2015 (5) TMI 273 - HC - Income Tax

Entitlement to claim deduction under Section 80-IA - Held that - The business undertaking of the assessee is wind mill power generation/hosiery goods, etc., and it has claimed the benefit of deduction under Section 80IA of the Income Tax Act for the assessment year in question and for the subsequent years as well. Having exercised its option and its losses have been set off already against other income of the business enterprise, the assessee in this appeal falls within the parameters of Section 80IA of the Income Tax Act. There appears to be no distinction on facts in relation to the decision reported in Velayudhaswamy Spinning Mills case (2010 (3) TMI 860 - Madras High Court). - Decided in favour of the assessee

Summary

Issues Involved:
1. Entitlement of the respondent/assessee to claim deduction under Section 80-IA of the Income Tax Act.
2. Treatment of losses and deductions set off in previous years for the purpose of computing current year income under Section 80-IA.

Issue-wise Detailed Analysis:

1. Entitlement to Claim Deduction Under Section 80-IA:

The core issue in this Tax Case (Appeal) is whether the respondent/assessee is entitled to claim deduction under Section 80-IA of the Income Tax Act. This issue has already been settled by the Madras High Court in the case of Velayudhaswamy Spinning Mills V. Asst. CIT (2012) 340 ITR 477. The Court in Velayudhaswamy Spinning Mills held that Chapter VI-A of the Income Tax Act, which includes Section 80-IA, provides for profit-linked incentives. The Supreme Court in Liberty India V. CIT (2009) 317 ITR 218 also emphasized that deductions under Sections 80I, 80IA, and 80IB are profit-linked incentives and should be computed as if the eligible business is the only source of income.

2. Treatment of Losses and Deductions Set Off in Previous Years:

The Court reiterated that once losses and other deductions have been set off against the income of previous years, they should not be reopened for the purpose of computing current year income under Section 80I or 80IA. This was supported by the Rajasthan High Court in CIT V. Mewar Oil and General Mills Ltd. (2004) 271 ITR 311, which held that losses or deductions already set off should not be reopened for current year computation under Section 80-I.

The relevant portion of the decision clarifies that the deduction is allowed from the profits and gains derived from the business, and the losses of earlier years, once set off, should not be brought forward notionally. The Court emphasized that the fiction created by Section 80-IA(5) is limited to the eligible business being the only source of income and does not extend to bringing forward losses set off in earlier years.

In the present case, the assessee's losses were already set off against profits of earlier years, and during the relevant assessment year, there were no unabsorbed losses or depreciation. The assessee exercised the option under Section 80-IA(2), and the Court agreed with the previous judgment that the Revenue cannot rework the set-off amount notionally.

Conclusion:

The Court dismissed the appeal, confirming that the assessee is entitled to the deduction under Section 80-IA, and losses set off in previous years should not be reopened. The questions of law were answered in favor of the assessee and against the Revenue. The decision aligns with the precedent set in Velayudhaswamy Spinning Mills and other related judgments. Appeals filed by the Revenue before the Supreme Court against the Velayudhaswamy Spinning Mills decision are still pending, but this does not affect the current judgment.