2016 (5) TMI 320 - AT - Income Tax

Deduction u/s 80IA - whether initial assessment year referred to in section 80IA(1) of the Act, would mean the year of commencement of eligible business or the year in which the deduction is claimed? - Held that - the circular issued by the CBDT vide circular no.1 of 2016, has settled the controversies of initial assessment year for the purpose of section 80IA of the Act. The initial assessment year would mean the first year opted by the assessee for claiming deduction u/s 80IA of the Act and not the year in which the eligible business was commenced. Therefore, we direct the A.O. to allow deduction u/s 80IA of the Act as claimed by the assessee. Hence, we set aside the order passed by the CIT(A) and direct the A.O. to allow deduction u/s 80IA of the Act. - Decided in favour of assessee

Issues Involved:
1. Interpretation of "initial assessment year" under Section 80IA of the Income Tax Act.
2. Applicability of brought forward losses and depreciation for computing deductions under Section 80IA.
3. Validity of the Assessing Officer's (A.O.) and Commissioner of Income Tax (Appeals) [CIT(A)]'s interpretation of Section 80IA.

Issue-wise Detailed Analysis:

1. Interpretation of "Initial Assessment Year" under Section 80IA:
The primary issue revolves around the interpretation of the term "initial assessment year" under Section 80IA of the Income Tax Act. The assessee argued that the "initial assessment year" should be the year in which the deduction is first claimed, not the year in which the eligible business commenced. This interpretation is supported by Section 80IA(2), which allows the assessee to claim deductions for any 10 consecutive assessment years out of 15 years, beginning from the year in which the eligible business commenced. The assessee cited the judgment of the Hon'ble Madras High Court in the case of Velayudhaswamy Spinning Mills Pvt. Ltd. vs. ACIT, which clarified that the "initial assessment year" is the year in which the deduction is first claimed, not the year of commencement of the eligible business.

2. Applicability of Brought Forward Losses and Depreciation for Computing Deductions under Section 80IA:
The A.O. and CIT(A) interpreted Section 80IA(5) to mean that the initial assessment year is the year in which the eligible business commenced. They argued that brought forward notional losses and depreciation should be set off against the income of the current year before claiming deductions under Section 80IA. The assessee contended that losses and depreciation from earlier years, which have already been set off against other income, should not be notionally brought forward and set off against the profits of the eligible business for computing deductions. This view is supported by the judgment of the Hon'ble Madras High Court in Velayudhaswamy Spinning Mills Pvt. Ltd. and the CBDT Circular No. 1 of 2016, which clarified that the "initial assessment year" is the first year opted by the assessee for claiming deduction under Section 80IA.

3. Validity of the A.O. and CIT(A)'s Interpretation of Section 80IA:
The A.O. and CIT(A) held that the initial assessment year is the year in which the eligible business commenced, and that notional losses and depreciation should be set off against the income of the current year before claiming deductions under Section 80IA. However, the Tribunal found this interpretation to be incorrect. The Tribunal noted that Section 80IA(2) clearly allows the assessee to choose the initial assessment year within a block of 15 years, and that the deduction can be claimed for any 10 consecutive assessment years. The Tribunal also noted that Section 80IA(5) is a deeming provision that creates a fiction for the purpose of determining the quantum of deduction, but does not define the initial assessment year. The Tribunal held that the initial assessment year should be the year in which the deduction is first claimed, as supported by the judgment of the Hon'ble Madras High Court in Velayudhaswamy Spinning Mills Pvt. Ltd. and the CBDT Circular No. 1 of 2016.

Conclusion:
The Tribunal concluded that the initial assessment year for the purpose of Section 80IA is the year in which the deduction is first claimed by the assessee, not the year in which the eligible business commenced. The Tribunal directed the A.O. to allow the deduction under Section 80IA as claimed by the assessee, setting aside the order of the CIT(A). The appeal filed by the assessee was allowed.

Judgment:
The appeal filed by the assessee is allowed, and the A.O. is directed to allow the deduction under Section 80IA as claimed by the assessee. The order was pronounced in the open court on 24th March 2016.

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