Featured image for Supreme Court Judgment dated 09-10-2017 in case of petitioner name Plastiblends India Limited vs Addl. Commissioner of Income T
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Depreciation and Deduction Under Section 80-IA: Supreme Court’s Verdict

The Supreme Court of India, in the case of Plastiblends India Limited vs. Addl. Commissioner of Income Tax, Mumbai, deliberated upon the crucial issue of claiming depreciation under Section 80-IA of the Income Tax Act, 1961. The core question before the Court was whether depreciation should be mandatorily deducted while computing income under Section 80-IA, even if the assessee chooses not to claim it.

The case involved several appeals, including Civil Appeal No. 238 of 2012 and numerous related appeals filed by different entities. The primary argument revolved around the interpretation of Section 80-IA, which allows tax deductions for specific business undertakings engaged in infrastructure development and other eligible businesses.

Background of the Case

Plastiblends India Limited, the appellant, engaged in manufacturing, had two industrial units eligible for deduction under Section 80-IA. The company, while filing its returns for the assessment years 1997-98 to 2000-01, chose not to claim depreciation, thereby increasing its taxable profits and, in turn, its deduction eligibility under Section 80-IA.

The Income Tax Department, however, contended that depreciation had to be mandatorily deducted while computing profits eligible for deduction under Section 80-IA, even if the assessee opted not to claim it.

Arguments Presented

Petitioner’s Arguments

  • The petitioner relied on the Supreme Court’s judgment in CIT v. Mahendra Mills, which held that depreciation is a claimable benefit and not a mandatory deduction. The company contended that it had the right to choose whether to claim depreciation.
  • It argued that Section 80-IA does not explicitly mandate the deduction of depreciation and that it should be optional.
  • The petitioner highlighted that disallowing the option to forego depreciation would effectively reduce the benefit under Section 80-IA.

Respondent’s Arguments

  • The Income Tax Department emphasized that Section 80-IA forms a complete code in itself and mandates the computation of profits as per the provisions of the Income Tax Act.
  • It argued that depreciation is a necessary deduction under the law and must be factored into income computation.
  • The Department relied on the Full Bench decision of the Bombay High Court in Plastiblends, which held that depreciation must be deducted while computing profits under Section 80-IA.

Key Observations of the Supreme Court

The Supreme Court analyzed the provisions of Chapter VI-A, which deals with special deductions, and contrasted them with Chapter IV, which governs the computation of business income. The Court made the following crucial observations:

  • Section 80-IA is a special provision: It governs the computation of deductions for eligible businesses and is a separate code in itself.
  • Depreciation cannot be opted out: The Court ruled that depreciation must be deducted while computing eligible profits, irrespective of whether the assessee claims it.
  • Distinction between general deductions and Chapter VI-A deductions: The Court differentiated between deductions allowed under Chapter VI-A and deductions allowed under Sections 30 to 43D.
  • The ruling in Mahendra Mills does not apply: The Court held that Mahendra Mills pertained to the computation of business income and not to deductions under Section 80-IA.
  • Purpose of Section 80-IA: The Court emphasized that the objective of Section 80-IA is to provide tax incentives linked to profits, but these profits must be computed in accordance with the Income Tax Act, including the mandatory deduction of depreciation.

Supreme Court’s Judgment

The Supreme Court upheld the decision of the Bombay High Court and ruled in favor of the Income Tax Department. The Court concluded:

“The quantum of deduction 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.”

This ruling clarified that while Section 80-IA provides tax benefits to eligible businesses, it does not allow the assessee to artificially inflate profits by opting out of depreciation.

Implications of the Judgment

This decision has significant implications for businesses availing deductions under Section 80-IA:

  • Assessees cannot forego depreciation to claim higher deductions under Section 80-IA.
  • The ruling ensures uniformity in tax treatment and prevents manipulation of profits for tax benefits.
  • Taxpayers need to consider depreciation while computing income for deductions under Chapter VI-A.

The Supreme Court’s verdict reinforces the principle that tax benefits should be availed as per the provisions of the Income Tax Act and not through artificial mechanisms to enhance deductions.

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