2015 (8) TMI 234 - HC - Income Tax

Disallowance of deduction claimed under section 80IA - CIT(A) allowed claim - 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

Issues Involved:
1. Entitlement of the assessee to claim deduction under Section 80-IA of the Income Tax Act.
2. Whether previous years' losses and deductions already set off should be reopened for the computation of current year income under Section 80-IA.

Detailed Analysis:

1. Entitlement of the assessee to claim deduction under Section 80-IA of the Income Tax Act:

The core issue raised in this Tax Case (Appeal) is whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the respondent/assessee is entitled to claim deduction under section 80-IA of the Income Tax Act.

The issue involved in this appeal has already been decided by this Court in the decision reported in (2012) 340 ITR 477 (Velayudhaswamy Spinning Mills V. Asst. CIT).

In the decision reported in (2012) 340 ITR 477 (Velayudhaswamy Spinning Mills V. Asst. CIT), this Court, while dealing with the benefit under Chapter VIA of the Income Tax Act, placed reliance on the decision reported in (2009) 317 ITR 218 (SC) (Liberty India V. CIT), wherein the Supreme Court considered the scope of Section 80I, 80IA and 80IB of the Income Tax Act and held that Chapter VI-A provides for incentives in the form of tax deductions essentially belong to the category of "profit-linked incentives".

This Court also placed reliance on the decision reported in (2004) 271 ITR 311 (Raj) (CIT V. Mewar Oil and General Mills Ltd.), and concluded that once the losses and other deductions have been set off against the income of the previous year, it should not be reopened again for the purpose of computation of current year income under Section 80I or 80IA of the Income Tax Act and the assessee should not be denied the admissible deduction under Section 80IA of the Income Tax Act.

2. Whether previous years' losses and deductions already set off should be reopened for the computation of current year income under Section 80-IA:

The relevant portion of the decision of this Court states:

"From a reading of the above, it is clear that the benefit is given to the profits and gains derived from the business of the hotel or the business of repairs to ocean-going vessels or other powered craft. The deduction is allowed to the extent of 20 per cent. from the profits and gains of the assessee. Sub-section (5) gives deduction for the period of seven assessment years immediately succeeding the initial assessment year. Sub-section (6) deals with computing the deduction under sub-section (1) and it starts with non obstante clause and also it is a deeming provision. The fiction created by the undertaking was the only source of income during the previous year initially and subsequent assessment years."

In the present case, we are concerned with the provision of section 80-IA. The said provision was introduced by the Finance Act, 1999, with effect from April 1, 2000. The provisions of sections 80-I and 80-IA are also more or less identically worded. Sections 80-I and 80-IA come in Chapter VI-A of the Income-tax Act. Chapter VI-A deals with deductions to be made in computing total income. There are two tax incentives contemplated in Chapter VI-A. One is investment incentive and the other one is profit-linked investment.

In the case of Liberty India v. CIT [2009] 317 ITR 218 (SC), the apex court considered the scope of sections 80-I, 80-IA and also section 80-IB of the Act, wherein, it has been held that Chapter VI-A provides for incentives in the form of tax deductions essentially belong to the category of "profit-linked incentives".

Section 80-IA reads as follows:

"80-IA. (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business) there shall, in accordance with and subject to the provisions of this section, be allowed in computing the total income of the assessee, a deduction of an amount equal to hundred per cent. of the profits and gains derived from such business for ten consecutive assessment years."

From a reading of sub-section (1), it is clear that it provides that where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in subsection (4), i.e., referred to as the eligible business, there shall, in accordance with and subject to the provisions of the section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to 100 per cent. of the profits and gains derived from such business for ten consecutive assessment years.

Sub-section (5) deals with quantum of deduction for an eligible business. The words "initial assessment year" are used in sub-section (5) and the same is not defined under the provisions. It is to be noted that "initial assessment year" employed in sub-section (5) is different from the words "beginning from the year" referred to in sub-section (2).

The important factors are to be noted in sub-section (5) and they are as under:

"(1) It starts with a non obstante clause which means it overrides all the provisions of the Act and other provisions are to be ignored ;

(2) It is for the purpose of determining the quantum of deduction ;

(3) For the assessment year immediately succeeding the initial assessment year ;

(4) It is a deeming provision ;

(5) Fiction created that the eligible business is the only source of income ; and

(6) During the previous year relevant to the initial assessment year and every subsequent assessment year."

From a reading of the above, it is clear that the eligible business were the only source of income, during the previous year relevant to the initial assessment year and every subsequent assessment years. When the assessee exercises the option, the only losses of the years beginning from initial assessment year alone are to be brought forward and no losses of earlier years which were already set off against other income of the assessee.

Once the set off is taken place in earlier year against the other income of the assessee, the Revenue cannot rework the set off amount and bring it notionally. A fiction created in sub-section does not contemplate to bring set off amount notionally. The fiction is created only for the limited purpose and the same cannot be extended beyond the purpose for which it is created.

In the present cases, there is no dispute that losses incurred by the assessee were already set off and adjusted against the profits of the earlier years. During the relevant assessment year, the assessee exercised the option under section 80-IA(2). During the relevant period, there were no unabsorbed depreciation or loss of the eligible undertakings and the same were already absorbed in the earlier years. There is a positive profit during the year.

In the case of CIT v. Mewar Oil and General Mills Ltd. (No. 1) [2004] 271 ITR 311 (Raj), the Rajasthan High Court also considered the scope of section 80-I and held that it is not at all required that losses or other deductions which have already been set off against the income of the previous year should be reopened again for computation of current income under section 80-I for the purpose of computing admissible deductions thereunder.

The standing counsel appearing for the Revenue is unable to bring to our notice any relevant material or any compelling reason or any contra judgment of other courts to take a different view. He only relied heavily on the Memorandum explaining the provisions in the Finance (No. 2) Bill, 1980, [1980] 123 ITR (St.) 154 to support this case.

We are, therefore, of the view that loss in the year earlier to the initial assessment year already absorbed against the profit of other business cannot be notionally brought forward and set off against the profits of the eligible business as no such mandate is provided in section 80-IA(5).

Under these circumstances, we set aside the order of the Tribunal and answer all the questions in favour of the appellant/assessee and against the Revenue in Tax Case Nos. 909 and 940 of 2009 respectively. Accordingly, tax cases are allowed.

Conclusion:

We, therefore, taking note of the decision rendered by this Court in the case of Velayudhasamy Spinning Mills (supra) and in a batch of cases in T.C.(A)Nos.408 of 2012, are inclined to dismiss the above Tax Case (Appeal), thereby confirm the order passed by the Tribunal.

In view of the above, the questions of law raised in this appeal are answered against the Revenue and in favour of the assessee. The above Tax Case (Appeal) stands dismissed. No costs.

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