GLIMPSES OF SUPREME COURT RULINGS

For the assessment year 2002-03, the assessee filed its income-tax return on 31st October, 2002 declaring total income as ‘Nil’. The return was subsequently revised on 6th December, 2002 and thereafter on 30th March, 2004.

In respect of deduction u/s 80-IA, the assessee was asked to explain why the deduction should not be restricted to business income as had been the stand of the Revenue for A.Y. 2000-01. The assessee had revised its claim u/s 80-IA to Rs. 546,26,01,224, having admitted that there was an error in calculation of income tax depreciation.

The A.O. considered the revised claim of the assessee u/s 80-IA and determined the amount eligible for deduction under it at Rs. 492,78,60,973 against the assessee’s claim of Rs. 546,26,01,224. However, the A.O. stated in the assessment order that the actual deduction allowable shall be to the extent of ‘income from business’ as per the provisions of section 80AB. The ‘business income’ of the assessee was computed at Rs. 355,74,73,451 and the ‘gross total income’ at Rs. 397,37,70,178. Inclusion of ‘income from other sources’ of Rs. 41,62,96,727 in the ‘gross total income’ and deduction claimed under Chapter VI-A against such ‘gross total income’ was not accepted by the A.O. The A.O. also rejected the claim of the assessee for allowing deduction u/s 80-IA, along with other deductions available to the assessee, to the extent of ‘gross total income’, and restricted the deduction allowed u/s 80-IA at Rs. 354,00,75,084 by limiting the aggregate of deductions under sections 80-IA and 80-IB to the ‘business income’ of the assessee.

The A.O. further rejected the contention of the assessee that section 80AB was not applicable. It was held that section 80AB makes it clear that for the purposes of deduction in respect of certain incomes, deduction had to be given on the income of the nature specified in the relevant section and allowed against income of that nature alone. Therefore, the deduction computed u/s 80-IA could not be allowed against any source other than business.

The Appellate Authority partly allowed the appeal filed by the assessee by an order dated 23rd March, 2006 and reversed the finding of the A.O. on the issue of deduction u/s 80-IA. The Appellate Authority held that section 80AB places a ceiling on the quantum of deductions in respect of incomes contained in Part C of Chapter VI-A. Such deductions are to be computed on the net eligible income, which will be deemed to be included in the gross total income. The Appellate Authority observed that section 80AB is limited to determining the quantum of deductible income included in the gross total income. It directed the A.O. not to restrict the deduction admissible u/s 80-IA to income under the head ‘business’. The A.O. was further directed to aggregate the deduction u/s 80-IA with the other deductions available to the assessee and then to allow deductions of such aggregate amount to the extent of ‘gross total income’. The order of the Appellate Authority was affirmed by the Tribunal and also the High Court. Aggrieved, the Revenue filed an appeal before the Supreme Court.

The Supreme Court observed that the controversy in this case pertained to the deduction u/s 80-IA being allowed to the extent of ‘business income’ only.

It noted that section 80AB was inserted in the year 1981 to get over a judgment of this Court in Cloth Traders (P) Ltd. vs. Additional Commissioner of Income Tax (1986) 1 SCC 43. The CBDT Circular dated 22nd September, 1980 made it clear that the reason for introduction of section 80AB was for the deductions under Part C of Chapter VI-A to be made on the net income of the eligible business and not on the total profits from the eligible business. A plain reading of section 80AB showed that the provision pertained to determination of the quantum of deductible income in the ‘gross total income’. According to the Supreme Court, section 80AB could not be read to be curtailing the width of section 80-IA. The Court noted that section 80A(1) stipulates that in the computation of the ‘total income’ of an assessee, deductions specified in section 80C to section 80U shall be allowed from his ‘gross total income’. Sub-section (2) of section 80A provides that the aggregate amount of the deductions under Chapter VI-A shall not exceed the ‘gross total income’ of the assessee.

The Supreme Court, therefore, agreed with the Appellate Authority that section 80AB which deals with determination of deductions under Part C of Chapter VI-A is with respect only to computation of deduction on the basis of ‘net income’.

After noting the provisions of sub-sections (5) and (1) of section 80-IA, the Supreme Court observed that the import of section 80-IA is that the ‘total income’ of an assessee is computed by taking into account the allowable deduction of the profits and gains derived from the ‘eligible business’. With respect to the facts of this appeal, there was no dispute that the deduction quantified u/s 80-IA was Rs. 492,78,60,973. The said amount represented the net profit made by the assessee from the ‘eligible business’ covered under sub-section (4), i.e., from its business unit involved in the generation of power. The claim of the assessee was that in computing its ‘total income’, deductions available to it have to be set-off against the ‘gross total income’, while the Revenue contended that it was only the ‘business income’ which had to be taken into account for the purpose of setting-off the deductions under sections 80-IA and 80-IB. The ‘gross total income’ of the assessee for A.Y. 2002-03 was less than the quantum of deduction determined u/s 80-IA. The assessee contended that income from all other heads including ‘income from other sources’, in addition to ‘business income’, have to be taken into account for the purpose of allowing the deductions available to it, subject to the ceiling of ‘gross total income’. The Supreme Court agreed with the view taken by the Appellate Authority that there was no limitation on deduction admissible u/s 80-IA to income under the head ‘business’ only.

The Supreme Court further observed that the other contention of the Revenue was that sub-section (5) of section 80-IA referred to computation of quantum of deduction being limited from ‘eligible business’ by taking it as the only source of income. It was contended that the language of sub-section (5) makes it clear that deduction contemplated in sub-section (1) is only with respect to the income from ‘eligible business’ which indicates that there is a cap in sub-section (1) that the deduction cannot exceed the ‘business income’. On the other hand, the Court noted, it was the case of the assessee that sub-section (5) pertains only to determination of the quantum of deduction under sub-section (1) by treating the ‘eligible business’ as the only source of income.

The Court noted that the amount of deduction from the ‘eligible business’ computed u/s 80-IA for A.Y. 2002-03 was Rs. 492,78,60,973. There was no dispute that the said amount represented income from the ‘eligible business’ u/s 80-IA and was the only source of income for the purposes of computing deduction u/s 80-IA. The question that arose further was with reference to allowing the deduction so computed to arrive at the ‘total income’ of the assessee and that could not be determined by resorting to interpretation of sub-section (5).

The Supreme Court observed that Synco Industries Ltd. vs. Assessing Officer, Income Tax, Mumbai and Anr. (2008) 4 SCC 22 was concerned with section 80-I. Section 80-I(6), which is in pari materia to section 80-IA(5) and wherein it was held that for the purpose of calculating the deduction u/s 80-I loss sustained in other divisions or units cannot be taken into account as sub-section (6) contemplates that only profits from the industrial undertaking shall be taken into account as it was the only source of income. Further, the Court concluded that section 80-I(6) dealt with actual computation of deduction, whereas section 80-I(1) dealt with the treatment to be given to such deductions in order to arrive at the total income of the assessee.

The Court further observed that in Canara Workshops (P) Ltd., Kodialball, Mangalore (1979) 3 SCC 538, the question that arose for consideration related to computation of the profits for the purpose of deduction u/s 80-E, as it then existed, after setting off the loss incurred by the assessee in the manufacture of alloy steels. Section 80-E, as it then existed, permitted deductions in respect of profits and gains attributable to the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule. It was argued on behalf of the Revenue that the profits from the automobile ancillaries industry of the assessee must be reduced by the loss suffered by the assessee in the manufacture of alloy steels. The Supreme Court was not in agreement with the submissions made by the Revenue. It was held that the profits and gains by an industry entitled to benefit u/s 80-E cannot be reduced by the loss suffered by any other industry or industries owned by the assessee.

The Supreme Court noted that in the present case there was no discussion about section 80-IA(5) by the Appellate Authority, nor by the Tribunal or the High Court. However, considering the submissions on behalf of the Revenue, and as it has a bearing on the interpretation of sub-section (1) of section 80-IA, it held that the scope of sub-section (5) of section 80-IA is limited to determination of the quantum of deduction under sub-section (1) of section 80-IA by treating ‘eligible business’ as the ‘only source of income’. Sub-section (5) cannot be pressed into service for reading a limitation of the deduction under sub-section (1) only to ‘business income’.

The Supreme Court further observed that an attempt was made by the Revenue to rely on the phrase ‘derived… from’ in section 80-IA(1) in respect of his submission that the intention of the Legislature was to give the narrowest possible construction to deduction admissible under this sub-section. According to the Supreme Court, it was not necessary to deal with this submission in view of the findings recorded above.

The Court dismissed the appeal for the aforementioned reasons qua the issue of the extent of deduction u/s 80-IA.