2009 (10) TMI 39 - HC - Income Tax

Section 80-IA profits must be computed after mandatory depreciation under Section 32, even if taxpayer disclaims it

HC held that deduction under Section 80-IA is a special, profit-linked deduction and must be computed after reducing all deductions allowable under ... Deduction under Section 80-IA - setting off the brought forward loss - Computation of gross total income - deduction of depreciation allowance - Whether, for the purposes of availing allowable special deduction under Chapter VI-A of the Income-tax Act, the gross total income is required to be computed by deducting allowable depreciation even though the assessee had disclaimed the same for the purposes of regular assessment ? - HELD THAT:- It is clear that Section 80IA is a Code by itself and the deduction allowable under Section 80IA is a special deduction which is linked to profits, unlike deductions contained in Chapter IV of the Act which are linked to investments. The deduction under Section 80IA is allowed at a percentage of the business profits computed in the manner specified in that Section and other provisions contained in Chapter VIA. In the case of Distributors (Baroda) P. Ltd.[1979 (5) TMI 2 - SUPREME COURT], the Apex Court has held that the deduction under section 80M relating to certain inter-corporate dividends has to be allowed after deducting the interest payable on monies borrowed for earning such dividend income. The Apex Court has also held that section 80M cannot be interpreted in a manner so as to confer additional benefit which would go beyond what is required for saving the amount of dividend from taxation once again in the hands of the assessee. Therefore, even in the case of Distributors Baroda (P) Ltd. (supra) the Apex Court has held that the computation of deduction under VIA cannot be done in a manner which gives additional benefit to the assessee than what is contemplated under Chapter VIA of the Act. Similar view has been taken by the Apex Court in the case of Liberty India [2009 (8) TMI 63 - SUPREME COURT] wherein it is held that any device adopted to reduce or inflate the profits of eligible business has got to be rejected in view of the overriding provisions of subsection 5 of section 80-IB [similar to section 80IA(7)]. Therefore, in the light of the aforesaid decisions of the Apex Court, it is clear that the quantum of deduction under section 80-IA would not be dependent upon the assessee claiming or not claiming current depreciation, because, the quantum deduction under section 80-IA has to be computed on the profits determined after deducting all deductions allowable under the Act. The deduction under Chapter VIA is a special deduction and the quantum of deduction thereunder has to be computed by ascertaining that part of the total income which represents the profits and gains derived by an undertaking after deducting all the deductions allowable under section 30 to 43D of the Act. Therefore, assuming that in the assessment year in question the assessee has an option to disclaim depreciation, the same would not have any bearing on the computation of quantum deduction under section 80-IA of the Act. As fairly stated by Mr. Dastur, the assessee is disclaiming depreciation neither with a view to be charitable nor with a view to pay more tax than what is legally payable. In the present case, the assessee by disclaiming depreciation, seeks deduction under section 80-IA at Rs.100/- instead of Rs.20/- which is legally permissible. Once it is held that the quantum of deduction allowable under section 80-IA after deducting all deductions allowable under Sections 30 to 43D is Rs.20/- only, then, by disclaiming current depreciation, the assessee would be worse off, because by disclaiming depreciation the assessee would have to pay tax on Rs.80/- and if depreciation is allowed, then there would be no tax liability. In these circumstances, disclaiming depreciation being not in the interest of the assessee, the A.O. was justified in allowing depreciation to the assessee, so that no tax liability is fastened upon the assessee by disclaiming depreciation. Thus, we hold that the quantum of deduction under Section 80IA is not dependent upon the assessee claiming or not claiming depreciation, because, under Section 80IA the quantum of deduction has to be determined by computing total income from business after deducting all deductions allowable under Section 30 to 43D of the Act. In the result, we answer the question referred to us above in the affirmative, that is, for the purposes of deduction under Chapter VIA, the gross total income has to be computed inter alia by deducting the deductions allowable under section 30 to 43D of the Act, including depreciation allowable under section 32 of the Act, even though the assessee has computed the total income under Chapter IV by disclaiming the current depreciation. Issues: Whether for the purpose of claiming deduction under Chapter VI-A (specifically Section 80-IA) the gross total income must be computed after deducting all deductions allowable under Sections 30 to 43D of the Income-tax Act, 1961 (including depreciation under Section 32), even where the assessee has computed total income under Chapter IV by disclaiming current depreciation.Analysis: The Court analysed the statutory scheme distinguishing computation of business income under Chapter IV (Sections 3043D) from special, profit-linked deductions under Chapter VI-A. It examined Section 80-IA and related provisions (including Sections 80A, 80AB and 80-IA(7)) and relied on Supreme Court precedents (notably Liberty India, Distributors (Baroda) and subsequent authorities) holding that Chapter VI-A constitutes a separate code where deductions are linked to profits derived from the eligible business. The Court held that the quantum of deduction under Section 80-IA must be computed on the profits determined after allowing all deductions permissible under Sections 3043D. It rejected the submission that an assessees disclaimer of depreciation for Chapter IV computation can be used to inflate the Chapter VI-A deduction, and treated such a device as impermissible under the statutory scheme and Supreme Court authority.Conclusion: The gross total income for the purpose of deduction under Chapter VI-A (including Section 80-IA) must be computed after deducting all deductions allowable under Sections 30 to 43D, including depreciation under Section 32, even if the assessee has computed income under Chapter IV by disclaiming current depreciation; outcome is in favour of the Revenue.