Scoop Industries P. Ltd. v. Income-Tax Officer (And Connected Appeals)

Dr. S. Radhakrishnan, J.:— In all the above tax appeals the following two substantial questions of law have been raised which read as under-:

“(i) Whether the Income-tax Appellate Tribunal was justified in law in confirming the order of the Assessing Officer thrusting the depreciation which was not claimed in the return of income and reject the claim of deduction under section 80-IA?

(ii) Whether on the facts and in law, the Appellate Tribunal is right in holding that the deduction under Chapter VI-A has to be allowed only after allowing the depreciation under section 32 of the Act which has not been claimed in the return of income ?”

2. As the identical substantial questions of law are involved in all the above tax appeals, by this judgment and order, we are disposing of all the above ten tax appeals by this common judgment and order. To understand the controversy, we are giving the brief factual background in the first appeal and even in the other tax appeals the facts are identical excepting the amounts involved and the dates. As such we are not burdening the judgment with all those details regarding figures and dates.

3. As far as the first Tax Appeal No. 33 is concerned, the brief facts are:

(a) The appellant is a private limited company engaged in the business of manufacturing industrial gases. The appellant's industrial undertaking is an eligible unit under the provisions of section 80-IA of the Act. Thus, the appellant claimed deduction under section 80-IA to the extent of its profits amounting to Rs. 12,72,571. The return for the impugned assessment year was filed on November 9, 2000 and the income was shown at nil. The appellant in its return of income by way of a note mentioned that it is not claiming the depreciation allowable under section 32 relying on the decision of the apex court in the case of CIT v. Mahendra Mills, [2000] 243 ITR 56. The returns were the subject matter of scrutiny assessment. While passing the assessment order under section 143(3) of the Act the Assessing Officer rejected the appellant's claim on the ground that the word “shall” used in section 32 of the Act makes it obligatory on the part of the Assessing Officer to allow deduction for depreciation after deletion of sub-section (1) of section 34. The respondent was of the opinion that the legislative intent in deleting section 34(1) has to be understood as withdrawal of the discretion available to the assessee to claim deduction of depreciation under section 32 of the Act. The respondent rejected the claim of deduction under section 80-IA and computed the total income by thrusting the depreciation which was not claimed in the return of income.

(b) The appellant being aggrieved by the assessment order passed by the respondent preferred an appeal before the Commissioner of Income-tax (Appeals) (hereinafter referred to as the CIT(A)). The Commissioner of Income-tax (Appeals) referred to the decision of the apex court in the case of CIT v. Mahendra Mills, [2000] 243 ITR 56 and referred to the hon'ble Punjab and Haryana High Court decision in the case of Ram Nath Jindal v. CIT, [2001] 252 ITR 590 and held that the insertion of Explanation 5 by the Finance Act, 2001, to section 32 which comes into effect from the assessment year 2002-03 makes it clear that the assessee had an option not to claim depreciation as deduction for the earlier assessment years. The Commissioner of Income-tax (Appeals) allowed the appellant's appeal.

(c) The respondent being aggrieved by the order of the Commissioner of Income-tax (Appeals) preferred an appeal under section 253 before the Appellate Tribunal. The Appellate Tribunal referred to the various decisions and then followed the decision of the Appellate Tribunal's Special Bench in the case of Vahid Paper Converters v. ITO, [2007] 289 ITR (AT) 10 (Ahmedabad) and held that while computing the deduction under Chapter VI-A, the appellant has to compute the profits by deducting the depreciation allowable under section 32. Thus, the contention of the respondent was upheld and the claim of the appellant made in the return was rejected.

4. Mr. Inamdar, learned counsel appearing on behalf of the appellants in all the above ten appeals, made the following propositions to substantiate his contentions:

(i) In computing the gross total income under normal provisions of the Act, an assessee is entitled not to claim depreciation and if he does not claim it, depreciation cannot be thrust upon him (CIT v. Shri Someshwar Sahakari Sakhar Karkhana Ltd., [1989] 177 ITR 443 (Bom) and CIT v. Mahendra Mills, [2000] 243 ITR 56 (SC) based on the word “allowed” used in section 32(1).

(ii) For applying the provisions of Chapter VI-A, gross total income as computed above is the starting point (section 80A(1) and section 80-IA).

(iii) It is only those profits which are included in such gross total income which can be considered for relief under any provision of Chapter VT-A, (section 80-IA(1)) page 447 of 177 ITR.

(iv) Therefore, if the assessee has not claimed depreciation at all depreciation cannot be deducted only for computing the profits under a particular section of Chapter VI-A.

(v) But if the assessee has claimed depreciation in computing the gross total income but does not claim depreciation only for computing deduction under any provision of Chapter VI-A, it is not permissible (Indian Rayon Corporation Ltd., Bombay…Applicant; v. Commissioner Of Income-Tax, Bombay…., [2003] 261 ITR 98 (Bom)).

(vi) The choice of not claiming depreciation is upheld because there are/were competing tax reliefs which are time bound, while depreciation is not.

(vii) Cambay Electric's decision [1978] 113 ITR 84 (SC) did not deal with this aspect at all.

5. Mr. Inamdar strongly submitted that in the light of the judgments of the Supreme Court in CIT v. Mahendra Mills, [2000] 243 ITR 56 and also of the Bombay High Court in CIT v. Shri Someshwar Sahakari Sakhar Karkhana Ltd., [1989] 177 ITR 443 the assessee has an option whether to avail of the depreciation or not under section 32 of the Income-tax Act (hereinafter referred to as “the said Act”). To put it in other words, Mr. Inamdar submitted that the claim of such depreciation cannot be forced down the throat of the assessee. Mr. Inamdar contended that for the purpose of tax planning if it is more advantageous to the assessee, the assessee has a choice in a particular year to claim that depreciation or may opt not to claim the depreciation. He made a fervent plea that even if the assessee is a “newly established undertaking” wherein Chapter VI-A of the said Act would apply, even then the assessee has an option whether to opt for depreciation or not. He strongly contended that both the aforesaid judgments, i.e, CIT v. Mahendra Mills, [2000] 243 ITR 56 (SC) as well as Shri Someshwar Sahakari Sakhar Karkhana Ltd., [1989] 177 ITR 443 make it explicitly clear that it is not mandatory for the assessee to claim depreciation and the same has been made optional. If that be so, Mr. Inamdar contended that the Income-tax Tribunal had wrongly construed the provisions of law to make it compulsory for these assessees to claim depreciation allowance under section 32 of the said Act and thereafter claim their deductions under Chapter VI-A of the said Act.

6. Mr. Inamdar thereafter sought to distinguish the Division Bench judgment of our High Court in Indian Rayon Corporation Ltd., Bombay…Applicant; v. Commissioner Of Income-Tax, Bombay…., [2003] 261 ITR 98 contending therein that in that case the only issue involved was determination of the amount of depreciation which should be set off while computing the profits and gains derived by the assessee from the “newly established undertaking” covered by section 80HH. Therefore, Mr. Inamdar submitted that the observations of the Division Bench judgment in the above case, regarding interpretation of section 32 of the said Act as well as Chapter VI-A of the said Act, ought not to be taken into account as the court was only concerned with the aforesaid computation of depreciation.

7. Thereafter Mr. Inamdar referred to another judgment of the Bombay High Court in CIT v. Gannon Dunkerley and Co. Ltd., [1995] 216 ITR 708 and the judgment of the Supreme Court in Cambay Electric Supply Industrial Co. Ltd. v. Cit , [1978] 113 ITR 84 and contended that they have no application in the instant case.

8. Mr. Inamdar also pointed out that the recent judgment of the Special Bench of the Income-tax Appellate Tribunal in Vahid Paper Converters v. ITO, [2007] 289 ITR (AT) 10 (Ahmedabad); [2006] 98 ITD 165 had not construed the judgments of the Supreme Court in CIT v. Mahendra Mills, [2000] 243 ITR 56 as well as the Bombay High Court judgment in CJT v. Shri Someshwar Sahakari Sakhar Karkhana Ltd., [1989] 177 ITR 443 in the proper perspective, accordingly he contended the said judgment is not correct as per law.

9. Mr. Rivonkar, learned counsel appearing on behalf of the respondent/Revenue strongly relied on a Division Bench judgment of our High Court in Indian Rayon Corporation Ltd., Bombay…Applicant; v. Commissioner Of Income-Tax, Bombay…., [2003] 261 ITR 98 and pointed out that the said judgment very specifically deals with the interpretation of section 32 of the said Act read with Chapter VI-A of the said Act and the Division Bench has observed as under at page 106:

“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 Income tax 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 section 80HH have to be reduced from the gross total income of the assessee. The question basically in this matter is concerning computation of deduction under Chapter VI-A in which section 80HH falls. Profits and gains of a newly established undertaking, therefore, have got to be computed as per the provisions of section 29 to section 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., section 29 to section 43A, which included section 32(2). Therefore, one cannot exclude depreciation allowance while computing profits derived from a newly established undertaking for computing deductions under Chapter VI-A. Therefore, the appellant's claim for allowance of deduction under section 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.”

(emphasis supplied by us)

10. Mr. Rivonkar contended that the Division Bench has considered very specifically the very questions raised in the present tax appeals in the sense, it has clearly interpreted to hold that it is not open to the assessee to disclaim depreciation allowance and as far as the “newly established undertaking” is concerned, the profits and gains have got to be computed as per the provisions of section 29 to section 43A of the said Act even if the assessee claims relief under Chapter VI-A of the said Act and it is not open to the assessee to disclaim depreciation allowance. Finally the Division Bench has in no uncertain terms held that no one can “exclude depreciation allowance” when computing depreciation allowance for computing deductions under Chapter VI-A. Mr. Rivonkar pointed out that as far as Cambay Electric Supply Industrial Co. Ltd. v. Cit , [1978] 113 ITR 84 (SC) is concerned they were dealing with the issue of whether unabsorbed depreciation and development rebate are deductible or not in computing the profits under section 80E of the said Act. In that context, the Supreme Court had observed and given a ruling. Similarly even in the case of CIT v. Gannon Dunkerley and Co. Ltd., [1995] 216 ITR 708 the Bombay High Court was dealing with the issue whether to exclude unabsorbed depreciation and unabsorbed rebate while computing the total income, wherein the Division Bench has clearly held at page 710, as under:

“Therefore while ascertaining the profits and gains attributable to a priority industry which forms a part of such total income necessary deductions required under the Income-tax Act have to be made including deduction for depreciation. In the present case, it is only the depreciation in the current year which is being deducted and we do not see any provisions in section 80-i under which such depreciation requires to be added back to the profits and gains attributable to the priority industry for the purpose of calculating the eight per cent, deduction under that section.”

11. The Division Bench decided the matter in favour of the Revenue.

12. Mr. Rivonkar thereafter referred to a judgment of the Rajasthan High Court in Vijay Industries v. CIT, [2004] 270 ITR 175 dealing with the very same issue of whether a “newly established undertaking” while claiming special deduction under section 80HH and where depreciation ought to be claimed under section 32 or not, has held that the depreciation under section 32 will have to be first taken into account, before granting deduction under Chapter VI-A.

13. Similarly learned counsel Mr. Rivonkar for the Revenue referred to a judgment of the Gujarat High Court in CIT v. Cadila Chemicals P. Ltd., [2003] 259 ITR 692 wherein in no uncertain terms it was held that when any deduction under Chapter VI-A is claimed, then while computing the total income the depreciation will have to be deducted before making any deduction under section 80HH of the said Act. In the light of the above and also in view of the detailed judgment of the Income-tax Tribunal (Special Bench) in Vahid Paper Converters v. ITO, [2007] 289 ITR (AT) 10 (Ahmedabad); [2006] 98 ITD 165. Mr. Rivonkar submitted that the interpretation of law as propounded by the Income-tax Appellate Tribunal is the proper one and the above appeals ought to be dismissed and the question ought to be answered in the affirmative, in favour of the Revenue.

14. After having considered the arguments of both learned counsel for the assessees as well as the Revenue, we are clearly of the view that the Division Bench judgment of the Bombay High Court in Indian Rayon Corporation Ltd., Bombay…Applicant; v. Commissioner Of Income-Tax, Bombay…., [2003] 261 ITR 98 in no uncertain terms holds that if a “newly established undertaking” claims a deduction under Chapter VI-A of the said Act, then the total income ought to be computed as per sections 29 to 43A of the said Act which includes section 32, i.e, before granting any deduction under Chapter VI-A, the depreciation under section 32 of the Act will have to be granted and thereafter the deduction under Chapter VI-A can be granted. To put it in other words the assessee if claiming deduction under Chapter VI-A as a “newly established undertaking”, will have to claim depreciation first and thereafter only the total income can be computed so as to enable the said undertaking to claim the benefit as a “newly established undertaking” under Chapter VI-A.

15. It may be also noted that both CIT v. Mahendra Mills, [2000] 243 ITR 56 (SC) and CIT v. Shri Someshwar Sahakari Sakhar Karkhana Ltd., [1989] 177 ITR 443 (Bom), were basically dealing with only in the context of depreciation under section 32, and not in the context of benefits under Chapter VI-A of the said Act.

16. The logic behind the deductibility of depreciation while computing the eligible profits for Chapter VI-A, is because if the depreciation is not reduced while computing the income, the assessee would claim deduction on the gross amount of income and that would amount to making more deduction under Chapter VI-A, that what the assessee is entitled to. It may be also noted that by not claiming depreciation, the assessee is in fact claiming higher deduction under Chapter VI-A, and at the same time keeping the written down value of its assets high (because if depreciation is claimed, the written down value would be reduced by the amount of depreciation actually allowed). The assessee would claim depreciation on such high written down value in the subsequent year. Thus, by not claiming depreciation in the years in which the assessee is entitled to deduction under Chapter VI-A, the assessee claims a double advantage (i) claiming a higher deduction under Chapter VI-A, than its entitlement, (ii) keeping the written down value of assets high resulting in higher claim of depreciation in the subsequent years.

17. Under the aforesaid facts and circumstances, we answer both the aforesaid substantial questions of law in the affirmative in favour of the Revenue and against the assessee, the income-tax appeals stand disposed of accordingly.