By TIOL News Service

NEW DELHI, OCT 10, 2017: THE issue before the Bench is - Whether allowing 100% deduction u/s 80IA which is linked to profits, would be anathema to the special scheme. YES is the verdict.

Facts of the case

The Assessee-company was engaged in the business of manufacturing master batches and compounds. The Assessee filed its return for AY 1997-98, determining the gross total income, which included profits and gains derived from business of undertakings I and II at Daman which were eligible for deduction u/s 80-IA. However, the Assessee did not claim depreciation but claimed deduction u/s 80-IA without reducing the same by depreciation allowance. This position was accepted by the AO in an intimation made under Section 143(1)(a). After reducing the gross total income by the deductions available u/s 80-IA, the total income was computed at Rs. Nil. Reassessment proceeding was initiated and thereby, the AO computed the gross total income at Rs.34,15,583/- and passed an assessment order u/s 143(3) r/w section 147. Further, the AO allowed deduction of depreciation while computing the profit and gains of business. After reducing the gross total income by the brought forward loss, he determined the business loss to be c/f to AY 1998-99. But for the AY 1996-97, the Assessee's claim was upheld by the Tribunal which had held that the depreciation could not be thrust on the Assessee.On appeal, the CIT(A) upheld the Assessee’s submission that the claim for depreciation was optional, based on the Tribunal’s order in its own case for AY 1996-97 and therefore, allowed the appeal but the Tribunal reversed the CIT(A)'s order following the decision of the High Court of Bombay in the case of Scoop Industries P. Ltd. On appeal, the High Court noticed that there was a conflict of opinion in two earlier decisions viz. Grasim Industries Ltd., wherein it was held that the profits and gains eligible for deduction under Chapter VI-A should be same as profits and gains computed in accordance with the provisions of the Act and included in the gross total income. The other being the decision in Scoop Industries P. Ltd., where it was held that depreciation whether claimed or not had to be reduced for arriving at the profits eligible for deduction under Chapter VI-A. Therefore, the matter was further referred to the Full Bench.

The Full Bench upheld Revenue's stand, that, while computing a deduction under Chapter VI-A, it was mandatory to grant deduction by way of depreciation. It was 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 u/s 80-IA.

After hearing the parties, the Apex Court held that,

++ it is clear from the arguments advanced by Mr. Pardiwala, senior counsel for the Assessees, the main thrust of his argument was predicated on the judgment of this Court in Mahendra Mills, which according to us, cannot be applied while interpreting Section 80-IA. It may be stated at the cost of the repetition that judgment in Mahendra Mills was rendered while construing the provisions of Section 32, as it existed at the relevant time, whereas we are concerned with the provisions of Chapter VI-A;

++ chapter IV, which allows depreciation u/s 32, is linked to investment. This Court has also made it clear that Section 80-IA not only contains substantive but procedural provisions for computation of special deduction. Thus, any device adopted to reduce or inflate the profits of eligible business has to be rejected. The Assessees wants 100% deduction, without taking into consideration depreciation which they want to utilise in the subsequent years. This would be anathema to the scheme u/s 80-IA 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 u/s 80-IA which cannot be permitted;

++ having interpreted the provisions of Section 80-IA, it is not necessary to go into the other question, viz., whether Explanation 5 to Section 32 is declaratory in nature or it is to be applied prospectively. Judgments cited by both the sides on this aspect, therefore, need not be dealt with. Result of the aforesaid discourse would be to hold that there is no merit in any of the appeals filed by the Assessees which are accordingly dismissed.

(See 2017-TIOL-377-SC-IT)