Tax Deduction Dispute: Court Upholds Assessee’s Right to Choose Initial Year

Get the full picture - access the original judgement of the court order here

Case Name: 

Principal Commissioner of Income Tax vs. Prabhu Spinning Mills Pvt. Ltd. (High Court of Madras)

TCA.Nos.240 to 249 of 2016 and 4739 to 4747 of 2016

Date: 16th March 2016

Key Takeaways:

• The court confirmed that an assessee eligible for deductions under Section 80IA (of Income Tax Act, 1961) can choose the initial assessment year from which to claim deductions for ten consecutive years.
• The decision aligns with the precedent set by the High Court in the case of M/s. Velayudhaswamy Spinning Mills (340 ITR 477).
• The ruling emphasizes the importance of the assessee’s choice and the continuity of the deduction period within the prescribed 15 or 20-year slab.

Issue:

Can an assessee choose the initial assessment year for claiming deductions under Section 80IA (of Income Tax Act, 1961), or must it be the year the eligible business commenced?

Facts:

Prabhu Spinning Mills § Ltd. claimed deductions under Section 80IA (of Income Tax Act, 1961), choosing a specific initial assessment year within the allowed period. The Revenue challenged this choice, arguing that the initial year should be the year the business commenced. The case was brought to the High Court after the Income Tax Appellate Tribunal ruled in favor of the assessee.

Arguments:

• Assessee’s Argument: Prabhu Spinning Mills argued that Section 80IA (of Income Tax Act, 1961) allows them to choose the initial assessment year for claiming deductions, as long as it falls within the prescribed 15 or 20-year period.
• Revenue’s Argument: The Revenue contended that the initial assessment year should be the year the business commenced operations, not a year chosen by the assessee.

Key Legal Precedents:

• M/s. Velayudhaswamy Spinning Mills (340 ITR 477): This case established that the assessee has the right to choose the initial assessment year for deductions under Section 80IA (of Income Tax Act, 1961).
• Section 80IA (of Income Tax Act, 1961): This section provides for deductions from profits and gains derived from eligible businesses, allowing the assessee to choose the initial year for claiming deductions.

Judgement:

The court dismissed the Revenue’s appeal, upholding the assessee’s right to choose the initial assessment year for claiming deductions under Section 80IA (of Income Tax Act, 1961). The court emphasized that the choice must be within the prescribed period and that the deduction period should be continuous.

FAQs:

1. What does this decision mean for businesses?

• Businesses can choose the initial assessment year for claiming deductions under Section 80IA (of Income Tax Act, 1961), provided it is within the allowed period.

2. Why was the Revenue’s appeal dismissed?

• The appeal was dismissed because the court found that the assessee’s right to choose the initial year was supported by legal precedent and the provisions of Section 80IA (of Income Tax Act, 1961).

3. Does this decision apply to all businesses?

• Yes, it applies to all businesses eligible for deductions under Section 80IA (of Income Tax Act, 1961), allowing them to choose the initial assessment year within the specified period.

4. What is the significance of the M/s. Velayudhaswamy Spinning Mills case?

• It set a precedent that supports the assessee’s right to choose the initial assessment year for deductions, which was upheld in this case.

The Revenue has come up with the above appeals raising the following substantial questions of law : "(1) Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that the assessee is entitled to deduction under Section 80IA (of Income Tax Act, 1961) without setting off the losses/unabsorbed depreciation pertaining to the windmill, which were set off in the earlier year against other business income of the assessee following the decision of the jurisdictional High Court in the case of M/s. Velayudhaswamy Spinning Mills (340 ITR 477), when the same is pending appeal before the Supreme Court in SLP. Civil No. 1136 of 2011 ? and

(2) Whether under the facts and circumstances of the case, the Income Tax Appellate Tribunal was correct in holding that the initial assessment year in Section 80IA(5) (of Income Tax Act, 1961) would only mean the year of claim of deduction under Section 80IA (of Income Tax Act, 1961) and not the year of commencement of eligible business ?"

2. Heard Mr.T.R.Senthilkumar, learned Standing Counsel for the Department. Mr.R.Sivaraman, learned counsel takes notice for the respondents.

3. Even according to the learned Standing Counsel for the Department, this Court has consistently followed the decision in M/s.Velayudhaswamy Spinning Mills (340 ITR 477), despite the Honourable Supreme Court ordering notice.

4. Interestingly, on the basis of the decision in Velayudhaswamy Spinning Mills, the Central Board of Direct Taxes has issued Circular No.1/2016 dated 15.2.2016. It will be useful to extract the circular in entirety, which is as follows ;

"Circular No.1/2016 Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes North Block, New Delhi, the 15th February, 2016 Subject: Clarification of the term ‘initial assessment year' in Section 80IA(5) (of Income Tax Act, 1961)

Section 801A (of Income Tax Act, 1961) (‘Act’), as substituted by Finance Act, 1999 with effect from 1.4.2000, provides for deduction of an amount equal to 100% of the profits and gains derived by an undertaking or enterprise from an eligible business (as referred to in Sub-Section (4) of that Section) in accordance with the prescribed provisions. Sub-Section (2) of Section 801A (of Income Tax Act, 1961) further provides that the aforesaid deduction can be claimed by the assessee, at his option, for any ten consecutive assessment years out of fifteen years (twenty years in certain cases) beginning from the year in which the undertaking commences operation, begins development or starts providing services etc. as stipulated therein. Sub-Section (5) of Section 801A (of Income Tax Act, 1961) further provides as under :

“Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of Sub- Section (1) apply shall, for the purposes of determining the quantum of deduction under that Sub-Section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made”.

In the above Sub-Section, which prescribes the manner of determining the quantum of deduction, a reference has been made to the term ‘initial assessment year’. It has been represented that some Assessing Officers are interpreting the term ‘initial assessment year’ as the year in which the eligible business/manufacturing activity had commenced and are considering such first year of commencement/operation etc. itself as the first year for granting deduction, ignoring the clear mandate provided under Sub-Section (2) which allows a choice to the assessee for deciding the year from which it desires to claim deduction out of the applicable slab of fifteen (or twenty) years. The matter has been examined by the Board. It is abundantly clear from Sub-Section (2) that an assessee who is eligible to claim deduction u/s 80IA (of Income Tax Act, 1961) has the option to choose the initial/first year from which it may desire the claim of deduction for ten consecutive years, out of a slab of fifteen (or twenty) years, as prescribed under that Sub-Section. It is hereby clarified that once such initial assessment year has been opted for by the assessee, he shall be entitled to claim deduction u/s 801A (of Income Tax Act, 1961) for ten consecutive years beginning from the year in respect of which he has exercised such option subject to the fulfillment of conditions prescribed in the section. Hence, the term ‘initial assessment year’ would mean the first year opted for by the assessee for claiming deduction u/s 801A (of Income Tax Act, 1961). However, the total number of years for claiming deduction should not transgress the prescribed slab of fifteen or twenty years, as the case may be and the period of claim should be availed in continuity.

The Assessing Officers are, therefore, directed to allow deduction u/s 801A (of Income Tax Act, 1961) in accordance with this clarification and after being satisfied that all the prescribed conditions applicable in a particular case are duly satisfied. Pending litigation on allowability of deduction u/s 80 (of Income Tax Act, 1961) IA shall also not be pursued to the extent it relates to interpreting ‘initial assessment year’ as mentioned in Sub- Section (5) of that section for which the Standing Counsel/DRs be suitably instructed. The above be brought to the notice of all Assessing Officers concerned."

5. Therefore, admittedly, the second question of law is covered by the above circular. Hence, the appeals deserve to be dismissed.

6. Accordingly, the above tax case appeals are dismissed. No costs.

7. But, we cannot resist our temptation to record one more fact. If an issue is covered by the judgment of the High Court, it is always open to the Department to take it on appeal to the Supreme Court and get the law settled once and for all. But, once a decision is taken at the level of the Board, we do not know why repeated appeals should be filed, only to meet with the same fate as that of a decision, on which, a circular has been issued.

The Department shall take note of this for future guidance.

16.3.2016

Internet : Yes

To

The Income Tax Appellate Tribunal, 'B' Bench, Chennai.

V.RAMASUBRAMANIAN,J

AND

N.KIRUBAKARAN,J