Plastiblends India Limited Vs Addl. Commissioner of Income Tax (Supreme Court of India)
Section 80-IA of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) provides deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc. Recently, in Plastiblends India Ltd. vs. ACIT[Civil Appeal No. 238 Of 2012 with Civil Appeal Nos. 12828 Of 2017, 12757 Of 2017,12758 Of 2017, 12762 Of 2017, 540 Of 2012, 529 Of 2012, 531 Of 2012, 532 Of 2012, 530 Of 2012, 535 Of 2012, 536 Of 2012, 533 Of 2012, 534 Of 2012, 537 Of 2012, 538 Of 2012, 543 Of 2012, 544 Of 2012, 541 Of 2012, 542 Of 2012, 546 Of 2012, 545 Of 2012, 547 Of 2012, 548 Of 2012, 539 Of 2012, 550 Of 2012, 549 Of 2012, 551 Of 2012, 12755 Of 2017 and 12980 Of 2017; decided on 9.10.17], the singular issue which was to be considered in the above appeals pertained to claim of depreciation under Section 80-IA of the Act. Interpreting the provisions of Section 32 of the Act (which prevailed in the relevant Assessment Years) Supreme Court in CIT vs. Mahendra Mills[(2000) 243 ITR 56] had held that it is a choice of an assessee whether to claim or not to claim depreciation. This decision was rendered in the context of assessing business income of an assessee under Chapter IV of the Act which is regulated by Sections 28 to 43D of the Act. Section 32 deals with depreciation and allows the deductions enumerated therein from the profits and gains of business or profession. Section 80-IA of the Act, on the other hand, contains a special provision for assessment of industrial undertakings or enterprises which are engaged in infrastructure development etc. This provision allows certain specific kind of deductions in respect of depreciation.
Briefly, the assessee was engaged in the business of manufacture of master batches and compounds. For this purpose, it had manufacturing undertakings at Daman Units I and II. Units I and II began to manufacture article or things in the previous years relevant to Assessment Years 1994-95 and 1995-96 respectively. Accordingly, for the year under consideration i.e. Assessment Year 1997-98 profits of the business of both the undertakings were eligible for 100% deduction under Section 80-IA of the Act. The assessee did not claim depreciation while computing its income under the head profits and gains of business. Consequently, deduction under Section 80-IA was also claimed on the basis of such profits i.e. without reducing the same by depreciation allowance. This position was accepted by the Assessing Officer (AO) in an intimation made under Section 143(1)(a) of the Act. Likewise, for the Assessment Year 1996-97, the assessee did not claim deduction on account of depreciation. Though, this position was not accepted by the AO, the claim of the assessee was upheld by the Tribunal.
The annual accounts prepared by the assessee for the captioned year disclosed that it earned a net profit of Rs.1,80,85,409/-. This was arrived at after charging depreciation of Rs.64,98,968/- inaccordance with the Companies Act, 1956. The assessee filed its return of income for Assessment Year 1997-98 determining the gross total income at Rs.2,46,04,962/-. The gross total income included profits and gains derived from business of undertakings I and II at Daman aggregating to Rs.2,46,04,962/- which profits were eligible for deduction under Section 80-IA of the Act. After reducing the gross total income by the deductions available under Section 80-IA, the total income was computed at Rs. Nil. The AO initiated reassessment proceedings and passed an assessment order under Section 143(3) read with Section 147 computing the gross total income at Rs.34,15,583/-. Though, the assessee had disclaimed deduction in respect of depreciation, the AO allowed deduction on this account as well in respect of the same in the sum of Rs.2,13,89,379/- while computing the profit and gains of business. After reducing the gross total income by the brought forward loss of Rs.98,47,170/-, he determined the business loss to be carried forward to Assessment Year 1998-99 at Rs.66,25,587/-.
Against the said assessment order, the assessee filed the appeal before the CIT(A) urging that the AO erred in not considering the Tribunal’s decision in the assessee’s own case for the Assessment Year 1996-97 wherein it had been held that depreciation cannot be thrust on it. The CIT(A) upheld the assessee’s submission that claim for depreciation is optional, based on the Tribunal’s order in its own case for Assessment Year 1996-97 and hence allowed the appeal.
Thereafter, against the appellate order of the CIT(A), the AO filed an appeal before the Tribunal with the plea that CIT(A) erred in directing him to work out business profit and deduction under Section 80-IA of the Act without taking into account the corresponding depreciation amount. The Tribunal reversed the appellate order of the CIT(A) following the decision of the High Court of Bombay in Scoop Industries P. Ltd. vs. ITO[(2007) 289 ITR 195]. Aggrieved by the Tribunal’s order, the assessee filed the appeal there against before the High Court of Bombay under Section 260A of the Act on the basis that a substantial question of law arose for consideration. The High Court was pleased to admit the appeal and formulated the following question of law as arising for determination:
“Whether the eligible income of an undertaking in respect of which deductions available under Section 80-IA has to be reduced by the allowance of depreciation for the year even though the assessee has exercised the option not to claim depreciation under Section 32 in arriving at its income of the undertaking for the purposes of computing the assessee’s income under the head profits and gains of business or profession?”
The Division Bench of the High Court at Bombay in the assessee’s case noticed that there was a conflict of opinion in two earlier decisions viz. Grasim Industries Ltd. vs. ACIT & Ors.[ (2000) 245 ITR 677] wherein it was held that the profits and gains eligible for deduction under Chapter VI-A of the Act shall be the same as profits and gains computed in accordance with the provisions of the Act and included in the gross total income and the decision in Scoop Industries P. Ltd. where it was held that depreciation whether claimed or not has to be reduced for arriving at the profits eligible for deduction under Chapter VI-A. Noticing this conflict of opinion, the matter was referred to the Full Bench, to resolve the conflict.
The Full Bench of the High Court of Bombay upheld the stand of the Revenue, that, whilst computing a deduction under Chapter VI-A of the Act, it was mandatory to grant deduction by way of depreciation. The High Court proceeded on the basis that the computation of profits and gains for the purposes of Chapter VI-A of the Act is different from computation of profits under the head ‘profits and gains of business’. It, therefore, concluded that, even assuming that the assessee had an option to disclaim current depreciation in computing the business income, depreciation had to be reduced for computing the profits eligible for deduction under Section 80-IA of the Act. The High Court concluded that Section 80-IA provides for a special deduction linked with profits and is a code by itself and in so doing relied on the decisions of this Court in the case of Liberty India vs. CIT[(2009) 317 ITR 218] ,CIT vs. Williamson Financial Services [ (2008) 297 ITR 17] and CIT, Dibrugarh vs. Doom Dooma India Ltd. [(2009) 310 ITR 392]. The High Court proceeded on the basis that this Court in the aforementioned decisions has held that for computing such special deduction, any device adopted by an assessee to reduce or inflate the profits of such eligible business has to be rejected. The High Court ultimately held that the quantum of deduction eligible under Section 80-IA has to be determined by computing the gross total income from business after taking into consideration all the deductions allowable under Sections 30 to 43D of the Act including depreciation under Section 32 of the Act.
On appeal before Supreme Court, briefly, the learned Judges observed that it is clear from the arguments advanced by the senior counsel of the assessee that main thrust of his argument was predicated on the judgment of Supreme Court in Mahendra Mills(supra), which according to us, cannot be applied while interpreting Section 80-IA of the Act. It may be stated that judgment in Mahendra Mills(supra) was rendered while construing the provisions of Section 32 of the Act, as it existed at the relevant time, whereas we are concerned with the provisions of Chapter VI-A of the Act. Chapter IV of the Act, which allows depreciation under Section 32 of the Act is linked to investment. Section 80-IA of the Act not only contains substantive but procedural provisions for computation of special deduction. The learned Judges held that any device adopted to reduce or inflate the profits of eligible business has to be rejected. The assessees/appellants want 100% deduction, without taking into consideration depreciation which they want to utilise in the subsequent years. This would be anathema to the scheme under Section 80-IA of the Act which is linked to profits and if the contention of the assessees is accepted, it would allow them to inflate the profits linked incentives provided under Section 80-IA of the Act which cannot be permitted.