Wind Mills Win: Tax Deduction Under Section 80IA (of Income Tax Act, 1961) Upheld

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Case Name: 

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

Tax Case (Appeal) No.303 of 2015

Date: 23rd June 2015

Key Takeaways:

• The court confirmed that once losses are set off against other income, they should not be reopened for computation under Section 80IA (of Income Tax Act, 1961).
• The decision reinforces the principle that tax incentives under Chapter VI-A are profit-linked.
• The ruling aligns with previous judgments, notably Velayudhaswamy Spinning Mills V. Asst. CIT, emphasizing the non-reopening of set-off losses.

Issue: 

Can the assessee claim a deduction under Section 80IA (of Income Tax Act, 1961) when losses have already been set off against other income?

Facts: 

Sree Narasimha Textiles Pvt. Ltd., operating wind mills, claimed deductions under Section 80IA (of Income Tax Act, 1961) for certain assessment years. The Revenue challenged this, arguing that the losses should be reconsidered. The court had to decide if the set-off losses could be reopened for deduction purposes.

Arguments:

• Assessee: Argued that the losses had been set off against other income, and thus, they should be eligible for the deduction under Section 80IA (of Income Tax Act, 1961).
• Revenue: Contended that the losses should be reconsidered for the deduction, implying a re-evaluation of the set-off.

Key Legal Precedents:

• Velayudhaswamy Spinning Mills V. Asst. CIT (2012) 340 ITR 477: This case was pivotal, as it established that once losses are set off, they should not be reopened for deduction purposes.
• Liberty India V. CIT (2009) 317 ITR 218 (SC): Highlighted that Chapter VI-A deductions are profit-linked incentives.

Judgement: 

The court ruled in favor of Sree Narasimha Textiles Pvt. Ltd., allowing the deduction under Section 80IA (of Income Tax Act, 1961). The court emphasized that once losses are set off, they should not be reopened, aligning with the precedent set by Velayudhaswamy Spinning Mills.

FAQs:

1. What does Section 80IA (of Income Tax Act, 1961) cover?

• It provides deductions for profits and gains from certain businesses, like infrastructure development, power generation, etc.

2. Why was the Revenue’s appeal dismissed?

• The court found no reason to reopen set-off losses, as established in previous cases.

3. What is the significance of this ruling?

• It reinforces the principle that once losses are set off, they should not be reconsidered for deductions, providing clarity on the application of Section 80IA (of Income Tax Act, 1961).

4. Are there any pending appeals related to this case?

• Yes, the Revenue has filed appeals before the Supreme Court, which are pending.

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 Standing 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 (of Income Tax Act, 1961). 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 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 (of Income Tax Act, 1961) 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), 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 (of Income Tax Act, 1961)/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 23.06.2015

To

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

R.SUDHAKAR,J.

AND

K.B.K.VASUKI,J.

Tax Case (Appeal) No.303 of 2015

23.06.2015