2015 (3) TMI 576 - HC - Income Tax

Computation of deduction under Section 80HHC - entire loss of Filati unit Should be set off against the profits of Seide unit before computing deduction under Section 80HHC and not only the loss which does not fall within the ambit of exclusion under Section 10B as held by tribunal - Held that - Identical questions as contained in substantial questions of law arose for consideration before this Court in CIT & ACIT Versus M/s SASKEN COMMUNICATION TECHNOLOGIES LTD 2014 (1) TMI 1538 - KARNATAKA HIGH COURT . However, the Court was considering Section 80HHE which is in paramateria to Section 80HHC. After considering the arguments and relevant provisions, the said question was answered in favour of the assessee Depreciation claim - Tribunal held that depreciation has to be allowed irrespective of the fact that the Assessee has not claimed depreciation in the Return of Income? - Tribunal held that depreciation is to be allowed in respect of the ASSESSMENT YEARS 2001-02 i.e., prior to insertion of/coming into force of Explanation 5 to 32 - Held that - The Apex Court in Mahindra Mill s case 2000 (3) TMI 3 - SUPREME Court was not merely interpreting Section 34. It was interpreting Sections 28 to 43A and the scheme of the Act and has made it very clear that the assessee is not bound to claim depreciation nor the revenue can grant depreciation even without his asking. If claiming depreciation is not in the interest of the assessee, Income Tax Officer has an obligation to advise him suitably. At any rate, this was the law as on that date in view of the judgment of the Apex Court. That probably the reason why it became necessary to introduce the explanation 5. Explanation 5 makes it clear that for the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income. Though the words for removal of doubts has been interpreted, the said provision is clarificatory in nature. In the instant case, clarification becomes necessary because of the law laid down by the Apex Court and therefore from the day explanation is introduced, the area is covered by legislation, the Supreme Court judgment would have no application. Therefore Explanation 5 is necessarily to be read as prospective in nature. Admittedly, in the instant case, the explanation has no application to the Assessment year 2001-02 as the explanation was inserted with effect from 01.04.2002. Therefore, the view taken by the Tribunal is incorrect and requires to be interfered with. Decided favour of the assessee.

Issues:
1. Deduction under Section 80HHC for exports made by Seide Unit.
2. Claiming depreciation for Seide Unit.
3. Application of Explanation 5 to Section 32 of the Income Tax Act.
4. Treatment of loss from Filati Unit.
5. Computation of deduction under Section 80HHC.
6. Interpretation of total turnover for computing deduction under Section 80HHC.

Analysis:

1. Deduction under Section 80HHC for exports made by Seide Unit:
The assessee claimed deduction under Section 80HHC for exports made by the Seide Unit but did not claim depreciation for the assets of the Seide Unit. The Assessing Officer restricted the claim of set off under Section 80HHC by setting off the entire loss from Filati Unit before determining the deduction under Section 80HHC. The Tribunal held that the entire loss of the Filati Unit should be set off against the profits of the Seide Unit before computing the deduction under Section 80HHC.

2. Claiming depreciation for Seide Unit:
The Assessing Officer observed that the assessee did not claim depreciation for the Seide Unit, and the Explanation 5 to Section 32 of the Act is clarificatory in nature. The Commissioner of Income Tax (Appeals) held that the Explanation 5 was not applicable for the assessment year 2001-02. However, the Tribunal disagreed and allowed depreciation irrespective of the assessee's claim, stating that the Assessing Officer is duty-bound to grant depreciation.

3. Application of Explanation 5 to Section 32 of the Income Tax Act:
The Tribunal held that Explanation 5 to Section 32 is clarificatory and applies whether or not the assessee has claimed the deduction in respect of depreciation. The Tribunal emphasized that the Explanation was introduced to remove doubts created by previous interpretations, making it prospective in nature and not applicable to the assessment year 2001-02.

4. Treatment of loss from Filati Unit:
The Tribunal held that the loss of the Filati Unit must be reduced from the profits of the Seide Unit before computing deductions under Section 80HHC. The Tribunal emphasized that the deduction under Section 10B is available only in respect of profits and cannot be ignored when the entity incurs a loss.

5. Computation of deduction under Section 80HHC:
Both appellate authorities held that once the assessee has determined the loss in the 10B Unit, there was no need to reduce the turnover of the 10B Unit from the total turnover for computing the deduction under Section 80HHC. The Tribunal considered the two units as belonging to the same assessee and granted the benefit of not reducing the turnover of the 10B Unit from the total turnover.

6. Interpretation of total turnover for computing deduction under Section 80HHC:
The Appellate Authorities did not consider the definition of total turnover prescribed under Section 80HHC of the Act, which identifies items to be excluded from the total turnover. The Tribunal's decision was considered perverse by the appellants, challenging the exclusion of certain items from the total turnover for computing the deduction under Section 80HHC.

In conclusion, the High Court allowed the appeals filed by the assessee and dismissed the appeals by the revenue, emphasizing the correct application of deductions, treatment of losses, and the prospective nature of Explanation 5 to Section 32 of the Income Tax Act.

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