2014 (3) TMI 808 - HC - Income Tax

Deduction u/s 80IA of the Act Set off of loss and depreciation - Whether the depreciation and losses of the eligible business can be set off against the profits earned by the eligible business for the period anterior to the claim for deduction put forth under Section 80IA Held that - An assessee is given the benefit of 100% deduction of the profits and gains from the eligible business - The quantum of deduction is to be calculated when the claim for deduction is made - For the purpose of determining the quantum of deduction u/s 80IA(5), the revenue cannot take into consideration the loss and depreciation which is already set off against the income of the assessee from other source and compute the profit u/s 80IA - the Assessing Authority and the Commissioner committed a serious error in setting off the profit earned by the assessee u/s 80IA against the losses and depreciation of the eligible business which is already set off from other source before such a claim is put forth - thus, there is no error committed by the Tribunal in setting aside the order passed by the Assessing Authority as well as the lower Appellate Authority. Both the Assessing Authority and the Appellate Authority proceeded on the basis that the initial claim for deduction is made in the assessment year 2006-07 - the assessee contends that the claim for deduction was put forth for the first time in the Assessment Year 2008-09 and therefore, it is his specific contention that loss and depreciation incurred by the eligible business was set off against the income of the assessee from other source - for the first time, when the claim was put forth for the Assessment Year 2008-09, the Assessing Authority was not justified in setting off the profit from eligible business against the loss and depreciation which had already been set off against the income of the assessee - this aspect has not been carefully looked into by either of the Authorities and the finding to be recorded is based on the finding of fact thus, the matter remitted back to the Assessing Authority to consider the claim of exemption u/s 80IA of the Act Decided in favour of Revenue.

Issues Involved:
1. Deduction under Section 80IA of the Income Tax Act.
2. Setoff of depreciation and losses of eligible business against profits.
3. Interpretation of "initial assessment year" under Section 80IA.
4. Application of the judgment in Velayudhaswamy Spinning Mills (P) Ltd. case.
5. Compliance with the provisions of Section 80IA(5).

Issue-wise Detailed Analysis:

1. Deduction under Section 80IA of the Income Tax Act:
The primary issue revolves around the deduction claimed by the assessee under Section 80IA of the Income Tax Act. The assessee, engaged in windmill operations, claimed a deduction of Rs.1,97,73,931/- for the Assessment Year 2008-09. The Assessing Authority, relying on sub-section (5) of Section 80IA, adjusted this profit against previous losses and depreciation, reducing the eligible deduction. The Tribunal, however, directed the Assessing Authority to grant the deduction without such adjustments, leading to the Revenue's appeal.

2. Setoff of depreciation and losses of eligible business against profits:
The Assessing Authority and the Appellate Authority set off the profits earned by the assessee against carried forward losses and depreciation from previous years. The Tribunal, relying on the Madras High Court judgment in Velayudhaswamy Spinning Mills (P) Ltd. case, held that once losses and depreciation from earlier years are set off against other business income, they should not be notionally carried forward for computing deductions under Section 80IA. The Tribunal's stance was that the profits of the eligible business should not be diluted by previously adjusted losses and depreciation.

3. Interpretation of "initial assessment year" under Section 80IA:
A crucial point of contention was the interpretation of "initial assessment year" under Section 80IA(5). The Tribunal and the assessee argued that the initial assessment year is the first year in which the claim for deduction is made, not necessarily the year when the business commenced. The assessee claimed the deduction for the first time in the Assessment Year 2008-09, and thus, losses and depreciation set off against other income in prior years should not affect the deduction computation for 2008-09.

4. Application of the judgment in Velayudhaswamy Spinning Mills (P) Ltd. case:
The Tribunal's decision was heavily influenced by the precedent set in Velayudhaswamy Spinning Mills (P) Ltd. case, where it was held that losses and depreciation already set off against other income should not be notionally carried forward for computing deductions under Section 80IA. This judgment emphasized that the fiction created by sub-section (5) of Section 80IA is limited to the eligible business being the only source of income for the purpose of determining the quantum of deduction.

5. Compliance with the provisions of Section 80IA(5):
The court analyzed Section 80IA(5), which mandates that profits and gains of the eligible business should be computed as if it were the only source of income from the initial assessment year onwards. The court concluded that once losses and depreciation are set off against other income, they do not exist for the purpose of computing deductions under Section 80IA. The Tribunal's approach, which did not dilute the deduction by previously adjusted losses and depreciation, was deemed correct.

Conclusion:
The court upheld the Tribunal's decision, emphasizing that the deduction under Section 80IA should not be reduced by losses and depreciation already set off against other income. The matter was remanded to the Assessing Authority to verify the factual correctness of the initial claim year and to apply the legal interpretation provided. The substantial question of law was answered in favor of the assessee, confirming that previously adjusted losses and depreciation should not affect the deduction computation under Section 80IA.

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