J.P. Devadhar, J.@mdashThis appeal filed u/s 260A of the Income Tax Act, 1961 (`Act'' for short) was initially heard by a Division Bench of this Court and by an order dated 19-12-2008, the said Division Bench requested the learned Chief Justice to constitute a Larger Bench to consider the following question of law:
Whether, in the facts and circumstances of the case, for the purposes of availing allowable special deduction under Chapter VI-A of the Income Tax Act, the gross total income is required to be computed by deducting allowable depreciation 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
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 that purpose, the assessee in its return of income, added back depreciation (as per books) to the net business profit, because, the net business profit under the Profit and Loss Account (`P & L A/c.'' for short) was arrived at after deducting depreciation (as per books). Thus, in the return of income, the assessee computed total income (under Chapter IV) without claiming depreciation. After making deductions and additions as per claims that are allowable and disallowable under the Act, the assessee determined the gross total income, on which 100% deduction was claimed u/s 80IA of the Act.
6. The above return of income was processed u/s 143(1) of the Act and intimation of acceptance of the return of income was issued u/s 143(1) of the Act without any adjustment.
7. Subsequently, the above assessment was reopened by the assessing officer [`A.O.'' for short] on the ground that 100% deduction u/s 80IA of the Act was liable to be determined on the gross total income computed after deducting all deductions allowable u/s 30 to 43D of the Act including current depreciation allowable u/s 32 of the Act. As the assessee had computed the gross total income without deducting depreciation allowable under the Act, the assessment was sought to be reopened. The assessee in its reply, relying upon the decision of the tribunal in the case of the assessee for AY 1996-1997 contended that the assessee had the option to claim or not to claim current depreciation and in the present case, the assessee had opted not to claim current depreciation and, therefore, the current depreciation cannot be trusted upon the assessee when not claimed. However, the AO rejected the contention of the assessee and passed a reassessment order by computing the gross total income after deducting the current depreciation allowable u/s 32 of the Act and after setting off the brought forward loss of AY 1996-1997. The gross total income so computed being loss, as per Section 80A(2), no deduction was allowable u/s 80IA of the Act.
8. Being aggrieved by the above reassessment order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [`CIT (A)'' for short], who allowed the appeal and directed the AO not to deduct current depreciation in computing the gross total 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
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 of this Court and the said Division Bench opined that the decision of this Court in the case of Scoop Industries (P) Limited (supra) is in conflict with the dictum laid down by another Bench of this Court in the case of Grasim Industries Limited (supra). Therefore, the appeal is placed before this Full Bench for resolving the controversy set out in the opening para of this judgment.
11. The above controversy between the assessee and the revenue can be easily understood by the following illustration. Suppose, the assessee in the year in question had only one source of income, namely, income from business. Suppose, the gross business profit in that year was Rs. 100/-, depreciation allowable as per books as also under the Act was Rs. 80/-, brought forward loss from earlier year that could be set off was Rs. 40/and the assessee was entitled to 100% deduction u/s 80IA of the Act. Assuming that there were no other claims that were allowable or disallowable under the Act, then, the computation of business profits / deduction under Chapter VI A, according to the assessee as well as the revenue would be as follows :
P & L A/c maintained by the assessee
Return of income filed by the Assessee :
Reassessment order by the A.O.
As the gross total income was in the negative, according to the revenue, no deduction was allowable u/s 80IA of the Act as per Section 80A(2) of the Act.
12. Thus, it is the contention of the assessee that by disclaiming the current depreciation allowable u/s 32 of the Act and setting off the brought forward loss of earlier year, the assessee is entitled to deduction u/s 80IA 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 u/s 80IA 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 u/s 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, the total income of any previous year of a person who is a resident includes all income from whatever source derived which
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or
(c) accrues or arises to him outside India during such year:
Provided....
17. Chapter IV of the Act deals with the computation of total income under various heads of income.
Section 14 in Chapter IV of the Act reads as follows:
Heads of income.
14. Save as otherwise provided by this Act, all income shall, for the purposes of charge of Income Tax and computation of total income, be classified under the following heads of income:
A.- Salaries.
B.-[*******]
C.-Income from house property.
D.-Profits and gains of business or profession.
E.-Capital gains.
F.-Income from other sources.
18. Section 28 in Chapter IV of the Act sets out various incomes that are chargeable to Income Tax under the head `Profits & gains of business or profession''. Section 29 in Chapter IV of the Act provides for the computation of income from profits & gains of business or profession as follows:
Income from profits and gains of business or profession, how computed.
29. The income referred to in Section 28 shall be computed in accordance with the provisions contained in Section 30 to 43D.
19. Thus, computation of business income chargeable to income tax under the head `profits and gains of business or profession'' in Chapter IV of the Act has to be made by deducting from the business income specified in Section 28, various deductions allowable u/s 30 to 43D of the Act. Section 32(1) of the Act with which we are concerned in the present case, to the extent relevant, reads as follows:
Depreciation.
32.(1) In respect of depreciation of buildings, machinery, plant or furniture owned [wholly or partly,] by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of Section 34, be allowed
(i) [***]
(ii) [in the case of any block of assets, such percentage on the written down value thereof as may be prescribed]:
20. Chapter VI of the Act (Sections 66 - 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 80C to 80U. 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 u/s 80IA contained in Chapter VI-A. Relevant provisions contained in Chapter VI-A including Section 80IA (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.
80A (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 deductions specified in Sections 80C to [80U].
(2) The aggregate amount of the deductions under this Chapter shall not, in any case, exceed the gross total income of the assessee.
Deduction to be made with reference to the income included in the gross total income.
80AB. Where any deduction is required to be made or allowed under any section [(except Section 80M)] included in this Chapter under the heading "C - Deductions in respect of certain incomes" in respect of any income of the nature specified in that section which is included in the gross total come of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income.
Definitions.
80B. In this Chapter
(1) ******
(2) ******
(3) ******
(4) ******
(5) "gross total income" means the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter.
"C. - Deductions in respect of certain incomes
....
....
Deductions in respect of profits and gains from industrial undertakings, etc., in certain cases:
80IA (1) Where the gross total income of an assessee includes any profits and gains derived from any business of an industrial undertaking or a hotel or operation of a shop or developing, maintaining and operating any infrastructure facility or scientific and industrial research and development or providing telecommunication services whether basic or cellular or operating an industrial park or commercial production of mineral oil in the North Eastern Region (such business being hereinafter referred to as the eligible business), to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income 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 up to and including the assessment year for which the determination is to be made.
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 relating to the aggregation of income and set off or carry forward of loss and Chapter VI-A of the Act provides for special deductions that are allowed at such rates that are specified in the respective provisions on the gross total income of the assessee.
24. The basic argument of Mr. Dastur, learned Senior Advocate appearing on behalf of the assessee is that, in the assessment year in question (AY 1997-1998) the assessee had an option to claim or not to claim current depreciation allowable u/s 32 of the Act and the assessee had chosen not to claim current depreciation. In such a case, it is contended that income chargeable to tax had to be computed without allowing current depreciation and, therefore, the AO was not justified in thrusting current depreciation upon the assessee while computing the income chargeable to tax.
25. In support of the above argument, Mr. Dastur strongly relied upon the decision of the Apex Court in the case of
26. Mr. Dastur further contended that in view of the deletion of Section 34(1) and (2) of the Act with effect from 1-4-1988, no doubt, the second condition would not survive, however, the first condition would still survive. Therefore, as per the decision of the Apex Court in the case of Mahendra Mills (Supra) unless the first condition is satisfied, that is, unless the assessee has claimed current depreciation, the same cannot be allowed or thrust upon the assessee. In the present case, admittedly the assessee has not claimed current depreciation and, therefore, irrespective of the deletion of Section 34(1) and (2), 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 Sub-section 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 had opted not to claim current depreciation.
28. In support of the above argument, Mr. Dastur relied upon a decision of the Kerala High Court in the case of
29. Mr. Dastur further submitted that the deduction u/s 80IA of the Act is at a percentage of the profits of the assessee''s industrial undertaking. As per Section 80AB, the profits of an industrial undertaking to which the percentage is to be applied has to be computed in accordance with the provisions of the Act before making any deduction under Chapter VIA. Profits of an industrial undertaking as per Section 29 of the Act is to be computed in accordance with the provisions contained in Sections 30 to 43D of the Act. Therefore, the expression "income.... computed in accordance with the provisions of this Act" in Section 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 u/s 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, the decision of the Apex Court in the case of Mahendra Mills (supra) has to be understood in the context in which the said decision was rendered. In that case, the Apex Court on interpretation of Section 32 and Section 34(1) and (2) of the Act (as they stood at the relevant time) held that the current depreciation can be allowed only when, firstly, the assessee has claimed current depreciation u/s 32 and secondly, the assessee has furnished requisite particulars u/s 34. The Apex Court in the Mahendra Mills (supra) has further held that the deduction by way of current depreciation is a benefit conferred upon the assessee and if the assessee does not wish to avail that benefit for some reason, then the current depreciation cannot be forced upon the assessee.
31. However, it is pertinent to note that firstly, the decision of the Apex Court in the case of Mahendra Mills (supra) was rendered in the context of determining total income of an industrial undertaking under Chapter IV of the Act and not in the context of determining the deduction under Chapter VIA of the Act. Secondly, what is held by the Apex Court in the case of Mahendra Mills (supra) is that, when there are two provisions under which an assessee can claim some benefit, it is for the assessee to choose one and that the consequence of the assessee not claiming deprecation in the current year would be that the written down value would remain the same for the following year (see
32. The choice or the option available to an assessee to claim or not to claim current depreciation as per the decision of the Apex Court in the case of Mahendra Mills (supra) can be elucidated by an illustration. Suppose an assessee is carrying business in scientific research. That assessee would be entitled to deduction u/s 32 (current depreciation on the plant and machinery used for that business) as well as deduction u/s 35(1)(iv) (capital expenditure on the scientific research business). In such a case, it cannot be said that the legislature intended to give double deduction in respect of the same business outgoing and the assessee 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 u/s 80IA of the Act is dependent upon the assessee claiming or not claiming current depreciation allowable under the Act ? To illustrate, suppose in the assessment year in question, the only source of income of the assessee was the business income. Suppose the gross business profit of the assessee in that year was Rs. 100/-, and the assessee was entitled to current depreciation u/s 32 at Rs. 80/-and 100% deduction u/s 80IA. Assuming that there were no other claims that were to be allowed to disallowed, then the computation of income,
as per the Assessee
as per the AO
Thus, as per the above illustration, where the depreciation is disclaimed by the assessee, the quantum of deduction u/s 80IA comes to Rs. 100/-and where depreciation is claimed by the assessee, the deduction u/s 80IA (as per the above illustration) comes to Rs. 20/-. The question, therefore, to be considered is, whether the quantum of deduction u/s 80IA is dependent upon the assessee claiming or not claiming depreciation ?
34. As noted earlier, the Apex Court in the case of Mahendra Mills (supra) has neither considered the scope of deduction under Chapter VI-A nor the said decision can be read to mean that by disclaiming current depreciation the assessee can claim enhanced deduction under any other provision in the Act. Therefore, reliance placed on the decision of the Apex Court in the case of Mahendra Mills (supra) in computing the quantum of deduction u/s 80IA of the Act is wholly misplaced.
35. The question then to be considered is, whether on a plain reading of Section 80IA read with other relevant provisions in Chapter VI-A, can it be said that the quantum of deduction allowable u/s 80IA depends upon the assessee claiming or not claiming current depreciation ? To be specific, the question is, whether the choice, if any, vested in the assessee in claiming or not claiming current depreciation has any bearing in determining the quantum of deduction allowable u/s 80IA of the Act ?
36. In our opinion, the above question is no longer resintegra. The Apex Court in the case of
13. Before analyzing Section 80IB, 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 80IA/80IB refers to profits derived from eligible business, it is not the ownership of that business which attracts the incentives. What attracts the incentives u/s 80IA/80IB 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 80IB(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 derived from the shipping operations. This what we mean in drawing the distinction between profit linked tax incentives and investment linked tax incentives. It is for this reason that Parliament has confined deduction to profits derived from eligible businesses mentioned in Sub-sections (3) to (11A) [as they stood at the relevant time]. One more aspect needs to be highlighted. Each of the eligible business in Sub-sections (3) to (11A) constitutes a stand-alone item in the matter of computation of profits. That is the reason why the concent of "Segment Reporting" stands introduced in the Indian Accounting Standards (IAS) by the Institute of Chartered Accountants of India (ICAI).
14. Analysing Chapter VI-A, we find that Sections 80IB / 80IA are the Code by themselves as they contain both substantive as well as procedural provisions. Therefore, we need to examine what these provisions prescribe for "computation of profits of the eligible business". It is evident that Section 80IB provides for allowing of deduction in respect of profits and gains derived from the eligible business. The words "derived from" in narrower in connotation as compared to the words "attributable to". In other words, by using the expression "derived from", Parliament intended to cover sources not beyond the first degree. In the present batch of cases, the controversy which arises for determination is: whether the DEPB credit / Duty drawback receipt comes within the first degree sources ? According to the assessee(s), DEPB credit / duty drawback receipt reduces the value of purchases (cost neutralization), hence, it comes within first degree source as it increases the net profit proportionately. On the other hand, according to the Department, DEPB credit, duty drawback receipt do not come within first degree source as the said incentives flow from Incentive Schemes enacted by the Government of India or from Section 75 of the Customs Act, 1962. Hence, according to the Department, in the present cases, the first degree source is the incentive scheme / provisions of the Customs Act. In this connection, Department places heavy reliance on the judgment of this Court in Sterling Food (supra). Therefore, in the present cases, in which we are required to examine the eligible business of an industrial undertaking, we need to trace the source of the profits to manufacture (see
15. Continuing our analysis of Sections 80IA / 80IB it may be mentioned that Sub-section (13) of Section 80IB provides for applicability of the provisions of Sub-section (5) and Sub-sections (7) to (12) to Section 80IA, so far as may be, applicable to the eligible business u/s 80IB. Therefore, at the outset, we stated that one needs to read Sections 80I, 80IA and 80IB as having a common Scheme. On perusal of Sub-section (5) of Section 80IA, 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 80IA, which are also required to be read into Section 80IB. [see Section 80IB(13)]. We may reiterate that Sections 80I, 80IA and 80IB 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 linked to profits and not to investment. On analysis of Sections 80IA and 80IB it becomes clear that any industrial undertaking, which becomes eligible on satisfying Sub-section (2), would be entitled to deduction under Sub-section (1) only to the extent of profits derived from such industrial undertaking after specified dates. Hence, apart from eligibility, Sub-section (1) purports to restrict the quantum of deduction to a specified percentage of profits. This is the importance of the words "derived from industrial undertaking" as against "profits attributable to industrial undertaking.
37. In the case of
In this connection, it is also important to note that Section 80A which falls in Chapter VI-A, deductions are allowed only from ''gross total income". The object for making such provision is to limit the amount of the amount of the Section 80HHC deduction. It is true that Section 80HHC provides for deduction of a percentage of the export profits. The percentage is calculated with reference to the export profits, but the deduction is only from "gross total income" as defined u/s under Section 80B(5) of the 1961 Act. Therefore, the very scheme of the 1961 Act is to treat the deductions under Chapter VI-A as deductions only from "gross total income" in order to arrive at the "total income". In other cases falling u/s 28 where computation of income falls under the head "Business", allowances are deductible from the income but not from "gross total income". It is, therefore, not possible to accept the contention that Section 80HHC is part of the provisions for computation of business income. Section 80HHC does not have any direct impact on the computation of business income in the manner in which, for example, Section 72 affects the computation of business income.
38. In the case of
Chapter VI-A refers to special deductions. It is a separate code by itself. There is a distinction between "deductions / allowances in Section 30 to 43-D and "deductions admissible under Chapter VI-A". Deductions / allowances provided in Sections 30 to 43-D are 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 80HHC of the 1961 Act, both by this Court and by the Kerala High Court stand on different footing.
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 u/s 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 u/s 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 80IA 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 profit linked incentives provided u/s 80IA of the Act which is not permissible as per the law laid down by the Apex Court.
40. Strong reliance was placed by the counsel for the assessee on the Constitution Bench decision of the Apex Court in the case of
41. We see no merit in the above contention. The question before the Apex Court in the case of Distributors Baroda (P) Ltd. (supra) was, where the gross total income of an assessee includes any income by way of dividends received from a domestic company, whether deduction u/s 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
...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 Section 80M, the Legislature intended to grant relief with reference to the amount of dividend computed in accordance with the provisions of the Act and not with reference to the full amount of dividend received from the paying company. It is difficult to imagine any reason why the Legislature should have intended to give relief with reference to the full amount of dividend received from the paying company when that is not the amount which is liable to suffer tax once again in the hands of the assessee. The Legislature could certainly be attributed with the intention to prevent double taxation but not to provide an additional benefit which would go beyond what is required for saving the amount of dividend from taxation once again in the hands of the assessee....
...Income by way of dividends from a domestic company included in the gross total income would, therefore, obviously be income computed in accordance with the provisions of the Act, that is, after deducting interest on monies borrowed for earning such income. If income by way of dividends from a domestic company computed in accordance with the provisions of the Act is included in the gross total income, or, in other words, forms part of the gross total income, the condition specified in the opening part of Sub-section (1) of Section 80M would be fulfilled and the provision enacted in that Sub-section would be attracted.
42. Thus, in the case of Distributors (Baroda) P. Ltd. (supra) the Apex Court has held that the deduction u/s 80M relating to certain inter-corporate dividends has to be allowed after deducting the interest payable on monies borrowed for earning such dividend income. The Apex Court has also held that Section 80M cannot be interpreted in a manner so as to confer additional benefit which would go beyond what is required for saving the amount of dividend from taxation once again in the hands of the assessee. Therefore, even in the case of Distributors Baroda (P) Ltd. (supra) the Apex Court has held that the computation of deduction under VIA cannot be done in a manner which gives additional benefit to the assessee than what is contemplated under Chapter VIA of the Act. Similar view has been taken by the Apex Court in the case of Liberty India (supra) wherein it is held that any device adopted to reduce or inflate the profits of eligible business has got to be rejected in view of the overriding provisions of subsection 5 of Section 80IB [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 u/s 80IA would not be dependent upon the assessee claiming or not claiming current depreciation, because, the quantum deduction u/s 80IA 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
On reading Sub-section (1), it will become clear that three important steps are required to be taken before the special deduction permissible there under 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 computed represents the profits and gains attributable to the business of the specified industry (here generation and distribution of electricity); and, thirdly, if there be profits and gains so attributable, deduct 8% thereof from such profits and gains and then arrive at the net total income exigible to tax.
[see
Thus, in all the aforesaid decisions of the Apex Court the consistent view taken is that, the deduction under Chapter VIA is a special deduction and the quantum of deduction there under has to be computed by ascertaining that part of the total income which represents the profits and gains derived by an undertaking after deducting all the deductions allowable u/s 30 to 43D of the Act. Therefore, assuming that in the assessment year in question the assessee has an option to disclaim depreciation, the same would not have any bearing on the computation of quantum deduction u/s 80IA of the Act.
44. To summarise, firstly, the Apex Court decision in the case of Mahendra Mills (supra) cannot be construed to mean that by disclaiming depreciation, the assessee can claim enhanced quantum of deduction u/s 80IA. Secondly, the Apex Court in the case of Distributors (Baroda) P. Ltd. (supra) and in the case of Liberty India (supra) has clearly held that the special deduction under Chapter VIA has to be computed on the gross total income determined after deducting all deductions allowable u/s 30 to 43D of the Act and any device adopted to reduce or inflate the profits of eligible business has got to be rejected. Thirdly, this Court in the case of Albright Morarji & Pandit Ltd. (supra), Grasim Industries Ltd. (supra) and Asian Cable Corporation Ltd. (supra) has only followed the decisions of the Apex Court in the case of Distributors Baroda (supra). Thus, on analysis of all the decisions referred hereinabove, it is seen that the quantum of deduction allowable u/s 80IA of the Act has to be determined by computing the gross total income from business, after taking into consideration all the deductions allowable u/s 30 to 43D of the Act. Therefore, whether the assessee has claimed the deductions allowable under Sections 30 to 43D of the Act or not, the quantum of deduction u/s 80IA has to be determined on the total income computed after deducting all deductions allowable under Sections 30 to 43D of the Act.
45. A part 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 u/s 80IA 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 u/s 80IA 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 observations made by this Court in the case of Indian Rayon (supra) which is followed in the case of Scoop Industries Ltd. (supra) are contrary to the dictum laid down by the Apex Court in the case of Mahendra Mills (supra) and Distributors Baroda (P) Ltd. (supra). It is true that in the case of Indian Rayon (supra) the assessee therein had claimed depreciation and the observations of this Court relating to cases where the assessee has not claimed depreciations were only general observations. Considerable argument was advanced by the Counsel for the assessee on the binding nature of such general observations. However, we do not consider it necessary to deal with those arguments, because in our opinion, those general observations are in consonance with the ratio laid down by the Apex Court in the case of Distributors Baroda (P) Ltd. (supra) and reiterated again in the case of Liberty India (supra). Even in the case of Grasim Industries Ltd. (supra), this Court has held that deduction u/s 80HH in Chapter VI-A has to be computed after deducting development rebate allowable u/s 33 of the Act. Thus, in our opinion, there is no conflict whatsoever in the decisions of this Court in the case of Grasim Industries Ltd. (supra) and Indian Rayon Ltd. (supra) and the ratio laid down in both the above cases are in consonance with the ratio laid down by the Apex Court in the case of Distributors Baroda (P) Ltd. (supra) and other cases referred to herein above.
47. Thus, the common thread passing through the above decisions of the Apex Court as well as the decisions of this Court including the decision in the case of Indian Rayon (supra) is that the deductions under Chapter VI-A are linked to profits and the profits for the purposes of deduction under Chapter VI-A have to be determined after considering all deductions allowable under the Act (except deductions allowable under Chapter VI-A). Therefore, whether the assessee has claimed current depreciation or not has no bearing in determining the quantum of deduction allowable u/s 80IA of the Act and once it is found that disclaiming depreciation is not in the interest of the assessee, the AO was justified in allowing current depreciation to the assessee.
48. For all the aforesaid reasons, we hold that the quantum of deduction u/s 80IA is not dependent upon the assessee claiming or not claiming depreciation, because, u/s 80IA the quantum of deduction has to be determined by computing total income from business after deducting all deductions allowable u/s 30 to 43D of the Act.
49. In the result, we answer the question referred to us set out at para 1 above in the affirmative, that is, for the purposes of deduction under Chapter VIA, the gross total income has to be computed inter alia by deducting the deductions allowable u/s 30 to 43D of the Act, including depreciation allowable u/s 32 of the Act, even though the assessee has computed the total income under Chapter IV by disclaiming the current depreciation.
50. The reference is accordingly disposed of with no order as to costs.
