2023 (8) TMI 768 - HC - Income Tax

Deduction u/s 80IA - which AY would qualify as the initial AY ? - HELD THAT - Tribunal, inter alia, relied upon CBDT Circular no.1/2016 dated 15.02.2016 as emphasized the fact that the initial AY was the year which the assessee chooses to opt for, and was not the year when the eligible business commenced or the point in time when the manufacturing activity was carried out in the first instance. Tribunal, in support of its reasoning, also relied upon the judgment of Prabhu Spinning Mills (P.) Ltd. 2016 (3) TMI 1309 - MADRAS HIGH COURT Whether unabsorbed losses/depreciation could be notionally carried forward for the purposes of determining profit for the eligible business u/s 80IA? - According to us, there is nothing to suggest in Sub-clause (5) of Section 80IA of the Act that the profits derived by an assessee from the eligible business can be adjusted against notional losses which stand absorbed against profits of other business. The deeming fiction created by sub-section (5) of Section 80IA does not envisage such an adjustment. The fiction which has been created is simply this the eligible business will be the only source of income. There is no fiction created, that losses which have already been absorbed, will be notionally carried forward and adjusted against the profits derived from the eligible business to quantify the deduction that the assessee could claim u/s 80IA of the Act. A perusal of the judgment rendered in the Microlabs Ltd. case 2015 (4) TMI 678 - KARNATAKA HIGH COURT would show that the Karnataka High Court gave weight to the fact that sub-section (5) of Section 80IA commenced with a non-obstante clause. It was based on this singular fact that the Karnataka High Court chose to veer away from the view expressed by the Madras High Court in the Velayudhaswamy Spinning Mills (P.) Ltd. 2010 (3) TMI 860 - MADRAS HIGH COURT case. We are unable to persuade ourselves to agree with the view taken by the Karnataka High Court in the Microlabs Ltd. case. We respectfully agree with the view taken by the Madras High Court in the Velayudhaswamy Spinning Mills (P.) Ltd. case, which has been followed in the Prabhu Spinning Mills (P.) Ltd. case as well. We have given our own reasons as to how sub-section (5) of Section 80IA should operate. Another additional reason why we agree with the view of the Tribunal. The Tribunal has noted that in earlier AYs, the AO has neither disallowed the claim nor adjusted notional depreciation/losses of previous years set off against other income in the years prior to the initial AY. Question of law is answered against the appellant/revenue and in favour of the respondent/assessee.

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Whether the Income Tax Appellate Tribunal erred in deleting the addition made by the Assessing Officer on account of disallowance of deduction under Section 80IA of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:

CM Appl.8121/2023

2. This is an application seeking condonation of delay. According to the appellant/revenue, the period of delay involved is 56 days.

3. For the reasons stated in the application, the delay is condoned.

4. The application is disposed of.

The court allowed the application for condonation of a 56-day delay in filing the appeal, stating that the reasons provided by the appellant/revenue were sufficient to justify the delay.

2. Deletion of Addition Made by the Assessing Officer:

ITA 105/2023

6.1 As proposed, the following question of law is taken up for consideration by this Court:

(i) Given the facts and circumstances of the case, has the Income Tax Appellate Tribunal [in short, "Tribunal"] erred in deleting the addition made by the Assessing Officer on account of disallowance of deduction under Section 80IA of the Income Tax Act, 1961 [in short, "Act"], amounting to Rs. 12,63,07,697/-, ignoring the mandate of provisions of Section 80IA(5) of the Act?

The core issue was whether the Tribunal erred in deleting the addition made by the AO regarding the disallowance of deduction under Section 80IA, amounting to Rs. 12,63,07,697/-. This appeal concerns Assessment Year (AY) 2016-17 and is directed against the order dated 22.07.2022 passed by the Tribunal.

Relevant Facts:

9.1 The respondent/assessee had filed its return of income under Section 139 of the Act on 14.10.2016. In the said return, the respondent/assessee had quantified its taxable income as Rs. 22,12,03,720/-. This return was revised on 03.05.2017, whereby the total taxable income was reduced marginally and pegged at Rs. 21,29,69,700/-.

9.2 It appears that the respondent/assessee's case was taken up for scrutiny and a notice was served under Section 143(2) of the Act on the respondent/assessee on 14.07.2017.

9.3 The record also shows that an assessment order was framed under Section 143(3) of the Act. This order was passed on 29.12.2018. While framing the assessment, the Assessing Officer (AO) disallowed Rs. 12,63,07,697/-, which was claimed by the respondent/assessee as deduction under Section 80IA of the Act, while determining its total income, which was quantified at Rs. 33,92,77,400/-.

The AO disallowed the deduction under Section 80IA, which was claimed by the respondent/assessee, resulting in an addition of Rs. 12,63,07,697/- to the total income.

Tribunal's Decision:

11. We may note that before the Tribunal, two issues were raised. Firstly, which AY would qualify as "the initial AY". Secondly, as to whether unabsorbed losses/depreciation could be notionally carried forward for the purposes of determining profit for the eligible business under Section 80IA of the Act.

11.1 Insofar as the first issue is concerned, the Tribunal, inter alia, relied upon the Central Board of Direct Taxes [in short, "CBDT"] circular no.1/2016 dated 15.02.2016.

11.2 The said circular, inter alia, emphasized the fact that the initial AY was the year which the assessee chooses to opt for, and was not the year when the eligible business commenced or the point in time when the manufacturing activity was carried out in the first instance.

11.3 The Tribunal, in support of its reasoning, also relied upon the judgment of the Madras High Court in Prabhu Spinning Mills (P.) Ltd.

11.4 Likewise, insofar as the second issue was concerned, the Tribunal ruled in favour of the respondent/assessee.

The Tribunal ruled in favor of the respondent/assessee, relying on the CBDT circular and the judgment of the Madras High Court, stating that the initial AY was the year chosen by the assessee and not the year when the business commenced. The Tribunal also ruled that unabsorbed losses/depreciation could not be notionally carried forward.

Court's Analysis:

12. Mr Rai says that since the Mircrolabs Ltd. case is pending in the Supreme Court, in which the Karnataka High Court has taken a decision in favour of the appellant/revenue, the appellant/revenue's appeal is sustainable.

13. We have examined in detail the facts of this case as noted above, and also the ratio of the three judgments cited before us.

13.1 As noted right in the beginning, there are two judgments of the Madras High Court, which are relevant for the purposes of determining the issue at hand, i.e., the Velayudhaswamy Spinning Mills (P.) Ltd. case and the Prabhu Spinning Mills (P.) Ltd. case.

13.2 We may note that insofar as the issue proposed by the revenue is concerned, the Division Bench of the Madras High Court in the Prabhu Spinning Mills (P.) Ltd. case has followed its own decision in the Velayudhaswamy Spinning Mills (P.) Ltd. case. The Division Bench has noted that they have followed the said decision in a number of cases. The large part of the discussion in the Prabhu Spinning Mills (P.) Ltd. case veered around what would be the initial AY of the eligible business. The court, after noting the CBDT's circular no.1/2016 dated 15.02.2016, concluded that the assessee had an option of choosing its initial AY and, in this regard, adverted to a plain language of sub-section (2) of Section 80IA of the Act. Although this issue is not proposed before us, the reasoning of the Division Bench of the Madras High Court in the Prabhu Spinning Mills (P.) Ltd. case is unimpeachable.

13.3 Insofar as the proposed issue is concerned, the following observations made by the Division Bench of the Madras High Court in the Velayudhaswamy Spinning Mills (P.) Ltd. case, being relevant, are extracted hereafter:

The court examined the facts and the relevant judgments, noting that the Madras High Court's decisions in Velayudhaswamy Spinning Mills (P.) Ltd. and Prabhu Spinning Mills (P.) Ltd. were pertinent. These judgments clarified that the initial AY could be chosen by the assessee and that losses already set off against other income could not be notionally carried forward.

Conclusion:

15. We are unable to persuade ourselves to agree with the view taken by the Karnataka High Court in the Microlabs Ltd. case. We respectfully agree with the view taken by the Madras High Court in the Velayudhaswamy Spinning Mills (P.) Ltd. case, which has been followed in the Prabhu Spinning Mills (P.) Ltd. case as well.

16. We have given our own reasons as to how sub-section (5) of Section 80IA should operate.

17. There is another additional reason why we agree with the view of the Tribunal. The Tribunal has noted that in earlier AYs, the AO has neither disallowed the claim nor adjusted notional depreciation/losses of previous years set off against other income in the years prior to the initial AY.

18. Accordingly, the question of law is answered against the appellant/revenue and in favour of the respondent/assessee.

19. The appeal is disposed of in the aforesaid terms.

20. The Registry will dispatch a copy of this judgement to the respondent/assessee via all permissible modes including email.

The court disagreed with the Karnataka High Court's view in Microlabs Ltd. and agreed with the Madras High Court's interpretation in Velayudhaswamy Spinning Mills (P.) Ltd. The court concluded that the Tribunal's decision was correct, and the question of law was answered against the appellant/revenue, thereby disposing of the appeal in favor of the respondent/assessee.

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