2017 (12) TMI 1323 - AT - Income Tax

Denying deduction u/s 80-IA - initial year for the purpose of Section 80-IA - whether loss and depreciation of earlier years in respect of the eligible wind mills had to be notionally brought forward and set off against profits of eligible business while computing deduction u/s 80IA? - Held that - As in case of CIT Vs. Anil H.Lad 2014 (3) TMI 808 - KARNATAKA HIGH COURT held that where depreciation and losses of earlier assessment years have already been set off in those years and subsequently deduction u/s 80-IA is claimed by the assessee, there is no need to notionally carry forward the same and set off from the income of the current year. Same view has been taken in other judicial pronouncements. Respectfully following the same, we hold that there was no need to notionally carry forward the earlier year s losses / depreciation to impugned AY before deduction could be granted to the assessee. Resultantly, the first ground of assessee s appeal stands allowed. Excluding the interest income and Foreign Exchange Gains for the purpose of computing deduction u/s 80-IA - Held that - The impugned forex gains earned by the assessee were assessable as Business Income and the same were not eligible for deduction u/s 80-IA. Resultantly, Ground No. 2 of assessee s appeal stands partly allowed. The Ld. AO is directed to re-compute assessed income of the assessee under normal provisions as well as under Section 115JB, being consequential in nature, in terms of our above order.

Summary

Issues Involved:
1. Denial of deduction under Section 80-IA of the Income Tax Act, 1961.
2. Exclusion of interest income and foreign exchange gains for computing deduction under Section 80-IA.

Issue-wise Detailed Analysis:

1. Denial of Deduction under Section 80-IA:
The assessee contested the denial of a deduction amounting to ?1,34,85,051 under Section 80-IA by the CIT(A), who upheld the AO's view that losses and depreciation from previous years related to the eligible wind mills had to be notionally brought forward and set off against the profits of the eligible business while computing the deduction. The assessee argued that Section 80-IA(5) did not mandate bringing forward losses or depreciation from years prior to the initial assessment year (AY) chosen for claiming the deduction. The assessee cited the judgment of the Hon’ble Madras High Court in Velayudhaswamy Spinning Mills Pvt. Ltd. Vs ACIT [231 CTR 368] to support this interpretation. The AO, however, relied on several judicial pronouncements to assert that the 'initial year' for Section 80-IA purposes meant the year in which the business commenced operations. The Tribunal, referencing CBDT Circular No. 1/2016 dated 15/02/2016, clarified that the 'initial assessment year' means the first year opted by the assessee for claiming the deduction. The Tribunal concurred with the assessee’s stance, holding that there was no need to notionally carry forward losses or depreciation from earlier years to the impugned AY before granting the deduction. Consequently, the first ground of the assessee’s appeal was allowed.

2. Exclusion of Interest Income and Foreign Exchange Gains:
The assessee did not press the issue regarding the exclusion of interest income of ?1,83,654, which was thus dismissed as 'not pressed'. However, the assessee contested the exclusion of foreign exchange gains of ?23,10,796 from the deduction under Section 80-IA. The assessee explained that these gains arose from term loan facilities obtained for setting up a wind farm project, and such gains were part of business operations, hence assessable under 'Business Income'. The Tribunal noted that the revenue had accepted similar gains as 'Business Income' in previous years, and thus, the principle of consistency applied. The Tribunal concluded that the foreign exchange gains were assessable as 'Business Income'. However, regarding the eligibility for deduction under Section 80-IA, the Tribunal referred to the Hon’ble Apex Court’s judgment in Liberty India Vs. CIT [317 ITR 218], which held that the term "derived from" has a narrower connotation than "attributable to". The Tribunal concluded that the forex gains were not derived from the activity of power generation and thus were not eligible for deduction under Section 80-IA. Consequently, Ground No. 2 was partly allowed, with the AO directed to re-compute the assessed income accordingly.

Conclusion:
The appeal of the assessee was partly allowed, with the Tribunal ruling in favor of the assessee on the first ground regarding the denial of deduction under Section 80-IA and partly allowing the second ground by recognizing the forex gains as 'Business Income' but denying the deduction under Section 80-IA for these gains. The AO was directed to re-compute the assessed income as per the Tribunal’s order.