THE issue before the Bench is - Whether while claiming deduction under section 10A, the assessee is compulsorily required to claim depreciation under section 32 of the Act. And the verdict goes in favour of the assessee.
Assessee contended that the said decision was not applicable as unlike the present case, the assessee in that case did make a claim for depreciation but after claiming deduction u/s 80HH. Sub-section (6) of section 10A categorically provides that in computing the total income of the assessee of the previous year immediately succeeding the last of the relevant assessment years, depreciation shall be allowed u/s 32 on the written down value of the assets by considering as if full effect had been given to sec 32 in the years during which deduction was available under this section. Sub-section (6) mandates that the depreciation for the years during which deduction is available should be deemed to have been claimed and allowed in full. Thus, the actual claim of depreciation is not mandatory. If there had been the statutory obligation to claim depreciation during the years of availability of deduction, then there was no need to have sub-section (6). The decision of Rayon Corporation had been made in the context of section 80HC which is a separate code in itself and as per sub-section (4) of section 10A, the profit derived from export of articles has been given in a formula which bears to the profits of the business of the undertaking the same proportion as export turnover in respect of such articles or things bears to the total turnover of the business carried on by the undertaking. In the case of Indian Rayon, the relevant discussion and finding had been made in the context of section 80HHC which is a separate code in itself and in which provision, unlike section 10A where the expression “profits of the business” as used in sub-section (4) has not been specifically defined, specifically defines this expression in Explanation (baa) to section 80HHC.
After hearing both the parties, the ITAT held that,
++ the question is whether deduction under sections 10A/10B is available on the profits of the business without allowing depreciation, more specifically when such claim for depreciation was not made by the assessee. The reason for the assessee in not claiming depreciation is simple. Higher the amount of expenses and allowances, lower the amount of profit and the resultant lower amount of deduction u/ss 10A/10B and vice versa. Thus in both the cases, whether depreciation is allowed or not, there will be no income chargeable to tax. By not claiming the depreciation, the assessee will 'eat the cake and have it too’ inasmuch as it will not only reap all the benefits attaching to the higher written down value of the fixed assets under the Income-tax Act, 1961, but also there will be no loss to the assessee in terms of tax liability and further its assets will remain at the higher un-depreciated value in the books of account. The Parliament has inserted Explanation 5 to section 32 , through the Finance Act 2002, declaring that depreciation shall be allowed whether or not the assessee has claimed it;
++ As per section 10A(1) deduction is available to an undertaking in respect of profits derived from the eligible articles. In the case of Rayon Corporation Ltd. Hon’ble Bombay High Court, observed that the profits derived from a newly started undertaking shall be computed in accordance with the provisions of the Act, i.e., sections 29 to 43A. 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. If the assessee claimed relied under chapter VI-A of the Act, then it is not open to the assessee to disclaim depreciation allowance. In the absence of any definition of the expression “profits of the business” given in section 10A, the same has to be understood in a commercial sense. All the allowances which have contributed to the determination of the profits of the business must also be given deduction. Once the operation of the undertaking is inconceivable or rather impossible without the use of fixed assets, the natural consequence is that the profits of the business of the undertaking cannot be computed without allowing depreciation on such fixed assets. Section 29 categorically provides that income from business under section 28 “shall be computed in accordance with the provisions contained in sections 30 to 43D”. As section 32 granting depreciation is included in sections 30 to 43D, there is no reason for excluding it for the purposes of computing the profits of the business of the undertaking;
++ Sections 80HH and 10A/10B deal with the deductions. Even though sections 10A/10B have been included in Chapter III, it would not make any difference for the reason that sections 10A/10B are deduction sections and not exemption sections as is the case with the sections in Chapter VI-A also dealing with deduction in respect of certain incomes. There can be no ground to distinguish sections 10A/10B from the sections placed under Chapter VI-A in so far as computation of 'profits of business’ is concerned. There is no definition of the expression “profits of the business” under sections 10A/10B on the one hand and section 80HH on the other, it becomes abundantly clear that this set of sections has to be placed in different compartment from section 80HHC which specifically defines the expression “profits of the business”;
++ Clause (i) of sub-section (6) makes it clear that in computing the total income of the assessee for the eleventh year (i.e. after the expiry of the benefit u/s 10A for the first ten assessment years), depreciation u/s.32 shall be computed on the written down value of the fixed assets as reduced by the full amount of depreciation allowable for the ten relevant assessment years from the actual cost of the assets. Further, clause (iv) makes it clear that the written down value of any asset used for the business of the undertaking in the eleventh year shall be computed as if the assessee had claimed and had been actually allowed the deduction in respect of depreciation for each of the relevant assessment years. Unless full amount of admissible depreciation is actually taken into account in the first ten years, logically there is no reason to reduce the written down value of the assets in the eleventh year by the depreciation actually taken into account in the first ten years;
++ Sub-section (6) merely clarifies that in the eleventh year depreciation u/s. 32 shall be allowed on the written down value of the assets as reduced by the amount of depreciation for the ten relevant assessment years. The purpose behind sub-section (6) is that the written down value in the eleventh year has essentially to be determined after reducing the depreciation for ten years from the actual cost of the assets irrespective of the fact whether or not there were sufficient profits in any of these years to absorb depreciation. It is with such an intention that sub-sec. (6) has been couched in sec. 10A. Practically there are two blocks of years, viz., firstly the ten consecutive assessment years in which deduction is available u/s 10A and secondly the years after that. Any amount which qualifies for deduction during the first block is not available for benefit in the second block either directly or in the shape of brought forward losses etc. It implies that the profits of the business for all the years in the first block need to be computed by considering that any expenditure or allowance which contributed to the earning of income and is permissible u/ss 28 to 43D, must be allowed. Thus, the judgement of the Hon’ble Bombay High Court in the case of Indian Rayon Corporation Ltd. is squarely applicable.
Facts of the case
Assessee claimed deduction u/s 10A/10B. While computing eligible income for deduction, assessee opted not to claim depreciation in view of the judement of Supreme Court in the case of CIT vs. Mahendra Mills that the assessee cannot be forced to claim depreciation. AO observed that in the past assessee had been consistently claiming depreciation and hence the departure made in this year was not bona fide. ITAT in its order considered the decision of Indian Rayan
Corporation Ltd. Vs. CIT. Assessee filed miscellaneous application for not giving opportunity to distinguish the said decision with the case of assessee.Assessee claimed deduction u/s 10A/10B. While computing eligible income for deduction, assessee opted not to claim depreciation in view of the judement of Supreme Court in the case of CIT vs. Mahendra Mills that the assessee cannot be forced to claim depreciation. AO observed that in the past assessee had been consistently claiming depreciation and hence the departure made in this year was not bona fide. ITAT in its order considered the decision of Indian Rayan
Assessee contended that the said decision was not applicable as unlike the present case, the assessee in that case did make a claim for depreciation but after claiming deduction u/s 80HH. Sub-section (6) of section 10A categorically provides that in computing the total income of the assessee of the previous year immediately succeeding the last of the relevant assessment years, depreciation shall be allowed u/s 32 on the written down value of the assets by considering as if full effect had been given to sec 32 in the years during which deduction was available under this section. Sub-section (6) mandates that the depreciation for the years during which deduction is available should be deemed to have been claimed and allowed in full. Thus, the actual claim of depreciation is not mandatory. If there had been the statutory obligation to claim depreciation during the years of availability of deduction, then there was no need to have sub-section (6). The decision of Rayon Corporation had been made in the context of section 80HC which is a separate code in itself and as per sub-section (4) of section 10A, the profit derived from export of articles has been given in a formula which bears to the profits of the business of the undertaking the same proportion as export turnover in respect of such articles or things bears to the total turnover of the business carried on by the undertaking. In the case of Indian Rayon, the relevant discussion and finding had been made in the context of section 80HHC which is a separate code in itself and in which provision, unlike section 10A where the expression “profits of the business” as used in sub-section (4) has not been specifically defined, specifically defines this expression in Explanation (baa) to section 80HHC.
After hearing both the parties, the ITAT held that,
++ the question is whether deduction under sections 10A/10B is available on the profits of the business without allowing depreciation, more specifically when such claim for depreciation was not made by the assessee. The reason for the assessee in not claiming depreciation is simple. Higher the amount of expenses and allowances, lower the amount of profit and the resultant lower amount of deduction u/ss 10A/10B and vice versa. Thus in both the cases, whether depreciation is allowed or not, there will be no income chargeable to tax. By not claiming the depreciation, the assessee will 'eat the cake and have it too’ inasmuch as it will not only reap all the benefits attaching to the higher written down value of the fixed assets under the Income-tax Act, 1961, but also there will be no loss to the assessee in terms of tax liability and further its assets will remain at the higher un-depreciated value in the books of account. The Parliament has inserted Explanation 5 to section 32 , through the Finance Act 2002, declaring that depreciation shall be allowed whether or not the assessee has claimed it;
++ As per section 10A(1) deduction is available to an undertaking in respect of profits derived from the eligible articles. In the case of Rayon Corporation Ltd. Hon’ble Bombay High Court, observed that the profits derived from a newly started undertaking shall be computed in accordance with the provisions of the Act, i.e., sections 29 to 43A. 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. If the assessee claimed relied under chapter VI-A of the Act, then it is not open to the assessee to disclaim depreciation allowance. In the absence of any definition of the expression “profits of the business” given in section 10A, the same has to be understood in a commercial sense. All the allowances which have contributed to the determination of the profits of the business must also be given deduction. Once the operation of the undertaking is inconceivable or rather impossible without the use of fixed assets, the natural consequence is that the profits of the business of the undertaking cannot be computed without allowing depreciation on such fixed assets. Section 29 categorically provides that income from business under section 28 “shall be computed in accordance with the provisions contained in sections 30 to 43D”. As section 32 granting depreciation is included in sections 30 to 43D, there is no reason for excluding it for the purposes of computing the profits of the business of the undertaking;
++ Sections 80HH and 10A/10B deal with the deductions. Even though sections 10A/10B have been included in Chapter III, it would not make any difference for the reason that sections 10A/10B are deduction sections and not exemption sections as is the case with the sections in Chapter VI-A also dealing with deduction in respect of certain incomes. There can be no ground to distinguish sections 10A/10B from the sections placed under Chapter VI-A in so far as computation of 'profits of business’ is concerned. There is no definition of the expression “profits of the business” under sections 10A/10B on the one hand and section 80HH on the other, it becomes abundantly clear that this set of sections has to be placed in different compartment from section 80HHC which specifically defines the expression “profits of the business”;
++ Clause (i) of sub-section (6) makes it clear that in computing the total income of the assessee for the eleventh year (i.e. after the expiry of the benefit u/s 10A for the first ten assessment years), depreciation u/s.32 shall be computed on the written down value of the fixed assets as reduced by the full amount of depreciation allowable for the ten relevant assessment years from the actual cost of the assets. Further, clause (iv) makes it clear that the written down value of any asset used for the business of the undertaking in the eleventh year shall be computed as if the assessee had claimed and had been actually allowed the deduction in respect of depreciation for each of the relevant assessment years. Unless full amount of admissible depreciation is actually taken into account in the first ten years, logically there is no reason to reduce the written down value of the assets in the eleventh year by the depreciation actually taken into account in the first ten years;
++ Sub-section (6) merely clarifies that in the eleventh year depreciation u/s. 32 shall be allowed on the written down value of the assets as reduced by the amount of depreciation for the ten relevant assessment years. The purpose behind sub-section (6) is that the written down value in the eleventh year has essentially to be determined after reducing the depreciation for ten years from the actual cost of the assets irrespective of the fact whether or not there were sufficient profits in any of these years to absorb depreciation. It is with such an intention that sub-sec. (6) has been couched in sec. 10A. Practically there are two blocks of years, viz., firstly the ten consecutive assessment years in which deduction is available u/s 10A and secondly the years after that. Any amount which qualifies for deduction during the first block is not available for benefit in the second block either directly or in the shape of brought forward losses etc. It implies that the profits of the business for all the years in the first block need to be computed by considering that any expenditure or allowance which contributed to the earning of income and is permissible u/ss 28 to 43D, must be allowed. Thus, the judgement of the Hon’ble Bombay High Court in the case of Indian Rayon Corporation Ltd. is squarely applicable.
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