section 80AB: Deduction to be made with reference to income included in gross total income
- Explanation 5 to Section 32(1): Mandatory allowance of depreciation w.e.f. 1-4-2002

2. Assessee's Argument:
- Citing the Supreme Court's decision in *C.I.T. v. Mahendra Mills*, the assessee argued that depreciation is optional and cannot be forced upon them if not claimed.
- The deletion of Section 34(1) and (2) did not affect the optional nature of claiming depreciation.
- Explanation 5 to Section 32(1) applies prospectively from 1-4-2002, hence not applicable for AY 1997-1998.

3. Revenue's Argument:
- Depreciation is mandatory for computing gross total income under Chapter VI-A, irrespective of whether claimed by the assessee.
- The Supreme Court's decision in *Mahendra Mills* does not apply to deductions under Chapter VI-A.
- The decision in *Liberty India* clarified that deductions under Chapter VI-A are profit-linked and must be computed after considering all allowable deductions, including depreciation.

Court's Analysis:
1. Interpretation of Mahendra Mills:
- The decision in *Mahendra Mills* was context-specific to Chapter IV and did not address Chapter VI-A deductions.
- Disclaiming depreciation cannot enhance the deduction under any other provision.

2. Chapter VI-A as a Separate Code:
- Sections 80-IA and 80-IB are self-contained codes for profit-linked incentives.
- Deductions under Chapter VI-A must be computed on profits after deducting all allowable expenses, including depreciation.
- Any attempt to inflate profits by disclaiming depreciation is not permissible.

3. Supreme Court Precedents:
- *Liberty India*: Deductions under Chapter VI-A are linked to operational profits, and devices to inflate profits must be rejected.
- *Distributors (Baroda) P. Ltd.*: Deductions under Chapter VI-A should be computed after deducting all allowable expenses.

4. Illustrative Example:
- The Court provided an example to illustrate that whether depreciation is claimed or not, the quantum of deduction under Section 80-IA must be computed after considering all allowable deductions.

5. Binding Nature of Observations:
- The Court upheld the general observations in *Indian Rayon* and *Scoop Industries*, aligning them with the Supreme Court's rulings.

Conclusion:
The Court held that for the purposes of deduction under Chapter VI-A, gross total income must be computed by deducting all allowable deductions under Sections 30 to 43D, including depreciation, even if the assessee disclaimed it in regular assessment. The quantum of deduction under Section 80-IA is not dependent on the assessee claiming or not claiming depreciation.

Judgment:
The reference was disposed of with the conclusion that gross total income for Chapter VI-A deductions must include all allowable deductions, including depreciation, regardless of whether it was claimed by the assessee in regular assessment. No order as to costs was made.