2020 (7) TMI 525 - AT - Income Tax

Deduction u/s.80IA(4) - losses arising in eligible business, if any, prior to exercise of option towards initial assessment year to be artificially carried forward and notionally adjusted from the profits arising from eligible business in the initial assessment year - whether the assessee is entitled in law for claim of deduction of income arising from eligible business during the year under s. 80IA(1) r.w.s. 80IA(4) without making adjustments towards losses arising in the earlier assessment years prior to exercise of option of initial assessment year with reference to the eligible business? - HELD THAT - The manner of determination of quantum of deduction as provided under s.80IA(5) has since been clarified by the CBDT Circular No.1 of 2016 dated 15.02.2016 and is devoid of controversy any more. Having regard to the wide ranging controversies, the CBDT circular has given categorical interpretation on exercise of option of choosing initial assessment year referred to sub-section (5) of Section 80IA of the Act in favour of the assessee. CBDT has also clarified that embargo placed under s.80IA(5) of the Act for quantification of deduction of profits and gains of an eligible business would apply from the assessment years immediately succeeding initial assessment years only. Having regard to express elucidation by CBDT, the CIT(A), in our view, has rightly decided the issue of manner of computation of quantum of deduction under s.80IA(5) in favour of the assessee. The assessee while determining the eligible profit, is not required to notionally reduce losses arising from eligible business in the earlier years already set off against other business of assessee in terms of Sections 70, 71 72 of the Act prior to exercise of option of initial assessment year . The losses arising in eligible business , if any, subsequent to earmarking of initial assessment year shall however continue to be governed by embargo placed in Section 80IA(5) of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Deduction under Section 80IA(4) of the Income Tax Act, 1961.
2. Interpretation and application of Section 80IA(5) regarding the notional carry forward of losses/depreciation.

Detailed Analysis:

1. Deduction under Section 80IA(4) of the Income Tax Act, 1961:

The primary issue revolves around whether the assessee is entitled to claim a deduction under Section 80IA(4) without adjusting the losses/depreciation from earlier years. The assessee, engaged in generating electricity through windmills, claimed a deduction of ?3,61,15,115/- for AY 2012-13. The AO denied this deduction by invoking Section 80IA(5), which led to the adjustment of notional carry forward losses/depreciation from earlier years, thus nullifying the claimed deduction.

2. Interpretation and application of Section 80IA(5) regarding the notional carry forward of losses/depreciation:

The CIT(A) reversed the AO's decision, citing various judicial precedents and CBDT Circular No. 1 of 2016. The CIT(A) noted that the assessee had chosen the year under consideration as the "initial assessment year" and had incurred losses in prior years which were already set off against other business income. Therefore, there was no business loss or unabsorbed depreciation to be set off against the current year's income.

The CIT(A) relied on the decision of the Hon'ble Madras High Court in Velayudhaswamy Spinning Mills (P) Ltd. v/s ACIT, which held that losses in years prior to the initial assessment year, already absorbed against other business profits, cannot be notionally brought forward and set off against the profits of the eligible business. This interpretation was further supported by the CBDT Circular, which clarified that the term "initial assessment year" refers to the first year opted by the assessee for claiming deduction under Section 80IA, and losses prior to this year should not be notionally carried forward.

The Tribunal, upon considering the rival submissions, upheld the CIT(A)'s decision. It emphasized that the manner of determining the quantum of deduction under Section 80IA(5) has been clarified by the CBDT Circular, which supports the assessee's position. The Tribunal concluded that the assessee is not required to notionally reduce losses from earlier years already set off against other business income before the initial assessment year. However, any losses arising in the eligible business subsequent to the initial assessment year must be adjusted as per Section 80IA(5).

Conclusion:

The Tribunal dismissed the Revenue's appeal, affirming that the assessee is entitled to the deduction under Section 80IA(4) without adjusting the notional carry forward of losses/depreciation from earlier years, in line with the judicial precedents and CBDT Circular. The decision clarifies that only losses incurred from the initial assessment year onwards need to be considered for adjustment under Section 80IA(5).