Adjustment of brought forward losses and unabsorbed depreciation, applicable only from the initial assessment year in case of eligible business

Backdrop:- Section 80-IA of the Income-tax Act, 1961 (ITA) deals with tax holidays for eligible businesses. Sub-section (5) of section 80-IA of ITA provides that for the purpose of determining the quantum of the deduction, the profits of the eligible business shall be computed as if such eligible business were the only source of income of the taxpayer. This deeming fiction is applicable from the initial assessment year i.e. the first year of claim of the deduction.

Taxpayers carrying on specified eligible businesses have the option to claim the deduction in, any 10 consecutive assessment years out of a total eligible period of 15 years; in other words, the taxpayer can decide the first year of claim of the deduction i.e. the initial assessment year.

The consequence of treating the eligible business as the only source of income of the taxpayer in terms of section 80-IA(5) of ITA is that the brought forward losses and unabsorbed depreciation of the eligible business are to be set off against the profits of the eligible business for the purpose of determining the quantum of the deduction, whether or not the losses and depreciation have already been set off against profits of earlier years.

Issue before High Court

Whether the brought forward losses and unabsorbed depreciation of earlier years prior to the initial assessment year, which have already been set off against profits of earlier years, can be notionally carried forward and taken into consideration for computation of deduction under section 80-IA of ITA?

Observations and ruling of the High Court

• The ^„initial assessment year^? under section 80-IA of ITA is the assessment year from which the taxpayer has chosen to claim deduction.
• The provisions of section 80-IA(5) of ITA treating the eligible business as the sole source of income of the taxpayer cannot be applied to a year prior to the year in which taxpayer opted to claim relief under section 80- IA(5) of ITA for the first time. Hence, when the taxpayer exercises the option, only losses of the year beginning from the initial assessment year alone are to be brought forward.
• Loss in the year earlier to the initial assessment year already absorbed against the profits of other business cannot be notionally brought forward and set off against the profits of the eligible business as no such mandate is provided in section 80-IA(5) of ITA.

Key takeaways:- The judgement of the Madras High Court is relevant in the context of tax holidays where the year of commencement of business operations of the eligible business is different from the first year of claim of the deduction and the tax holiday provisions provide for computing the deduction as if such eligible business were the only source of income of the taxpayer.

Source: Velayudhaswamy Spinning Mills (P) Ltd. Vs. ACIT (38 DTR 57), Madras High Court