Depreciation Must Be Included in Deductions Under Chapter VI-A, Even If Not Claimed in Return, Rules ITAT Special Bench.

The ITAT Special Bench concluded that depreciation, though not claimed by the assessee in their return, must be allowed when computing deductions under Chapter VI-A of the Income-tax Act. This decision aligns with legislative mandates and judicial precedents, emphasizing that income must be computed in accordance with all provisions, including section 32 for depreciation. Consequently, the appeals filed by the revenue were allowed, and those filed by the assessees were dismissed. The Assessing Officer is required to include depreciation in the computation of profits for deductions under Chapter VI-A, regardless of whether it was claimed in the return.

---

---

Issues Involved:
1. Whether depreciation, though allowable but not claimed in the return for normal computation of income, must be allowed while computing deductions under Chapter VI-A (sections 80HH, 80-IA, 80-IB, etc.) of an industrial undertaking.

Issue-wise Detailed Analysis:

1. Allowability of Depreciation for Chapter VI-A Deductions:

Facts and Background:
The President of the Income-tax Appellate Tribunal (ITAT) constituted a Special Bench to address whether depreciation, though allowable but not claimed in the return for normal computation of income, must be allowed while computing deductions under Chapter VI-A of the Income-tax Act. The case of Vahid Paper Converters was used as a representative example, where the assessee did not claim depreciation to reduce tax liability in subsequent years.

Assessing Officer's View:
The Assessing Officer recalculated the income of the industrial undertaking eligible for deduction under section 80-IB by allowing depreciation for the year under consideration. This was based on the opinion that not claiming depreciation was a tax avoidance strategy, which was not permissible as per the Supreme Court's ruling in McDowell & Co. Ltd. v. CTO.

CIT(A)'s View:
The CIT(A) upheld the Assessing Officer's decision, emphasizing that the method of computation of income should be consistent among all assessees. The CIT(A) referred to the Supreme Court's decision in Cambay Electric Supply Industrial Co. Ltd. v. CIT and the Bombay High Court's decision in Indian Rayon Corpn. Ltd. v. CIT, which supported the inclusion of depreciation while computing eligible income for deductions under Chapter VI-A.

Special Bench's Analysis:
The Special Bench examined the scheme of the Act for granting deductions under Chapter VI-A, focusing on sections 80A, 80AB, and 80B. It was noted that the gross total income must be computed in accordance with all provisions of the Act before making any deductions under Chapter VI-A. The Bench referred to the Supreme Court's decision in Cambay Electric Supply Industrial Co. Ltd., which mandated that income must be computed in accordance with sections 30 to 43A, including section 32 for depreciation.

Jurisdictional High Court's View:
The Gujarat High Court in CIT v. Cadila Chemicals (P.) Ltd. held that depreciation must be deducted before making any deduction under section 80HH. The Rajasthan High Court in Vijay Industries v. CIT and the Bombay High Court in Indian Rayon Corpn. Ltd. also supported this view.

Supreme Court's Precedents:
The Supreme Court in Cambay Electric Supply Industrial Co. Ltd. and Mettur Chemical & Industrial Corpn. Ltd. held that both unabsorbed and current depreciation must be deducted while computing eligible income for deductions under Chapter VI-A.

Assessees' Contentions:
The assessees argued that depreciation is a choice and cannot be thrust upon them if not claimed. They relied on the Supreme Court's decision in CIT v. Mahendra Mills, which was applicable for assessment years prior to 1-4-1988 when section 34 was still in effect. However, the Special Bench noted that this decision was not applicable for computing income for Chapter VI-A deductions post-1988.

Conclusion:
The Special Bench concluded that depreciation, though allowable but not claimed in the return for normal computation of income, must be allowed while computing deductions under Chapter VI-A. This decision was based on the legislative mandate and judicial precedents that emphasized computing income in accordance with all provisions of the Act, including section 32 for depreciation.

Result:
The appeals filed by the revenue were allowed, and the appeals filed by the assessees were dismissed. The Special Bench held that the Assessing Officer must allow depreciation while computing the profits derived from an industrial undertaking for the purpose of deductions under Chapter VI-A, even if the depreciation was not claimed by the assessee in their return.

---