Computing eligible profits for s.80HH deduction: current depreciation u/s32 must be deducted; claim disallowed.

In computing profits and gains derived from a newly established undertaking for deduction under s. 80HH, the issue was whether current depreciation must be deducted. The HC held that Chapter VI-A operates as an independent code: the "profits and gains" eligible for special deduction must be computed in accordance with ss. 29-43A, which necessarily includes depreciation under s. 32, and the assessee cannot disclaim depreciation to inflate eligible profits; the s. 32(2) analogy applicable in normal computation does not override Chapter VI-A computation. Consequently, depreciation had to be deducted while computing eligible profits, and the assessee's claim to s. 80HH deduction without considering current depreciation was rejected, answering the issue in favour of the revenue.

---

---

Issues Involved:
1. Whether depreciation allowance should be deducted while computing the total income for the purposes of deduction under section 80HH of the Income-tax Act, 1961.

Detailed Analysis:

Facts:
The assessee claimed a deduction under section 80HH based on profits calculated without deducting depreciation. The assessee argued that the term "chargeable" in section 32(2) should mean profits computed after deductions under sections 80HH and 80J. The Assessing Officer rejected this and calculated the deduction after deducting depreciation, resulting in no allowable deduction. The first appellate authority upheld this decision, leading the assessee to appeal to the Tribunal, which also ruled against the assessee, citing the Supreme Court's judgment in Cambay Electric Supply Industrial Co. Ltd. v. CIT.

Scope of the Income-tax Act:
The court examined several sections of the Income-tax Act, including sections 4(1), 5(1), 2(45), 10, 14, 28, 29, 32, 70(1), 72(1), 80A, 80B(5), and 80HH. The court emphasized that income-tax is charged on the total income computed according to the Act's provisions. Special deductions under Chapter VI-A, including section 80HH, must be computed after considering all relevant provisions, including depreciation under section 32.

Point at Issue:
The court illustrated the dispute with an example showing different computations by the Assessing Officer and the assessee. The key issue was whether the deduction under section 80HH should be calculated before or after deducting depreciation.

Arguments:
- Assessee's Argument: The deduction under section 80HH should be calculated on profits before deducting depreciation. The term "chargeable" in section 32(2) should refer to profits after special deductions. The assessee also referenced the Supreme Court's judgment in CIT v. Mahendra Mills, arguing that depreciation could be disclaimed.

- Department's Argument: The Department argued that depreciation must be deducted before calculating the section 80HH deduction, citing the Supreme Court's judgment in Cambay Electric Supply Industrial Co. Ltd. v. CIT. The Department distinguished the Mahendra Mills case, noting it did not concern special deductions under Chapter VI-A.

Findings:
The court found that the assessee had not disclaimed depreciation and that the Mahendra Mills judgment did not apply to this case. The court emphasized that special deductions under Chapter VI-A must be computed according to the Act's provisions, including depreciation. The court reiterated that profits for section 80HH must be computed after deducting depreciation, as per the Supreme Court's ruling in Cambay Electric Supply Industrial Co. Ltd. v. CIT.

Conclusion:
The court concluded that the deduction under section 80HH must be computed after deducting depreciation. The question was answered in favor of the Department and against the assessee. The income-tax reference was disposed of with no order as to costs.

---