Bombay H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was justified in coming to the conclusion that depreciation allowance ought to be deducted while computing the total income for the purposes of deduction under s. 80HH ?

High Court Of Bombay

Indian Rayon Corpn. Ltd. vs. CIT

Sections 80HH

Asst. Year 1976-77

S.H. Kapadia & J.P. Devadhar, JJ.

IT Ref. No. 571 of 1987

22nd January, 2003

Counsel Appeared

J.D. Mistry with R. Thakkar, for the Applicant : R.V. Desai with P.S. Jetley, for the Respondent

JUDGMENT

S.H. KAPADIA J. :

At the behest of the assessee, the Tribunal has referred the following question of law for our opinion under s. 256(1) of the IT Act. The reference concerns asst. yr. 1976-77. The question referred is as follows : “Whether, on the facts and in the circumstances of the case, the Tribunal was justified in coming to the conclusion that depreciation allowance ought to be deducted while computing the total income for the purposes of deduction under s. 80HH ?”

Facts

2. In the return for assessment year in question, the assessee claimed deduction under s. 80HH as follows : Rs. Profits as per P&L a/c 77,96,076 Less : Development rebate 9,32,677 68,63,399 On this amount of Rs. 68,63,399, the assessee claimed relief under s. 80HH at the rate of 20 per cent, amounting to Rs. 13,72,600. The said computation of the assessee was made, by placing reliance on s. 32(2) of the IT Act. According to the assessee, in s. 32(2) of the Act, the word “chargeable” should be interpreted to signify the amount of profits and gains computed, after deducting therefrom the deductions permissible under ss. 80HH and 80J. That, the effect would be that to the extent of deduction, the profits and gains would not be chargeable. In this connection the assessee relied upon the judgment of the Kerala High Court in the case of Indian Transformers Ltd. vs. CIT (1972) 86 ITR

192 (Ker). This argument was rejected by the AO. The AO determined the allowable deduction under s. 80HH as follows: : Rs. Rs. Profit as per P&L a/c. 77,96,076 Less: Depreciation 87,76,690 Development rebate 9,32,677 97,09,367 Nil.

5. Being aggrieved, the assessee went in appeal to the CIT. The first appellate authority rejected the contention of the assessee. It took the view that depreciation has got to be taken into account for determination of profits derived from industrial undertaking whether it is determination of profits of business in accordance with the Act or it is determination of true profits under proper principles of accountancy. In the circumstances, the assessee’s claim for deduction under s. 80HH, without taking into consideration current depreciation, came to be rejected. Being aggrieved, the assessee carried the matter in appeal to the Tribunal. Relying on the judgment of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. vs. CIT 1978 CTR (SC) 50 : (1978) 113 ITR 84 (SC), the Tribunal took the view that the AO was justified in deducting depreciation and development rebatewhile computing the total income for the purposes of s. 80HH. Being aggrieved, the assessee has come by way of reference.

Scope of the IT Act

6. Before coming to the arguments advanced on behalf of the assessee, the following sections of the IT Act needs to be looked into. Sec. 4(1) refers to charge of income-tax. It states, inter alia, that income-tax shall be charged in accordance with and subject to the provisions of the Act in respect of total income of the previous year. Sec. 5(1) refers to scope of total income. It states that the total income of any previous year includes all income from whatever source derived. Sec. 2(45) defines “Total income” to mean income computed as per the provisions of the Act. Chapter III refers to incomes which do not form part of total income. Sec. 10 states that in computing total income any income falling within any of the clauses in s. 10 shall not be included. Chapter IV deals with computation of total income. Sec. 14 states inter alia, that all income shall, for purposes of computation, be classified under stipulated heads of income. In this case, we are concerned with the head “Profits & gains of business or profession”. Sec. 28 refers to computation of income under the head “Profits & gains of business”. Sec. 29 states that the income under the head “Profits & gains of business” shall be computed in accordance withs. 30 to s. 43A. Sec. 32 refers to depreciation. Sec. 32(1) states that in respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business, certain deductions shall be allowed. Sec. 32(2), which is heavily relied upon in this case by the assessee, inter alia, provides for carry forward of depreciation allowance in cases where it is not possible to set off such allowance against profits owing to absence of such profits or gains chargeable for the previous year or owing to such profits or gains chargeable, being less than the allowance (emphasis, italicised in print, supplied). Sec. 70(1), inter alia, states that where the net result for any assessment year in respect of any source falling under any head of income other than “capital gains” is a loss, then the assessee shall be entitled to have such loss set off against his income from any other source under the same head. Sec. 72 refers to carry forward and set off of business losses. Sec. 72(1) states that where the net result of the computation under the head “Profits & gains of business” is a loss and such loss cannot be set off against income under any head then such loss could be carried forward to the following year and it could be set off against business profits, it any, accruing during that following assessment year.

Chapter VI-A refers to deductions to be made in computing total income. Chapter VI-A refers to special types of deductions. Chapter VI-A refers to special deductions to be made for computing total income. Sec. 80A(1) states that in computing the total income, there shall be allowed from gross total income, in accordance with and subject to the provisions of Chapter VI-A, the deductions specified in s. 80C to s. 80VV, which includes s. 80HH, which arises for interpretation, once again, in this case. Sec. 80A(2) states that the aggregate amount of deductions under Chapter VI-A shall not exceed the gross total income of the assessee. Sec. 80B(5) defines “gross total income” to mean total income computed in accordance with the provisions of the Act, before making any deduction under Chapter VI-A. Sec. 80HH comes under cl. C to Chapter VI-A, deductions in respect of certain incomes. Sec. 80HH refers to deduction in respect of profits and gains from newly established industrial undertakings in backward areas. It lays down that where gross total income of an assessee includes profits and gains derived from such industrial undertaking then, there shall be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to 20 per cent. In other words, where the gross total income of an assessee includes certain types of incomes falling in cl. C hereinabove then, while computing the total income of the assessee, a deduction of 20 per cent is required to be made from profits of such undertaking computed as per the Act. In this case, we are concerned with income derived from newly established industrial undertaking in backward area. In other words, in cases where gross total income includes profits from newly established undertaking, one has to compute such profits and gains derived from newly established undertaking in backward area in accordance with the provisions of the Act so as to form part of gross total income and after so computing, one must deduct 20 per cent thereof from gross total income to arrive at total taxable income. This is the ratio of the judgment of the Supreme Court also in the case of Cambay Electric Supply Industrial Co. Ltd. (supra).

The conspectus of the above sections show that income-tax is a charge on an assessee in respect of his total income computed in accordance with the provisions of the Act. However, in cases where the total taxable income comprises of profits derived from newly established undertaking under s. 80HH, then such profits have got to be computed separately as laid down by the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. (supra) as if it concerns a separate assessee. While calculating such profits, we must bear in mind ss. 29 to 43A of the Act. Hence, depreciation has got to be set off as an expense against gross income of the newly established undertaking in order to arrive at profits and gains of newly established undertaking. Hence net profits as per P&L a/c of newly established undertaking would be computed, after taking depreciation into account and 20 per cent of such net profit would be deductible from the gross total income of the assessee to arrive at total income of the assessee. It needs to be clarified that in this case, we are concerned with computation of total income of an assessee who seeks relief under s. 80HH. In this case, the assessee has claimed depreciation allowance. It is important to note that in cases of computation of normal income, without seeking benefit of special deduction under Chapter VI-A, an assessee is free not to claim depreciation in view of the judgment of the Supreme Court in the case of CIT vs. Mahendra Mills (2000) 159 CTR (SC) 381 : (2000) 243 ITR 56 (SC), but if the assessee claims depreciation, then such depreciation will be set off as any other expense against gross income. Further, if such an assessee claims deduction under Chapter VI-A, then to calculate profits and gains of newly established undertaking, depreciation allowance has got to be set off against gross income of newly established undertaking to arrive at profits computed in accordance with the provisions of the Act, which profits would form part of gross total income and which would be exigible to 20 per cent deduction. The reason is that Chapter VI-A deals with special types of income. The deduction of 20 per cent is not to be equated with depreciation, which is an ordinary expense. The idea under the above formula is that the assessee should not claim more than what he is entitled to. Take the case of s. 80HHC under which deduction is given in commensuration with the foreign exchange, which the assessee brings in. Therefore, if an assessee claims deduction under s. 80HHC, depreciation has got to be set off against gross income. Our view is supported by the judgment of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. (supra)

Point at issue

7. Before considering the arguments one must be clear on the nature of dispute, which is spelt out by the following illustration. Illustration Computation of deduction under s. 80HH according to AO Assessee has claimed depreciation of Rs. 75. Therefore, the AO has set off Rs. 75 against the gross income of Rs. 100 derived from newly established undertaking, leaving a balance profit of Rs. 25. This sum of Rs. 25 is exigible to 20 per cent deduction [see the judgment of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. (supra)] under s. 80HH. Consequently, the AO has computed deduction under s. 80HH, which is reduced from gross total income leaving the taxable profit at Rs. 20. Computation of deduction under s. 80HH by the assessee Assessee sets off Rs. 20 (i.e., 20 per cent deduction under s. 80HH) against gross income of Rs. 100 without depreciation. Hence assessee applies 20 per cent benefit of Rs. 20 under s. 80HH leaving the balance profits at Rs.

80 from which the assessee sets off Rs. 75 as depreciation and returns taxable profit of Rs. 5. This illustration shows that the assessee has not disclaimed depreciation. This illustration illustrates the basic controversy.

Arguments

8. Mr. Mistry, learned counsel appearing on behalf of the assessee firstly contended that deduction under s. 80HH should be calculated with reference to income net of depreciation. That, the said deduction should be with reference to the profits of the newly established undertaking before charging depreciation. That, under s. 32(2) if, in a given case, there were no profits and gains chargeable, then depreciation was required to be carried forward. That the words “chargeable” in s. 32(2) refers to profits and gains computed after deducting therefrom special deductions under Chapter VI-A, which included s. 80HH because the effect of such deductions was that, to the extent of such deductions, profits and gains were not chargeable. He also relied upon s. 4 of the IT Act. He submitted that if one reads s. 32(2) with s. 4 of the IT Act then it is clear that deduction under s. 80HH should be first made from profits and gains of the concerned newly established undertaking, without depreciation. In this connection, he invited our attention also to s. 80B(5) which defines gross total income to mean total income computed in accordance with the provisions of the Act. Mr. Mistry contended that s. 4 of the IT Act imposes a charge of tax in respect of the total income. That the word “total income” has been defined under s. 2(45) to mean total amount of income computed in the manner laid down in the Act. Therefore, he contended that if one reads s. 80HH, which provides for computation of deduction at 20 per cent, it is clear that one must take into account the total profits of the unit, without depreciation and apply to it the special rate of 20 per cent. He contended that only by such methodology one can give effect to the special provisions of Chapter VI-A. Mr. Mistry, in the alternative submitted that in several cases decided by this Court dealing with computation of deductions under Chapter VI-A, it has been held that profits and gains of newly established undertaking shall be computed in accordance with the provisions of the Act. In this connection, he cited the following judgments of the Bombay High Court to which one of us (Kapadia, J.) was a party, in the case of CIT vs. Gannon Dunkerlay & Co. Ltd. (1993) 114 CTR (Bom)

22 : (1995) 216 ITR 708 (Bom), in the case of CIT vs. Albright Morarji & Pandit Ltd. (1999) 154 CTR (Bom) 455 : (1999) 236 ITR 914 (Bom) and in the case of Grasim Industries Ltd. vs. Asstt. CIT (2000) 163 CTR (Bom) 486 : (2000) 245 ITR 677 (Bom). However, Mr. Mistry contended that all these judgments were delivered prior to the judgment of the Supreme Court in the case of Mahendra Mills (supra). He contended that in the case of Mahendra Mills (supra), it has been held by the apex Court now that business profits can be computed, net of depreciation if the assessee disclaims such depreciation allowance. Mr. Mistry, therefore, contended that one has to read s. 80HH in the light of the judgment of the Supreme Court in Mahendra Mill’s case (supra) and if so read, he contended that it is clear that deduction under s. 80HH should be made from profits and gains of the concerned units computed in accordance with the provisions of the Act which covers s. 29 to s. 43A of the IT Act as it stood at the relevant time and since s. 32(2) is a part of those provisions, the computation of profits of newly established undertakings could be made, net of depreciation provided the assessee opts not to claim depreciation allowance.

9. Mr. R.V. Desai, learned senior counsel appearing on behalf of the Department has relied upon the above judgments of the Bombay High Court and submitted that the arguments of the assessee had no merits. He contended that in view of the judgment of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. (supra) the point at issue has been resolved. He submitted that in the said judgment of the Supreme Court it has been unequivocally laid down that items like depreciation and development rebate have to be deducted in arriving at the figure which would be exigible to deduction at 20 per cent under s. 80HH. He clarified that the judgment of the Supreme Court was dealing with s. 80E, which was also a special deduction under Chapter VI-A for which the rate prescribed was 8 per cent and not 20 per cent. However, the principle laid down by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd.’s case (supra) would equally apply to the facts of this case. Mr. R.V. Desai further submitted that the judgment of the Supreme Court in the case of Mahendra Mills (supra) had no application to the facts of this case. He contended that the only argument advanced before the Supreme Court in that matter was whether the assessee was free to disclaim/not to claim depreciation allowance while computing profits and gains of business. It is in that light that the Supreme Court has held, after considering the provisions of ss. 28, 29, 32 and 34 with the circulars issued by CBDT that the AO cannot grant depreciation allowance when the same is not claimed by the assessee. Mr. Desai contended that in the case of Mahendra Mills (supra), applicability of special deductions under Chapter VI-A was not in issue. He, therefore, contended that Mahendra Mill’s case (supra) did not apply to the present controversy. Mr. R.V. Desai further pointed out that in any event in this case the assessee has not disclaimed depreciation. He submitted that on the contrary the assessee claims deduction of Rs. 75 in its entirety and he also claims full deduction at 20 per cent under s. 80HH as could be seen from the example given hereinabove. In the circumstances, he submitted that the entire attempt of the assessee was to maximize the deduction under s. 80HH at the cost of distorting the computation of true profits.

Findings

10. The only question which arises for determination in this case is the amount of depreciation which should be set off while computing profits and gains derived by the assessee from newly established undertaking covered by s. 80HH. The point at issue is amply clear from the illustration given hereinabove under the caption “Point at issue”. The illustration indicates that the assessee has not disclaimed depreciation. The point, therefore, to be noted is that the assessee has also claimed depreciation, but at a later stage and, therefore, the judgment of the Supreme Court in Mahendra Mills’ case (supra) has no application. According to the assessee the profits derived from the unit was Rs. 100 because under s. 32(2) r/w s. 4 of the IT Act, the chargeability was in respect of the total income and, therefore, the rate of 20 per cent was applicable to the total income of Rs. 100 without deducting depreciation. Secondly, in any event, the controversy in Mahendra Mill’s case (supra) was not concerning deductions under Chapter VI-A of the IT Act. Therefore, that judgment would not apply to this case. The important distinction, which is required to be noticed in this case, is that we are required to compute total taxable income of the assessee who has claimed special deduction under Chapter VI-A. For that purpose, one has to keep in mind provisions of ss. 80B(5) and 80AB. Consequently, s. 80HH, inter alia, lays down that if the gross total income includes profits from newly established undertaking then 20 per cent of such profits would be deductible from gross total income in order to arrive at total taxable income. That, in such a case, profits derived from newly established undertaking shall be computed in accordance with the provisions of the Act i.e., s. 29 to s. 43A. Therefore, net profit will have to be computed in accordance with the provisions of the Act. The argument of the assessee is that in view of the judgment of the Supreme Court in Mahendra Mill’s case (supra), it is open to the assessee not to claim depreciation allowance under s. 32 and consequently it is argued that 20 per cent rate of deduction should be applied to Rs. 100 in the above illustration, without taking into account the depreciation. We do not find any merit in this argument. The scheme of s. 4 and s. 5 of the IT Act does indicate that income-tax is a tax in respect of income computed as per the provisions of the Act. There is a distinct dichotomy between cases of computation of normal income under the Act de hors Chapter VI-A and computation of taxable income where the assessee claims the benefit of deduction under Chapter VI-A because the legislature has intended that these special deductions should be restricted to the profits derived from newly established undertaking. To give an illustration, export profits under s. 80HHC are required to be restricted to the receipt of foreign exchange. If this object is kept in mind, then it is clear that the analogy of s. 32(2) given by the assessee will not apply in cases where an assessee claims special deduction under Chapter VI-A. The matter can be looked at from another angle. While computing normal income, an assessee may set off depreciation against its gross income. In such cases, depreciation is like any other ordinary expense. However, such depreciation cannot be equated with special deduction under Chapter VI-A. In any event, in this case, on facts, the assessee claims depreciation of Rs. 75 from the balance income of Rs. 80 and, therefore, the judgment of the Supreme Court in Mahendra Mill’s case (supra) has no application.

11. In the above judgments of the Bombay High Court, to which one of us (Kapadia, J.) was a party, it has been held inter alia, that Chapter VI-A of the IT Act deals with special deductions. That, Chapter VI-A, for the purposes of computing such deductions, constituted a separate code by itself. In order to compute the total taxable income of the assessee, deductions computed under s. 80HH have to be reduced from gross total income of the assessee. The question basically in this matter is concerning computation of deduction under Chapter VI-A in which s. 80HH falls. Profits and gains of newly established undertaking, therefore, have got to be computed as per the provisions of s. 29 to s. 43A and if the assessee claims relief under Chapter VI-A of the Act, then it is not open to the assessee to disclaim depreciation allowance. This is because Chapter VI-A is an independent code by itself for computing these special types of deductions. In other words, one must first calculate the gross total income from which one must deduct a percentage of incomes contemplated by Chapter VI-A. That such special incomes were required to be computed as per the provisions of the Act viz., s. 29 to s. 43A, which included s. 32(2). Therefore, one cannot exclude depreciation allowance while computing profits derived from newly established undertaking for computing deductions under Chapter VI-A. Therefore, the appellant’s claim for allowance of deduction under s. 80HH, without taking into consideration the current depreciation will have to be rejected. Conclusion For the above reasons, we answer the above question in the affirmative i.e. in favour of the Department and against the assessee. Accordingly, the income-tax reference is disposed of with no order as to costs.

[Citation : 261 ITR 9]

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