2017 (10) TMI 423 - SC - Income Tax

Claim of depreciation under Section 80-IA - Whether the eligible income of an undertaking in respect of which deductions available under Section 80-IA has to be reduced by the allowance of depreciation for the year even though the assessee has exercised the option not to claim depreciation under Section 32 in arriving at its income of the undertaking for the purposes of computing the assessee s income under the head profits and gains of business or profession? - Held that - As already mentioned that Full Bench of the Bombay High Court answered the reference by holding that depreciation had to be reduced for computing the profits eligible for deduction under Section 80-IA of the Act, as it was a complete code in itself. For arriving at the said conclusion, the Full Bench took note of the relevant provisions of Chapter VI-A, particularly, Section 80A, Section 80AB and Section 80B as well as Section 80-IA of the Act. Contrasting the provisions of Chapter VI-A with Chapter IV, the High Court remarked that whereas Chapter IV contains provision relating to the computation of total income under various heads of income as also the deductions that are allowable under each head, Chapter VI contains provisions relating to the aggregation of income and set off or carry forward of loss. Chapter VI-A of the Act, on the other hand, provides for special deductions that are allowed at such rates that are specified in the respective provisions on the gross total income of the assessee. Keeping in view the aforesaid scheme of these Chapters, the High Court distinguished the judgment of this Court in Mahendra Mills 2000 (3) TMI 3 - SUPREME Court and held it to be not applicable, when dealing with the cases under Section 80-IA of the Act. Not only Section 80-IA is a code by itself, it contains the provision for special deduction which is linked to profits. In contrast, Chapter IV of the Act, which allows depreciation under Section 32 of the Act is linked to investment. This Court has also made it clear that Section 80-IA of the Act not only contains substantive but procedural provisions for computation of special deduction. Thus, any device adopted to reduce or inflate the profits of eligible business has to be rejected. The assessees/appellants want 100% deduction, without taking into consideration depreciation which they want to utilise in the subsequent years. This would be anathema to the scheme under Section 80-IA of the Act which is linked to profits and if the contention of the assessees is accepted, it would allow them to inflate the profits linked incentives provided under Section 80-IA of the Act which cannot be permitted. - Decided against assessee.

Issues Involved:
1. Claim of depreciation under Section 80-IA of the Income Tax Act, 1961.
2. Interpretation of Section 32 of the Income Tax Act, 1961.
3. Applicability of the judgment in CIT v. Mahendra Mills (2000) 243 ITR 56.
4. Analysis of Chapter VI-A of the Income Tax Act, 1961.
5. Impact of Explanation 5 to Section 32 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Claim of Depreciation under Section 80-IA:
The primary issue in these appeals pertains to whether the claim for deduction on account of depreciation under Section 80-IA is optional for the assessees or mandatory while computing income under this provision. The Supreme Court analyzed the factual background, noting that the assessee did not claim depreciation while computing its income under the head "profits and gains of business," and claimed deduction under Section 80-IA based on such profits without reducing them by depreciation allowance.

2. Interpretation of Section 32:
Section 32 deals with depreciation and allows deductions from the profits and gains of business or profession. The Court referenced the Mahendra Mills case, where it was held that it is the choice of an assessee whether to claim or not to claim depreciation. However, this decision was rendered in the context of assessing business income under Chapter IV of the Act.

3. Applicability of the Judgment in CIT v. Mahendra Mills:
The Court distinguished the Mahendra Mills judgment, noting that it was rendered in the context of Chapter IV and not Chapter VI-A. The Full Bench of the Bombay High Court had held that the computation of profits and gains for the purposes of Chapter VI-A is different from the computation under Chapter IV. The Supreme Court agreed with this distinction, emphasizing that Section 80-IA is a special provision linked to profits and is a code by itself.

4. Analysis of Chapter VI-A:
Chapter VI-A provides for special deductions allowed on the gross total income of the assessee. The Supreme Court noted that the Full Bench of the Bombay High Court rightly concluded that for computing the deduction under Chapter VI-A, it was mandatory to consider depreciation. The Court cited the Liberty India case, which clarified that Sections 80-IA and 80-IB are codes by themselves containing both substantive and procedural provisions for computing the profits of the eligible business.

5. Impact of Explanation 5 to Section 32:
The Revenue argued that Explanation 5 to Section 32, added by the Finance Act, 2001, nullified the effect of the Mahendra Mills case and should be applied retrospectively. However, the Supreme Court found it unnecessary to delve into this aspect, as the interpretation of Section 80-IA itself sufficed to resolve the issue.

Conclusion:
The Supreme Court upheld the Full Bench judgment of the Bombay High Court, concluding that the quantum of deduction under Section 80-IA has to be determined by computing the gross total income from business after considering all deductions allowable under Sections 30 to 43D, including depreciation. The Court dismissed the appeals, emphasizing that Section 80-IA is a code by itself, linked to profits, and any device to inflate profits for enhanced deduction is impermissible.

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