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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 238 OF 2012

PLASTIBLENDS INDIA LIMITED .....APPELLANT(S)

VERSUS

ADDL.  COMMISSIONER  OF  INCOME TAX, MUMBAI & ANR. .....RESPONDENT(S)

W I T H

CIVIL APPEAL NO. 12828 OF 2017

CIVIL APPEAL NO. 12757 OF 2017

CIVIL APPEAL NO. 12758 OF 2017

CIVIL APPEAL NO. 12762 OF 2017

CIVIL APPEAL NO. 540 OF 2012

CIVIL APPEAL NO. 528 OF 2012

CIVIL APPEAL NO. 529 OF 2012

CIVIL APPEAL NO. 531 OF 2012

CIVIL APPEAL NO. 532 OF 2012

CIVIL APPEAL NO. 530 OF 2012

CIVIL APPEAL NO. 535 OF 2012

CIVIL APPEAL NO. 536 OF 2012

CIVIL APPEAL NO. 533 OF 2012

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CIVIL APPEAL NO. 534 OF 2012

CIVIL APPEAL NO. 537 OF 2012

CIVIL APPEAL NO. 538 OF 2012

CIVIL APPEAL NO. 543 OF 2012

CIVIL APPEAL NO. 544 OF 2012

CIVIL APPEAL NO. 541 OF 2012

CIVIL APPEAL NO. 542 OF 2012

CIVIL APPEAL NO. 546 OF 2012

CIVIL APPEAL NO. 545 OF 2012

CIVIL APPEAL NO. 547 OF 2012

CIVIL APPEAL NO. 548 OF 2012

CIVIL APPEAL NO. 539 OF 2012

CIVIL APPEAL NO. 550 OF 2012

CIVIL APPEAL NO. 549 OF 2012

CIVIL APPEAL NO. 551 OF 2012

CIVIL APPEAL NO. 12755 OF 2017

A N D

CIVIL APPEAL NO. 12980 OF 2017

J U D G M E N T

A.K. SIKRI, J.

The singular issue which needs to be considered in these appeals

pertains to claim of depreciation under Section 80-IA of the Income Tax

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Act,  1961  (hereinafter  referred  to  as  the  ‘Act’).   Interpreting  the

provisions  of  Section  32  of  the  Act  (which  prevailed  in  the  relevant

Assessment Years1) this Court in CIT v. Mahendra Mills2 held that it is a

choice of an assessee whether to claim or not to claim depreciation.  As

aforesaid,  that  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.  The issue is as to whether claim

for  deduction  on  account  of  depreciation  under  Section  80-IA is  the

choice  of  the  assessees  or  it  has  to  be  necessarily  taken  into

consideration  while  computing  the  income under  this  provision.   For

better understanding of the aforesaid issue, the factual environment in

which the aforesaid question has germinated, needs to be recapitulated.

For the sake of convenience, facts appearing in Civil Appeal No. 238 of

2012 are taken note of.

1   Section 32 was amended by Finance Act, 2001 and Explanation 5 was added to nullify the effect of Mahendra Mills case. 2  (2000) 243 ITR 56

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2) The Assessment Years involved in this appeal are 1997-98 to 2000-01.

The assessee is  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.   

3) Coming to the Assessment Year 1997-98, from which Assessment Year

the dispute has arisen, the annual accounts prepared by the assessee

for the 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/-  in

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accordance 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/-.   

Aggrieved by the said assessment order, the assessee filed the

appeal  before  the  Commissioner  of  Income  Tax  (Appeals)  {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

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on the Tribunal’s order in its own case for Assessment Year 1996-97 and

hence allowed the appeal.   

Aggrieved by 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.  v.

Income-Tax Officer3.  Aggrieved by the Tribunal’s order, the assessee

filed the appeal thereagainst 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.  v.  Assistant  Commissioner  of

3  (2007) 289 ITR 195

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Income-Tax  &  Ors.4 wherein  it  was  held  that  the  profits  and  gains

eligible for deduction under Chapter VI-A 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 has upheld the stand

of the Revenue, that, whilst computing a deduction under Chapter VI-A,

it was mandatory to grant deduction by way of depreciation.  The High

Court has proceeded on the basis that the computation of profits and

gains for the purposes of Chapter VI-A is different from computation of

profits under the head ‘profits and gains of business’.  It has, 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  v.  Commissioner  of  Income  Tax5,

4  (2000) 245 ITR 677 5  (2009) 317 ITR 218

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Commissioner of Income Tax  v.  Williamson Financial  Services &

Ors.6 and Commissioner of Income Tax, Dibrugarh v. Doom Dooma

India Ltd.7.  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 including depreciation under Section 32.

4) After the Full Bench answered the reference in the aforesaid manner,

the appeal of the assessee was disposed of by the Division Bench vide

order dated November 03, 2009 following the aforesaid opinion of the

Full Bench.  This is how the matter has travelled up to this Court.   

5) The relevant portion of the provisions of Section 80-IA of the Act, which

was in vague during the concerned Assessment Years8, reads as under:  

“80-IA.   Deductions  in  respect  of  profits  and  gains  from industrial  undertakings etc.,  in certain cases.-  (1) Where the gross total  income of  an  assessee includes any profits  and gains derived from any business of an industrial undertaking or a hotel or operation of a ship or developing, maintaining and

6  (2008) 297 ITR 17 7  (2009) 310 ITR 392 8  It may be mentioned that Section 80-IA inserted by the Finance (No.2) Act,  1991 and was amended from time to time.  The provision was recasted and substituted by Finance Act, 2001 and certain amendments made to that provision also thereafter.  We are, however, concerned with the provision that was in force before its amendment vide Finance Act, 2001.

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operating any infrastructure facility or scientific and industrial research  and  development  or  providing  telecommunication services  whether  basic  or  cellular  including  radio  paging, domestic satellite service or network of trunking and electronic data interchange services or construction and development of housing projects or operating an industrial park or commercial production or refining of mineral oil in the North Eastern Region or in any part of India on or after the 1st day of April, 1997 (such business being hereinafter referred to as the eligible business), 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 from such profits and gains of an amount equal to the percentage specified  in  sub-section  (5)  and  for  such  number  of assessment years as is specified in sub-section (6).”

6) It  is not  in dispute that all  the assessees in these appeals are those

industrial undertakings which fulfil the conditions mentioned in Section

80-IA  and,  therefore,  are  entitled  to  deductions  as  stipulated  in

sub-section (5) of the said Section.  It is also not in dispute that all the

assessees  fall  in  that  category  of  industrial  undertakings  which  are

entitled to 100% deduction of the profits and gains derived from such

industrial undertakings for the specified number of years.  It is also an

admitted  fact  that  for  the  Assessment  Years  in  question,  they  were

entitled  to  the  aforesaid  deduction  and  their  assessments  were

completed under Section 80-IA of the Act.  Submission of Mr. Pardiwala,

the learned senior counsel for the assessees, was that deduction is to

be  allowed  from  ‘such  profits  and  gains’  and,  therefore,  in  the  first

instance, profits and gains which are earned by the assessees in the

relevant Assessment Year are to be computed.  For computation of such

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profits and gains,  one has to go back and apply the provisions from

Section  28  onwards  contained  in  Part  D  of  Chapter  IV  dealing  with

‘profits and gains from business or profession’.  Section 29 of the Act, in

this behalf, specifically stipulates that income referred to in Section 28

shall be computed in accordance with provisions contained in Sections

30  to  43D.   In  this  hue,  he  argued,  when  it  comes  to  claiming

depreciation, Section 32 of the Act gets attracted and interpreting this

Section, it has been held in Mahendra Mills case that whether to claim

depreciation  or  not  is  the  option  of  the  assessees  and  it  cannot  be

thrusted  upon  the  assessees.   Following  passage  from  the  said

judgment was relied upon by the learned senior counsel:

“40.  We do not think that the Gujarat High Court in the case of Gujarat State Warehousing Corpn. [(1976) 104 ITR 1 (Guj)] has taken the correct view in respect of the issues with which we are concerned in the present appeal. The High Court has not properly appreciated the context in which this Court made observations  in  the  case  of Jaipuria  China  Clay  Mines  (P) Ltd. [(1966) 59 ITR 555 : AIR 1966 SC 1187] on which the High Court  has  relied.  In  the  later  two  cases  of Chokshi  Metal Refinery [(1977) 107 ITR 63 (Guj)] and Arun Textile “C” [(1991) 192 ITR 700 (Guj)] the Gujarat High Court has itself taken, if we may say so, a different view falling in line with the views of the  Bombay,  Punjab  and  Haryana,  Karnataka,  Andhra Pradesh,  Calcutta  and  Kerala  High  Courts  which  view commends to us. The language of the provisions of Sections 32 and 34 is specific and admits of no ambiguity. Section 32 allows depreciation as deduction subject to the provisions of Section 34. Section 34 provides that deduction under Section 32 shall  be allowed only if  prescribed particulars have been furnished. We have seen Rule 5-AA of the Rules which though since  deleted  provided  for  the  particulars  required  for  the purpose of deduction under Section 32. Even in the absence of Rule  5-AA  return  of  income  in  the  form  prescribed  itself requires  particulars  to  be  furnished  if  the  assessee  claims depreciation. These particulars are required to be furnished in

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great detail. There is a circular of the Board dated 31-8-1965, which provides that depreciation could not be allowed where the  required  particulars  have  not  been  furnished  by  the assessee and no claim for the depreciation has been made in the return. The Income Tax Officer in such a case is required to compute the income without allowing depreciation allowance. The circular of the Board dated 11-4-1955 is of no help to the Revenue.  It  imposes  merely  a  duty  on  the  officers  of  the Department to assist the taxpayers in every reasonable way, particularly, in the matter of claiming and securing relief. The officer is required to do no more than to advise the assessee. It does  not  place  any  mandatory  duty  on  the  officer  to  allow depreciation  if  the  assessee  does  not  want  to  claim  that. Provision for claim of depreciation is certainly for the benefit of the assessee. If he does not wish to avail that benefit for some reason,  benefit  cannot  be  forced  upon  him.  It  is  for  the assessee  to  see  if  the  claim  of  depreciation  is  to  his advantage. Rather, the Income Tax Officer should advise him not  to  claim  depreciation  if  that  course  is  beneficial  to  the assessee. That would be in our view the spirit of the circular dated 11-4-1955. Income under the head “Profits and gains of business  or  profession”  is  chargeable  to  income  tax  under Section  28  and  that  income  under  Section  29  is  to  be computed  in  accordance  with  the  provisions  contained  in Sections  30  to  43-A.  The  argument  that  since  Section  32 provides for depreciation it has to be allowed in computing the income  of  the  assessee  cannot  in  all  circumstances  be accepted in view of the bar contained in Section 34. If Section 34  is  not  satisfied  and  particulars  are  not  furnished  by  the assessee his claim for depreciation under Section 32 cannot be allowed.  Section 29 is thus to be read with reference to other provisions of the Act. It is not in itself a complete code.”

 7) He also referred to sub-sections (9)  and (10)  of  Section 80-IA which

provide for specific eventualities for the purpose of deductions under the

said Section and submitted that insofar as depreciation is concerned,

that was not mentioned therein.  Thus, according to him, it is these two

sub-sections  which  contained  special  provisions  and  except  that,  for

computing the profits and gains of the business, Sections 30 to 43D had

to be applied which would embrace Section 32 as well.  

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8) Counsel  appearing  in  other  appeals  for  the  assessees  made  their

submissions  almost  on  the  same lines  thereby virtually  adopting  the

arguments advanced by Mr. Percy.     

9) Learned  counsel  for  the  Revenue  emphatically  refuted  the  aforesaid

submissions.  He extensively referred to the Full Bench judgment of the

High Court, justifying the view taken therein on the reasoning contained

in the said judgment.  In addition, he submitted that the very basis of the

judgment of this Court in Mahendra Mills Limited has been knocked off

by the Parliament with the addition of Explanation 5 to Section 32 vide

Finance Act, 2001.  Though, this provision was given effect to from April

1,  2002,  his  submission  was  that  it  is  declaratory  in  nature  and,

therefore,  has to be applied retrospectively.  In order to buttress this

submission, he relied upon the following judgments:  

(i) CIT, Bombay  v.  M/s  Gwalior  Rayon  Silk  Manufacturing  Co. Ltd.9   

(ii) Commissioner of Income Tax v. M/s Alps Theatre10  

(iii) Commissioner  of  Income  Tax-I,  Ahmedabad  v.  Gold  Coin Health Food Private Limited11  

10) In rejoinder, Mr. Percy argued that Explanation 5 to Section 32 was

9  (1992) 3 SCC 326 10  AIR 1967 SC 1437 = (1967) 3 SCR 181 11  (2008) 9 SCC 622

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specifically  made  applicable  w.e.f.  April  1,  2002  and  was,  therefore,

prospective in nature.  In this behalf,  he referred to three High Court

judgments  rendered  by Kerala  High  Court,  Madras  High   Court  and

Punjab & Haryana High Court which had taken the view as projected by

him in the following cases:  

(i) Commissioner of Income-Tax  v.  Kerala Electric Lamp Works Ltd. & Anr.12,  

(ii) Commissioner  of  Income Tax  v.  Sree Senhavalli  Textiles P. Ltd.13 and  

(iii) Shri  Ram  Nath  Jindal  and  Shri  Jaghjiwan  Ram  v.  The Commissioner of Income-Tax, Haryana, Rohtak14   

He  argued  that  wherever  Legislature  wanted  a  particular

amendment to be retrospective in nature, it was specifically provided so.

11) Before dealing with the aforesaid submissions, let us first discern

the reasons which prevailed with the Full Bench of the Bombay High

Court in arriving at the said conclusion.  

 12) We have already mentioned that Full Bench of the Bombay High

Court answered the reference by holding that  depreciation had to be

reduced for computing the profits eligible for deduction under Section

80-IA of the Act, as it was a complete code in itself.  For arriving at the

said conclusion, the Full Bench took note of the relevant provisions of

12  (2003) 261 ITR 721 13  (2003) 259 ITR 77 14  (2001) 252 ITR 590

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Chapter VI-A, particularly, Section 80A, Section 80AB and Section 80B

as  well  as  Section  80-IA  of  the  Act.   Contrasting  the  provisions  of

Chapter VI-A with Chapter IV, the High Court remarked that whereas

Chapter IV contains provision relating to the computation of total income

under various heads of income as also the deductions that are allowable

under  each  head,  Chapter  VI  contains  provisions  relating  to  the

aggregation of income and set off or carry forward of loss.  Chapter VI-A

of the Act, on the other hand, provides for special deductions that are

allowed at such rates that are specified in the respective provisions on

the gross total income of the assessee.  Keeping in view the aforesaid

scheme of these Chapters, the High Court distinguished the judgment of

this  Court  in  Mahendra Mills and held it  to  be not  applicable,  when

dealing with the cases under Section 80-IA of the Act.  In the process,

the High Court gave the following three reasons:

“31. However, it is pertinent to note that firstly, the decision of the  Apex  Court  in  the  case  of Mahendra  Mills (supra)  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 the deduction under Chapter VIA of the Act. Secondly, what is held by the Apex Court in the case of Mahendra  Mills (supra)  is  that,  when  there  are  two provisions under which an assessee can claim some 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 for the following year (see 243 ITR 56 at Page 62). Thirdly, the Apex Court in the case of Mahendra Mills (supra) has not laid down any proposition of law that by disclaiming depreciation, the assessee can claim enhanced deduction allowable under any other provision in the Act.

32. The choice or the option available to an assessee to claim

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or not to claim current depreciation as per the decision of the Apex  Court  in  the  case  of Mahendra  Mills (supra)  can  be elucidated by an illustration. Suppose an assessee is carrying business  in  scientific  research.  That  assessee  would  be entitled to deduction under section 32 (current depreciation on the plant  and machinery used for  that  business)  as  well  as deduction under section 35(1)(iv) (capital  expenditure on the scientific research business). In such a case, it cannot be said that  the  legislature  intended  to  give  double  deduction  in respect  of  the  same  business  outgoing  and  the  assessee would have to choose one out of the above two deductions and cannot claim both the deductions. In these circumstances, the Apex Court in the case of Mahendra Mills(supra) has observed that the assessee has an option to disclaim depreciation and that the consequence of disclaiming depreciation would be that the written down value of the asset would remain the same for the following year. Thus,  even according to the Apex Court, disclaiming of depreciation cannot result in enhancement in the quantum  of  deduction  that  is  allowable  under  any  other provision in the Act.”  

13) The High Court also observed that in  Mahendra Mills case, this

Court neither consider the scope of deduction under Chapter VI-A nor

the  said  decision  can  be  read  to  mean  that  by  disclaiming  current

depreciation, the assessees can claim enhanced deduction under any

other provisions in the Act.

14) After  removing  the  applicability  of  Mahendra  Mills  on  the

aforesaid grounds, the High Court proceeded to consider as to whether

it can be said that the quantum of deduction allowable under Section

80-IA  depend  upon  the  assessees  claiming  or  not  claiming  current

depreciation?  The Full Bench went on to answer this question with the

observations that it  was no longer  res integra as the Apex Court had

reflected  thereupon  in  the  case  of  Liberty  India  and  quoted  the

following passage from the said  judgment  in  support  of  its  aforesaid

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remarks:

“13.   Before  analyzing  section  80-IB,  as  a  prefatory  note,  it needs to be mentioned that the 1961 Act broadly provides for two  types  of  tax  incentives,  namely,  investment  linked incentives  and  profit  linked  incentives.  Chapter  VI-A  which provides for incentives in the form of tax deductions essentially belong to the category of “profit linked incentives”. Therefore, when section 80-IA/80-IB refers to profits derived from eligible business, it is not the ownership of that business which attracts the  incentives.  What  attracts  the  incentives  under  section 80-IA/80-IB is the generation of profits (operational profits). For example, an assessee company located in Mumbai may have a  business  of  building  housing  projects  or  a  ship  in  Nava Sheva. Ownership of a ship per se will not attract section 80-IB (6). It is the profits arising from the business of a ship which attracts  sub-section  (6).  In  other  words,  deduction  under sub-section (6) at the specified rate has linkage to the profits derived from the shipping operations. This what we mean in drawing the distinction between profit linked tax incentives and investment  linked  tax  incentives.  It  is  for  this  reason  that Parliament  has  confined  deduction  to  profits  derived  from eligible businesses mentioned in sub-sections (3) to (11A) [as they stood at the relevant time]. One more aspect needs to be highlighted. Each of the eligible business in sub-sections (3) to (11A)  constitutes  a  stand-alone  item  in  the  matter  of computation of profits.’That is the reason why the concent of “Segment  Reporting”  stands  introduced  in  the  Indian Accounting  Standards  (IAS)  by  the  Institute  of  Chartered Accountants of India (ICAI).

14.  Analysing Chapter VI-A, we find that sections 80-IB/80-IA are the Code by themselves as they contain both substantive as  well  as  procedural  provisions  .  Therefore,  we  need  to examine what these provisions prescribe for “computation of profits of the eligible business”.  It is evident that section 80-IB provides  for  allowing  of  deduction  in  respect  of  profits  and gains derived from the eligible business. The words “derived from” in  narrower  in  connotation as  compared to  the words “attributable  to”.  In  other  words,  by  using  the  expression “derived  from”,  Parliament  intended  to  cover  sources  not beyond the  first  degree.  In  the  present  batch  of  cases,  the controversy  which  arises  for  determination  is:  whether  the DEPB  credit/Duty  drawback  receipt  comes  within  the  first degree  sources?  According  to  the  assessee(s),  DEPB credit/duty drawback receipt  reduces the value of  purchases (cost neutralization), hence, it comes within first degree source as it increases the net profit proportionately. On the other hand,

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according  to  the  Department,  DEPB  credit,  duty  drawback receipt  do  not  come within  first  degree  source  as  the  said incentives  flow  from  Incentive  Schemes  enacted  by  the Government of India or from section 75 of the Customs Act, 1962.  Hence,  according  to  the  Department,  in  the  present cases,  the  first  degree  source  is  the  incentive scheme/provisions  of  the  Customs  Act.  In  this  connection, Department  places  heavy  reliance  on  the  judgment  of  this Court in Sterling Food (supra). Therefore, in the present cases, in which we are required to examine the eligible business of an industrial  undertaking,  we  need  to  trace  the  source  of  the profits  to  manufacture  [see CIT v. Kirloskar  Oil  Engines  Ltd., reported in (1986) 157 ITR 762].  

15. Continuing our analysis of sections 80-IA/80-IB it may be mentioned that sub-section (13) of section 80-EB provides for applicability  of  the  provisions  of  sub-section  (5)  and sub-sections (7)  to (12) to section 80-IA, so far as may be, applicable  to  the  eligible  business  under  section  80-IB. Therefore,  at  the  outset,  we  stated  that  one needs  to  read sections 80-1, 80-IA and 80-EB as having a common Scheme. On perusal of sub-section (5) of section 80-IA, it is noticed that it provides for manner of computation of profits of an eligible business. Accordingly, such profits are to be computed as if such  eligible  business  is  the  only  source  of  income  of  the assessee.  Therefore,     the devices adopted to reduce or inflate the profits of eligible business has got to be rejected in view of the overriding provisions of  sub-section (5) of  section 80-IA, which  are  also  required  to  be  read into  section  80-IB.  [see section 80-EB(13)]. We may reiterate that sections 801, 80-IA and 80-IB have a common scheme and if so read it is clear that  the  said  sections  provide  for  incentives  in  the  form  of deduction(s) which are linked to profits and not to investment. On analysis of sections 80-IA and 80-EB it becomes clear that any  industrial  undertaking,  which  becomes  eligible  on satisfying sub-section (2), would be entitled to deduction under sub-section (1) only to the extent of profits derived from such industrial undertaking after specified date(s). Hence, apart from eligibility, sub-section (1)  purports  to  restrict  the quantum of deduction  to  a  specified  percentage  of  profits.  This  is  the importance of the words  “derived from industrial undertaking” as against “profits attributable to industrial undertaking.

(Emphasis supplied)”   

15) The High Court also took aid of the following discussion from the

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judgment of this Court in Williamson Financial Services and held that:

“In this connection, it is also important to note that section 80A which falls in Chapter VI-A, deductions are allowed only from ‘gross total income”. The object for making such provision is to limit  the amount  of  section 80HHC deduction.  It  is  true that section 80HHC provides for deduction of a percentage of the export profits. The percentage is calculated with reference to the export profits, but the deduction is only from “gross total income”  as  defined  under  section  80B(5)  of  the  1961  Act. Therefore,  the  very  scheme of  the  1961 Act  is  to  treat  the deductions under Chapter VI-A as deductions only from “gross total income” in order to arrive at the “total income“. In other cases falling under section 28 where computation of income falls  under  the  head  “Business”,  allowances  are  deductible from  the  income  but  not  from  “gross  total  income”.  It  is, therefore,  not  possible  to  accept  the contention that  section 80HHC is part of the provisions for computation of business income. Section 80 HHC does not have any direct impact on the computation of business income in the manner in which, for example,  section  72  affects  the  computation  of  business income.”

 16) The High Court also noted that in  Doom Dooma India Ltd., this

Court  had  specifically  remarked  that  Chapter  VI-A  refers  to  special

deduction.  It is a distinct code by itself.  It was also held in the said

judgment  that  there  was  a  clear  distinction  between

‘deductions/allowances in Section 30 to 43D’ and ‘deductions admissible

under  Chapter  VI-A’ inasmuch as deductions/  allowances provided in

Sections 30 to 43D are allowed in determining gross total income and

are not  chargeable  to  tax  because the same constitute  a charge on

profit, whereas, deductions under Chapter VI-A are allowed from gross

total  income chargeable  to  tax.   After  discussing the  aforesaid  three

judgments of this Court, the High Court noticed that Section 80-IA is a

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code by itself and deduction allowable under Section 80-IA is a special

deduction  which  is  linked  to  profits,  unlike  deductions  contained  in

Chapter IV of the Act which are linked to investment.   

17) The  aforesaid  conclusion  of  the  Full  Bench  is  based  on  the

judgments  of  this  Court  and there is  no reason to disagree with  the

same, on finding that the judgments of this Court are rightly analysed

and ratio thereof is correctly understood and applied.  We, thus, entirely

agree  with  the  Full  Bench  judgment  of  the  Bombay  High  Court  in

Plastiblends  India  Limited  v.  Additional  Commissioner  of

Income-Tax & Ors.15 and the following manner in which the position has

been summed up by the High Court:

“44. To summarise, firstly, the Apex Court decision in the case of Mahendra Mills (supra) cannot be construed to mean that by disclaiming  depreciation,  the  assessee  can  claim  enhanced quantum of deduction under section 80IA. Secondly, the Apex Court in the case of Distributors (Baroda) P. Ltd. (supra) and in the  case  of Liberty  India (supra)  has  clearly  held  that  the special deduction under Chapter VIA has to be computed on the  gross  total  income  determined  after  deducting  all deductions allowable under sections 30 to 43D of the Act and any device adopted to reduce or inflate the profits of eligible business has got to be rejected. Thirdly, this Court in the case of Albright  Morarji  and  Pandit  Ltd. (supra), Grasim Industries Ltd. (supra) and Asian Cable Corporation Ltd. (supra) has only followed  the  decisions  of  the  Apex  Court  in  the  case of Distributors  Baroda (supra).  Thus,  on  analysis  of  all  the decisions referred hereinabove, it is seen that the quantum of deduction allowable under section 80-IA of the Act 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.  Therefore, whether the assessee has claimed the deductions allowable under sections 30 to 43D of the Act or not,  the quantum of

15  (2009) 318 ITR 352

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deduction under section 80IA has to be determined on the total income  computed  after  deducting  all  deductions  allowable under sections 30 to 43D of the Act.”

18) As is clear from the arguments advanced by Mr. Pardiwala, 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 of the Act.  It may be stated at the cost of the

repetition  that  judgment  in  Mahendra  Mills 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.   Marked  distinction  between  the  two  Chapters,  as

already held by this Court in the judgments noted above, is that not only

Section 80-IA is a code by itself,  it  contains the provision for  special

deduction which is linked to profits.  In contrast, Chapter IV of the Act,

which  allows  depreciation  under  Section  32  of  the  Act  is  linked  to

investment.  This Court has also made it clear that Section 80-IA of the

Act  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/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

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accepted,  it  would  allow them to  inflate  the  profits  linked  incentives

provided under Section 80-IA of the Act which cannot be permitted.

19) Having interpreted the provisions of Section 80-IA in the aforesaid

manner, it is not necessary to go into the other question, viz., whether

Explanation 5 to Section 32 of the Act 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.

20) 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.

.............................................J. (A.K. SIKRI)

.............................................J. (ASHOK BHUSHAN)

NEW DELHI; OCTOBER 9, 2017.