2007 (10) TMI 354 - AT - Income Tax

Deduction u/s 80-IA - Profits of the units - Industrial Undertaking - Entitled to claim deduction u/s 80-IA? - setting off notionally carried forward unabsorbed depreciation or loss - Initial assessment year - HELD THAT - 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 u/s 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 assessee opted to claim relief u/s 80-IA for the first time. Depreciation and carry forward loss relief to the unit which claims deduction tinder section 80-IA, cannot be notionally carried forward and set off against the income from the year in which the assessee started claiming deduction u/s 80-IA. At the cost of repetition, we make it clear that the case laws relied on by the DR are delivered before the amendment to section by Finance Act, 1999. Before the amendment the initial assessment year was defined in the Act but after the amendment there is no definition for initial assessment year in the Act and there is option to the assessee in selecting the year of claiming relief u/s 80-1A. In view of this, we are of the opinion that there is no question of setting off notionally carried forward unabsorbed depreciation or loss against the profits of the units and assessee is entitled to claim deduction u/s 80-IA on current assessment year on the current year profit. Accordingly we allow the claim of the assessee. In the result, the appeal of the assessee is allowed.

Summary

Issues Involved:
1. Withdrawal of deduction under Section 80-IA.
2. Setting off notionally carried forward loss against profits generated by the industrial undertaking.

Issue-Wise Detailed Analysis:

1. Withdrawal of Deduction under Section 80-IA:

The assessee contested the CIT(A)'s decision confirming the withdrawal of deduction under Section 80-IA. The CIT(A) observed that the provisions of Section 80-IA should be applied in the year the deduction is claimed. The CIT(A) concluded that earlier years' losses should be notionally brought forward and adjusted to determine the actual profit. If the actual profit is negative, the assessee is not eligible for any deduction. The assessee argued that the deduction under Section 80-IA should be allowed without adjusting or setting off any notionally brought forward losses from earlier years. The assessee emphasized that there is no concept under the IT Act of notionally carrying forward losses and that the option to claim deduction under Section 80-IA(1) for any 10 consecutive years out of 15 years is at the discretion of the assessee. The Department cannot compel the assessee to claim the deduction from the first year only. The assessee further argued that the provisions of Section 80-IA(5) cannot be applied to years prior to the year under appeal if the deduction was not claimed in those years. The Departmental Representative relied on previous Tribunal decisions which held that unabsorbed losses and depreciation should be set off against the income of the eligible business.

2. Setting off Notionally Carried Forward Loss Against Profits:

The assessee argued that the initial assessment year should be the year in which the deduction is first claimed, not necessarily the year in which the undertaking commenced operations. The assessee contended that the provisions of Section 80-IA(5) treating the undertaking as a separate sole source of income cannot be applied to a year prior to the year in which the deduction is first claimed. The Departmental Representative cited case laws where it was held that unabsorbed losses and depreciation should be set off against the income of the eligible business even if these losses were set off against profits from other sources in earlier years. However, the Tribunal noted that these case laws were applicable to assessment years prior to the amendment by the Finance Act, 1999. The Tribunal emphasized that the amended Section 80-IA gives the assessee the option to claim the deduction for any 10 consecutive years out of 15 years and that the initial assessment year is the year in which the deduction is first claimed. The Tribunal concluded that there is no question of setting off notionally carried forward unabsorbed depreciation or loss against the profits of the units for the years prior to the year in which the deduction is first claimed.

Conclusion:

The Tribunal allowed the appeal of the assessee, holding that the initial assessment year is the year in which the deduction under Section 80-IA is first claimed, and not necessarily the year in which the undertaking commenced operations. Therefore, the provisions of Section 80-IA(5) do not apply to years prior to the year in which the deduction is first claimed, and there is no need to set off notionally carried forward unabsorbed depreciation or loss against the profits of the current year.