2010 (3) TMI 860 - HC - Income Tax

Deduction u/s 80-IA - whether initial assessment year in section 80-IA(5) would only mean the year of commencement and not the year of claim ? - Unabsorbed depreciation - Held that - Assessee has been setting off the loss against the income of the company for the earlier years. During the assessment year, the assessee exercised the option claim of deduction under section 80-IA of the Act. But the Assessing Officer denied the exemption on the finding that loss or depreciation already allowed and set off against other sources of the income of the assessee has to be notionally carried forward and set off against the current year s income from the units for which the assessee is claiming deduction under section 80-IA. There is no dispute that during the year, there is a profit. Therefore, the assessee claimed deduction under section 80-IA and the Revenue has no authority to notionally bring forward the unabsorbed depreciation and loss of the earlier year which has been already set off as against the current year profit from the unit. Thus the initial assessment year in this case starts from 2004-05 since the assessee has opted to claim this deduction only in this assessment year, the initial assessment year cannot be the year in which the undertaking commenced its operations and in this case, the initial assessment year is the assessment year in which assessee has chosen to claim deduction under section 80-IA. Hence, the provisions of section 80-IA(5) treating undertaking as a separate sole source of income cannot be applied to a year prior to the year in which the assessee opted to claim relief under section 80-IA for the first time. Depreciation and carry forward loss relief to the unit which claims deduction under section 80-IA, cannot be notionally carried forward and set off against the income from the year in which the assessee started claiming deduction under section 80-IA - Decided in favor of the assessee

Issues Involved:
1. Entitlement to claim deduction under section 80-IA.
2. Interpretation of "initial assessment year" in section 80-IA(5).
3. Notional carry forward of unabsorbed depreciation and losses.
4. Applicability of the decision of the Special Bench in Goldmine Shares and Finance (P) Ltd.
5. Admissibility of additional evidence regarding the initial assessment year.

Detailed Analysis:

1. Entitlement to Claim Deduction under Section 80-IA:
The core issue revolves around whether the assessee is entitled to claim deduction under section 80-IA of the Income-tax Act, 1961. The Tribunal held that the assessee is not entitled to the deduction due to the notional carry forward of unabsorbed depreciation and losses. However, the High Court disagreed, stating that losses already set off in previous years cannot be notionally carried forward for the purpose of computing the deduction under section 80-IA. The High Court emphasized that section 80-IA is a beneficial provision and should be liberally construed.

2. Interpretation of "Initial Assessment Year" in Section 80-IA(5):
The High Court clarified that the "initial assessment year" under section 80-IA(5) refers to the year in which the assessee first claims the deduction, not necessarily the year of commencement of the eligible business. This interpretation is pivotal as it determines the period for which the deduction can be claimed. The court noted that the fiction created by section 80-IA(5) applies only from the initial assessment year chosen by the assessee and not retrospectively.

3. Notional Carry Forward of Unabsorbed Depreciation and Losses:
The High Court ruled that unabsorbed depreciation and losses of earlier years, which have already been set off against other income, cannot be notionally carried forward for computing the deduction under section 80-IA. The court emphasized that once the set-off has taken place in earlier years, the Revenue cannot rework the set-off amount and bring it notionally. This ruling aligns with the principle that the fiction created by section 80-IA(5) is limited and does not extend to bringing forward set-off amounts notionally.

4. Applicability of the Decision of the Special Bench in Goldmine Shares and Finance (P) Ltd.:
The Tribunal had relied on the Special Bench decision in Goldmine Shares and Finance (P) Ltd., which was rendered before the amendment to section 80-IA by the Finance Act, 1999. The High Court noted that the Tribunal's reliance on this decision was misplaced as the amendment brought significant changes to the interpretation of "initial assessment year" and the computation of eligible income. The court thus set aside the Tribunal's order, reinforcing that the amendment should be considered in the interpretation.

5. Admissibility of Additional Evidence Regarding the Initial Assessment Year:
In Tax Case No. 918 of 2008, the Revenue challenged the Tribunal's finding that the initial assessment year was 2004-05, arguing that it should be 1999-2000 based on additional evidence. The High Court upheld the Tribunal's decision, noting that the finding regarding the initial assessment year had reached finality and the Revenue's challenge was not in accordance with procedural rules. The court confirmed that the assessee had the option to choose the initial assessment year and had correctly exercised this option for the year 2004-05.

Conclusion:
The High Court allowed the appeals filed by the assessees in Tax Case Nos. 909 and 940 of 2009, setting aside the Tribunal's orders and ruling in favor of the assessees on all substantial questions of law. In Tax Case No. 918 of 2008, the court dismissed the Revenue's appeal, confirming the Tribunal's order and ruling in favor of the assessee on all questions. The judgments emphasize the correct interpretation of section 80-IA, particularly regarding the initial assessment year and the treatment of unabsorbed depreciation and losses.

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