2006 (2) TMI 222 - AT - Income Tax

Summary

Issues Involved:
1. Whether unabsorbed carry forward depreciation is to be deducted in computing the business profits for determining the deduction allowable under section 80HHC of the Income-tax Act.
2. Whether the Assessing Officer was justified in rectifying the order passed under section 250/143(3) by passing an order under section 154.
3. Whether brought forward unabsorbed depreciation can be deducted while computing the business profits for the purposes of computing the deduction under section 80HHC, which is a debatable issue, can be decided by the Assessing Officer by passing an order under section 154.

Detailed Analysis:

1. Deduction of Unabsorbed Carry Forward Depreciation:
The primary issue was whether unabsorbed carry forward depreciation should be deducted when computing business profits for determining the deduction under section 80HHC. The assessee argued that "profit of the business" should be adopted at Rs. 44,90,53,661 without adjusting the brought forward losses of Rs. 3,88,68,268. The CIT(A) rejected this claim, referencing the Supreme Court's decision in Cambay Electric Supply Industrial Co. v. CIT, which held that unabsorbed depreciation must be deducted before arriving at the figure for deduction under section 80HHC. The Tribunal upheld this view, stating that section 32(2) deems unabsorbed depreciation of earlier years as current year's depreciation, which must be deducted when computing the business profits.

2. Justification of Rectification by the Assessing Officer:
The second issue was whether the Assessing Officer was justified in rectifying the order under section 250/143(3) by passing an order under section 154. The Tribunal noted that the theory of merger applies only to issues in appeal before the CIT(A). Since the issue of deduction of unabsorbed brought forward depreciation was not considered by the CIT(A) in the appeal, the Assessing Officer was justified in rectifying the mistake in the original order. The Tribunal cited the decision of the Ahmedabad Tribunal in Monarch Foods (P.) Ltd. v. Asstt. CIT, which supported the rectification of such mistakes under section 154.

3. Debatable Issue and Section 154:
The third issue was whether the deduction of brought forward unabsorbed depreciation is a debatable issue that could be decided under section 154. The Tribunal concluded that the issue was not debatable due to the specific provision of section 32(2), which treats brought forward unabsorbed depreciation as current year's depreciation for computing business income. Hence, the Assessing Officer was within his rights to rectify the order under section 154.

Conclusion:
The Tribunal upheld the CIT(A)'s order, confirming that unabsorbed depreciation must be deducted when computing business profits for section 80HHC deductions. The Assessing Officer was justified in rectifying the order under section 154, as the issue was not considered by the CIT(A) and was not debatable due to the clear provisions of section 32(2). The appeal by the assessee was dismissed.