10. A conjoint reading of the provisions of the Act would show that Chapter VIA of the Act refers to special types of deductions available to the assessee while computing his total income. Section 80A(1), referred to herein above, clearly sets out that in computing the Assessee is total income there shall be allowed from his gross total income, in accordance with and subject to the provisions of the Chapter VI-A deductions specified in Section 80 (C) to 80(U). The deductions sought by the assessee under Section 80-IB and 80 HHC therefore are required to be allowed in computing the total income of the assessee. Section 80-B(5) in turn, as noticed above, defines gross total income for the purposes of Chapter VI-A to mean total income computed in accordance with the provisions of this Act before making any deductions under Chapter VI-A. Sections 80-IB and 80 HHC fall in Part C under the heading ‘deductions in respect of certain incomes’. The said Part C of Chapter VI-A begins with Section 80H. Therefore, in calculating the deductions under Section 80-IB and 80 HHC firstly, gross total income would have to be calculated, which would mean, calculation of total income in accordance with the provisions of this Act. In the instant case we are concerned, with calculation of deductions under 80-IB and 80HHC.
11. In arriving at the extent of the permissible deduction under section 80 IB and section 80HHC, the income which is to be considered is that which is calculated in accordance with the provisions of the Act alone. Thus, in calculating profits and gains of business ‘derived’ from the industrial undertakings i.e, eligible businesses, under Section 80-IB or export business under Section 80 HHC, we would have to bear in mind the provisions of Sections 30 to 43D as referred to in Section 29, Section 80AB and Section 80B(5). A conjoint reading of these provisions leads to the conclusion that depreciation allowance under Section 32 will have to be deducted in arriving at the ‘profits and gains’ of business derived by an Assessee, from an industrial undertaking specified under Section 80-IB or export business under Section 80 HHC.
12. In the instant case as noticed by the Assessing Officer, the Assessee while claiming depreciation for all his units except six (6) units located in Baddi had attempted to seek a dual benefit, not envisaged under the provisions of the Act. Firstly, by opting out of a claim for depreciation allowance under Section 32 of the Act which resulted in enhancement of profit and gains derived from the industrial undertakings and/or businesses specified under Section 80-IB and Section 80 HHC of the Act, and consequent thereto led to an enhancement of the quantum of deduction under the said provisions. Secondly, by this methodology the Assessee ensured that it could avail the benefit of depreciation allowance on a higher written value of the assets in the years subsequent to the period over which the deductions under Sections 80-IB and 80 HHC would be available.
13. It is, thus, according to us important to bear in mind the scheme of the Act which envisages that, while computing normal profits which does not involve relief by way of special deduction provided for under Chapter VI-A of the Act, an Assessee is entitled to opt out of a claim for depreciation allowance. In other words, the Assessee can choose to declare and pay tax on a greater amount of income. Where, however, the Assessee seeks to claim ‘special deductions’ under Chapter VI-A of the Act, there is no option available to the assessee, but to provide for depreciation allowance while calculating the eligible profits and gains on which deduction is permissible under the provisions specified in Chapter VI-A. In this context, as discussed also by the authorities below, the decision of the Supreme Court in the case of CIT vs. Mahindra Mills Ltd. (2000) 243 ITR 246 is clearly distinguishable for following reasons:-
13.1 Firstly, the decision in Mahindra Mills Ltd. (supra) pertained to assessment years 1974-75 when, Section 34 was present on the Statute book. Briefly, Section 34 provided that in order to claim depreciation under Section 32 of the Act, the Assessee was required to give particulars as specified under Section 34 of the Act. With effect from 1.4.1988 Section 34 was deleted from the Statute book and, a consequential amendment was made in Section 32 of the Act. It was in this context that the Supreme Court had observed that the Assessee had an option to claim depreciation and the same could not be thrust upon the assessee.
13.2 The case which is apposite to the facts of the present case is the judgment of the Supreme Court in the case of Cambay Electric Supply Industrial Company Ltd. Vs. CIT (1978) 113 ITR 84. The assessee in the said case was in the business of generation and distribution of electricity, and as such, was entitled to deduction under Section 80E(1) of the Act as obtaining at the relevant point in time. The Assessing Officer had included income earned by the assessee on sale of machinery under Section 41(2) as balancing charge. Apart from the issue whether income from sale of machinery and the resulting balancing charge could be included in arriving at profits ‘attributable’ (the expression then appearing in the Act as against ‘derived’) to the business of the Assessee, the other issue which the Supreme Court was called upon to answer was whether unabsorbed depreciation and unabsorbed development rebate would have to be adjusted in computing the eligible profits ‘attributable’ to such business. The Supreme Court answered the question as follows:-
???. The court has further observed that in its opinion the deduction under Section 80E is a special benefit given to a company which satisfies the conditions under Section 80E and the deduction permissible thereunder is only from profits and gains attributable to the specified activities and this benefit should not be diminished by the other benefits conferred by the Act, such as the right to have the previous losses set off, that the two serve different purposes and the benefit of both must be available to an assessee, without the one impinging on the other. It will thus appear that the Kerala High Court has regarded section 72 appearing in Chapter VI as a provision unconnected with the computation of the total income of an assessee and a provision which comes into operation at a stage subsequent to the computation of the total income arising from business done in accordance with Sections 30 to 43A occurring in Chapter IV of the Act and, therefore, the unabsorbed losses cannot be set off before calculating the deduction under Section 80E. It is not possible to accept the view that section 72 has no bearing on, or is unconnected with, the computation of the total income of an assessee under the head ‘Profits and gains of business or profession’. Actually, section 72(1) provides that where the net result of computation
under the head ‘Profits and gains of business or profession’ is a loss and such loss cannot be or is not wholly set off against the income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off, subject to the other provisions of the Chapter, shall be carried forward to the following assessment year and shall be set off against the profits and gains, if any, of any business or profession for that assessment year. Therefore, section 72(1) has a direct impact upon the computation under the head ‘Profits and gains of business or profession’. In other words, the correct figure of total income, which is otherwise taxable under other provisions of the Act, cannot be arrived at without working out the net result of computation under the head ‘Profits and gains of business or profession’. Further, the question whether special benefit under section 80E as well as the normal or usual benefit of carry forward of losses of previous years should both be available to an assessee, without one impinging on the other must depend upon the intention of the legislature and such intention has to be gathered from the language employed. In this view of the matter it is extremely doubtful whether in spite of the legislative mandate contained in the three steps provided for by sub-section (1) of section 80E, the carried forward losses would not be deductible before working out the 8% deduction contemplated by Section 80E and, therefore, the contention that by parity of reasoning or on a priori reasoning unabsorbed development rebate and unabsorbed depreciation should be held to be non-deductible before working out the 8% deduction under section 80E(1) cannot be accepted. As observed earlier, on a proper construction of the provision contained in sub-section (1) of section 80E, items like unabsorbed depreciation and unabsorbed development rebate will have to be deducted in arriving at the figure which would be exigible to deduction of 8% under section 80E(1).
14. The controversy at hand was examined by the Bombay High Court in the case of Indian Rayon Corporation Ltd. Vs. Commissioner of Income Tax (2003) 261 ITR 98. The Bombay High Court examined the issue at great length. The relevant observations read as follows:-
?? Secondly, in any event, the controversy in Mahendra Mills case (2000) 243 ITR 56 (SC) was not concerning deductions under Chapter VI-A of the Income-tax Act. Therefore, that judgment would not apply to this case. The important distinction, which is required to be noticed in this case, is that we are required to compute the total taxable income of the assessee who has claimed special deduction under Chapter VI-A. For that purpose, one has to keep in mind the provisions of sections 80B(5) and 80AB. Consequently, section 80HH, inter alia, lays down that if the gross total income includes profits from a newly established undertaking then 20 per cent of such profits would be deductible from the gross total income in order to arrive at the total taxable income. That, in such a case, profits derived from a newly established undertaking shall be computed in accordance with the provisions of the Act, i.e., section 29 to section 43A. Therefore, net profit will have to be computed in accordance with the provisions of the Act. The argument 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 assessee claims special deduction under Chapter VI-A. The matter can be looked at from another angle. While computing normal income, an assessee may set off depreciation against its gross income. In such cases, depreciation is like any other ordinary expense. However, such depreciation cannot be equated with special deduction under Chapter VI-A. In any event, in this case, on the facts, the assessee claims depreciation of Rs.75 from the balance income of Rs. 80 and, therefore, the judgment of the Supreme Court in Mahendra Mills case (2000) 243 ITR 56 has no application. In the above judgments of the Bombay High Court to which one of us (Kapadia J.) was a party it has been held, inter alia, that Chapter VI-A of the Income-tax Act deals with special deductions. That, Chapter VI-A, for the purposes of computing such deductions, constituted a separate code by itself. In order to compute the total taxable income of the assessee, deductions computed under section 80HH have to be reduced from the gross total income of the assessee. The question basically in this matter is concerning computation of deduction under Chapter VI-A in which section 80HH falls. Profits and gains of a newly established undertaking, therefore, have got to be computed as per the provisions of section 29 to section 43A and if the assessee claims relief under Chapter VI-A of the Act, then it is not open to the assessee to disclaim depreciation allowance. This is because Chapter VI-A is an independent code by itself for computing these special types of deductions. In other words, one must first calculate the gross total income from which one must deduct a percentage of incomes contemplated by Chapter VI-A. That such special incomes were required to be computed as per the provisions of the Act, viz., section 29 to section 43A, which included section 32(2). Therefore, one cannot exclude depreciation allowance while computing profits derived from a newly established undertaking for computing deductions under Chapter VI-A. Therefore, the appellant’s claim for allowance of deduction under section 80HH, without taking into consideration the current depreciation will have to be rejected.