2005 (11) TMI 166 - AT - Income Tax

Deduction - Possibility of two views - Computation of income - Under general provisions vis-a-vis under Chapter VI-A - Whether, the depreciation which is though allowable but not claimed in the return for normal computation of income has to be allowed while computing the deductions under Chapter VI-A viz. sections 80HH, 80I-A, 80-IB, etc., of an industrial undertaking? - HELD THAT - The income for the purpose of Chapter VI-A is a mirror image of the income computed under the head Income from business'. Therefore, when the assessee can be permitted not to claim depreciation and the income can be computed without depreciation, the same income has to be the basis for Chapter VI-A Deduction. We are unable to accept the above contention of the learned counsel for the assessee. Exceptions are provided in Chapter VI-A itself. We can find these in sub-section (5) of section 80-IA providing that for the purpose of determining the quantum of deduction under this section, the profits and gains of the eligible business is to be computed as if such eligible business were the only source of income of the assessee. This provision overrides the other provisions of the Act which is clear from the sentence notwithstanding anything contained in other provisions of this Act . Thus, the separate computation of the profits and gains of the eligible business for the purpose of deduction under this section is the clear mandate of the Legislature. Sub-section (8) of section 80-IA provides another exception, i.e., where there is transfer of goods or services by the eligible business to any other business carried on by the assessee or vice versa and the consideration for such transfer as recorded in the accounts does not correspond to the market value of such goods, then for the purpose of deduction under this section the profits and gains of the eligible business is to be computed by taking the market value of such goods or services on the date of transfer. Therefore, though in the accounts the goods or services are transferred at a different rate and the said rate will be taken for the purpose of computation of profits and gains of business but for the purpose of computing the profits and gains of eligible business for the purpose of deduction u/s 80-IA, the profits and gains is to be re-computed by taking the market value of goods or services transferred to or from the eligible business. Two views stated t o be (i) the depreciation has to be allowed while determining the profit and gains of Industrial Undertaking for the purpose of computing deduction under Chapter VI-A. The view canvassed by the revenue is supported by the decisions of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. 1978 (4) TMI 1 - SUPREME COURT and Mettur Chemical Industrial Corpn. Ltd. 1995 (11) TMI 3 - SUPREME COURT , the decision of the Jurisdictional High Court in the case of Cadila Chemicals (P.) Ltd. 2001 (9) TMI 12 - GUJARAT HIGH COURT , Rajasthan High Court in the case of Vijay Industries 2004 (5) TMI 35 - RAJASTHAN HIGH COURT and the Bombay High Court in the case of Indian Rayon Corpn. Ltd. 2003 (1) TMI 58 - BOMBAY HIGH COURT ; (ii) The other view stated to be canvassed on behalf of the assessees that to claim or not to claim the depreciation is choice of the assessees and it cannot be thrust upon them even for the purpose of Chapter VI-A. This view is claimed to be supported by the decisions of the Supreme Court in the case of Mahendra Mills 2000 (3) TMI 3 - SUPREME COURT , Jurisdictional High Court in the case of Arun Textile 'C' 2000 (3) TMI 3 - SUPREME COURT , Bombay High Court in the case of Shri Someshwar Sahakari Sakhar Karkhana Ltd 1988 (12) TMI 92 - BOMBAY HIGH COURT . On the facts of these cases the assessees want to avail both the benefits and opt to pay lesser tax ultimately by resorting this type of disclaimer. In any case by virtue of deeming fiction that the Industrial Undertaking would be the only source of income for computing the income on that hypothesis, there is bound to be difference in both the incomes as well as written down values from year to year. Again the different written down values is for computing the income for the purpose of Chapter VI-A and would have no impinging effect in disturbing written down values for the purpose of section 43(6) in determining the income of the assessee u/s 29 of the Act. This contention of the assessees, therefore, has no decisive value for deciding the issue before us. We, therefore, hold that the depreciation, which is though allowable but not claimed in the return for 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. In the result, two appeals filed by the revenue, are allowed and remaining 24 appeals filed by the assessees are dismissed.

Summary

Issues Involved:
1. Whether depreciation, though allowable but not claimed in the return for normal computation of income, must be allowed while computing deductions under Chapter VI-A (sections 80HH, 80-IA, 80-IB, etc.) of an industrial undertaking.

Issue-wise Detailed Analysis:

1. Allowability of Depreciation for Chapter VI-A Deductions:

Facts and Background:
The President of the Income-tax Appellate Tribunal (ITAT) constituted a Special Bench to address whether depreciation, though allowable but not claimed in the return for normal computation of income, must be allowed while computing deductions under Chapter VI-A of the Income-tax Act. The case of Vahid Paper Converters was used as a representative example, where the assessee did not claim depreciation to reduce tax liability in subsequent years.

Assessing Officer's View:
The Assessing Officer recalculated the income of the industrial undertaking eligible for deduction under section 80-IB by allowing depreciation for the year under consideration. This was based on the opinion that not claiming depreciation was a tax avoidance strategy, which was not permissible as per the Supreme Court's ruling in McDowell & Co. Ltd. v. CTO.

CIT(A)'s View:
The CIT(A) upheld the Assessing Officer's decision, emphasizing that the method of computation of income should be consistent among all assessees. The CIT(A) referred to the Supreme Court's decision in Cambay Electric Supply Industrial Co. Ltd. v. CIT and the Bombay High Court's decision in Indian Rayon Corpn. Ltd. v. CIT, which supported the inclusion of depreciation while computing eligible income for deductions under Chapter VI-A.

Special Bench's Analysis:
The Special Bench examined the scheme of the Act for granting deductions under Chapter VI-A, focusing on sections 80A, 80AB, and 80B. It was noted that the gross total income must be computed in accordance with all provisions of the Act before making any deductions under Chapter VI-A. The Bench referred to the Supreme Court's decision in Cambay Electric Supply Industrial Co. Ltd., which mandated that income must be computed in accordance with sections 30 to 43A, including section 32 for depreciation.

Jurisdictional High Court's View:
The Gujarat High Court in CIT v. Cadila Chemicals (P.) Ltd. held that depreciation must be deducted before making any deduction under section 80HH. The Rajasthan High Court in Vijay Industries v. CIT and the Bombay High Court in Indian Rayon Corpn. Ltd. also supported this view.

Supreme Court's Precedents:
The Supreme Court in Cambay Electric Supply Industrial Co. Ltd. and Mettur Chemical & Industrial Corpn. Ltd. held that both unabsorbed and current depreciation must be deducted while computing eligible income for deductions under Chapter VI-A.

Assessees' Contentions:
The assessees argued that depreciation is a choice and cannot be thrust upon them if not claimed. They relied on the Supreme Court's decision in CIT v. Mahendra Mills, which was applicable for assessment years prior to 1-4-1988 when section 34 was still in effect. However, the Special Bench noted that this decision was not applicable for computing income for Chapter VI-A deductions post-1988.

Conclusion:
The Special Bench concluded that depreciation, though allowable but not claimed in the return for normal computation of income, must be allowed while computing deductions under Chapter VI-A. This decision was based on the legislative mandate and judicial precedents that emphasized computing income in accordance with all provisions of the Act, including section 32 for depreciation.

Result:
The appeals filed by the revenue were allowed, and the appeals filed by the assessees were dismissed. The Special Bench held that the Assessing Officer must allow depreciation while computing the profits derived from an industrial undertaking for the purpose of deductions under Chapter VI-A, even if the depreciation was not claimed by the assessee in their return.