2016 (5) TMI 256 - AT - Income Tax

Disallowance under section 80-IA - choosing of the initial assessment year - Held that - Choosing of the initial assessment year for claiming deduction under section 80-IA of the Act in a block of ten years out of fifteen years is with the assessee i.e. it is the option of the assessee to choose the initial assessment year for claiming deduction under section 80-IA of the Act. Further the loss claimed by the assessee in respect of eligible business is to be set off against the income of the assessee from other ineligible business as in respect of the assessment years and there is no need to notion ally carry forward these losses up to the initial assessment year and write off the same out of the profits of eligible business. - Decided in favour of assessee

Summary

Issues Involved:
1. Determination of the "initial assessment year" for the purpose of claiming deduction under section 80-IA of the Income-tax Act, 1961.
2. Applicability of section 80-IA(5) regarding the set-off of brought forward losses against the income of the eligible business.

Issue-wise Detailed Analysis:

1. Determination of the "initial assessment year" for the purpose of claiming deduction under section 80-IA of the Income-tax Act, 1961:

The primary contention revolved around the interpretation of the "initial assessment year" under section 80-IA of the Income-tax Act. The assessee established two windmills and claimed a deduction under section 80-IA for the income earned from these wind power generation projects. The Assessing Officer (AO) argued that the initial assessment year should be the year when the business commenced operations (2004-05), thereby requiring the set-off of losses from earlier years against the income from the eligible business. However, the assessee contended that as per section 80-IA(2), they had the option to choose any ten consecutive assessment years out of fifteen years starting from the year the business began operations. The assessee chose the assessment year 2008-09 as the initial assessment year, which was upheld by the Commissioner of Income-tax (Appeals) (CIT(A)).

2. Applicability of section 80-IA(5) regarding the set-off of brought forward losses against the income of the eligible business:

The AO noted that the assessee incurred losses in the initial years (2004-05 to 2006-07) and set them off against non-eligible business income. The AO argued that these losses should be notionally carried forward and set off against the income from the eligible business in subsequent years, rendering the income from the eligible business at nil and denying the claimed deduction. The CIT(A) and the Income-tax Appellate Tribunal (ITAT) disagreed, stating that section 80-IA(5) applies from the initial assessment year chosen by the assessee (2008-09). Therefore, losses from years prior to the initial assessment year should not be considered for set-off against the income of the eligible business.

Detailed Analysis:

Background and Facts:
The assessee established two windmills and claimed a deduction under section 80-IA for the income earned from these projects. The AO disallowed the deduction, arguing that the initial assessment year should be the year the business commenced operations (2004-05), and losses from earlier years should be set off against the income from the eligible business. The assessee contended that they had the option to choose the initial assessment year within a fifteen-year period, and chose 2008-09 as the initial assessment year.

CIT(A) Decision:
The CIT(A) upheld the assessee's contention, stating that the initial assessment year is at the option of the assessee and can be any year within the fifteen-year period. The CIT(A) referred to similar decisions in the assessee's case for earlier years and allowed the appeal.

ITAT Decision:
The ITAT upheld the CIT(A)'s decision, referencing its own decision in the assessee's case for the assessment year 2010-11, where it was held that the initial assessment year is at the option of the assessee. The ITAT also referred to the CBDT Circular No. 1 of 2016, which clarified that the assessee has the option to choose the initial assessment year for claiming deduction under section 80-IA. The ITAT concluded that losses from years prior to the initial assessment year should not be considered for set-off against the income of the eligible business.

Legal Precedents:
The ITAT relied on judgments from the Madras High Court in Velayudhaswamy Spinning Mills P. Ltd. and the Karnataka High Court in Anil H. Lad, which supported the view that the initial assessment year is at the option of the assessee and losses from prior years should not be notionally carried forward. The Mumbai Bench of the Tribunal in Shevie Exports also upheld this view.

Conclusion:
The ITAT dismissed the Revenue's appeal, upholding the assessee's right to choose the initial assessment year and ruling that losses from years prior to the chosen initial assessment year should not be set off against the income from the eligible business. The decision emphasized that the initial assessment year is at the option of the assessee and supported the interpretation that section 80-IA(5) applies from the chosen initial assessment year, not retrospectively from the year the business commenced operations.