2006 (8) TMI 125 - HC - Income Tax

Partial adjustment of unabsorbed depreciation overturned; adjust depreciation and investment allowance against export income under Sections 10B and 32

HC set aside the Tribunal's allowance of partial adjustment of unabsorbed depreciation and upheld the Commissioner's direction to treat unabsorbed ... Adjustment of the unabsorbed depreciation against the income from other sources - 'Whether, Tribunal is right in holding that the assessment order passed by the Assessing Officer allowing the claim of the assessee for adjustment of the unabsorbed depreciation against the income from other sources was in order and hence cannot be considered to be erroneous or prejudicial to the interests of the Revenue and in cancelling the order under sections 263?' HELD THAT:- We are not prepared to accept this argument advanced by the assessee. Exemption also has to be scrutinized by the Department as otherwise there is every chance of exemption being misused by an assessee. It may be true that even after taking into consideration, the unabsorbed depreciation, the assessee may get exemption but none the less he cannot take only a portion of depreciation just to suit his income for the purpose of nil liability and adjust the balance of unabsorbed depreciation for other business income once again to show nil liability. When the unabsorbed depreciation could have been taken for arriving at an exempted income, the assessee cannot play with the figures for the purpose of showing nil liability as has been done in the case on hand. The intention of the Legislature is only to provide 100 per cent, exemption for export income and not for other income. The petitioner by dividing depreciation contrary to section 32 has virtually taken exemption from payment of tax even for other business income in the case on hand. That cannot be allowed as rightly ruled by the Commissioner. The allowance of the depreciation by the Tribunal, in our view, is prejudicial to the interests of the Revenue as argued by the Department. The Tribunal has taken a narrow view of the matter without taking into consideration, the laudable object of exemption and at the same time providing for tax liability towards other liability. The interpretation has to be meaningful and acceptable and it cannot be against the intention of the legislation. Legislation never wanted the entire income to be exempted by taking advantage of section 10B of the Act. The approach of the Tribunal to our mind is incorrect and, hence, we find substance in the argument of the Revenue. Commissioner directed that the unabsorbed depreciation and unabsorbed investment allowance should be adjusted against the income of the export-oriented business undertaking and the total income of the assessee should accordingly be recomputed afresh. - calculation cannot be at the whims and fancies of an assessee for exemption of tax - Commissioner is fully justified in holding that the assessee is not justified in showing nil return. We, therefore, deem it proper to answer the questions of law in favour of the Revenue. Consequently, the order of the Tribunal has to be set aside and the order of the Commissioner has to be accepted Issues Involved:1. Whether the Income-tax Appellate Tribunal was correct in holding that the assessment order allowing the adjustment of unabsorbed depreciation against income from other sources was not erroneous or prejudicial to the interests of the Revenue.Detailed Analysis:Issue 1: Adjustment of Unabsorbed Depreciation Against Income from Other SourcesThe Revenue challenged the decision of the Income-tax Appellate Tribunal, which upheld the assessee's claim to adjust unabsorbed depreciation from previous years against income from other sources. The Commissioner of Income-tax had earlier found this adjustment to be erroneous and prejudicial to the interests of the Revenue, directing a recomputation of the total income by adjusting the unabsorbed depreciation against the income from the export-oriented business.Facts of the Case:- The respondent-assessee is a 100% export-oriented unit under section 10B of the Income-tax Act, which exempts profits from such undertakings from being included in total income.- The assessee did not claim benefits under section 10B for the initial years but claimed them from the assessment year 1992-93.- For the assessment year 1994-95, the assessee adjusted unabsorbed depreciation from 1988-89 against income from other sources, resulting in a nil taxable income.- The Commissioner of Income-tax, invoking section 263, deemed this adjustment incorrect and prejudicial to the Revenue, directing a recomputation of income.- The Tribunal reversed the Commissioner's order, leading to the present appeal by the Revenue.Arguments:- Revenue's Argument: The Revenue argued that the Tribunal erred in reversing the Commissioner's order. It contended that unabsorbed depreciation should have been considered for exemption under section 10B, and the assessee's method of showing nil taxable income was contrary to the provisions of the Income-tax Act.- Assessee's Argument: The assessee argued that section 10B provides for total exemption and the computation could be on a commercial basis. The Tribunal was justified in allowing the adjustment of unabsorbed depreciation against income from other sources.Court's Analysis:- The court examined the computation of total income and noted that the assessee had filed a nil return by adjusting unabsorbed depreciation against income from other sources.- The Commissioner had issued a show-cause notice and concluded that the unabsorbed depreciation should have been adjusted against the business income for the purpose of section 10B exemption.- The court emphasized that section 10B cannot be read in isolation and must be considered along with other provisions of the Income-tax Act, particularly sections 29 to 43, which govern the computation of total income and deductions.- The court rejected the assessee's argument that the computation could be on a commercial basis, stating that exemption provisions must have a rationale and be consistent with other provisions of the Act.- The court highlighted that the intention of the Legislature was to provide 100% exemption for export income, not for other income. The assessee's method of dividing depreciation to show nil liability for other business income was contrary to section 32 and the legislative intent.Precedents Cited:- The court referred to several judgments, including:- Distributors (Baroda) P. Ltd. v. Union of India: The Supreme Court ruled that deductions should be calculated with reference to the amount of income computed under the Act.- Cambay Electric Supply Co. v. CIT: The court held that unabsorbed depreciation and development rebate must be deducted in computing profits for deductions.- CIT v. Virmani Industries P. Ltd.: The Supreme Court addressed the issue of unabsorbed depreciation under section 32(2).- CIT v. Sun Stone Engineering Industries P. Ltd. and CIT v. Surendra Textiles: The Rajasthan High Court ruled that unabsorbed losses and depreciation must be deducted in determining eligible income for deductions.- Indian Rayon Corporation Ltd. v. CIT: The Bombay High Court emphasized that special deductions under Chapter VI-A must be computed as per sections 29 to 43A.Conclusion:- The court concluded that the Tribunal's decision was incorrect and prejudicial to the interests of the Revenue. It emphasized that the calculation of exemptions must be in accordance with the provisions of the Income-tax Act and not based on the assessee's discretion.- The court answered the question of law in favor of the Revenue, setting aside the Tribunal's order and upholding the Commissioner's order for recomputation of income.Final Judgment:- The court ruled in favor of the Revenue, setting aside the Tribunal's order and reinstating the Commissioner's order. No costs were awarded.