TaxTMI 
TaxTMI 
2003 (1) TMI 58
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....; Rs. Profits as per profit and loss account 77,96,076 Less: Development rebate 9,32,677 ------------ 68,63,399 ------------ On this amount of Rs. 68,63,399, the assessee claimed relief under section 80HH at the rate of 20 per cent., amounting to Rs. 1....
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.... depreciation has got to be taken into account for determination of profits derived from industrial undertaking whether it is determination of profits of business in accordance with the Act or it is determination of the true profits under proper principles of accountancy. In the circumstances, the assessee's claim for deduction under section 80HH, without taking into consideration current depreciation, came to be rejected. Being aggrieved, the assessee carried the matter in appeal to the Tribunal. Relying on the judgment of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84, the Tribunal took the view that the Assessing Officer was justified in deducting depreciation and development rebate while computing the total income for the purposes of section 80HH. Being aggrieved, the assessee has come by way of reference. Scope of the Income-tax Act: Before coming to the arguments advanced on behalf of the assessee, the following sections of the Income-tax Act need to be looked into. Section 4(1) refers to charge of income-tax. It states, inter alia, that income-tax shall be charged in accordance with and subject to the provisions of ....
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.... computing total income. Chapter VI-A refers to special types of deductions. Chapter VI-A refers to special deductions to be made for computing total income. Section 80A(1) states that in computing the total income, there shall be allowed from the gross total income, in accordance with and subject to the provisions of Chapter VI-A, the deductions specified in section 80C to section 80VV, which includes section 80HH, which arises for interpretation, once again, in this case. Section 80A(2) states that the aggregate amount of deductions under Chapter VI-A shall not exceed the gross total income of the assessee. Section 80B(5) defines "gross total income" to mean the total income computed in accordance with the provisions of the Act, before making any deduction under Chapter VI-A. Section 80HH comes under clause "C." to Chapter VI-A--Deductions in respect of certain incomes. Section 80HH refers to deduction in respect of profits and gains from newly established industrial undertakings in backward areas. It lays down that where the gross total income of an assessee includes profits and gains derived from such industrial undertaking then, there shall be allowed, in computing the total i....
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....f computation of normal income, without seeking benefit of special deduction under Chapter VI-A, an assessee is free not to claim depreciation in view of the judgment of the Supreme Court in the case of CIT v. Mahendra Mills [2000] 243 ITR 56, but if the assessee claims depreciation, then such depreciation will be set off as any other expenses against gross income. Further, if such an assessee claims deduction under Chapter VI-A, then to calculate profits and gains of newly established undertaking, depreciation allowance has got to be set off against the gross income of newly established undertaking to arrive at the profits computed in accordance with the provisions of the Act, which profits would form part of the gross total income and which would be exigible to 20 per cent. deduction. The reason is that Chapter VI-A deals with special types of income. The deduction of 20 per cent. is not to be equated with depreciation, which is an ordinary expense. The idea under the above formula is that the assessee should not claim more than what he is entitled to. Take the case of section 80HHC under which deduction is given in commensuration with the foreign exchange, which the assessee bri....
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....(2) with section 4 of the Income-tax Act then it is clear that deduction under section 80HH should be first made from profits and gains of the concerned newly established undertaking, without depreciation. In this connection, he invited our attention also to section 80B(5) which defines gross total" income to mean total income computed in accordance with the provisions of the Act. Mr. Mistry contended that section 4 of the Income-tax Act imposes a charge of tax in respect of the total income. That the word "total income" has been defined under section 2(45) to mean total amount of income computed in the manner laid down in the Act. Therefore, he contended that if one reads section 80HH, which provides for computation of deduction at 20 per cent., it is clear that one must take into account the total profits of the unit, without depreciation and apply to it the special rate of 20 per cent. He contended that only by such methodology one can give effect to the special provisions of Chapter VI-A. Mr. Mistry, in the alternative submitted that in several cases decided by this court dealing with computation of deductions under Chapter VI-A, it has been held that the profits and gains of n....
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....t in Cambay Electric Supply Industrial Company Ltd.'s case [1978] 113 ITR 84 would equally apply to the facts of this case. Mr. R.V. Desai further submitted that the judgment of the Supreme Court in the case of Mahendra Mills [2000] 243 ITR 56 had no application to the facts of this case. He contended that the only argument advanced before the Supreme Court in that matter was whether the assessee was free to disclaim/not to claim depreciation allowance while computing the profits and gains of the business. It is in that light that the Supreme Court has held, after considering the provisions of sections 28, 29, 32 and 34 with the circulars issued by the Central Board of Direct Taxes that the Assessing Officer cannot grant depreciation allowance when the same is not claimed by the assessee. Mr. Desai contended that in the case of Mahendra Mills [2000] 243 ITR 56 (SC), applicability of special deductions under Chapter VI-A was not in issue. He, therefore, contended that Mahendra Mills' case [2000] 243 ITR 56 (SC) did not apply to the present controversy. Mr. R.V. Desai further pointed out that in any event in this case the assessee has not disclaimed depreciation. He submitted that on....
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....ent of the assessee is that in view of the judgment of the Supreme Court in Mahendra Mills' case [2000] 243 ITR 56, it is open to the assessee not to claim depreciation allowance under section 32 and consequently it is argued that 20 per cent. rate of deduction should be applied to Rs. 100 in the above illustration, without taking into account the depreciation. We do not find any merit in this argument. The scheme of section 4 and section 5 of the Income-tax Act does indicate that income-tax is a tax in respect of income computed as per the provisions of the Act. There is a distinct dichotomy between cases of computation of normal income under the Act de hors Chapter VI-A and computation of taxable income where the. assessee claims the benefit of deduction under Chapter VI-A because the Legislature has intended that these special deductions should be restricted to the profits derived from a newly established undertaking. To give an illustration, export profits under section 80HHC are required to be restricted to the receipt of foreign exchange. If this object is kept in mind, then it is clear that the analogy of section 32(2) given by the assessee will not apply in cases where an a....