Supreme Court Mandates Depreciation Deduction Under Section 80-IA of Income Tax Act: Plastiblends India Ltd. vs. ACIT (2017)

Date of the Judgment: October 9, 2017
Citation: (2017) INSC 824
Judges: A.K. Sikri, J., Ashok Bhushan, J.
Can businesses choose to ignore depreciation when calculating deductions under Section 80-IA of the Income Tax Act? The Supreme Court of India addressed this critical question, clarifying that depreciation must be considered when computing profits eligible for deductions under this section, regardless of whether the assessee claims it or not. This judgment settles a long-standing dispute about the interpretation of tax laws related to industrial undertakings. The bench comprised of Justice A.K. Sikri and Justice Ashok Bhushan, with Justice A.K. Sikri authoring the judgment.

Case Background

The case involves Plastiblends India Limited, a company engaged in manufacturing master batches and compounds, with manufacturing units in Daman. For the assessment years 1997-98 to 2000-01, the company claimed a 100% deduction under Section 80-IA of the Income Tax Act, 1961, without factoring in depreciation. The company argued that, based on a previous ruling, they had the option to not claim depreciation. However, the Income Tax Department contended that depreciation must be considered to calculate profits eligible for deduction under Section 80-IA. This dispute arose when the Assessing Officer (AO) initiated reassessment proceedings for the assessment year 1997-98, disallowing the company’s claim.

Timeline

Course of Proceedings

The Assessing Officer (AO) initiated reassessment proceedings for the Assessment Year 1997-98, disallowing the company’s claim of deduction under Section 80-IA without considering depreciation. The Commissioner of Income Tax (Appeals) {CIT(A)} initially sided with the assessee, stating that depreciation was optional. However, the Income Tax Appellate Tribunal (Tribunal) reversed this decision, following the Bombay High Court’s ruling in Scoop Industries P. Ltd. v. Income-Tax Officer. The matter was then referred to a Full Bench of the Bombay High Court due to conflicting opinions in previous cases. The Full Bench upheld the Revenue’s view, stating that depreciation must be deducted for computing profits under Section 80-IA. The Division Bench of the High Court then disposed of the appeal, following the Full Bench’s opinion.

Legal Framework

The core legal issue revolves around the interpretation of Section 80-IA of the Income Tax Act, 1961, which provides deductions for profits and gains from industrial undertakings. The relevant portion of Section 80-IA states:

“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 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).”

The Supreme Court also considered Section 32 of the Income Tax Act, which deals with depreciation. The Court referred to its previous judgment in CIT v. Mahendra Mills, which held that claiming depreciation is an option for the assessee. However, the Court clarified that this ruling was in the context of assessing business income under Chapter IV of the Act, not for deductions under Section 80-IA in Chapter VI-A.

Arguments

Assessee’s Arguments:

• ✓ The assessees argued that deductions under Section 80-IA should be allowed from the ‘profits and gains’ earned, which are to be computed as per Sections 28 to 43D of the Income Tax Act.
• ✓ They contended that Section 32, which deals with depreciation, is part of this computation, and based on the Mahendra Mills case, depreciation is optional for the assessee.
• ✓ They also pointed out that sub-sections (9) and (10) of Section 80-IA did not specifically mention depreciation, implying it was not mandatory.

Revenue’s Arguments:

• ✓ The Revenue argued that Section 80-IA is a self-contained code for computing deductions, distinct from the provisions for calculating business income under Chapter IV.
• ✓ They emphasized that the Full Bench of the Bombay High Court had correctly held that depreciation must be considered when determining profits under Section 80-IA.
• ✓ The Revenue also argued that the addition of Explanation 5 to Section 32 by the Finance Act, 2001, which made depreciation mandatory, was declaratory and should be applied retrospectively.

Innovativeness of the Argument: The assessee’s argument was innovative in its attempt to apply the principle of optional depreciation from the Mahendra Mills case to Section 80-IA, thereby seeking to maximize their deductions.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for determination:

1. Whether the eligible income of an undertaking in respect of which deductions are 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?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each authority was viewed by the Court?

• ✓ The Court distinguished CIT v. Mahendra Mills [(2000) 243 ITR 56], stating that it was not applicable to Section 80-IA as it pertained to Chapter IV of the Act.
• ✓ The Court followed Scoop Industries P. Ltd. v. Income-Tax Officer [(2007) 289 ITR 195], holding that depreciation must be reduced for arriving at profits eligible for deduction under Chapter VI-A.
• ✓ The Court relied on Liberty India v. Commissioner of Income Tax [(2009) 317 ITR 218], stating that Section 80-IA is a code by itself and linked to profits.
• ✓ The Court also relied on Commissioner of Income Tax v. Williamson Financial Services & Ors. [(2008) 297 ITR 17], noting that deductions under Chapter VI-A are allowed from gross total income.
• ✓ The Court relied on Commissioner of Income Tax, Dibrugarh v. Doom Dooma India Ltd. [(2009) 310 ITR 392], stating that Chapter VI-A refers to special deduction and is a distinct code by itself.
• ✓ The Court approved Plastiblends India Limited v. Additional Commissioner of Income-Tax & Ors. [(2009) 318 ITR 352], upholding the Full Bench judgment of the Bombay High Court.

What weighed in the mind of the Court?

The Supreme Court emphasized that Section 80-IA is a special provision designed to incentivize industrial undertakings by providing deductions linked to profits. The Court reasoned that allowing assessees to choose whether to claim depreciation would lead to an artificial inflation of profits, defeating the purpose of Section 80-IA. The Court highlighted that Chapter VI-A, which includes Section 80-IA, is a distinct code that requires all allowable deductions, including depreciation, to be considered when computing profits. This ensures that the deductions are based on actual profits and not artificially inflated figures.

The Court’s decision was primarily influenced by legal considerations, focusing on the interpretation of Section 80-IA and its distinction from Chapter IV provisions. While the factual context of the case was considered, the legal principles and the legislative intent behind Section 80-IA were the main drivers of the Court’s reasoning.

Logical Reasoning

The Court rejected the argument that assessees could choose not to claim depreciation under Section 80-IA. It emphasized that Section 80-IA is a self-contained code for computing special deductions linked to profits, not investment. Allowing assessees to inflate profits by not claiming depreciation would defeat the purpose of the provision. The Court also clarified that its previous ruling in Mahendra Mills, which allowed for optional depreciation, was specific to the context of assessing business income under Chapter IV of the Act and not applicable to Section 80-IA.

The Supreme Court concluded that the quantum of deduction under Section 80-IA must be determined by computing the gross total income from business after taking into consideration all deductions allowable under Sections 30 to 43D of the Income Tax Act, including depreciation under Section 32.

The Court quoted:

“The choice or the option available to an assessee to claim 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.”

“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.”

“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.”

Key Takeaways

• ✓ Depreciation must be mandatorily considered when computing profits eligible for deduction under Section 80-IA of the Income Tax Act.
• ✓ The ruling in CIT v. Mahendra Mills, which allowed for optional depreciation, does not apply to Section 80-IA.
• ✓ Section 80-IA is a self-contained code linked to profits, not investment, and any attempt to inflate profits will be rejected.
• ✓ This judgment clarifies the interpretation of tax laws related to deductions for industrial undertakings.

Directions

No specific directions were given by the Supreme Court in this judgment.

Development of Law

The ratio decidendi of this case is that depreciation is mandatory for computing profits eligible for deduction under Section 80-IA of the Income Tax Act, 1961. This decision clarifies that the principle of optional depreciation, as established in CIT v. Mahendra Mills, does not apply to deductions under Section 80-IA. This ruling reinforces the position that Section 80-IA is a self-contained code linked to profits, not investment, and that any attempt to artificially inflate profits for the purpose of claiming enhanced deductions will not be permitted.

Conclusion

The Supreme Court’s judgment in Plastiblends India Limited vs. Additional Commissioner of Income Tax clarifies that businesses must include depreciation when calculating profits for deductions under Section 80-IA of the Income Tax Act. This decision ensures that tax deductions are based on actual profits and not inflated figures, upholding the integrity of the tax system. The court dismissed all appeals filed by the assessees, reinforcing the mandatory nature of depreciation under Section 80-IA.