High Court remands case to ITAT for further inquiry on Section 80HH applicability

The High Court quashed the ITAT's order and remanded the case to the ITAT to consider the additional question of law regarding the applicability of Section 80HH. The Tribunal was instructed to conduct a factual inquiry to determine if the assessee falls under Section 80HH and, if so, to apply the law as laid down in the Indian Rayon case. All contentions, including the maintainability of the appeal, were kept open for consideration. The High Court emphasized that its observations were preliminary and not final conclusions on the factual aspects.

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Issues Involved:
1. Whether the Assessing Officer can thrust depreciation on the assessee when it is not claimed.
2. Applicability of Section 80HH of the Income Tax Act to the assessee.
3. Maintainability of the appeal based on the tax effect.

Detailed Analysis:

1. Whether the Assessing Officer can thrust depreciation on the assessee when it is not claimed:

The primary issue in this case was whether the Assessing Officer could impose depreciation on the assessee when it was not claimed. The assessee, a company engaged in the fabrication of automobile parts, filed its return declaring total income without claiming depreciation. The Assessing Officer, referencing the Supreme Court's decision in Saharanpur Electrical Supply Company Ltd. vs CIT, determined that depreciation must be considered under the Block of Assets Concept, thereby adjusting the total income. The Commissioner of Income Tax (Appeals) accepted the assessee's contention that it had the option to claim or not claim depreciation, referencing CIT vs Sri Someshwar Sahnkari Sakhar Karhana Limited. The Income Tax Appellate Tribunal (ITAT) upheld this view, citing the Supreme Court's decision in CIT vs Mahendra Mills, which held that the Assessing Officer cannot grant depreciation allowance when it is not claimed by the assessee.

2. Applicability of Section 80HH of the Income Tax Act to the assessee:

The Revenue argued that the assessee, being a newly established industrial unit under Section 80HH of the Act, had no option but to claim depreciation. The ITAT did not consider this aspect, leading to the framing of an additional question of law by the High Court: "Whether the Assessee can disclaim depreciation, when it has claimed special deduction under Section 80HH of Chapter VI-A of the Act." The High Court noted that if the assessee falls under Section 80HH, the law laid down by the Bombay High Court in Indian Rayon Corporation Limited vs CIT, which states that units under Section 80HH cannot opt out of claiming depreciation, would apply. The case was remanded to the ITAT to determine if the assessee falls within the ambit of Section 80HH and to decide the applicability of the Indian Rayon case.

3. Maintainability of the appeal based on the tax effect:

Initially, the appeal was dismissed by the High Court due to the tax effect being less than Rs. 2,00,000, as per the Central Board of Direct Taxes (CBDT) circulars. However, the Revenue filed a Review Application and a Special Leave Petition, arguing that the notional income exceeded Rs. 20,00,000, thus falling outside the purview of the CBDT's limit. The Supreme Court allowed the appeal, stating that review is available for orders passed under Section 260A of the Income Tax Act, and remanded the case to the High Court for reconsideration. The High Court, considering the Supreme Court's directive and the decision in Commissioner of Income Tax vs. Meghalaya Steels Ltd., acknowledged that the tax effect was substantial enough to warrant a review.

Conclusion:

The High Court quashed the ITAT's order and remanded the case to the ITAT to consider the additional question of law regarding the applicability of Section 80HH. The Tribunal was instructed to conduct a factual inquiry to determine if the assessee falls under Section 80HH and, if so, to apply the law as laid down in the Indian Rayon case. All contentions, including the maintainability of the appeal, were kept open for consideration. The High Court emphasized that its observations were preliminary and not final conclusions on the factual aspects.

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