TaxTMI 
TaxTMI 
2009 (10) TMI 39
X X X X Extracts X X X X
X X X X Extracts X X X X
....on even though the assessee had disclaimed the same for the purposes of regular assessment ?" 2. On the above question of law, the Division Bench observed that there are conflicting decisions rendered by the two Division Benches of this Court in the case of Grasim Industries Limited V/s. C.I.T. reported in 245 I.T.R. 677 (Bom) and in the case of M/s. Scoop Industries (P) Limited V/s. Income Tax Officer reported in 289 I.T.R. 195 (Bom). The Division Bench further observed that since the above two decisions do not go hand-in-hand, and run counter to each other, the issue ought to be resolved by a Larger Bench. Accordingly, the learned Chief Justice has constituted this Full Bench for resolving the above controversy. 3. Facts relevant to the present case are that the Respondent [hereinafter referred to as 'the assessee'] is a Company incorporated under the Companies Act, 1956 and is engaged in the manufacture of master batches and compounds at its units situated at Daman. 4. The assessment year ['AY' for short] involved herein is AY 1997-1998. 5. In the assessment year in question, the assessee filed its return of income without claiming depreciation. For tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... income. 9. Being aggrieved by the aforesaid order, the Revenue filed an appeal before the Income Tax Appellate Tribunal ['ITAT' for short] and the ITAT allowed the appeal by following the decision of this Court in the case of Scoop Industries (P) Limited (supra). The decision of this Court in the case of Scoop Industries Ltd. (supra) is based on the decision of this Court in the case of Indian Rayon Corporation Ltd. V/s. CIT reported in 261 ITR 98 (Bom) wherein it was held that Chapter VIA is a separate Code by itself and if an assessee claims relief under Chapter VIA of the Act, then it is not open to that assessee to disclaim depreciation allowance. In other words, what is held in the case of Indian Rayon Ltd. (supra) is that, one cannot exclude depreciation allowance while computing profits derived from a newly established undertaking for computing deductions under Chapter VIA. Accordingly, the Tribunal set aside the order of CIT (A) and restored the reassessment order passed by the A.O. 10. Challenging the aforesaid order of the Tribunal, the present appeal is filed by the assessee. As noted earlier, the said Appeal was initially heard by a Division Bench o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion 80-IA at Rs.60/- (as per the above illustration) whereas, according to the AO, the gross total income computed after deducting the depreciation allowable under the Act (though not claimed by the assessee) results in loss and, therefore, as per Section 80A(2) no deduction was allowable under section 80-IA of the Act. 13. The basic controversy, therefore, is, whether the assessee had an option not to claim current depreciation and if so, whether the same would have any bearing in computing the deduction allowable under Section 80IA of the Act ? 14. Before dealing with the rival contentions on the above question, we may quote some of the provisions of the Act as they stood at the relevant time. 15. Section 2 (45) of the Act defines 'total income' as follows : "Definitions. 2. In this Act, unless the context otherwise requires, - 1 to 44 --------------- 45. "total income" means the total amount of income referred to in section 5, computed in the manner laid down in this Act;" 16. Section 5 of the Act (to the extent relevant) reads as follows :- "Scope of total income. 5. (1) Subject to the provisions of this Act,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eof as may be prescribed]: 20. Chapter VI of the Act (sections 66 to 80) provides for aggregation of income falling under different heads of income and also provision for set off or carry forward of loss. 21. Chapter VI-A of the Act provides for special deductions in cases specified in Sections 80-C to 80-U. Chapter VI-A is divided in to four sub-headings, namely : A - General (Sections 80A to 80B), B - deductions in respect of certain payments (Section 80C to 80GGA), C - Deductions in respect of certain incomes (Section 80H to 80RRA) and D - Other deductions (Section 80U). 22. In the present case, the dispute relates to the special deduction allowable under Section 80-IA contained in Chapter VI-A. Relevant provisions contained in Chapter VI-A including Section 80-IA (to the extent relevant), read as follows :- " CHAPTER VI-A DEDUCTIONS TO BE MADE IN COMPUTING TOTAL INCOME A-General Deductions to be made in computing total income. 80-A (1) In computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of this Chapter, the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the assessee, a deduction from such profits and gains of an amount equal to the percentage specified in sub-section (5) and for such number of assessment years as is specified in sub-section (6). (2) to (6) ........... (7) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes of determining the quantum of deduction under sub-section (5) for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year upto and including the assessment year for which the determination is to be made. (emphasis supplied) 23. Thus, Chapter II of the Act contains provisions relating to the basic charge of income tax. Chapter IV contains provisions relating to the computation of total income under various heads of income as also the deductions that are allowable under each head. Chapter VI contains provisions relat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....), the current depreciation could not be thrust upon the assessee when not claimed by the assessee. 27. Mr. Dastur referred to Explanation 5 to Section 32 (1) inserted by Finance Act 2001 with effect from 1-4-2002, which reads thus :- "Explanation 5. - For the removal of doubts, it is hereby declared that the provisions of this subsection shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income; Mr. Dastur submitted that since Explanation 5 to Section 32(1) has been expressly made operative with effect from 1-4-2002, it is clear that the said Explanation applies prospectively and not retrospectively and, therefore, in view of the clear legislative intent, current depreciation cannot be thrust upon the assessee till 1-4-2002 if not claimed by the assessee. The submission is that, when the legislature has expressly made it clear that the current depreciation has to be mandatorily allowed (even if not claimed by the assessee) with effect from 1-4-2002, the AO was not justified in thrusting current depreciation upon the assessee in the assessment year in question (AY 1997-98) even though the assessee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ection 80AB must mean business profits computed as per the provisions contained in sections 30 to 43D of the Act and if in computing the business profits under Section 30 to 43D of the Act, the claim for depreciation as per the decision of the Apex Court in the case of Mahendra Mills (supra) is optional, then, it would also be so for the purposes of section 80AB of the Act. The submission is that once the total income under Chapter IV is computed in accordance with the provisions contained in Section 30 to 43D of the Act without deducting the allowable current depreciation (on account of the assessee not claiming it), then the gross total income for the purpose of deduction under Chapter VI-A would also have to be computed without deducting current depreciation. In other words, the submission is that, where the assessee chooses not to claim current depreciation, then the total income under Chapter IV as well as the gross total income under Chapter VI-A have to be computed without deducting from the business profits the current depreciation allowable under the Act. 30. We see no merit in the above contentions. As rightly contended by Mr. Srivastav, learned counsel for the revenue....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessee would have to choose one out of the above two deductions and cannot claim both the deductions. In these circumstances, the Apex Court in the case of Mahendra Mills (supra) has observed that the assessee has an option to disclaim depreciation and that the consequence of disclaiming depreciation would be that the written down value of the asset would remain the same for the following year. Thus, even according to the Apex Court, disclaiming of depreciation cannot result in enhancement in the quantum of deduction that is allowable under any other provision in the Act. 33. Although it is contended on behalf of the revenue that the decision of the Apex Court in the case of Mahendra Mills (supra) is rendered ineffective by the subsequent amendments, we do not consider it necessary to deal with that argument, because, in our opinion, even assuming that in the year in question the assessee had an option to disclaim current depreciation in computing the total income under Chapter IV of the Act, the question is, whether the quantum of deduction allowable under section 80-IA of the Act is dependent upon the assessee claiming or not claiming current depreciation allowable under the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 36. In our opinion, the above question is no longer res-integra. The Apex Court in the case of M/s. LibertyIndia V/s. Commissioner of Income Tax reported in 2009 (12) SCALE 61, held as under : "13. Before analyzing Section 80-IB, as a prefatory note, it needs to be mentioned that the 1961 Act broadly provides for two types of tax incentives, namely, investment linked incentives and profit linked incentives. Chapter VI-A which provides for incentives in the form of tax deductions essentially belong to the category of "profit linked incentives". Therefore, when Section 80-IA / 80-IB refers to profits derived from eligible business, it is not the ownership of that business which attracts the incentives. What attracts the incentives under Section 80-IA / 80-IB is the generation of profits (operational profits). For example, an assessee company located in Mumbai may have a business of building housing projects or a ship in Nava Sheva. Ownership of a ship per se will not attract Section 80-IB (6). It is the profits arising from the business of a ship which attracts sub-section (6). In other words, deduction under sub-section (6) at the specified rate has linkage to the profits ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... v. Kirloskar Oil Engines Ltd., reported in [1986] 157 ITR 762) 15. Continuing our analysis of Sections 80-IA / 80-IB it may be mentioned that sub-section (13) of Section 80-IB provides for applicability of the provisions of sub-section (5) and sub-sections (7) to (12) to Section 80-IA, so far as may be, applicable to the eligible business under Section 80-IB. Therefore, at the outset, we stated that one needs to read Sections 80I, 80-IA and 80-IB as having a common Scheme. On perusal of sub-section (5) of Section 80-IA, it is noticed that it provides for manner of computation of profits of an eligible business. Accordingly, such profits are to be computed as if such eligible business is the only source of income of the assessee. Therefore, the devices adopted to reduce or inflate the profits of eligible business has got to be rejected in view of the overriding provisions of sub-section (5) of Section 80-IA, which are also required to be read into Section 80-IB. [see Section 80-IB(13)]. We may reiterate that Sections 80I, 80-IA and 80-IB have a common scheme and if so read it is clear that the said sections provide for incentives in the form of deduction(s) which are....
X X X X Extracts X X X X
X X X X Extracts X X X X
....allowed in determining gross total income and are not chargeable to tax because the same constitute charge on profit, whereas, deductions under Chapter VI-A are allowed from gross total income chargeable to tax. Therefore, the judgments rendered in the context of Section 80-HHC of the 1961 Act, both by this Court and by the Kerala High Court stand on different footing. "(emphasis supplied) 39. In the light of the aforesaid decisions of the Apex Court, 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. The Apex Court has held that section 80-IA contains both substantive and procedural provisions for computation of the special deduction and any device adopted to reduce or inflate the profits, of eligible business has to be rejected. In the present case, the assessee by not claiming current depreciation seeks to inflate the p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ome of an assessee includes any income by way of dividends received from a domestic company, whether deduction under section 80M contained in Chapter VIA of the Act has to be computed after deducting the interest payable on monies borrowed for earning such dividend income ? The Apex Court after reviewing the entire case law and after reversing its own judgment in the case of Cloth Traders (P) Ltd. V/s. ACIT reported in 118 ITR 243 (S.C.) held (see 155 ITR 120 at page 134) as follows:- "...... Now when an amount by way of dividend is received by the assessee from the paying company, the full amount of such dividend would have suffered tax in the assessment of the paying company and it is obvious, that, in order to encourage inter-company investments, the Legislature intended that this amount should not bear tax once again in the hands of the assessee either in its entirety or to a specified extend. But the amount by way of dividend which would otherwise suffer tax in the hands of the assessee would be the amount computed in accordance with the provisions of the Act and not the full amount received from paying company. Therefore, it is reasonable to assume that in enacting S....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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. 43. The Apex Court in the case of Distributors Baroda (P) Ltd. (supra) has quoted with approval the following passage from the decision of the Apex Court in the case of Cambay Electric Supply Industrial Co. Ltd. V/s. CIT reported in 113 ITR 84 (SC):- " On reading sub-section (1), it will become clear that three important steps are required to be taken before the special deduction permissible thereunder is allowed and the net total income exigible to tax is determined. First, compute the total income of the concerned assessee in accordance with the other provisions of the Act i.e. in accordance with all the provisions except section 80E; secondly, ascertain what part of the total income so....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ons allowable under Sections 30 to 43D of the Act. 45. Apart from the above, in the present case, 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 as per the illustration at para 33 above. 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 (as per the illustration at para 33), 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. 46. Now, let us consider the argument as to whether the ob....