THE COMMISSIONER OF INCOME TAX vs. V.M.SALGAONCAR and BROS.LTD. and ANR.

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TXA/6/2002HC BombayHCBM05002272200227 March 2012Author: A. P. LAVANDE,R. P. SONDURBALDOTA40 pages
AI SummaryPartly Allowed

What did the High Court hold?

The High Court answered Question (i) in favour of the Revenue, holding that depreciation has to be allowed to the assessee while working out deductions under Section 80HHC and also while working out income under the head 'Business', even if not claimed in the return of income. This was based on the binding precedent of *Plastiblend's* case, which held that for deductions under Chapter VI-A, gross total income must be computed by deducting allowable deductions under Sections 32 to 43D, including depreciation under Section 32, even if current depreciation was disclaimed in Chapter IV. Questions (ii) and (iii) were answered in favour of the assessee and against the Revenue. The Court held that the mechanism under Section 80HHC(3)(c) requires determining profits attributable to export of traded goods by deducting direct and indirect costs from export turnover. If this results in a loss, as per Section 80HHC(3)(c)(ii), this loss is to be treated as profit derived from export of trading goods. Explanation (b) to Section 80HHC(3)(c) defines 'adjusted profits of the business' as profits reduced by profits from trading activity. If trading activity results in a loss, it must be added to composite profits to determine profit from manufactured goods. The Court found the Revenue's reliance on *IPCA Laboratory* and *A.M. Moosa* to be misplaced, as these cases did not support the Revenue's contention that losses on trading goods should be ignored when there is a loss. The Tribunal's finding that losses on export of trading goods have to be adjusted was upheld.

What were the facts?

The appeals were filed by the Revenue against the order of the Income-Tax Appellate Tribunal (Tribunal) dated September 28, 2001, which had allowed the appeals of the assessee, V.M. Salgaonkar & Brothers Ltd. The assessee is primarily engaged in the extraction, processing, and export of iron ore, with other income from a hotel division and services. For assessment years 1994-1995, 1995-1996, and 1996-1997, the assessee did not claim depreciation on assets used for business and also did not claim it while computing the deduction under Section 80HHC. The assessee had added losses incurred in the export of trading goods to the profits of the business to arrive at the adjusted profit for Section 80HHC purposes. The Assessing Officer disallowed depreciation in computing gross total income but allowed it for Section 80HHC. The CIT(A) allowed depreciation for both computations and directed adjustment of losses from traded goods. The Tribunal allowed depreciation for both computations and held that losses on trading goods should be added to business profits for adjusted profits and for deduction under Section 80HHC.

What were the issues?

The Tribunal had to decide three substantial questions of law: 1. Whether, on the facts and circumstances, depreciation has to be allowed to the assessee while calculating the deduction under Section 80HHC and also while calculating income under the head 'Business', even if not claimed by the assessee in the return of income. 2. Whether, in view of the disclaimer certificate issued, the assessee is entitled to add the losses on the export of trading goods of the supporting manufacturer in computing the deduction under Section 80HHC(1). 3. Whether losses on export of trading goods are to be added to the profits of the business to arrive at the adjusted profit of the business as per Explanation (b) to sub-section (3) of Section 80HHC for computing deduction under Section 80HHC, or if such loss is to be ignored. The Revenue contended that depreciation should not be allowed if not claimed. The assessee argued that depreciation must be allowed for both computations as per established law. Regarding questions (ii) and (iii), the Revenue relied on the Supreme Court decision in *IPCA Laboratory Limited vs. Deputy Commissioner of Income-Tax* to argue that losses on trading goods should be ignored. The assessee countered that the *IPCA Laboratory* decision was distinguishable and that the Supreme Court in *A.M. Moosa vs. C.I.T.* held that adjusted profit requires deduction of profits from trading goods, and if there's a loss, it should be adjusted.

Which sections of the Income-tax Act were involved?

Section 260A,Section 80HHC,Section 143(1)(a),Section 143(2),Section 142(1),Section 44AB,Section 32,Section 43D

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
1 ITXAs : 5,6,7 of 2002 IN THE HIGH COURT OF BOMBAY, AT PANAJI­GOA INCOME TAX APPEAL NO. 5 OF 2002 WITH INCOME TAX APPEAL NO. 6 OF 2002 WITH INCOME TAX APPEAL NO. 7 OF 2002 The Commissioner of Income Tax ] Having Office at Aaykar Bhavan, ] Appellant Patto Plaza, Panaji Goa ]  Vs. 1.  V.M. Salgaonkar & Brothers Ltd. ]      Salgaonkar House, ]      F.L. Gomes Road, ]      Vasco­da­Gama. ] ] 2.  The Income­Tax Appellate Tribunal ]     Panaji Bench, Aayakar Bhavan, ] Respondents     Patto Plaza, Panaji, Goa ] Ms. Asha Desai for appellant. Mr. P.J. Pardiwalla, Senior Counsel with  Mr. A.F. Diniz for respondent no.1  Coram :  A.P. Lavande &      Smt. R.P. SondurBaldota, JJ. Judgment reserved on    :   22nd September 2011 Judgment declared on    :   27th March 2012 2 ITXAs : 5,6,7 of 2002

JUDGMENT (Per Smt. R.P. SondurBaldota, J.)

1.

These   three   appeals   are   filed   by   the   revenue   under Section 260A of the Income­Tax Act (hereinafter referred to as the Act”).  The appeals are directed against the order dtd. “

28th September 2001 passed by Income­Tax Appellate Tribunal (hereinafter   referred   to   as   the   Tribunal”)   allowing   the “

appeals by respondent no.

1.

Since all the three appeals raise common questions of law, they are being disposed off   by a common order.

2.

Five questions of law were raised by the revenue in these appeals.     However,   on   10th  June   2002,   the   appeals   were admitted only on two questions. Subsequently on applications filed by the revenue, this Court by the order dtd. 19th  July 2005 has admitted one more question.  The learned counsel for the respondent­assessee submitted that admitting the third question by order dtd. 19th  July 2005 amounts to sitting in appeals over the order dtd. 10th June 2002. There is no merit in this contention because, order dtd. 10th June 2002 does not decide any issue on merits and if it is brought to the notice of the Court that an additional question needs to be admitted, then it is open to this Court to do so.  Moreover, the assessee has not challenged the order dtd. 19th July 2005. Hence, the objection   raised   for   entertaining   the   appeals   cannot   be entertained.

3.

Thus, the substantial questions of law to be considered in these appeals are as follows:­ i) Whether on the facts and circumstances of the case, depreciation has to be allowed to the assessee while working out deduction under Section 80 HHC and also   while   working   out   income   under   the   head Business” even if not claimed by the assessee in “

the return of income. ii) Whether   in   view   of   the   disclaimer   certificate issued, the assessee is entitled to add the losses on the   export   of   trading   goods   of   the   supporting manufacturer in computing the deduction under Section 80HHC (1). iii)Whether losses on export of trading goods is to be added to the profits of the business to arrive at the adjusted   profit   of   the   business   as   given   in   the Explanation (b) to sub­section (3) of section 80HHC for computing deduction under Section 80HHC or such loss to be ignored.

4.

The brief facts needed to be stated for appreciation of the above   questions  are   that   respondent   no.1,   the   assessee   is mainly engaged in extraction processing and export of iron ore. It also has other income by way of hotel division and other services.   It   had   filed   returns   of   income   for   the   years 1994­1995, 1995­1996 and 1996­1997 along with audit reports under Section 44 AB of the Act and other documents.   The returns were processed under Section 143(1)(a) of the Act. The department issued notices under Section 143(2) and 142 (1) to the assessee, who had responded by furnishing the required details.

5.

The assessee, while computing the total income, did not claim depreciation in respect of the assets used for the purpose of the assessee’s business.   The depreciation was also not claimed while claiming deduction under Section 80 HHC of the Act.   Further the assessee had while computing profits under Section 80 HHC (3)(c) from export of goods, which included both, own processed ore and trading goods, added losses incurred in export of trading goods to the profit of the business to arrive at adjusted profit of the business.   The addition of the losses was further made while computing total deduction under Section 88 HHC (1) to the extent of disclosure certificate issued to the supporting manufacturers.

6.

The assessing officer by his order dtd. 17th March 1997 disallowed   the   depreciation   in   computing   the   gross   total income of the assessee, but allowed the depreciation while computing deduction under Section 80HHC.  He treated the profits of the trading goods derived by the assessee as  Nil” “

for the purpose of arriving at the adjusted profits of the business holding that the profits do not include losses.  The profits from the trading goods were taken as  Nil”, also for “

the purpose of computing deduction under Section 80 HHC (3) (c) of the Act.  He further dis­allowed the addition of losses in respect of disclosure certificates issued, holding that Section 80 HHC (1) applies only in case of profits.

7.

Being aggrieved by the assessment order, the assessee preferred   appeals   before   the   Commissioner   of   Income­Tax (Appeals) [CIT(A) for short] .  The appeals were disposed off by the order dtd. 20th January 1998 allowing depreciation in computation of income as well as in computation of deduction under Section 80HHC. On the issue of computation of profits derived from exportation of goods and trading goods under Section 88HHC (3)(c) of the Act, the Assessing Officer was directed to reduce the loss from the traded goods worked out under   Section   80HHC   (3)(c)(ii)   from   the   proportionate adjusted profits from manufactured goods as worked out under Section  80  HHC  (3)(c)(i)   resulting   in   enhancement   of  the assessment. As regards the disclosure certificate issued by the assessee under the proviso to sub­section 1 to Section 80 HHC, the claim was rejected.

8.

Being aggrieved by the order of  C.I.T.(A), the assessee preferred   appeals   before   the   Tribunal,   which   came   to   be allowed by the order dtd. 28th September 2001. The Tribunal held that depreciation should not be deducted while computing total income as well as while computing 80 HHC deduction.  It further held that loss on trading goods is to be added to the profits of business for the purpose of adjusted profits of the business.  As regards issuance of disclaimer certificates, the Tribunal held that since the profits of trading goods includes losses,   loss   account   of   sale   to   the   extent   of   disclaimer certificates issued is to be further added to the deduction under Section 80 HHC (3)(c).   This order of the tribunal is challenged by the revenue in the present appeals.

9.

For   the   sake   of   convenience,   Section   80HHC   is reproduced below : [(1)  Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise 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 of the extend of profits, referred to in sub­section (1B,] derived by the   assessee   from   the   export   of   such   goods   or merchandise : Provided that if the assessee, being a holder of an   Export   House   Certificate   or   a   Trading   House Certificate (hereafter in this section referred to as an Export House or a Trading House, as the case may be,) issues a certificate referred to in clause (b) of sub­ section (4A), that in respect of the amount of the export turnover specified therein, the deduction under this   sub­section   is   to   be   allowed   to   a   supporting manufacturer, then the amount of deduction in the case of the assessee shall be reduced by such amount which   bears   to   the   [total   profits   derived   by   the assessee from the export of trading goods, the same proportion as the amount of export turnover specified in   the   said   certificate   bears   to   the   total   export turnover of the assessee in respect of such trading goods]. (1A)  Where   the   assessee,   being   a   supporting manufacturer, has during the previous year, sold goods or merchandise to any Export House or Trading House in   respect   of   which   the   Export   House   or   Trading House has issued a certificate under the proviso to sub­section (1), 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 to the extent of profits, referred to in sub­ section (I B),] derived by the assessee from the sale of goods or merchandise to the Export House or Trading House in respect of which the certificate has been issued by the Export House or Trading House.] (1B) For   the   purpose   of   sub­sections   (1)   and (1A), the extent of deduction  of the profits shall be an amount equal to­ (i) eighty per cent, thereof for an assessment year beginning on the 1st day of April 2001; (ii) seventy per cent, thereof for an assessment year beginning on the 1st day of April 2002; (iii) fifty per cent, thereof for an assessment year beginning on the 1st day of April 2003; (iv) thirty per cent, thereof for an assessment year beginning on the 1st day of April 2004; and no deduction shall be allowed in respect of the assessment year beginning on the 1st  day of April, 2005 and any subsequent assessment year.] (2)(a)   This   section   applies   to   all   goods   or merchandise, other than those specified in clause (b), if the  sale  proceeds  of such goods or merchandise exported out of India are [received in, or brought into India] by the assessee [(other than the supporting manufacturer)] in convertible foreign exchange [within a period of six months from the end of the previous year or, [within such further period as the competent authority may allow in this behalf ]. [Explanation.­ For the purposes of this clause, the   expression   "competent   authority"   means   the Reserve Bank of India or such other authority as is authorised under any law for the time being in force for   regulating   payments   and   dealings   in   foreign exchange.] (b) This section does not apply to the following goods or merchandise, namely :­ (i) mineral oil; and (ii) minerals and ores [(other than processed minerals and ores specified   in the Twelfth Schedule)]. [Explanation 1 : The sale proceeds referred to in clause (a) shall be deemed to have been received in India   where   such   sale   proceeds   are   credited   to   a separate account maintained for the purpose by the assessee   with   any   bank   outside   India   with   the approval of the Reserve Bank of India].

[Explanation 2 : For the removal of doubts, it is hereby declared that where any goods or merchandise are transferred by an assessee to a branch, office, warehouse or any other establishment of the assessee situate outside India and such goods or merchandise are   sold   from   such   branch,   office,   warehouse   or establishment, then, such transfer shall be deemed to be export out of India of such goods and merchandise and the value of such goods or merchandise declared in the shipping bill or bill of export as referred to in sub­section (1) of section 50 of the Customs Act, 1962 (52 of 1962), shall, for the purposes of  this section, be deemed to be the sale proceeds thereof]. [(3) For the purposes of sub­section (1), ­ (a)   Where   the   export   out   of   India   is   of   goods   or merchandise   [manufactured   or   processed   by   the assessee,] the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of   such   goods   bears   to   the   total   turnover   of   the business carried on by the assessee; (b) Where the export out of India is of trading goods, the   profits   derived   from   such   export   shall   be   the export turnover in respect of such trading goods as reduced   by   the   direct   costs   and   indirect   costs attributable to such export; (c)   Where   the   export   out   of   India   is   of   goods   or merchandise   [manufactured   or   processed   by   the assessee,] and of trading goods, the profits derived from such export shall, ­ (i)   in   respect   of   the   goods   or   merchandise [manufactured or processed by the assessee,] be the amount which bears to the adjusted profits of the business, the same proportion as the adjusted export turnover in respect of such goods bears to the adjusted total   turnover   of   the   business   carried   on   by   the assessee; and (ii) In respect of trading goods, be the export turnover in respect of such trading goods as reduced by the direct and indirect costs attributable to export of such trading goods : Provided that the profits computed under clause (a) or clause (b) or clause (c) of this sub­section shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiia) (not being profits on sale of a license acquired from any   other   person),   and   clauses   (iiib)   and   (iiic),   of section 28, the same proportion as the export turnover bears to the total turnover of business carried on by the assessee: [Provided further that in the case of an assessee having export turnover not exceeding rupees ten crores during the previous year, the profits computed under clause (a) or clause (b) or clause (c ) of this sub­section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent, of any sum referred to in clause (iiid) or clause (iiie), as the case may be, of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee: Provided also that in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the profits computed under clause (a) or clause (b) or clause (c ) of this sub­section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent, of any sum referred to in clause (iiid) of Section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assess has necessary and sufficient evidence to prove that,­ (a) he   had   an   option   to   choose   either   the   duty drawback or the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme; and (b) the rate of drawback credit attributable to the customs   duty   was   higher   than   the   rate   of   credit allowable   under   the   Duty   Entitlement   Pass   Book Scheme, being the Duty Remission Scheme: Provided also that in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the profits computed under clause (a) or clause (b) or clause (c ) of this sub­section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent, of any sum referred to in clause (iiie) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that,­ (a) he   had   an   option   to   choose   either   the   duty drawback or the Duty Free Replenishment Certificate, being the Duty Remission Scheme; and (b) the rate of drawback credit attributable to the customs   duty   was   higher   than   the   rate   of   credit allowable   under   the   Duty   Free   Replenishment Certificate, being the Duty Remission Scheme. Explanation.­­ For the purposes of this clause, rate of credit allowable” means the rate of credit “

allowable   under   the   Duty   Free   Replenishment Certificate,   being   the   Duty   Remission   Scheme calculated in the manner as may be notified by the Central Government:] [ Provided   also   that   in   case   the   computation “

under clause (a) or clause (b) or clause (c ) of this sub­ section is a loss, such loss shall be set off against the amount which bears to ninety per cent. of­­ (a) any sum referred to in clause (iiia) or clause (iiib) or clause (iiic), as the case may be, or (b) any sum referred to in clause (iiid) or clause (iiie), as the case may be, of section 28, as applicable in the case of an assessee referred to in the second or the third or the fourth proviso, as the case may be, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee.”] Explanation : For the purposes of this sub­section, ­ (a)   "Adjusted   export   turnover"   means   the   export turnover as reduced by the export turnover in respect of trading goods; (b) "Adjusted profits of the business" means the profits of the business as reduced by the profits derived from the business of export out of India of trading goods as computed in the manner provided in clause (b) of sub­ section (3); (c) "Adjusted total turnover" means the total turnover of the business as reduced by the export turnover in respect of trading goods; (d) "Direct costs" means costs directly attributable to the trading goods exported out of India including the purchase price of such goods; (e) "Indirect costs" means costs, not being direct costs, allocated in the ratio of the export turnover in respect of trading goods to the total turnover;

(f)   "Trading   goods"   means   goods   which   are   not manufactured or processed by the assessee. (3A)   For   the   purposes   of   sub­section   (1A),   profits derived by a supporting manufacturer from the sale of goods or merchandise shall be, ­ (a) In a case where the business carried on by the supporting manufacturer consists exclusively of sale of goods or merchandise to one or more Export Houses or Trading Houses, the profits of the business; (b) In a case where the business carried on by the supporting manufacturer does not consist exclusively of sale of goods or merchandise to one or more Export Houses or Trading Houses, the amount which bears to the profits of the business the same proportion as the turnover in respect of sale to the respective Export House or Trading House bears to the total turnover of the business carried on by the assessee. (4) The deduction under sub­section (1) shall not be admissible   unless   the   assessee   furnishes   in   the prescribed form, along with the return of income, the report of an accountant, as defined in the Explanation below sub­section (2) of section 288, certifying that the deduction has been correctly claimed [in accordance with the provisions of this section. (4A) The deduction under sub­section (1A) shall not be admissible   unless   the   supporting   manufacturer furnishes in the prescribed form along with his return of income, ­ (a) The report 1076 of an accountant, as defined in the Explanation below sub­section (2) of section 288, certifying   that   the   deduction   has   been   correctly claimed on the basis of the profits of the supporting manufacturer   in   respect   of   his   sale   of   goods   or merchandise to the Export House or Trading House;

and (b)   A   certificate   1078   from   the   Export   House   or Trading House containing such particulars as may be prescribed and verified in the manner prescribed that in respect of the export turnover mentioned in the certificate, the Export House or Trading House has not claimed the deduction under this section : Provided that the certificate specified in clause (b) shall be duly certified by the auditor auditing the accounts of the Export House or Trading House under the provisions of this Act or under any other law. (4B) For the purpose of computing the total income under sub­section (1) or sub­section (1A), any income not charged to tax under this Act shall be excluded. Explanation : For the purposes of this section, ­ (a)   "Convertible   foreign   exchange"   means   foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act,   1973   (46   of   1973),   and   any   rules   made thereunder; (aa)   "Export   out   of   India"   shall   not   include   any transaction by way of sale or otherwise, in a shop, emporium or any other establishment situate in India, not   involving   clearance   at   any   customs   station   as defined in the Customs Act, 1962 (52 of 1962); (b) "Export turnover" means the sale proceeds received in,   or   brought   into,   India   by   the   assessee   in convertible foreign exchange in accordance with clause (a) of sub­section (2) of any goods or merchandise to which this section applies and which are exported out of India, but does not include freight or insurance attributable   to   the   transport   of   the   goods   or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962); (ba)   "Total   turnover"   shall   not   include   freight   or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962) : Provided that in relation to any assessment year commencing on or after the 1st day of April, 1991, the expression "total turnover" shall have effect as if it also excluded any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28; (baa) "Profits of the business" means the profits of the business as computed under the head "Profits and gains of business or profession" as reduced by ­ (1) Ninety per cent of any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (2) The profits of any branch, office, warehouse or any other establishment of the assessee situate outside India; Question No. (i) : 10. allowance of a deduction for depreciation is subject to two pre­ conditions.  First is that the assessee should have asked for it and the second is that the particulars therefor should have been furnished.  In the absence of fulfillment of either of the conditions, the deduction cannot be allowed by the assessing officer. Since in the instant case, the assessee had not claimed for deduction of the depreciation, the Assessing Officer could not have allowed it on his own.   However, when it came to computing deduction under Section 80 HHC, the   assessing officer   concluded   that   depreciation   had   to   be   taken   into account for the purpose of computing the deduction in view of the decision of this court in  C.I.T. vs. Gannon Dunkerley & therein that a thing is  allowed” when it is claimed.   And “

further that a privilege cannot be to a disadvantage and an option cannot become an obligation.  The Tribunal held that the depreciation not claimed by the assessee either for the purposes of deduction under Section 80HHC or for purposes of computation of total income of the assessee should not be thrust upon the assessee.

11.

Ms. Asha Desai, the learned counsel for the revenue submits that the issue of depreciation under Chapter VIA  is no more res­integra, it having been considered and decided by the Full Bench of our Court in Plastiblends India Limited vs. Additional Commissioner of Income­Tax and others, reported in [2009] 318 I.T.R. 352 (Bom) [FB].  She submits that further relief under Chapter VI­A of the Act, then it is not open to the High Court has considered issue of claiming depreciation vis­ a­vis Section 80HHC of the Act and held that the judgment of Mahendra Mill’s case has no application.  Mr. Pardiwala, the the decision in Indian Rayon’s case. The reference in that case concerned the assessment year 1976­1977. The assessee had deducted development rebate from profits as per the profits and loss account to arrive at an amount for claiming relief under Section 80 HH.  This computation of the assessee was rejected by the Assessing Officer, who deducted depreciation also from the profits.   The contention of the assessee was further rejected by both, the first appellate authority as well as   the   Tribunal.     The   Tribunal   took   the   view   that   the Assessing Officer was justified in deducting depreciation and development rebate while computing the total income for the purposes of Section 80HH.   Being aggrieved, the assessee approached this Court by way of reference.  Our High Court after referring to the scheme of the Act held as follows.

“ The conspectus of the above sections show that income­tax is a charge on an assessee in respect of his total   income   computed   in   accordance   with   the provisions of the Act.   However, in cases where the total taxable income comprises profits derived from newly established undertaking under Section 80HH, then such profits have got to be computed separately as laid down by the Supreme Court in the case of Cambay Electric Supply Co. [1978] 113 I.T.R. 84 as if it concerns a separate assessee.   While calculating such profits, we must bear in mind sections 29 to 43A of the act.  Hence, depreciation has got to be set off as an   expense   against   gross   income   of   the   newly established undertaking in order to arrive at profits and gains of newly established undertaking.  Hence, the net profits as per the profit and loss account of newly established undertaking would be computed, after taking depreciation into account and 20 per cent of such net profit would be deductible from the gross total income of the assessee to arrive at the total income of the assessee.  It needs to be clarified that in this case, we are concerned with computation of total income of an assessee who seeks relief under Section 80HH.  In this case the assessee has claimed depreciation allowance. It is important to note that in cases   of   computation   of   normal   income,   without seeking benefit of special deduction under Chapter VI­A, an assessee is free not to claim depreciation in view of the judgment of the Supreme Court in the case of CIT v. Mahendra Mills [2000] 243 ITR 56, but if   the   assessee   claims   depreciation,   then   such depreciation will be set off as any other expenses against gross income.   Further, if such an assessee claims   deduction   under   Chapter   VI­A,   then   to calculate   profits   and   gains   of   newly   established undertaking, depreciation allowance has got to be set off   against   the   gross   income   of   newly   established undertaking   to   arrive   at   the   profits   computed   in accordance   with   the   provisions   of   the   Act,   which profits would form part of the gross total income and which would be exigible to 20 per cent deduction.  The reason is that Chapter VI­A deals with special types of income.  The deduction of 20 per cent is not to be equated   with   deprecation,   which   is   an   ordinary expense.   The idea under the above formula is that the assessee should not claim more than what he is entitled to.   Take the case of section 80HHC under which deduction is given in commensuration with the foreign   exchange,   which   the   assessee   brings   in. Therefore,   if   an   assessee   claims   deduction   under section 80HHC, depreciation has got to be set off against the gross income.  Our view is supported by the judgment of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84.” After stating the above position in law arising from scheme of the Act, our Court considered the rival arguments advanced before it.  One of the arguments advanced, on behalf of the assessee, was based on the decision in Mahendra Mills case. The argument of reading Section 80HH of the Act in the light of Mahendra Mill’s case was rejected by the Court by holding that   Mahendra   Mill’s   case   considered   only   whether   while computing profits and gains of the business, the assessee was free to disclaim depreciation allowance. It was not concerning deductions under Chapter VI­A of the Act.   The Supreme Court was required to consider only Sections 28, 29, 32 and 34 of the Act,  with the circulars issued by the Central Board of Direct   Taxes   that   the   Assessing   Officer   cannot   grant depreciation allowance when the same is not claimed by the assessee.   The   Court   observed   that   there   is   a   distinct dichotomy between cases of computation of normal income under   the   Act   de   hors   Chapter   VI­A   and   computation   of taxable   income   where   the   assessee   claims   the   benefit   of deduction under Chapter VI­A because the legislature has intended that these special deductions should be restricted to the profits derived from a newly established undertaking. The Court finally concluded as follows. “The question basically in this matter is concerning computation of deduction under Chapter VI­A 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 VI­A of the Act, then it is not open to the assessee to disclaim   depreciation   allowance.   This   is   because Chapter  VI­A 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 VI­A.    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 VI­A.  Therefore, the appellant’s claim for allowance of deduction under section 80HH, without taking into consideration the current depreciation will have to be rejected.”

13.

According to Mr. Pardiwala, Indian Rayon’s case has no application to the present issue, since in that case the assessee had not disclaimed depreciation but was merely agitating the point about stage at which deduction for depreciation was to be allowed. He concedes that there are observations in the judgment that if an assessee claims deduction under Chapter VI­A of the Act then it has no option not to claim depreciation but submits that those observations, have to be confined, if they   have   any   precedential   value,   to   a   case   for   claim   of deduction under Section 80HH is made.

14.

We are not inclined to accept the distinction sought to be drawn by Mr. Pardiwala since the decision is seen to consider the situation of disclaimer also.   Besides Section 80HH and Section 80HHC are part of the same Chapter VI­A of the Act. Indian Rayons case has in terms held that if the assessee claims relief under Chapter VI­A of the Act, then it is not open to the assessee to disclaim depreciation allowance.

15.

Ms. Asha Desai next places heavy reliance upon the decision of the Full Bench of this Court in Plastiblends case (supra).   The   facts   in   Plastiblends   case   were   that   in   the assessment year in question, the assessee had filed its return of income without claiming depreciation.  It had added back depreciation (as per books) to the net business profit, because the net business profit under the profit and loss account 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   deduction   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 under Section 80­IA of the Act.  The assessment had been re­opened by the Assessing Officer on the ground that 100% deduction under Section 80­IA of the Act was liable to be determined on the gross total income computed after deducting all the deductions allowable under Section 30 to 43D of the Act including current depreciation allowable under Section 32 of the Act.  The assessee in its reply contended that it had an option to claim or not to claim current depreciation. Since the assessee had opted not to claim current depreciation, it could not be thrust upon the assessee when not claimed. When the issue travelled to this court after the decision of the Tribunal, it was found that there was conflict in the view taken by two Division Benches of this court in the cases of Scoop Industries (P) Limited, reported in [2007] 289 I.T.R. 195 and Grasim Industries Limited, reported in [2000] 245 I.T.R.

677.

Therefore, the appeal was placed before the Full Bench for resolving the controversy. The question of law referred to the Full Bench was  Whether, in the facts and circumstances “

of the case, for the purposes of availing of allowable special deduction under Chapter VI­A of the Income­Tax 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 ?”

16.

Ms. Asha Desai submits that though the judgment dealt with specific case under Section 80IA of the Act, the reference to   the   full   bench   was   for   resolving   the   issue   regarding depreciation as allowable under Chapter VIA of the Act.  She draws our attention to the conclusion arrived at by the full bench in following words: “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 VI, in affirmative, that is, for the purpose of deduction under Chapter VI­ A, the gross total income has to be computed, inter alia, by deducting the deductions allowable under section 330 to   43D   of   the   Act,   including   depreciation   allowable under Section 32 of the Act, even though the assessee has computed the total income under Chapter IV by disclaiming the current depreciation .“

17.

Mr. Pardiwala, in reply, submits that the decision of the Full   Bench   in   Plastiblends   case,   may,   at   the   first   blush, appear to control the issue against the assessee but a closer look will confirm that it is not applicable to the facts of the present   case.   In   Plastiblend’s   case,   the   full   bench   was considering a claim for deduction under Section 80IA of the Act and not under Section 80HHC.  He submits that though the Full Bench had started with the consideration of a larger question, what was actually decided was a narrower question. In order to substantiate the argument, he draws our attention to the question of law referred to the Full Bench which has been reproduced above.  He then refers to paragraphs 14 and 24 of the judgment where the dispute is said to be narrowed down.  The same read as follows:

“14. 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 under Section 80­IA of the Act?” “24. In the present case, the dispute relates to the special   deduction   allowable   under   section   80­IA contained in Chapter VI­A”. We have carefully gone through the text of the decision in Plastiblends and find that the question referred to the Full Bench was not narrowed down.  References by the Full Bench to the specific dispute involved in the appeal will not amount to narrowing down the issue referred to at paragraph 1 of the judgment.  This gets confirmed by the concluding paragraph of the judgment which has been quoted above.

18.

Mr.Pardiwala next points out that the difference between Section 80­IA and Section 80HHC of the Act is that Section 80­IA does not specifically define how the profits derived from industrial   undertaking   are   to   be   computed   unlike   Section 80HHC which statutorily defines the same.  He submits that the very language of Section 80HHC(3) read with clause (baa) to the explanation to the section forces one to go back to Chapter IV for computation unlike other sections.  On so going back, according to him, the decision in Mahendra Mill’s case will become applicable giving an option to the assessee as regards depreciation.

19.

A similar argument had been advanced before the Full Bench by the Counsel for the assessee.  It was submitted that in the assessment year in question, the assessee had an option to claim or not to claim the current depreciation allowable under Section 32 of the Act and the assessee had chosen not to claim current depreciation.  In such a case, it was contended that the income chargeable to tax had to be computed without allowing current depreciation and, therefore, the Assessing Officer was not justified in thrusting current depreciation on the assessee while computing the income chargeable to tax. The   assessee   had   strongly   relied   upon   the   decision   in Mahendra   Mills  case   in   support   of   his   argument.   The submission was that, once the total income under Chapter IV is computed in accordance with the provisions contained in Sections 32 to 43D without deducting the allowable current depreciation, then the gross total income for the purpose of deduction under Chapter VI­A would also have to be computed without deducting current depreciation.  In other words, where the assesee chooses not to claim current depreciation, then the total income under Chapter IV, as well as, the total gross income under Chapter VI­A, will have to be computed without deducting  from the business profits the current depreciation allowable under the Act.   The Full Bench did not find any merit   in   the   contention.   It   found   that   the   decision   in Mahendra   Mills   case   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 deduction under Chapter VI­A of the  Act.  Secondly, it was held   in   Mahendra   Mills   case   that   when   there   are   two provisions under which an assessee can claim benefit, it is for the assessee to choose one and that the consequence of the assessee  not claiming depreciation in the current year would be that, the written down value would remain the same in the following year.  Thirdly, the Full Bench noted that the Apex Court   in   Mahendra   Mills   case   had   not   laid   down   any proposition   of   law   that   by   disclaiming     depreciation,   the assessee can claim enhanced deduction allowable under any other provision of the Act.   These observations of the Full Bench would be applicable with equal force to the facts of the present case also.

20.

Mr. Pardiwala, seeks to draw support from Williamson’s case. He submits that in that case, the Supreme Court was concerned with  a claim for deduction under Section 80HHC by a company that was engaged in the business of growing and manufacturing tea.  The company claimed that out of its total profits from the manufacture and sale of tea, deduction under Section 80HHC should be first allowed and Rule 8 which prescribes that 40% of the composite income from the sale of tea grown and manufactured liable to tax under the Act is to be applied to the resultant figure.  The revenue had claimed that one has to first apply Rule 8, determine the income chargeable under the head  Profits and gains of business or “

profession”   after   applying   that   Rule,   and   thereafter   allow deduction under Section 80HHC.   The Supreme Court had upheld   the   contention   of   the   revenue.     Mr.   Pardiwala,

therefore submits that one has to first compute the income chargeable under the head  Profits and gains of business or “ profession”   and   thereafter   arrive   at   the   deduction   under Section 80HHC by having regard to the figure so determined. We fail to see how this decision takes the case of the assessee any further.  The revenue has undoubtedly first computed the income   chargeable   under   the   head   Profits   and   gains   of “

business or profession” and thereafter arrived at deduction under   Section   80HHC   by   having   regard   to   the   figure   so determined.

21.

The third decision cited by Ms. Asha Desai is of Delhi High Court in Dabur’s case (supra).  This decision follows the suit in Indian Rayon’s case.  Its facts are identical to the facts of the present case, inasmuch as, they relate to deductions under Section 80HHC of the Act.  The Delhi High Court has held that it is 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 VI­A of the Act, the assessee is entitled to opt out of an claim for depreciation allowance.  Under Chapter VI­ A of the Act, there is no option available to the assessee, but to provide for depreciation allowance while calculating eligible profits and gains on which deduction is permissible under the provisions specified in Chapter VI­A.   Delhi High Court, then proceeded to distinguish the decision of the Apex Court in Mahendra Mills case, in the same way as done in the earlier two decisions.   Mr. Pardiwala, submits that though Dabur’s case deals with a claim for deduction under Section 80HHC, unfortunately, the attention of the Delhi High Court was not invited to the specific language used in sub­section 3 read with Clause (baa) which mandates that one must compute the income   chargeable   under   the   head   Profits   or   gains   of “

business or profession”.  This argument has already been dealt with earlier and rejected.

22.

The decision of Full Bench of this Court in Plastiblend’s case, that for the purposes of deduction under Chapter VI­A, the  gross  total  income  has  to be  computed,  inter­alia,  by deducting the deductions allowable under Sections 32 to 43D of the Act, including depreciation allowable under Section 32 of the Act even though the assessee has computed the total income   under   Chapter   IV   by   disclaiming   the   current depreciation, is binding on this Court.  Besides, we are also in complete agreement with the position of law stated therein. Therefore, we accept the argument of Ms. Asha Desai that the first   question   is   no   more   res­integra   and   we   hold   that depreciation has to be allowed to the assessee while working out deductions under Section 80HHC and also while working out income under the head  business” even if not claimed by “

the assessee in the return of the income.   Question (i) is

accordingly answered in favour of the revenue. Questions No. (ii) and (iii) :­

23.

These questions are two facets of one question namely, where the profits of trading goods determined under Section 80HHC(3)(c)(ii)   after  deducting   direct   and   indirect   cost   of trading goods from the export turnover of trading goods is a loss,   then,   whether   such   loss   has   to   be   ignored   while computing deduction under Section 80HHC(1) of the Act ?

24.

It   is   not   in   dispute   that   deduction   under   Section 80HHC(1) has to be computed as per the mechanism provided under  Section  80HHC(3).     In  the   present   case,   since   the assessee is engaged in the export of both traded goods as also manufactured goods, the mechanism provided under Clause (c) of Section 80HHC (3) would apply.   Section 80HHC (3)(c) provides that where a composite profit reflected in the profit and loss account, one must determine the profits that are attributable to the export of traded goods and then determine the profits that are attributable to the export of manufactured goods.

25.

The   profits   from   the   export   of   traded   goods   as   per Section   80HHC(3)(c)(ii)   are   required   to   be   determined   by reducing from the export turnover of traded goods, the direct and indirect costs.

26.

In the present case, the export turnover of trading goods is   Rs.41,50,59,635/­   and   direct/indirect   costs   are   Rs.

35,81,34,588/­ and Rs.11,14,89,257/­ respectively.  If the export turnover of trading goods amounting to Rs.41,50,59,635/­ is reduced by the direct and indirect costs amounting to Rs. 46,96,23,845/­   (Rs.35,81,34,588/­   +   Rs.   11,14,89,257/­),   the

result would be loss of Rs. 5,45,64,210/­.   As per Section 80HHC(3)(c)(ii),   the   amount   so   determined   i.e.   Rs. 5,45,64,210/­ is liable to be treated as profits derived from export of trading goods.

27.

The next step is to determine the profits arising from the export of manufactured goods as per the formula set out in Section 80HHC(3)(c)(i) of the Act.   The formula in Section 80HHC(3)(c)(ii) requires determination of adjusted profits of the   business.     Explanation   (b)   below   Section   80HHC(3)(c) defines the expression `adjusted profits of the business’   to mean the profits of the business as reduced by the profits derived from the business of export out of India of trading goods   as   computed   in   the   manner   provided   in   Section 80HHC(3)(b).  The expression `as reduced by’ in explanation (b) below Section 80HHC(3)(c) makes it clear that from the composite profits of the business, one has to deduct the profits from the trading activity so as to determine the profits from the manufacturing activity.  If the trading activity results in a loss, which as per Section 80HHC(3)(c) is liable to be treated as profit derived from trading activity, it has to be added to the composite profits to determine the profit from the export of manufactured goods.

28.

According to the revenue, in the light of the decision of the Apex Court in the case of  IPCA Laboratory Limited vs. Deputy   Commissioner   of   Income­Tax,   reported   in  [2004] (A.P. Lavande, J.)

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