Chartered Accountant Finance: [aaykarbhavan] Judgments Discussion 80IA.

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C A Shah D J

USA

Introduction :

In recent times, companies have been installing windmills mainly for two reasons (a) to garner green electrical energy from non-conventional sources availing various incentives offered by the government including allowing captive consumption, and (b) as a tax planning measure due to availability of higher depreciation in first 3,4 years of its installment and tax-free income for subsequent ten years u/s.80-IA out of total fifteen years. Many issues arise while availing tax benefits u/s.80-IA. This article attempts to highlight the main issue of notional carry forward and set-off of loss from eligible undertaking. Though 'windmill' is taken as the 'eligible undertaking' as an example, the discussion is applicable for all other undertakings u/s.80-IA. The discussion is based on the recent order of the Madras High Court in the case of Velayudhaswamy Spinning Mills (P) Ltd. v. ACIT, (2010) 38 DTR 57 which overruled the judgment of the Ahmedabad Special Bench in case of Goldmine Shares and Finance (P.) Ltd [2008] 113 ITD 209 ITAT AHMEDABAD (SPECIAL BENCH) .

Notional brought forward of loss of the earlier years u/s.80-IA(5) :

This is an important issue in determining the eligible profit of the windmill and the available period of deduction u/s.80-IA. The provisions of S. 80-IA(5) are analysed accepting that the notional loss is to be set off and that the provisions of S. 80-IA (5) are not redundant.

The Income-tax Act provides for deduction of 100% of income of a windmill u/s.80-IA for a period of ten consecutive years out of fifteen years. One possible interpretation is that the loss of the undertaking of the windmill from the year in which it starts generating electricity is to be notionally carried forward for setting off against the profits from windmill in the subsequent years and only after the entire loss is absorbed by the income from windmill, deduction u/s.80IA is available. The other interpretation is that only the loss incurred in any year after first time deduction is claimed is required to be set off before deduction can be claimed in any subsequent year.

Analysis of S. 80-IA(5) :

S. 80-IA(5) reads as under :

"Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of Ss.(1) apply shall for the purpose of determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made." (Emphasis supplied).

There was controversy between various benches of ITAT's regarding applicability of provisions of sec. 80IA(5) of the Act.

The decision of the Tribunal, Bombay Benches, in the case of M. Pallonji & Co. (P.) Ltd. v. Jt. CIT [2006] 6 SOT 287 is in favour of the assessee and it held that unabsorbed depreciation of eligible project could not be set off against profit of eligible business for the purposes of deduction under section 80-IA which unabsorbed depreciation stood already adjusted against profits of assessee from other business. Whereas, another Bench of the Tribunal in Addl. CIT v. Ashok Alco Chem Ltd. [2005] 96 ITD 160 (Mum.) is stated to have held against the assessee by observing that for the purpose of applying the provisions contained in section 80-IA of the Act, the profits or gains of the eligible business are to be computed as if the eligible business were the only business of the assessee right from the initial year, brought forward losses of the unit have to be set off against the profits and in the absence of profit from the eligible units after set off of brought forward losses of the said units, deduction under section 80-IA could not be allowed. The Tribunal, Kolkata Benches, in the case of ITO v. Kanchan Oil Industries Ltd. [2005] 92 ITD 557 has concluded that in view of sub-section (7) of section 80-IA, for computing deduction under section 80-IA, brought forward losses and unabsorbed depreciation of ineligible business cannot be deducted from the income of eligible business and only the unabsorbed depreciation/brought forward losses of eligible business can be so deducted.

To resolve this controversy, a reference was made by revenue for constitution of Special Bench.

Because of the cleavage of opinion between the Benches of Tribunal viz., Mumbai and Kolkata the President, Income-tax Appellate Tribunal, has constituted this Special Bench for considering the following issue:

"Whether in view of the provisions of section 80-IA(5) of the Income-tax Act, 1961, the profit from the eligible business for the purpose of deduction under section 80-IA of the Act has to be computed after deduction of the notional brought forward losses and depreciation of eligible business even though they have been allowed set off against other income in earlier years."

The Special Bench in below mentioned case

Assistant Commissioner of Income-tax*, Circle-4, Ahmedabad v/s

Goldmine Shares and Finance (P.) Ltd [2008] 113 ITD 209 ITAT AHMEDABAD (SPECIAL BENCH) decided the issue in favour of revenue by holding that "Section 80IA of the Income-tax Act, 1961 - Deductions - Profits and gains from industrial undertakings, etc., after certain dates/infrastructure undertakings - Assessment years 1997-98 to 2002-03 - Whether in view of specific provisions of section 80-IA(5), profit from eligible business for purpose of determination of quantum of deduction under section 80-IA has to be computed after deduction of notional brought forward losses and depreciation of eligible business, even though they have been allowed to be set-off against other income in earlier years - Held, yes"

The provision is analysed with the following example :

The assessee has a spinning mill division.
It has installed windmill (windmill division) which is eligible for deduction u/s.80-IA in A.Y. 2002-03 (first year of generation of power).
The loss from windmill division has been set off against the profit of the spinning mill division for the first three years.
As there was loss from the windmill division, no deduction has been claimed u/s.80-IA for these three years i.e., till A.Y. 2004-05.
When the operations of the windmill division resulted in profit after setting of its loss against the profit of the spinning mill division, the assessee claimed deduction u/s.80-IA from the fourth year i.e. A.Y. 2005-06 (first year of claim).

Method I :

One method of working would be to set off the loss of windmill division against the income from the spinning mill division and once the loss of windmill is fully set off against either income from the windmill or the spinning mill division, then start claiming deduction u/s.80-IA. By this method, the assessee would be in an advantageous position since he can claim the deduction in respect of windmill from an earlier point of time and also for the entire period of ten consecutive years within the span of 15 years. Working under this method is given in Table 1.

Method-II

Other alternative would be to treat the windmill division as the only source of income from the first year, notionally carry forward the loss including the unabsorbed depreciation and set off against the income from windmill division till that entire loss is fully set off and then start claiming deduction u/s.80-IA. Working of the total income of the assessee in that case is given in Table 2.

PARTICULARS	TABLE 1 (Considering FIRST year of CLAIM as INITIAL YEAR)			TABLE 2 (Considering FIRST year of PRODUCTION as INITIAL YEAR)
	Year ended 31/03/2005
	Normal Profit	Wind Mill Profit	TOTAL PROFIT	Normal Profit	Wind Mill Profit	TOTAL PROFIT
NP as per P&L A/c	7,25,680	8,90,820	16,16,500	7,25,680	8,90,820	16,16,500
ADD: DISALLOWABLE ITEMS
Disallowable Expenses	41,102	0	41,102	41,102	0	41,102
Depreciation	46,26,141	10,68,437	56,94,578	46,26,141	10,68,437	56,94,578
SUB TOTAL	53,92,923	19,59,257	73,52,180	53,92,923	19,59,257	73,52,180
LESS: I TAX DEPRECIATION	24,02,442	2,22,13,454	2,46,15,896	24,02,442	2,22,13,454	2,46,15,896
NET PROFIT	29,90,481	(2,02,54,197)	(1,72,63,716)	29,90,481	(2,02,54,197)	(1,72,63,716)
Year ended 31/03/2006
PARTICULARS	Normal Profit	Wind Mill Profit	TOTAL PROFIT	Normal Profit	Wind Mill Profit	TOTAL PROFIT
NP as per P&L A/c	21,40,784	41,93,324	63,34,108	21,40,784	41,93,324	63,34,108
ADD: DISALLOWABLE ITEMS
Disallowable Expenses	2,35,590	0	2,35,590	2,35,590	0	2,35,590
Depreciation	48,08,648	41,10,493	89,19,141	48,08,648	41,10,493	89,19,141
SUB TOTAL	71,85,022	83,03,817	1,54,88,839	71,85,022	83,03,817	1,54,88,839
LESS: I TAX DEPRECIATION	15,79,870	2,65,47,219	2,81,27,089	15,79,870	2,65,47,219	2,81,27,089
NET PROFIT	56,05,152	(1,82,43,402)	(1,26,38,250)	56,05,152	(1,82,43,402)	(1,26,38,250)
LOSS B/F					(2,02,54,197)
TOTAL LOSS C/F					(3,84,97,599)
Year ended 31/03/2007
PARTICULARS	Normal Profit	Wind Mill Profit	TOTAL PROFIT	Normal Profit	Wind Mill Profit	TOTAL PROFIT
NP as per P&L A/c	2,16,820	38,11,877	40,28,697	2,16,820	38,11,877	40,28,697
ADD: DISALLOWABLE ITEMS
Disallowable Expenses	5,81,200	0	5,81,200	5,81,200	0	5,81,200
Depreciation	16,06,552	41,10,493	57,17,045	16,06,552	41,10,493	57,17,045
SUB TOTAL	24,04,572	79,22,370	1,03,26,942	24,04,572	79,22,370	1,03,26,942
LESS: I TAX DEPRECIATION	16,55,840	53,09,444	69,65,284	16,55,840	53,09,444	69,65,284
NET PROFIT	7,48,732	26,12,926	33,61,658	7,48,732	26,12,926	33,61,658
LOSS B/F					(3,84,97,599)
TOTAL LOSS C/F					(3,58,84,673)
Year ended 31/03/2008
PARTICULARS	Normal Profit	Wind Mill Profit	TOTAL PROFIT	Normal Profit	Wind Mill Profit	TOTAL PROFIT
NP as per P&L A/c	3,15,252	37,08,531	40,23,531	3,15,252	37,08,531	40,23,531
ADD: DISALLOWABLE ITEMS
Disallowable Expenses	6,33,091	0	6,33,091	6,33,091	0	6,33,091
Depreciation	18,47,904	41,21,754	59,69,658	18,47,904	41,21,754	59,69,658
SUB TOTAL	27,96,247	78,30,285	1,06,26,532	27,96,247	78,30,285	1,06,26,532
LESS: Allowable Expenses	2,13,929	0	2,13,929	2,13,929	0	2,13,929
I TAX DEPRECIATION	18,07,315	10,61,889	28,69,204	18,07,315	10,61,889	28,69,204
NET PROFIT	7,75,003	67,68,396	75,43,399	7,75,003	67,68,396	75,43,399
LOSS B/F					(3,58,84,673)
TOTAL LOSS C/F					(2,91,16,277)
Year ended 31/03/2009
PARTICULARS	Normal Profit	Wind Mill Profit	TOTAL PROFIT	Normal Profit	Wind Mill Profit	TOTAL PROFIT
NP as per P&L A/c	3,89,984	1,05,64,218	1,09,54,202	3,89,984	1,05,64,218	1,09,54,202
ADD: DISALLOWABLE ITEMS
Disallowable Expenses	1,45,582	0	1,45,582	1,45,582	0	1,45,582
Depreciation	22,77,853	41,21,754	63,99,607	22,77,853	41,21,754	63,99,607
SUB TOTAL	28,13,419	1,46,85,972	1,74,99,391	28,13,419	1,46,85,972	1,74,99,391
LESS: Allowable Expenses	6,81,927	0	6,81,927	6,81,927	0	6,81,927
I TAX DEPRECIATION	16,97,001	2,12,378	19,09,379	16,97,001	2,12,378	19,09,379
NET PROFIT	4,34,491	1,44,73,594	1,49,08,085	4,34,491	1,44,73,594	1,49,08,085
LOSS B/F					(2,91,16,277)
TOTAL LOSS C/F					(1,46,42,638)
Year ended 31/03/2010
PARTICULARS	Normal Profit	Wind Mill Profit	TOTAL PROFIT	Normal Profit	Wind Mill Profit	TOTAL PROFIT
NP as per P&L A/c	(4,49,415)	59,70,330	55,20,915	(4,49,415)	59,70,330	55,20,915
ADD: DISALLOWABLE ITEMS
Disallowable Expenses	1,06,059	0	1,06,059	1,06,059	0	1,06,059
Depreciation	35,55,964	41,10,493	76,66,457	35,55,964	41,10,493	76,66,457
SUB TOTAL	32,12,608	1,00,80,823	1,32,93,431	32,12,608	1,00,80,823	1,32,93,431
LESS: I-TAX DEPRECIATION	24,05,481	42,475	24,47,956	24,05,481	42,475	24,47,956
NET PROFIT	8,07,127	1,00,38,348	1,08,45,475	8,07,127	1,00,38,348	1,08,45,475
LOSS B/F					(1,46,42,638)
TOTAL LOSS C/F					(46,04,335)
LESS: DEDUCTION u/s 80IB		1,00,38,438	1,00,38,438		NIL	NIL
TOTAL INCOME			8,07,127			1,08,45,475

Issues :

The question here is which method is the correct one for claiming deduction u/s.80-IA in respect of income from the windmill. In order to analyse this further, we may consider the following issues :

1. Whether the 'initial assessment year' referred in S. 80-IA(5) is the first year of commencement of production or the first year claim of deduction u/s.80-IA ?

2. Whether the fiction, namely, 'eligible business was the only source of income' u/s.80-IA(5) is to be applied only from the second year of the claim or from the second year of the commencement of operation of the windmill?

Issue 1 : Initial Assessment Year :

S. 80-IA as it stands presently does not define the term 'initial assessment year'. However, S. 80-IA as it stood prior to 31-3-2000, defined the term 'initial assessment year' basically in two ways depending on the type of deduction available. Erstwhile S. 80-IA provided for the following two types of deductions :

(i) Ten or fixed consecutive years starting from the first year of commencement — like an undertaking engaged in cold storage plant, ship or hotel;

(ii) Ten years out of twelve/fifteen years starting from the first year of commencement — like an undertaking engaged in the business of developing, maintaining and operating any infrastructure facility;

For undertakings falling under (i) above, the initial assessment year was defined as the first year of commencement of production or operation pursuant to the definition under erstwhile S. 80IA(12)(c) (1), (3), (4) and (5). For undertakings falling under (ii) above, the initial assessment year was defined to be the first year of claim under erstwhile S. 80-IA(12)(c)(2) which reads as under :

"Initial assessment year, in the case of an enterprise carrying on the business of developing infrastructure facility means the assessment year specified by the assessee at his option to be the initial assessment year not falling beyond twelfth assessment year starting from the previous year in which the enterprise begins operating and maintaining the infrastructure facility." (Emphasis supplied)

Relevant contents of erstwhile S. 80-IA (12) are tabulated in Table 3.

Sub-cl. (12)(c)	Nature of undertaking — Ss.(4)	Period of deduction — Ss.(6)	Initial Asst. Year — Ss.(12)(c)
(1)	Cold storage plant, ship or hotel	Ten years	Year in which it begins to manufacture
(2)	Infrastructure facility	Ten out of Twelve years	Year specified by the assessee at his option
(3)	Scientific research	Five years	Year of approval by the prescribed authority
(4)	Telecommunication service	Ten years	Year in which service begins
(5)	Industrial park	Ten years	Year of starting of the park
(6)	Production of mineral oil	Seven years	Year of commencement of commercial production

Power-generating undertakings, namely, windmills are similar to category (2) of the above viz. infrastructure facilities and accordingly the initial assessment year in the case of windmills should be the first year of claim.

New S. 80-IA w.e.f. 1-4-2000 :

The Finance Act, 1999, w.e.f 1-4-2000 substituted the erstwhile section S. 80-IA with two sections, namely, 80-IA and 80-IB. While doing so, the undertakings originally eligible for deduction for a fixed block of years like the one stated in clause (i) above, namely, the cold storage plant, ships, etc. are covered by S. 80-IB and undertakings which have the option to claim deduction for ten consecutive years within a block of twelve or fifteen years, like the infrastructure undertakings, are retained under the new S. 80-IA. A brief comparison is given in Table 4.

Erstwhile S. 80-IA effective up to 31.3.2000	Present S. 80-IA	New 80-IB (Similar to old 80-IA)
Eligible period of deduction varied from undertaking to undertaking, industry to industry.	Deduction is available for ten years in a block of fifteen years for all undertakings (Ss.2).	Eligible period of deduction varies from undertaking to undertaking.
Initial assessment year varied from undertaking to undertaking as defined in Ss.(12)(c).	Not defined.	Initial assessment year is defined for each type of undertaking separately.

Contents of Form 10CCB :

Whenever a confusion of this kind arises, a reference to the form prescribed may at times throw more light to clarify the confusion. In the present case also, the contents and language of Form 10CCB are relevant. Relevant extracts from Form 10CCB, under the Rule 18BBB are reproduced below :

(a) Clause 8 — "Date of commencement of operation/activity by the undertaking"

(b) Clause 9 — "initial assessment year from when the deduction is being claimed".

From the above clauses it is clear that the term the 'initial assessment year' under the present S. 80-IA is the first year of claim and not the first year of operation/commencement of production.

Issue 2 : Applicability of the fiction u/s.80-IA(5) :

There is no dispute that Ss.(5) creates a fiction. The fiction mandates a notional carry forward of loss from eligible business presuming that the eligible business is the only source of income. The moot issue is the year of applicability of the fiction. For easy analysis, Ss.(5) is divided into phrases as below :

(a) for the purpose of determining the quantum of deduction;

(b) for the assessment year immediately succeeding the initial assessment year;

(d) during the previous year relevant to the initial assessment year;

(e) and to every subsequent assessment year up to and including the assessment year for which the determination is to be made;

Phrase (c) introduces the fiction 'eligible business was the only source of income' and phrase (d)

Further MADRAS HIGH COURT in latest judgment in case of VELAYUDHASWAMY SPINNING MILLS (P) LTD v/s ACIT . 38 DTR 57 (2010) , overruled the Ahmedabad Special Bench decision and upheld the judgment of Chennai Bench in case of MOHAN BREWERIES & DISTILLERIES LTD v/s ACIT(2008) 114 TTJ 532 which has held that

"Section 80IA of the Income-tax Act, 1961 - Deductions - Profits and gains from infrastructure undertakings - Assessment year 2004-05 - Whether section 80-IA(2) gives an option to assessee with effect from 1-4-2000 to claim relief under section 80-IA for any 10 consecutive assessment years out of 15 years beginning from year ending in which undertaking or enterprise develops or begins to operate any infrastructure facility, etc., and it does not mandate that first year of 10 consecutive assessment years should be always first year of set-up of enterprise - Held, yes - Whether provision of section 80-IA(5), treating eligible undertaking as a separate sole source of income, is applicable only when assessee chooses to claim deduction under section 80-IA and same cannot be applied to a year prior to year in which assessee opted to claim relief under section 80-IA for first time - Held, yes - In respect of profits of eligible units established during assessment years 1996-97 and 1999-2000, assessee claimed deduction under section 80-IA for first time in assessment year 2004-05 - Assessing Officer held that notional brought forward loss incurred by those units in earlier years was to be first set-off against their income of current assessment year and, thereafter, if any remaining profit was available then deduction under section 80-IA had to be given - Whether since assessee had opted to claim deduction under section 80-IA only in assessment year 2004-05, in view of section 80-IA(5), there was no question of setting-off notionally carried forward unabsorbed depreciation or loss of earlier years against profits of units and assessee was entitled to claim deduction under section 80-IA on current assessment year's profit - Held, yes

The High Court has held that as initial year is not defined in section 80IA as compared to 80IB where it is specifically provided that the year of commencement of business will be the initial year for the purpose of claiming the deduction .However as initial year is not defined in sec. 80IA , the year of option (method-ii)has to be treated as initial assessment year for the purpose of section 80IA.

If METHOD I is adopted Dept will LOOSE Tax as under
TOTAL AMOUNT of LOSS
31-03-2005	2,02,54,197)
31-03-2006	(1,82,43,402)
	(3,84,97,599)
TOTAL AMOUNT of PROFIT
31-03-2007		26,12,926
31-03-2008		67,68,396
31-03-2009		1,44,73,594
31-03-2010		1,00,38,348	30.00%	30,11,504.40
		3,38,93,264
		46,04,335	30.00%	13,81,300.50
				43,92,804.90

Now in view of above discussions , it is advised that same may be brought to the notice of CBDT for immediate amendment in sec.80IA,i.e just including one explanation- The initial year for claim of deduction u/s 80IA will be year of commencement of business/undertaking.

Otherwise it will be disastrous for revenue because now when assessee has loss from the eligible business, same will be set off against the income from other sources and assessee will save tax during first 4,5 years .When the eligible unit starts earning profit, he will opt for deduction and will again save tax.

*In favour of revenue.