S.H. Kapadia, J.

1. At the behest of the assesses the Tribunal has referred the following question of law for our opinion under Section 256(1) of the Income Tax Act 1961. The reference concerns the assessment year 1976-77. The question referred, is as follows :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in coming to the conclusion that depreciation allowance ought to be deducted while computing the total income for the purposes of deduction under Section 80HH "

Facts :

2. In the return for the assessment year in question, the assessee claimed deduction under Section 80HH as follows :

Rs.

Profit as per profit and loss account

77,96,076

Less : Development rebate

9,32,677

68,63,399

3. On this amount of Rs. 68,63,399, the assessee claimed relief under Section 80HH at the rate of 20 per cent., amounting to Rs, 13,72,680.

4. The said computation of the assessee was made, by placing reliance on Section 32(2) of the Income Tax Act. According to the assessee, in Section 32(2) of the Act, the word "chargeable" should be interpreted to signify the amount of profits and gains computed, after deducting therefrom the deductions permissible under Sections 80HH and 80]. That, the effect would be that to the extent of deduction, the profits and gains would not be chargeable. In this connection, the assessee relied upon the judgment of the Kerala High Court in the case of Indian Transformers Limited v. CIT : [1972]86ITR192(Ker) .

5. This argument was rejected by the Assessing Officer. The Assessing Officer determined the allowable deduction under Section 80HH as follows :

Rs.

Rs.

Profits as per profit and loss account

77,96,076

Less : Depreciation

87,76,690

Development rebate

9,32,677

97,09,367

Nil

6. Being aggrieved, the assessee went in appeal to the Commissioner. The first appellate authority rejected the contention of the assessee. It took the view that depreciation has got to be taken into account for determination of profits derived from industrial undertaking whether it is determination of profits of business in accordance with the or it is determination of the true profits under proper principles of accountancy. In the circumstances, the assessees claim for deduction under Section 80HH, without taking into consideration current depreciation, came to be rejected. Being aggrieved, the assessee carried the matter in appeal to the Tribunal. Relying on the judgment of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT : [1978]113ITR84(SC) , 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 has come by way of reference.

Scope of the Income Tax Act:

7. Before coming to the arguments advanced on behalf of the assessee, the following sections of the Income Tax Act need to be looked into. Section 4(1) users to charge of Income Tax. It states, inter alia, that Income Tax shall be charged in accordance with and subject to the provisions of the in respect of the total income of the previous year. Section 5(1) refers to scope of total income. It states that the total income of any previous year includes all income from whatever source derived. Section 2(45) defines "total income" to mean income computed as per the provisions of the. Chapter III refers to incomes which do not form part of total income. Section 10 states that in computing the total income, any income falling within any of the clauses in Section 10 shall not be included. Chapter IV deals with computation of total income. Section 14 states, inter alia, that all income shall, for the purposes of computation, be classified under stipulated heads of income. In this case, we are concerned with the head "Profits and gains of business or profession". Section 28 refers to computation of income under the head "Profits and gains of business". Section 29 states that the income under the head "Profits and gains of business" shall be computed in accordance with Section 30 to Section 43A. Section 32 refers to depreciation. Section 32(1) states that in respect of depreciation of buildings, machinery, plant or furniture owned by the asses-see and used for the purposes of the business, certain deductions shall be allowed. Section 32(2), which is heavily relied upon in this case by the assessee, inter alia, provides for carry forward of depreciation allowance in cases where it is not possible to set off such allowance against profits owing to absence of such profits or gains chargeable for the previous year or owing to such profits or gains chargeable, being less than the allowance. Section 70(1), inter alia, states that where the net result for any assessment year in respect of any source falling under any head of income other than "capital gains" is a loss, then the assessee shall be entitled to have such loss set off against his income from any other source under the same head. Section 72 refers to carry forward and set off of business losses. Section 72(1) states that where the net result of the computation under the head "Profits and gains of business" is a loss and such loss cannot be set off against income under any head then such loss could be carried forward to the following year and it could be set off against business profits, if any, accruing during that following assessment year.

8. Chapter VI-A refers to deductions to be made in computing total income. Chapter VI-A refers to special types of deductions. Chapter VI-A refers to special deductions to be made for computing total income. Section 80A(1) states that in computing the total income, there shall be allowed from the gross total income, in accordance with and subject to the provisions of Chapter VI-A, the deductions specified in Section 80C to Section SOW, which includes Section 80HH, which arises for interpretation, once again, in this case. Section 80A(2) states that the aggregate amount of deductions under Chapter VI-A shall not exceed the gross total income of the assessee. Section 80B(5) defines "gross total income" to mean the total income computed in accordance with the provisions of the, before making any deduction under Chapter VI-A. Section 80HH comes under Clause "C" to Chapter VI-A--Deductions in respect of certain incomes. Section 80HH refers to deduction in respect of profits and gains from newly established industrial undertakings in backward areas. It lays down that where the gross total income of an assessee includes profits and gains derived from such industrial undertaking then, there shall be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to 20 per cent. In other words, where the gross total income of an assessee includes certain types of incomes falling in Clause (c) hereinabove then, while computing the total income of the assessee, a deduction of 20 per cent, is required to be made from profits of such under- taking computed as per the. In this case, we are concerned with income derived from a newly established industrial undertaking in a backward area. In other words, in cases where the gross total income includes profits from a newly established undertaking, one has to compute such profits and gains derived from the newly established undertaking in backward area in accordance with the provisions of the so as to form part of the gross total income and after so computing, one must deduct 20 per cent, thereof from the gross total income to arrive at the total taxable income. This is the ratio of the judgment of the Supreme Court also in the case of Cambay Electric Supply Industrial Company Limited v. CIT : [1978]113ITR84(SC) .

9. The conspectus of the above sections show that Income Tax is a charge on an assessee in respect of his total income computed in accordance with the provisions of the. 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]113ITR84(SC) as if it concerns a separate assessee. While calculating such profits, we must bear in mind Sections 29 to 43A of the. 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 VI-A, 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 [LQ/SC/2000/540] , 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 VI-A, 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, 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 VI-A deals with special types of income. The deduction of 20 per cent, is not to be equated with depreciation, which is an ordinary expense. The idea under the above formula is that the assessee should not claim more man 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 Indus trial Co. Ltd. v. CIT : [1978]113ITR84(SC) .

Point at issue :

10. Before considering the arguments one must be clear on the nature of dispute, which is spelt out by the following illustration.

Illustration :

11. Computation of deduction under Section 80HH according to the Assessing Officer.

12. The assessee has claimed depreciation of Rs. 75. Therefore, the Assessing Officer has set off Rs. 75 against the gross income of Rs. 100 derived from newly established undertaking, leaving a balance profit of Rs. 25. This sum of Rs. 25 is exigible to 20 per cent, deduction (see the judgment of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT : [1978]113ITR84(SC) ), under Section 80HH. Consequently, the Assessing Officer has computed deduction under Section 80HH, which is reduced from the gross total income leaving the taxable profit at Rs. 20.

Computation of deduction under Section 80HH by the assessee :

13. The assessee sets off Rs. 20 (i.e., 20 per cent, deduction under Section 80HH) against the gross income of Rs. 100, without depreciation. Hence, the assessee applies 20 per cent, benefit of Rs. 20 under Section 80HH leaving the balance profits at Rs. 80 from which the assessee sets off Rs. 75 as depreciation and returns taxable profit of Rs. 5.

14. This illustration shows that the assessee has not disclaimed depreciation.

15. This illustration illustrates the basic controversy.

Arguments :

16. Mr. Mistry, learned counsel appearing on behalf of the assessee, firstly, contended that deduction under Section 80HH should be calculated with reference to income net of depreciation. That, the said deduction should be with reference to the profits of the new established undertaking before charging depreciation. That, under Section 32(2) if, in a given case, there were no profits and gains chargeable, then depreciation was required to be carried forward. That the words "chargeable" in Section 32(2) refers to profits and gains computed after deducting therefrom special deductions under Chapter VI-A, which included Section 80HH because the effect of such deductions was that, to the extent of such deductions, profits and gains were not chargeable. He also relied upon Section 4 of the Income Tax Act. He submitted that if one reads Section 32(2) with Section 4 of the Income Tax Act then it is clear that deduction under Section 80HH should be first made from profits and gains of the concerned newly established undertaking, without depreciation. In this connection, he invited our attention also to Section 80B(5) which defines "gross total" income to mean total income computed in accordance with the provisions of the. Mr. Mistry contended that Section 4 of the Income Tax Act imposes a charge of tax in respect of the total income. That the word "total income" has been defined under Section 2(45) to mean total amount of income computed in the manner laid down in the. Therefore, he contended that if one reads Section 80HH, which provides for computation of deduction at 20 per cent., it is clear that one must take into account the total profits of the unit, without depreciation and apply to it the special rate of 20 per cent, He contended that only by such methodology one can give effect to the special provisions of Chapter VI-A. Mr. Mistry, in the alternative submitted that in several cases decided by this court dealing with computation of deductions under Chapter VI-A, it has been held that the profits and gains of newly established undertaking shall be computed in accordance with the provisions of the. In this connection, he cited the following judgments of the Bombay High Court to which one of us (Kapadia J.) was a party, in the case of CIT v. Gannon Dunkerley and Co. Ltd. : [1995]216ITR708(Bom) , in the case of CIT v. Albright Morarji and Pandit Ltd. : [1999]236ITR914(Bom) and in the case of Grasim Industries Ltd. v. Asst. CIT : [2000]245ITR677(Bom) . However, Mr. Mistry contended that all these judgments were delivered prior to the judgment of the Supreme Court in the case of CIT v. Mahendra Mills : [2000] 243 ITR 56. [LQ/SC/2000/540] He contended that in the case of Mahendra Mills : [2000] 243 ITR 56 [LQ/SC/2000/540] , it has been held by the apex court now that business profits can be computed, net of depreciation if the assessee disclaims such depreciation allowance. Mr. Mistry, therefore, contended that one has to read Section 80HH in the light of the judgment of the Supreme Court in Mahendra Mills case : [2000] 243 ITR 56 [LQ/SC/2000/540] and if so read, he contended that it is clear that deduction under Section 80HH should be made from profits and gains of the concerned units computed in accordance with the provisions of the which covers Section 29 to Section 43A of the Income Tax Act as it stood at the relevant time and since Section 32(2) is a part of those provisions, the computation of profits of newly established undertakings could be made, net of depreciation provided the assessee opts not to claim depreciation allowance.

Mr. R. V. Desai, learned senior counsel appearing on behalf of the Department, has relied upon the above judgments of the Bombay High Court and submitted that the arguments of the assessee had no merit. He contended that in view of the judgment of the Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT : [1978]113ITR84(SC) the point at issue has been resolved. He submitted that in the said judgment of the Supreme Court it has been unequivocally laid down that items like depreciation and development rebate have to be deducted in arriving at the figure which would be exigible to deduction at 20 per cent, under Section 80HH. He clarified that the judgment of the Supreme Court was dealing with Section 80E, which was also a special deduction under Chapter VI-A for which the rate prescribed was 8 per cent, and not 20 per cent. However, the principle laid down by the Supreme Court in Camboy Electric Supply Industrial Company Ltd.s case : [1978]113ITR84(SC) would equally apply to the facts of this case. Mr. R. V. Desai further submitted that the judgment of the Supreme Court in the case of Mahendra Mills : [2000] 243 ITR 56 [LQ/SC/2000/540] had no application to the facts of this case. He contended that the only argument advanced before the Supreme Court in that matter was whether the assessee was free to disclaim/not to claim depreciation allowance while computing the profits and gains of the business. It is in that light that the Supreme Court has held, after considering the provisions of Sections 28, 29, 32 and 34 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. Mr. Desai contended that in the case of Mahendra Mills : [2000] 243 ITR 56 [LQ/SC/2000/540] , applicability of special deductions under Chapter VI-A was not in issue. He, therefore, contended that Mahendra Mills case : [2000] 243 ITR 56 [LQ/SC/2000/540] did not apply to the present controversy. Mr. R. V. Desai further pointed out that in any event in this case the assessee has not disclaimed depreciation. He submitted that on the contrary the assessee claims deduction of Rs. 75 in its entirety and it also claims full deduction at 20 per cent, under Section 80HH as could be seen from the example given hereinabove. In the circumstances, he submitted that the entire attempt of the assessee was to maximise the deduction under Section 80HH at the cost of distorting the computation of true profits.

Findings :

17. The only question which arises for determination in this case is the amount of depreciation which should be set off while computing the profits and gains derived by the assessee from the newly established undertaking covered by Section 80HH.

18. The point at issue is amply clear from the illustration given hereinabove under the caption "Point at issue". The illustration indicates that the assessee has not disclaimed depreciation. The point, therefore, to be noted is that the assessee has also claimed depreciation, but at a later stage and, therefore, the judgment of the Supreme Court in Mahendra Mills case : [2000] 243 ITR 56 [LQ/SC/2000/540] has no application. According to the assessee the profits derived from the unit was Rs. 100 because under Section 32(2) read with Section 4 of the Income Tax Act, the chargeability was in respect of the total income and, therefore, the rate of 20 per cent, was applicable to the total income of Rs. 100 without deducting depreciation. Secondly, in any event, the controversy in Mahendra Mills case : [2000] 243 ITR 56 [LQ/SC/2000/540] was not concerning deductions under Chapter VI-A of the Income Tax Act. Therefore, that judgment would not apply to this case. The important distinction, which is required to be noticed in this case, is that we are required to compute the total taxable income of the asses-see who has claimed special deduction under Chapter VI-A. For that purpose, one has to keep in mind the provisions of Sections 80B(5) and 80AB. Consequently, Section 80HH, inter alia, lays down that if the gross total income includes profits from a newly established undertaking then 20 per cent, of such profits would be deductible from the gross total income in order to arrive at the total taxable income. That, in such a case, profits derived from a newly established undertaking shall be computed in accordance with the provisions of the, i.e., Section 29 to Section 43A. Therefore, net profit will have to be computed in accordance with the provisions of the. The argument of the assessee is that in view of the judgment of the Supreme Court in Mahendra Mills case : [2000] 243 ITR 56 [LQ/SC/2000/540] , it is open to the assessee not to claim depreciation allowance under Section 32 and consequently it is argued that 20 per cent, rate of deduction should be applied to Rs. 100 in the above illustration, without taking into account the depreciation. We do not find any merit in this argument. The scheme of Section 4 and Section 5 of the Income Tax Act does indicate that Income Tax is a tax in respect of income computed as per the provisions of the. There is a distinct dichotomy between cases of computation of normal income under the de hors Chapter VI-A and computation of taxable income where the. assessee claims the benefit of deduction under Chapter VI-A because the Legislature has intended that these special deductions should be restricted to the profits derived from a newly established undertaking. To give an illustration, export profits under Section 80HHC are required to be restricted to the receipt of foreign exchange. If this object is kept in mind, then it is clear that the analogy of Section 32(2) given by the assessee will not apply in cases where an assessee claims special deduction under Chapter VI-A. The matter can be looked at from another angle. While computing normal income, an assessee may set off depreciation against its gross income. In such cases, depreciation is like any other ordinary expense. However, such depreciation cannot be equated with special deduction under Chapter VI-A. In any event, in this case, on the facts, the assessee claims depreciation of Rs. 75 from the balance income of Rs. 80 and, therefore, the judgment of the Supreme Court in Mahendra Mills case : [2000] 243 ITR 56 [LQ/SC/2000/540] has no application.

In the above judgments of the Bombay High Court to which one of us (Kapadia J.) was a party it has been held, inter alia, that Chapter VI-A of the Income Tax Act deals with special deductions. That, Chapter VI-A, for the purposes of computing such deductions, constituted a separate code by itself. In order to compute the total taxable income of the assessee, deductions computed under Section 80HH have to be reduced from the gross total income of the assessee. The question basically in this matter is concerning computation of deduction under Chapter VI-A 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 VI-A of the, then it is not open to the assessee to disclaim depreciation allowance. This is because Chapter VI-A 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 VI-A. That such special incomes were required to be computed as per the provisions of the, 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 VI-A. Therefore, the appellants claim for allowance of deduction under Section 80HH, without taking into consideration the current depreciation will have to be rejected.

Conclusion :

19. For the above reasons, we answer the above question in the affirmative, i.e., in favour of the Department and against the assessee.

20. Accordingly, the Income Tax reference is disposed of with no order as to costs.