Tax Deduction Dispute: Court Upholds Assessee's Right to Section 80-IA (of Income Tax Act, 1961) Benefits

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Case Name:

Commissioner of Income Tax vs. Vasudeva Textiles Pvt. Ltd. (High Court of Madras)

Tax Case (Appeal) No.448 of 2015

Date: 22nd July 2015

Key Takeaways:

- The court confirmed that once losses are set off against previous years' income, they should not be reopened for current year computations under Section 80-IA (of Income Tax Act, 1961).

- The decision reinforces the principle that tax incentives under Chapter VI-A are profit-linked and should not be affected by past losses that have been accounted for.

- This ruling aligns with previous judgments, notably Velayudhaswamy Spinning Mills V. Asst. CIT, which set a precedent for similar cases.

Issue

The central legal question was whether the Income Tax Appellate Tribunal was correct in allowing Vasudeva Textiles to claim deductions under Section 80-IA (of Income Tax Act, 1961) without considering past losses that had already been set off.

Facts

Vasudeva Textiles Pvt. Ltd. claimed tax deductions under Section 80-IA (of Income Tax Act, 1961) for their windmill business. The Revenue argued that past losses should be considered in the current year's deduction calculations. However, these losses had already been set off against other income in previous years.

Arguments

- Assessee (Vasudeva Textiles): Argued that once losses are set off, they should not be reopened for future computations under Section 80-IA (of Income Tax Act, 1961). They relied on the precedent set by Velayudhaswamy Spinning Mills V. Asst. CIT.

- Revenue: Contended that past losses should be brought forward and considered in the current year's deduction calculations.

Key Legal Precedents

- Velayudhaswamy Spinning Mills V. Asst. CIT: This case established that once losses are set off, they should not be reopened for future computations under Section 80-IA (of Income Tax Act, 1961).

- Liberty India V. CIT: Highlighted that Chapter VI-A provides profit-linked incentives, which should not be affected by past losses.

Judgement

The court ruled in favor of Vasudeva Textiles, affirming that past losses, once set off, should not be reopened for current year computations under Section 80-IA (of Income Tax Act, 1961). The court dismissed the Revenue's appeal, confirming the Tribunal's decision.

FAQs

Q1: What does Section 80-IA (of Income Tax Act, 1961) entail?

A1: Section 80-IA (of Income Tax Act, 1961) provides tax deductions for profits and gains derived from certain eligible businesses, such as infrastructure development, power generation, etc.

Q2: Why can't past losses be reopened under Section 80-IA (of Income Tax Act, 1961)?

A2: The court ruled that once losses are set off against previous years' income, reopening them for current computations contradicts the profit-linked incentive nature of Chapter VI-A.

Q3: How does this decision impact future cases?

A3: This decision reinforces the precedent that past losses, once set off, should not affect current deductions under Section 80-IA (of Income Tax Act, 1961), providing clarity for similar future disputes.

1. This Tax Case (Appeal) is filed by the Revenue as against the

order of the Income Tax Appellate Tribunal. The core issue raised in

this Tax Case (Appeal) is whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the respondent/ assessee is entitled to claim deduction under section 80-IA (of Income Tax Act, 1961).

2. The issue involved in this appeal has already been decided by this Court in the decision reported in (2012) 340 ITR 477 (Velayudhaswamy Spinning Mills V. Asst. CIT).

3. It is stated by the learned Standing Counsel appearing for the Revenue that as against the decision rendered by this Court in the case of Velayudhaswamy Spinning Mills V. Asst. CIT reported in (2012) 340 ITR 477, the Revenue preferred appeals before the Supreme Court and the same are pending.

4. Heard learned counsel appearing for the Revenue and perused the materials placed before this Court.

5. In the decision reported in (2012) 340 ITR 477 (Velayudhaswamy Spinning Mills V. Asst. CIT), this Court, while dealing with the benefit under Chapter VIA of the Income Tax Act, placed reliance on the decision reported in (2009) 317 ITR 218 (SC) ( Liberty India V. CIT), wherein the Supreme Court considered the scope of Section 80I (of Income Tax Act, 1961), 80IA and 80IB of the Income Tax Act and held that Chapter VI-A provides for incentives in the form of tax

deductions essentially belong to the category of "profit-linked incentives". This Court also placed reliance on the decision reported in (2004) 271 ITR 311 (Raj) (CIT V. Mewar Oil and General Mills Ltd.), and came to the conclusion that once the losses and other deduction have set off against the income of the previous year, it should not be reopened again for the purpose of computation of current year income under Section 80I (of Income Tax Act, 1961) or 80IA of the Income Tax Act and the assessee should not be denied the admissible deduction under Section 80IA (of Income Tax Act, 1961).

6. For better understanding of the decision, we extract the

relevant portion of the decision of this Court as such:

"From a reading of the above, it is clear that the benefit is

given to the profits and gains derived from the business of the

hotel or the business of repairs to ocean-going vessels or other

powered craft. The deduction is allowed to the extent of 20 per

cent. from the profits and gains of the assessee. Sub-section (5)

gives deduction for the period of seven assessment years

immediately succeeding the initial assessment year. Sub-section

(6) deals with computing the deduction under sub-section (1)

and it starts with non obstante clause and also it is a deeming

provision. The fiction created by the undertaking was the only

source of income during the previous year initially and

subsequent assessment years. Sub-section (6) was the subject-

matter before this court in the above-mentioned unreported

judgment, wherein this court had held that while interpreting the

above provision, for the purpose of allowing deduction under

section 80-I (of Income Tax Act, 1961) brought forward losses and unabsorbed depreciation

of the new industry need not be taken into consideration once

they have been set off from other sources of income earlier. In

the present case, we are concerned with the provision of section

80-IA. The said provision was introduced by the Finance Act,

1999, with effect from April 1, 2000. The provisions of sections

80-I and 80-IA are also more or less identically worded. Sections

80-I and 80-IA come in Chapter VI-A of the Income-tax Act.

Chapter VI-A deals with deductions to be made in computing

total income. There are two tax incentives contemplated in

Chapter VI-A. One is investment incentive and the other one is

profit-linked investment. Chapter VI-A was introduced by the

Finance Act, 1965, with effect from April 1, 1965, and it consists

of four headings. They are A, B, C and D. Heading "A" is general

and it also contains definition. It consists of sections 80A, 80AA,

80AB, 80AC and 80B. Section 80AB (of Income Tax Act, 1961) deals with "Deductions to be

made with reference to the income included in the gross total

income", which reads as follows :

"Where any deduction is required to be made or allowed under

any section included in this Chapter under the heading 'C-

Deductions in respect of certain incomes' in respect of any

income of the nature specified in that section which is included in

the gross total income of the assessee, then, notwithstanding

anything contained in that section, for the purpose of computing

the deduction under that section, the amount of income of that

nature as computed in accordance with the provisions of this Act

(before making any deduction under this Chapter) shall alone be

deemed to be the amount of income of that nature which is

derived or received by the assessee and which is included in his

gross total income."

A mere reading of the above provision makes it clear that any

income of the nature specified in that section, which is included in

the gross total income of the assessee for the purpose of

computing the deduction under that section, the amount of

income of that nature as computed in accordance with the

provision of this Act shall alone be deemed to be the amount of

income of that nature which is derived or received by the

assessee and which is included in the gross total income. Section

80AB defines "gross total income" which means the total income

has to be computed in accordance with the Act before making

deduction under this Chapter. Heading "B" deals with "deductions

in respect of certain payments" which consists of sections 80C to

80GGC. Heading "C" deals with "deductions in respect of certain

incomes", which consists of sections 80H to 80TT. The last

heading "D" deals with "other deductions" which consists of

sections 80U to 80V. Heading "C" is relevant for considering the

issue in these appeals. The relevant provisions that are to be

considered are sections 80-I, 80-IA and 80-IB. In the case of

Liberty India v. CIT [2009] 317 ITR 218 (SC) ; [2009] 225 CTR

(SC) 233 ; [2009] 28 DTR (SC) 73, the apex court considered

the scope of sections 80-I, 80-IA and also section 80-IB (of Income Tax Act, 1961) of the

Act, wherein, it has been held that Chapter VI-A provides for

incentives in the form of tax deductions essentially belong to the

category of "profit-linked incentives". Therefore, when section

80-IA/80-IB refers to profits derived from eligible business, it is

not the ownership of that business which attracts the incentives.

Further, it has been held that sections 80-IB/80-IA are the code

by themselves as they contain both substantive as well as

procedural provisions. The Supreme Court further observed in the

said judgment that sub-section (5) of section 80-IA (of Income Tax Act, 1961) provides for

manner of computation of profits of an eligible business.

Accordingly such profits are to be computed as if such eligible

business is the only source of income of the assessee.

Section 80-IA (of Income Tax Act, 1961) reads as follows :

"80-IA. (1) Where the gross total income of an assessee includes

any profits and gains derived by an undertaking or an enterprise

from any business referred to in sub-section (4) (such business

being hereinafter referred to as the eligible business) 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 of an amount equal to hundred per cent. of the profits

and gains derived from such business for ten consecutive

assessment years.

(2) The deduction specified in sub-section (1) may, at the option

of the assessee, be claimed by him for any ten consecutive

assessment years out of fifteen years beginning from the year in

which the undertaking or the enterprise develops and begins to

operate any infrastructure facility or starts providing

telecommunication service or develops an industrial park or

develops a special economic zone referred to in clause (iii) of

sub-section (4) or generates power or commences transmission

or distribution or power or undertakes substantial renovation and

modernisation of the existing transmission or distribution lines.

(4) This section applies to-

(i) any enterprise carrying on the business of (i) developing, or

(ii) operating and maintaining, or (iii) developing, operating and

maintaining any infrastructure facility which fulfils all the

following conditions, namely :

(a) it is owned by a company registered in India or by a

consortium of such companies (or by an authority or a board or a

corporation or any other body established or constituted under

any Central or State Act) ;

(b) it has entered into an agreement with the Central

Government or a State Government or a local authority or any

other statutory body for (i) developing, or (ii) operating and

maintaining, or (iii)developing, operating and maintaining a new

infrastructure facility ;

(c) it has started or starts operating and maintaining the

infrastructure facility on or after the 1st April, 1995.

(5) 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."

From a reading of sub-section (1), it is clear that it provides that

where the gross total income of an assessee includes any profits

and gains derived by an undertaking or an enterprise from any

business referred to in subsection (4), i.e., referred to as the

eligible business, there shall, in accordance with and subject to

the provisions of the section, be allowed, in computing the total

income of the assessee, a deduction of an amount equal to 100

per cent. of the profits and gains derived from such business for

ten consecutive assessment years. Deduction is given to eligible

business and the same is defined in sub-section (4). Sub-section

(2) provides option to the assessee to choose 10 consecutive

assessment years out of 15 years. Option has to be exercised, if

it is not exercised, the assessee will not be getting the benefit.

Fifteen years is outer limit and the same is beginning from the

year in which the undertaking or the enterprise develops and

begins to operate any infrastructure activity, etc. Sub-section (5)

deals with quantum of deduction for an eligible business. The

words "initial

assessment year" are used in sub-section (5) and the same is

not defined under the provisions. It is to be noted that "initial

assessment year" employed in sub-section (5) is different from

the words "beginning from the year" referred to in sub-section

(2). The important factors are to be noted in sub-section (5) and

they are as under :

"(1) It starts with a non obstante clause which means it

overrides all the provisions of the Act and other provisions are to

be ignored ;

(2) It is for the purpose of determining the quantum of deduction

;

(3) For the assessment year immediately succeeding the initial

assessment year ;

(4) It is a deeming provision ;

(5) Fiction created that the eligible business is the only source of

income ; and

(6) During the previous year relevant to the initial assessment

year and every subsequent assessment year."

From a reading of the above, it is clear that the eligible business

were the only source of income, during the previous year relevant

to the initial assessment year and every subsequent assessment

years. When the assessee exercises the option, the only losses of

the years beginning from initial assessment year alone are to be

brought forward and no losses of earlier years which were

already set off against the income of the assessee. Looking

forward to a period of ten years from the initial assessment is

contemplated. It does not allow the Revenue to look backward

and find out if there is any loss of earlier years and bring forward

notionally even though the same were set off against other

income of the assessee and the set off against the current

income of the eligible business. Once the set off is taken place in

earlier year against the other income of the assessee, the

Revenue cannot rework the set off amount and bring it notionally.

A fiction created in sub-section does not contemplates to bring

set off amount notionally. The fiction is created only for the

limited purpose and the same cannot be extended beyond the

purpose for which it is created.

In the present cases, there is no dispute that losses incurred by

the assessee were already set off and adjusted against the

profits of the earlier years. During the relevant assessment year,

the assessee exercised the option under section 80-IA(2) (of Income Tax Act, 1961). In Tax

Case Nos. 909 of 2009 as well as 940 of 2009, the assessment

year was 2005-06 and in Tax Case No. 918 of 2008 the

assessment year was 2004-05. During the relevant period, there

were no unabsorbed depreciation or loss of the eligible

undertakings and the same were already absorbed in the earlier

years. There is a positive profit during the year. The unreported

judgment of this court cited supra considered the scope of sub-

section (6) of section 80-I (of Income Tax Act, 1961), which is the corresponding provision

of sub-section (5) of section 80-IA (of Income Tax Act, 1961). Both are similarly worded

and, therefore, we agree entirely with the Division Bench

judgment of this court cited supra. In the case of CIT v. Mewar

Oil and General Mills Ltd. (No. 1) [2004] 271 ITR 311 (Raj) ;

[2004] 186 CTR (Raj) 141, the Rajasthan High Court also

considered the scope of section 80-I (of Income Tax Act, 1961) and held as follows (page

314 of 271 ITR) :

"Having considered the rival contentions which follow on the line

noticed above, we are of the opinion that on finding the fact that

there was no carry forward losses of 1983-84, which could be set

off against the income of the current assessment year 1984-85,

the recomputation of income from the new industrial undertaking

by setting off the carry forward of unabsorbed depreciation or

depreciation allowance from previous year did not simply arise

and on the finding of fact noticed by the Commissioner of

Income-tax (Appeals), which has not been disturbed by the

Tribunal and challenged before us, there was no error much less

any error apparent on the face of the record which could be

rectified. That question would have been germane only if there

would have been carry forward of unabsorbed depreciation and

unabsorbed development rebate or any other unabsorbed losses

of the previous year arising out of the priority industry and

whether it was required to be set off against the income of the

current year. It is not at all required that losses or other

deductions which have already been set off against the income of

the previous year should be reopened again for computation of

current income under section 80-I (of Income Tax Act, 1961) for the purpose of computing

admissible deductions thereunder.

In view thereof, we are of the opinion that the Tribunal has not

erred in holding that there was no rectification possible under

section 80-I (of Income Tax Act, 1961) in the present case, albeit, for reasons somewhat

different from those which prevailed with the Tribunal. There

being no carry forward of allowable deductions under the head

depreciation or development rebate which needed to be absorbed

against the income of the current year and, therefore,

recomputation of income for the purpose of computing

permissible deduction under section 80-I (of Income Tax Act, 1961) for the new industrial

undertaking was not required in the present case.

Accordingly, this appeal fails and is hereby dismissed with no

order as to costs."

From a reading of the above, the Rajasthan High Court held that

it is not at all required that losses or other deductions which have

already been set off against the income of the previous year

should be reopened again for computation of current income

under section 80-I (of Income Tax Act, 1961) for the purpose of computing admissible

deductions thereunder. We also agree with the same. We see no

reason to take a different view.

The standing counsel appearing for the Revenue is unable to

bring to our notice any relevant material or any compelling

reason or any contra judgment of other courts to take a different

view. He only relied heavily on the Memorandum explaining the

provisions in the Finance (No. 2) Bill, 1980, [1980] 123 ITR (St.)

154 to support this case and the same reads as follows :

"Clause 30(iii). In computing the quantum of 'tax holiday' profits

in all cases, taxable income derived from the new industrial units,

etc., will be determined as if such units were an independent unit

owned by a taxpayer who does not have any other source of

income. In the result, the losses, depreciation and investment

allowance of earlier years in respect of the new industrial

undertaking, ship or approved hotel will be taken into account in

determining the quantum of deduction admissible under the new

section 80-I (of Income Tax Act, 1961) even though they may have been set off against the

profits of the taxpayer from other sources."

We are not agreeing with the counsel for the Revenue. We are,

therefore, of the view that loss in the year earlier to the initial

assessment year already absorbed against the profit of other

business cannot be notionally brought forward and set off against

the profits of the eligible business as no such mandate is

provided in section 80-IA(5) (of Income Tax Act, 1961).

Under these circumstances, we set aside the order of the Tribunal

and answer all the questions in favour of the appellant/assessee

and against the Revenue in Tax Case Nos. 909 and 940 of 2009

respectively. Accordingly, tax cases are allowed.

7. It is relevant to note that as against the above-said decision

rendered by this Court, the Revenue has filed appeals before the

Supreme Court, which are stated to be pending, in which, only notice

was ordered and were not yet admitted by the Supreme Court.

8. The facts in the present case are also identical to the above-

said decision of this Court that all the business undertakings are wind

mills and they have claimed the benefit of deduction under Section

80IA of the Income Tax Act for the assessment years in question and

for the subsequent years as well. Having exercised their option and

their losses have been set off already against other income of the

business enterprise, the assessee in this appeal falls within the

parameters of Section 80IA (of Income Tax Act, 1961). In the decision

reported in (2012) 340 ITR 477 (Velayudhaswamy Spinning Mills

V. Asst. CIT), there appears to be no distinction on facts.

9. Again in a batch of cases in T.C.(A)Nos.408 of 2012, by

order dated 12.1.2015, this Court, following the decision reported in

(2012) 340 ITR 477 (Velayudhaswamy Spinning Mills V. Asst.

CIT) held in favour of the assessee and against the Revenue.

10. We, therefore, taking note of the decision rendered by this

Court in the case of Velayudhasamy Spinning Mills (supra) and in

a batch of cases in T.C.(A)Nos.408 of 2012, are inclined to dismiss

the above Tax Case (Appeal), thereby confirm the order passed by

the Tribunal.

11. In view of the above, the questions of law raised in this

appeal are answered against the Revenue and in favour of the

assessee. The above Tax Case (Appeal) stands dismissed. No costs.

Index: Yes / No (R.S.,J.)

(K.B.K.V.,J.)

Internet: Yes / No 22.07.2015

To

The Income Tax Appellate Tribunal, Madras 'C' Bench.

R.SUDHAKAR,J.

AND

K.B.K.VASUKI,J.

Tax Case (Appeal) No.448 of 2015

22.07.2015