Facts of the Case

The respondent/assessee filed its return of income under Section 139 of the Income Tax Act, 1961 for Assessment Year 2016–17, declaring total income which was subsequently revised. The case was selected for scrutiny and assessment was completed under Section 143(3).

During assessment, the Assessing Officer disallowed deduction of ₹12,63,07,697 claimed under Section 80IA, thereby enhancing the total income.

Aggrieved, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals), who allowed the claim. The Revenue then filed an appeal before the Income Tax Appellate Tribunal (ITAT), which was dismissed. Subsequently, the Revenue filed an appeal before the Delhi High Court under Section 260A.

 Issues Involved

  1. Whether the ITAT erred in allowing deduction under Section 80IA ignoring Section 80IA(5)?
  2. Whether losses/unabsorbed depreciation of earlier years already set off can be notionally brought forward for computing deduction under Section 80IA?
  3. What constitutes the “initial assessment year” for claiming deduction under Section 80IA?

 Petitioner’s Arguments (Revenue)

  • The Revenue contended that Section 80IA(5) contains a non-obstante clause, overriding other provisions of the Act.
  • It was argued that earlier years’ losses and depreciation, even if already set off, must be notionally brought forward and adjusted against profits of the eligible business.
  • Reliance was placed on the Karnataka High Court judgment in Microlabs Ltd. vs ACIT, which supported the Revenue’s interpretation.

 Respondent’s Arguments (Assessee)

  • The assessee relied on the judgments of the Madras High Court in:
    • Velayudhaswamy Spinning Mills (P.) Ltd.
    • Prabhu Spinning Mills (P.) Ltd.
  • It was contended that:
    • The assessee has the option to choose the “initial assessment year”.
    • Losses already set off in earlier years cannot be notionally brought forward again.
    • Section 80IA(5) creates a limited deeming fiction and does not permit reopening of past set-offs.

 Court’s Findings / Order

The Delhi High Court held:

  • Section 80IA(5) does not permit adjustment of notional losses which were already absorbed against other income in earlier years.
  • The deeming fiction under Section 80IA(5) is limited to treating the eligible business as the only source of income and cannot be extended further.
  • The Court agreed with the view taken by the Madras High Court in Velayudhaswamy Spinning Mills (P.) Ltd. and Prabhu Spinning Mills (P.) Ltd..
  • The Court expressly disagreed with the Karnataka High Court ruling in Microlabs Ltd..
  • It was also noted that in earlier assessment years, the Revenue had not disturbed such claims.

Final Order:
The question of law was answered against the Revenue and in favour of the assessee, and the appeal was dismissed.

 Important Clarifications

  • Losses/depreciation already set off in earlier years cannot be notionally revived for computing deduction under Section 80IA.
  • The “initial assessment year” is at the option of the assessee, not necessarily the year of commencement.
  • Section 80IA(5) does not allow retrospective recomputation of earlier years’ losses.
  • Deeming fiction provisions must be strictly construed and not extended beyond their purpose.

 Sections Involved

  • Section 80IA of the Income Tax Act, 1961
  • Section 80IA(5) – Computation of deduction
  • Section 139 – Filing of return
  • Section 143(2) & 143(3) – Assessment proceedings
  • Section 260A – Appeal to High Court

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/RAS20022023ITA1052023_165343.pdf

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