Mandatory depreciation and money-lending exclusion shape the computation of deduction and deemed-dividend treatment under income tax law.

For computation of deduction under Chapter VI-A, current depreciation under section 32 must be given effect to in determining gross total income, even if the assessee did not claim it in the return; the deduction was therefore worked out after mandatory depreciation adjustment. A loan or advance to a concern is not treated as deemed dividend under section 2(22)(e) where it is made in the ordinary course of business and lending of money forms a substantial part of the lender's business; on the stated facts, the exclusion applied because the lender had deployed substantial assets in loans and advances and earned interest income. The assessment was accordingly to be recomputed on this basis.

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Issues: (i) whether depreciation under section 32 of the Income-tax Act, 1961 had to be deducted while computing deduction under section 80-IA even if not claimed by the assessee; (ii) whether the loan advanced by the sister concern was taxable as deemed dividend under section 2(22)(e) of the Income-tax Act, 1961 or was excluded because lending of money formed a substantial part of the lender's business.

Issue (i): whether depreciation under section 32 of the Income-tax Act, 1961 had to be deducted while computing deduction under section 80-IA even if not claimed by the assessee

Analysis: The special deduction under Chapter VI-A has to be computed on gross total income after giving effect to all deductions allowable under sections 30 to 43D. The Full Bench decision relied upon held that current depreciation is part of the mandatory computation and cannot be omitted merely because the assessee did not claim it in the return.

Conclusion: The depreciation had to be deducted. The issue was decided against the assessee and in favour of the Revenue.

Issue (ii): whether the loan advanced by the sister concern was taxable as deemed dividend under section 2(22)(e) of the Income-tax Act, 1961 or was excluded because lending of money formed a substantial part of the lender's business

Analysis: Clause (e) treats certain loans or advances to a shareholder or a concern as dividend, but clause (ii) excludes loans made in the ordinary course of business where lending of money is a substantial part of the lender's business. On the facts, only the amount actually advanced during the relevant year could be considered, and the lender's deployment of a significant portion of its assets in loans and advances, together with its interest income, showed that money-lending was a substantial part of its business. The exclusion therefore applied.

Conclusion: The amount was not taxable as deemed dividend. The issue was decided in favour of the assessee and against the Revenue.

Final Conclusion: The appeal succeeded only in part. The deduction issue was answered for the Revenue, the deemed-dividend issue for the assessee, and the assessment was directed to be recomputed accordingly.

Ratio Decidendi: For deduction under Chapter VI-A, all allowable depreciation must be taken into account in computing gross total income, and a loan is outside deemed-dividend treatment where it is advanced in the ordinary course of business by a company for which money-lending is a substantial part of the business.

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