2021 (11) TMI 105 - AT - Income Tax

Deduction u/s 80IA - manner of computation of amount of deduction allowable u/s 80IA - AO had arrived at the amount of eligible profits for the purpose of deduction u/s 80IA of the Act by setting off of unabsorbed losses of earlier years against current year profits of the eligible unit i.e. Windmill - HELD THAT - As provisions of section 80IA of the Act are separate and distinct and has to be treated on standalone basis and also lays down a special method of computing the profits and gains entitled to deduction u/s 80IA of the Act. Further, it also suggests that the provisions of section 80IA of the Act are overriding in nature and the provisions of section 80IA of the Act shall be applied as if each unit is an independent unit and one and only source of income which means that the profits and losses of other units cannot be mixed up. As in the case of CIT Vs. Dewan Kraft Systems 2007 (2) TMI 149 - DELHI HIGH COURT also held to the same effect and there is long line of authority in support of the this proposition. As a natural corollary of this, the losses of ineligible units cannot be set off against the profits of eligible units for the purpose of computing the amount of deduction and this line of approach has been consistently followed by several High Courts. Whether the unabsorbed losses of eligible units should be set off against the profits of current year for the purpose of computing the amount of deduction u/s 80IA? - The Hon ble Madras High Court in the case of Velayudhaswamy Spinning Mills 2010 (3) TMI 860 - MADRAS HIGH COURT clearly held that the initial assessment year would mean the first year opted by the assessee for claiming deduction u/s 80IA of the Act out of block of years and not the first year of commencement of operations of eligible business. CBDT also issued a Circular No.1/2016, dated 15.02.2016 accepting the legal position enunciated by the Hon ble Madras High Court in the case of Velayudhaswamy Spinning Mills Vs. ACIT (supra). Therefore, the finding of AO that the initial assessment year commences from the first year of commencement of commercial operations of eligible business has no legs to stand. Neither the ld. CIT(A) nor AO had dealt with the factual aspects as to whether the unabsorbed losses are pertaining to the prior period to the initial assessment year as opted by the assessee or after the initial assessment year. CIT(A) merely granted the relief by accepting the legal position without discussing it in detail on the factual aspects. Since the order of ld. CIT(A) is bereft of material facts necessary for adjudication of issue in appeal, we have no other option but to remit the matter back to the file of AO to examine the claim of assessee after due verification on the aspects whether the unabsorbed losses set off by the AO against current year eligible profits falls prior to the initial assessment year or after the initial assessment year. Appeal of Revenue for A.Y. 2013-14 is partly allowed for statistical purposes.

Summary

Issues Involved:
- Interpretation of provisions of section 80IA(5) of the Income Tax Act for deduction eligibility.
- Application of set off and carry forward provisions before determining gross total income for deduction u/s. 80IA.
- Consideration of each unit of eligible business as a separate profit center for deduction computation.
- Deduction reference to profits derived from eligible business, not every unit engaged in eligible business.
- Setting off unabsorbed losses against current year profits for deduction calculation.

Analysis:
1. Interpretation of Section 80IA(5): The case involved a dispute over the computation of deduction under section 80IA of the Income Tax Act. The AO restricted the deduction claimed by the assessee based on the set off of unabsorbed losses from earlier years against current year profits. However, the Tribunal emphasized that section 80IA provisions are standalone and require profits and losses to be treated separately for each unit. The High Court's decision in CIT Vs. Dewan Kraft Systems supported this approach, highlighting that losses of ineligible units cannot be set off against profits of eligible units for deduction calculation.

2. Application of Set Off Provisions: The AO's methodology of setting off unabsorbed losses against current year profits was challenged by the assessee, arguing that losses incurred before the initial assessment year cannot be set off against eligible unit profits. The Tribunal referred to the Madras High Court's ruling in Velayudhaswamy Spinning Mills Vs. ACIT, clarifying that the initial assessment year is the year chosen by the assessee for claiming deduction, not the year of commencing operations. The Tribunal remitted the matter back to the AO for detailed verification on whether the unabsorbed losses pertained to periods before or after the initial assessment year.

3. Judgment and Application to A.Y. 2014-15: The Tribunal partially allowed the Revenue's appeal for A.Y. 2013-14, emphasizing the need for a factual examination of the timing of unabsorbed losses set off against current year profits. The decision for A.Y. 2014-15 mirrored that of A.Y. 2013-14, applying the same reasoning and outcome. Both appeals were partly allowed for statistical purposes, with the matter remitted back to the AO for further verification.

In conclusion, the judgment focused on the correct interpretation and application of section 80IA provisions, emphasizing the standalone treatment of profits and losses for each eligible unit. The Tribunal's decision highlighted the importance of adhering to legal principles and factual considerations in determining deductions under the Income Tax Act.