JUDGMENT
Rajesh Bindal, J.
1. The Revenue has approached this Court by filing the present appeal, raising the following substantial questions of law, arising out of order dt. 18th Dec, 2003 passed by the Income-tax Appellate Tribunal, Chandigarh Bench ‘A’, Chandigarh (for short, ‘the Tribunal’), in ITA No. 1050/Chd/1996 for the asst. yr. 1994-95:
1. Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that depreciation under Section 32 of the IT Act, 1961, was allowable on the plant and machinery in question?
2. Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that for the purpose of computation of deduction under Section 80HHC of the IT Act, 1961, sales-tax and Central sales-tax cannot be excluded (sic-included) in the total turnover?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in directing computation of interest income for the purpose of deduction under Section 80HHC as per Clause (baa) of the Explanation to Section 80HHC for computing the eligible profits and gains of business?
2. Briefly, the facts as noticed in the orders passed by the authorities below are that the assessee filed its return for the assessment year inquestion on 30th Nov., 1994 declaring its income at Rs. 18,76,090. The same was processed under Section 143(1)(a) of the IT Act, 1961 (for short, ‘the Act’) vide order dt. 20th June, 1995. Thereafter, regular assessment proceedings are initiated by issuing notice under Sections 142(1) and 143(2) of the Act.
Question No. 1:
3. During the course of assessment proceedings, the AO disallowed depreciation claimed by the assessee on investment made in the garment unit on the ground that the machinery so set up was not used. In appeal, the order passed by the AO, disallowing the claim of depreciation, was upheld. However, in further appeal before the Tribunal, the claim made by the assessee was accepted relying upon the judgment of this Court in CTT v. Pepsu Road Transport Corporation (2002) 172 CTR (P & H) 72 : (2002) 121 Taxman 232 (P & H). While accepting the claim, the Tribunal observed that the machinery was kept ready for use and was in fact actually used by the assessee during the last two years when the assessee had received orders from foreign customers for the supply of garments. The same could not be used during the year in question on account of non-receipt of orders.
4. Learned Counsel for the Revenue submitted that unless the machinery is actually used, no depreciation should be allowed. However, we find that similar contention was considered by this Court in the case of Pepsu Road Transport Corporation (supra) wherein it was held that even where the machinery is kept ready for use and could not be put to use, the assessee would be entitled to depreciation as everything ages with the passage of time and even if the machinery is kept ready for use, there is a normal depreciation of value. Accordingly, the question being covered by the judgment of this Court, we answer the same against the Revenue and in favour of the assessee.
Question No. 2:
5. As far as question No. 2 is concerned, learned Counsel for the Revenue could not dispute that identical question came up for consideration before this Court in IT Appeal No. 293 of 2005, CIT v. Vaidhman Polytex Ltd., decided on 22nd May, 2006 [reported at (2006) 203 CTR (P & H) 397Ed.] and the same has been answered against the Revenue and in favour of the assessee.
For the reasons stated in Vaidhman Polytex Ltd.’s case (supra), the question No. 2 is answered against the Revenue and in favour of the assessee. Question No. 3:
6. As far as question No. 3 is concerned; the claim of the assessee is that the interest income earned by him on FDRs should be considered as income from business and profession and accordingly should be included for the purpose of computing deduction under Section 80HHC of the Act. However, the claim made by the assessee was rejected by the AO. The Commissioner of Income-tax (Appeals) [for short, the ‘CIT(A)’], in appeal on this issue, confirmed the order passed by the AO relying upon the judgment of Rajasthan High Court in CIT v. Rajasthan Land Development Corporation (1995) 125 CTR (Raj) 261 : (1995) 211 TIP 597 (Raj), wherein it was held that the interest income earned, even from employment of surplus funds, was liable to be assessed as income from other sources.
7. Still aggrieved against the order, the assessee preferred an appeal before the Tribunal. The ground of appeal raised by the assessee on this account is extracted below:
That the learned CIT(A) erred in law and on facts in sustaining the decision of AO that interest income be considered as income from other sources and be excluded from profits for computation of deduction under Section 80HHC. Directions may be given to consider interest income of Rs. 22,24,201 as part of profits of business and compute deduction under Section 80HHC accordingly.
The issue was considered by the Tribunal in paras 13 and 14 of the order passed by it, which are extracted below:
13. Regarding the second issue involved in ground No. 4 of appeal of the assessee relating to interest income for the purposes of deduction under Section 80HHC, the learned Authorised Representative for the assessee submitted that the new Clause (baa)(operative for and from the asst. yr. 1992-93) of the Explanation to Section 80HHC (which was also applicable to the instant case of the assessee for asst. yr. 1994-95 under consideration before the Tribunal), the expression ‘profits of the business’, for the purposes of Section 80HHC means the profits of the business as computed under the head ‘Profits and gains of business or profession’ as reduced by 90 per cent of any sum referred to in els. (iiia), (iiib) and (iiic) of Section 28 or of any receipts by way of brokerages, commission, interest, rent, charges or any other receipt of a similar nature included in such profit. Hence, according to learned Authorised Representative for the assessee, as per Clause (baa) of the Explanation to Section 80HHC in order to compute profits and gains of business of the assessee for the purposes of Section 80HHC, 90 per cent of the receipts from interest are to be reduced which were included in such profits. The learned Authorised Representative for the assessee further contended that as per the submissions made by him, mentioned hereinabove, for computing the receipts from interest for the purposes of Section 80HHC, the AO should be directed to reduce 90 per cent of the interest receipts, which were included by him while computing such profits.
14. The learned Departmental Representative for the Revenue was fair enough to concede to the abovementioned submission of the learned Authorised Representative for the assessee. Hence, the order of the learned CIT(A) on this issue is reversed and the AO is directed to compute the interest income for the purpose of deduction under Section 80HHC as per newly inserted Clause (baa) of the Explanation to Section 80HHC for computing the eligible profits and gains of business by reducing 90 per cent of the interest receipts which were included in such profits. Orders are passed accordingly.
8. From a perusal of para 13 of the order passed by the Tribunal, which records the contentions raised by learned Counsel appearing for the assessee, it is evident that he only submitted that as per Clause (baa) of the Explanation to Section 80HHC of the Act, in order to compute profits and gains of business for the purpose of deduction under Section 80HHC of the Act, 90 per cent of the receipts on account of interest are to be reduced, which are included in such profits. As the interpretation put by the assessee’s counsel was strictly in spirit of the language of the section, the Departmental Representative conceded on that ground.
9. No argument was raised by the assessee in support of the ground of appeal in the memo of parties disputing the treatment of interest income under the head ‘Income from other sources’, meaning thereby that the findings of the authorities below on the treatment of interest income under the head ‘Income from other sources’ were admitted. Accordingly, the issue for consideration is that as to whether under these circumstances, only for the purpose of computation of deduction under Section 80HHC of the Act, such interest income could be treated as part of profits and gains of business.
10. Relevant Clause (baa) of the Explanation to Section 80HHC of the Act, which defines the term ‘Profits and gains of business’ is extracted below:
(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 els. (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;
A perusal of the above clause shows that deduction of 90 per cent of the receipts on various accounts including on account of interest are to be reduced while computing profits and gains of business for the purpose of deduction under Section 80HHC of the Act, which are included in such profits and not otherwise. As is evident from the facts on record that the interest income earned by the assessee, which was sought to be claimed by him to be dealt with as income from business or profession, was in fact assessed as income from other sources, which order’ was upheld in appeal by the CIT(A). Even though, in the ground, the assessee had raised the issue for consideration of the interest income as part of the profits of business but the issue was never argued.
11. Once the conceded position on record is that the interest income earned by the assessee does not form part of income from business or profession, as computed at the time of assessment, there arises no question of deduction of 90 per cent thereof for the purpose of calculation of deduction under Section 80HHC of the Act. The question of deduction of 90 per cent of the income in terms of Clause (baa) of the Act would arise only if the same forms a part of the income from the business or profession.
12. Any enabling provision for deduction of a part thereof presupposes inclusion of the entire income under that head without which the provision cannot be given effect to. The interest income cannot be given two different treatments i.e., while computing the income under various heads at the time of assessment and another by calculating the deduction under Section 80HHC of the Act.
13. Similar question came up for consideration before this Court in IT Appeal No. 73 of 2005, CTT v. Aveiy Cycle Industries Ltd., decided on 12th Sept., 2006 [reported at (2006) 206 CTR (P & H) 347Ed.] wherein the Revenue raised the issue that the Tribunal had gone wrong in directing the AO to consider the interest income as part of business profit for computing deduction under Section 80HHC of the Act. While considering the issue, this Court found that in fact while framing the assessment in Avery Cycle Industries Ltd. ‘s case (supra), the AO himself had considered the receipts on account of interest as part of the business income. Under those circumstances, it was held that once the AO himself had treated the interest income as part of the income from business, there was no occasion to treat the same differently for the purpose of calculation of deduction under Section 80HHC of the Act. The relevant para from the judgment in Avery Cycle Industries Ltd. ‘s case (supra) is extracted below:
Once at the time of passing of the assessment order in computing the income from business or profession, the amount of receipt of interest, as mentioned above, has been shown and assessed as income from business or profession, there is no reason for reducing the same out of the income from business or profession for the purpose of calculation of deduction under Section 80HHC of the Act, as after including the same in the income from business or profession, the reduction, as envisaged under that provision, would be carried out. this is clear even from what the Tribunal has directed. Accordingly, we do not find any merit in this contention of the Revenue and hold that once the income is assessed as income from business or profession, the same has to be taken as such for the purpose of calculation of profits of the business in terms of Clause (baa) of Section 80HHC of the Act after reducing therefrom 90 per cent of the amount, so referred in the clause.
14. In view of our above discussion, we find that the assessee having not raised any issue with regard to treatment of interest income under the head ‘Income from other sources’ and the same being not part of the business income, there was no occasion for deduction of 90 per cent thereof. If any income forms part of the business income then only the question of deduction of 90 per cent thereof would arise. We find that patent illegality has been committed by the Tribunal in accepting the plea of the assessee, which is not in conformity with law. Accordingly, the appeal on this ground is accepted and the order passed by the Tribunal is set aside.
The appeal is disposed of in the manner indicated above.