Case Law Details
During the AY 2004-05, BTPU and BSPPL amalgamated with the taxpayer. The taxpayer claimed set-off of losses of BTPU under section 72A. The AO disallowed the set-off of loss brought forward on the basis that the taxpayer failed to:
- Hold three-fourth of the book value of fixed assets of amalgamating company for a continuous period of five years;
- Achieve the production of 50 percent of the installed capacity of the amalgamating company as per Rule 9C within a period of three years and nine months; and
- Furnish the certificate of particulars of production in the prescribed form under Rule 9C.
As regards the first objection of the AO, the Tribunal found that the AO computed the holding of fixed assets on the basis of aggregate fixed assets of both the amalgamating companies. It was held that if there are two or more amalgamations in a year, then the amalgamated company is required to prove satisfaction of these conditions in respect of such companies one by one as a prerequisite for availing benefit under Section 72A in respect of each such company separately. Since the taxpayer was claiming set-off for losses of BTPU only the assets of BTPU only should have been considered.
The twin condition prescribed under Rule 9C of the Rules is required to be achieved for the subsequent assessment years, relevant to previous years falling within five years from the date of amalgamation, i.e. in any year before the end of four years from the date of amalgamation. Therefore, the Tribunal held that since the period of four years is not yet over, the AO was not required to verify this condition at this stage and it was premature to require the material for demonstrating efforts taken by the amalgamated company for reviving the business of the amalgamating company.
Therefore, the Tribunal held that there is no failure on the part of the taxpayer to fulfill the requisite conditions for claiming set-off of brought forward business losses and unabsorbed depreciation of BTPU in the year under consideration.
S. 80-IA(5): Loss of eligible unit, even if set-off against non-eligible profits, has to be aggregated & carried forward for set-off against future eligible profits
(i) The “initial assessment year” is the year in which the eligible unit commences operations. It is not the year in which the assessee chooses to claim deduction. The requirement of s. 80-IA(5) is that the loss and unabsorbed depreciation of the eligible unit should begin to be aggregated from the “initial assessment year” to the last allowable year. The aggregation has to continue for every year irrespective of whether s. 80-IA (1) deduction for that year is exigible or not;
(ii) If the eligible unit has no profit, the loss & depreciation of the eligible unit is entitled to be set-off against the other income. However, despite such set-off, the loss and depreciation has to be aggregated and notionally carried forward for set-off against the future profits of the eligible unit.
ITAT MUMBAI BENCHES “A”
ITA Nos. : 7944, 7946, 2255 & 7943/Mum/201 1
Assessment Years: 2005-06 to 2008-09
Hercules Hoists Limited
Vs.
ACIT
Date of Pronouncement: 13.02.20 13
ORDER
Per Sanjay Arora, A.M.:
This is a set of four Appeals by the Assessee directed against the Orders by the Commissioner of Income Tax (Appeals)-22, Mumbai (‘CIT(A)’ for short) dated 07.09.2010, 07.09.2010, 21.12.2010 and 13.09.2011 for four consequent years, being assessment years (AYs) 2005-06 to 2008-09, partly allowing the assessee’s appeals against its assessments u/s. 143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter) for the relevant years.
2. The appeals raising common issues, were heard together and are being disposed of vide a common, consolidated order. The principal issue arising in these appeals, raised by the assessee per its Ground No. 1, is in respect of determination of its business income for the relevant years without allowing it set off of depreciation / losses of its two Units, i.e., Windmill 1 and 2, income from which is otherwise eligible for deduction u/s. 80IA.
2.1 The basis of the Assessing Officer’s (A.O.) dis allowance, since confirmed by the ld. CIT(A), is section 80-IA(5), which reads as under:
“(5) Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (1) apply shall, for the purposes 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.”
2.2 The said provision, which begins with a non obstante clause, subject to which, among others, the deduction u/s.80-IA(1) is to be granted, deems the eligible business to be the only source of income for the years up to which the deduction is being claimed there under. Accordingly, the provisions of sections 70, 71 and 72, i.e., the provisions for set off of losses from one source of income against another falling under the same head of income (s.70); of loss computed under one head of income against another (s. 71), would not apply in relation to income (positive or negative) arising from this source, i.e., the eligible business u/s.80-IA(4); and the carry forward and set off of business loss (s.72) also apply considering it to be the only source of income. The assessee’s explanation that the fiction of section 80-IA(5) is, however, limited only to determining the quantum of deduction u/s.80IA(1), did not find favour with the authorities below, again, on the basis of the interpretation of section 80-IA(5), for which reliance was placed on the decisions in the case of ACIT vs. Gold Mine Shares & Finance (P.) Ltd., 113 ITD 209 (SB) (Ahd) and CIT vs. Sonakaya Steering Systems Ltd. (2010) 321 ITR 463 (Del) – the latter rendered in the context of section 80-I(6), a para materia provision. Aggrieved, the assessee is in second appeal.
3.1 Before us, the assessee would submit that the language of section 80-IA(5) itself lays down the ambit and scope of the provision, i.e., toward determining the quantum of deduction u/s.80-IA(1), which was admittedly being not claimed for the current year. How could then, the said provision be applicable for the current year? When observed by the Bench that this would only imply that the unabsorbed depreciation and losses, though set off against the other income of the assessee, would nevertheless be carried forward for being adjusted against the income from the eligible unit/source for the subsequent year/s in arriving at the deduction exigible u/s. 80-IA for those years, even as clarified by the Board vide its Circular, the ld. AR would submit that that is a separate and different aspect, or the second limb of the matter, and with which we may not be concerned with for the moment. Further, reliance was placed by him on the decisions in the case of CIT vs. Mewar Oil and General Mills Ltd. (No.1) (2004) 271 ITR 311 (Raj.); Velayudhaswamy Spinning Mills (P.) Ltd. v. ACIT (2012) 340 ITR 477 (Mad) and Gold Mine Shares & Finance (P) Ltd. (supra). Though in all these cases, he continued, the issue involved was the second limb (supra), i.e., whether in view of the unabsorbed depreciation and losses of the eligible business having been set off against the other income of the assessee, could the said allowance or losses be notionally carried forward for set off against the income from the same source for the subsequent years for the purpose of determination of quantum of deduction exigible for those years, these decisions support the assessee’s case in-as-much as they clarify that there is no embargo in law to such set off, i.e., against the income from non-eligible business, which the Revenue denies in the instant case. What, if there is no income for the subsequent years from the eligible business, he posited. The assessee would stand to loose either way, so that rather than being beneficial to the assessee, it would operate adversely thereto. In fact, the assessee has not even invoked the option for claim of deduction u/s.80-IA, so that the invocation of s.80-IA(5) by the Revenue is itself misconceived. For all we know, there may be no occasion to claim deduction u/s.80-IA(1) in the subsequent years? The decision by the Bangalore Bench of the Tribunal in the case of Swarnagiri Wire Insulations Pvt. Ltd. vs. ITO (ITA No.200/Bang/2010, dated 21.05.2010) is squarely on the point.
3.2 The ld. DR, on the other hand, would rely on the orders of the authorities below. In addition, he would submit that it was incorrect to state that the decision by the Special Bench of the tribunal in the case of Gold Mine Shares & Finance (P.) Ltd. (supra) was in favour of the assessee, drawing our attention to para 33 of its order (as against para 65 by the ld. AR earlier), wherein it stands clarified that neither the income nor the losses of an eligible business can be set off or adjusted against the losses or income, as the case may be, from any other source.
3.3 In rejoinder, the ld. A.R would submit that that was not the question before the tribunal in that case; the impugned depreciation / losses having been already set off against the other income, so that the only issue was of its notional carry forward, adverting our attention to the question at para 1 of the said order.
4. We have heard the parties, and perused the material on record as well as the case law cited.
4.1 The first question before us is if the question under reference is, or can be said to be, covered by any of the decisions relied upon by the parties, and if so, to what extent? Toward this, we find that all the decisions, irrespective of the view taken or the findings issued, involved the interpretation of section 80-IA(5). However, the assessee disputes the very application of the provision for the year under reference on the basis that no deduction u/s.80-IA(1), to determine the quantum of which the provision of s. 80-IA(5) is brought on the statue, is being claimed or allowed for the current year. Clearly, if sec. 80IA(5) is not applicable for the current year, there is no question of it being given effect to for that year. We are aware that if we were to ignore or disregard the assessee’s this argument, which was absent in the case of Swarnagiri Wire Insulations Pvt. Ltd. vs. ITO (supra), its proposition for being allowed set off of unabsorbed depreciation/loss of the eligible business against the other income for the current year, stands covered by the said decision by the tribunal. Further, it may well be argued, and understandably, as to if it is at all necessary or even relevant to consider and answer the assessee’s said argument, as the tribunal has in the case of Swarnagiri Wire Insulations Pvt. Ltd. (supra) confirmed the said proposition after interpreting the provision, so that even if the Revenue’s contention of the applicability of section 80-IA(5) for the current year is accepted, it would be to no avail or material effect. However, the decision in the case of Swarnagiri Wire Insulations Pvt. Ltd. (supra) has been rendered without reference to the decision by the special bench in the case of Goldmine Shares and Finance (P.) Ltd. (supra), and we observe some inconsistencies between the two. While in the case of Swarnagiri Wire Insulations Pvt. Ltd. (supra), the tribunal, through its example at para 6.6 (read with its findings at paras 6.7 to 6.9) brings out the purport of section 80-IA(5), or its interpretation thereof, the findings in the case of Goldmine Shares and Finance (P.) Ltd. (supra) are listed at para 63 of its order (pg. 253 of the report). We may reproduce the same herein-below to highlight the conflict between the two decisions:-
Goldmine Shares and Finance (P.) Ltd. (supra)
“63. In our opinion the only harmonious construction of Section 80-IA (5), consistent with the object in allowing deduction only to profits and gains of the eligible business would be that:
a. the deduction under that section would be computed with reference to profits of the eligible unit, unaffected by losses suffered in other units;
b. in case of loss suffered by the eligible unit, such loss would not be set off against profits of other units / other business / other incomes in the initial year of assessment or subsequent years of eligible years of assessments ;
c. where losses of the eligible unit remained to be adjusted against that very source they are to be carried forward to subsequent year(s), and set of in the succeeding year(s), and on the balance profit alone the deduction admissible would be computed;
d. where there are no losses of the eligible unit carried forward (in view of set off against profits of that very source), it is the mandate of law that the losses of earlier years, though already absorbed against other sources they are once again be notionally brought forward and set off against profits of the eligible unit to compute eligible deduction.e. the deduction would be limited to gross total income;”
“6.6 Let us presume that the assessee has two business of which one is eligible u/s. 80IA of the Act and the financial results are as follows for the various previous years.
| Previous Year |
Eligible business |
Ineligible business |
| 2004-05 | (-) 1,00,000 | 2,40,000 |
| 2005-06 | 60,000 | 2,80,000 |
| 2006-07 | 1,20,000 | 2,00,000 |
6.7 In the previous year 2004-05, there is a loss of Rs.1,00,000 after claiming depreciation allowance for the eligible business u/s. 80IA. Therefore section 80IA becomes insignificant for claiming deduction. However, since the assessee has derived a profit of Rs.2,40,000 from a different source under the same head of income, the assessee becomes eligible to set off the loss of Rs.1,00,000 as per section 70(1) of the Act. Thus, the income chargeable to tax for the previous year 2004-05 will be Rs.1,40,000 (2,40,000 – 1,00,000).
6.8 In the previous year 2005-06, there is a profit of Rs.60,000 from the eligible business of the assessee u/s. 80IA. However, on this year also, no deduction u/s. 80IA is allowable because for the purpose of deduction, it is assumed that such business is the only source of income of the assessee and notional brought forward loss (since the assessee had already set off Rs.1,00,000 u/s. 70(1) of the Act during the earlier previous year), is to be set off under the same source before allowing deduction u/s. 80IA of the Act. Thus, the balance notional loss of Rs.40,000 (1,00,000 – 60,000) will be carried forward to the next previous year.
6.9 In the previous year 2006-07, the profit of eligible business is Rs.1,20,000 and the carry forward of notional loss of Rs. 40,000, therefore the deduction u/s. 80IA will be allowed at 100% i.e., on Rs.80,000 (1,20,000 – 40,000). The total income of the assessee for the assessment year 2007-08 will be computed as under:
| Income from eligible business u/s. 80IA | 1,20,000 |
| Income from ineligible business u/s. 80IA | 2,00,000 |
| Gross total income | 3,20,000 |
| Less: Deduction u/s. 80IA | 80,000 |
| Total Income | 2,40,000 |
As would be apparent, while the special bench clearly provides for non set off of the losses/allowance of the eligible business u/s.80-IA against the income from a non‑eligible business, i.e., validates the set off of such losses only against the income from that very source (refer paras 31, 33 & 63(b)), the very course being adopted by the Revenue in the instant case, the tribunal in the case of Swarnagiri Wire Insulations Pvt. Ltd. (supra) finds no such bar in law (refer para 6.7), so that the income for Year 1 in the example (previous year 2004-05) was worked out at Rs. 1,40,000/-. Both, however, are in agreement that where such losses stand (already) set off against the income from a non eligible source, the same are to be, in terms of section 80-IA(5), brought forward notionally for set off against the income from the same source to determine the quantum of deduction u/s. 80-IA(1) (refer paras 63(d) and 6.8 & 6.9 respectively of the said orders). The two are also in agreement about the first year of operations as being the initial year (or the initial assessment year), and it is not the year for which the deduction is being claimed or stands to be claimed u/s.80-IA(1) for the first time. This would again be apparent from the reading of the two orders, and is manifest in their respective findings, as capsuled at paras 63 & 65 (pgs. 253, 254) and paras 6.6 to 6.9 thereof respectively. Where is the question of loss being determined for Year 1 and Year 2, or of its notional carry forward (to Year 3) in the case of Swarnagiri Wire Insulations Pvt. Ltd. (supra), as in fact advocated by both the said orders, if the provision of section 80-IA (5) is itself not applicable for the year/s of losses? Thus, though, while the decision in the case of Swarnagiri Wire Insulations Pvt. Ltd. (supra), relied upon by the assessee, covers the issue in the instant case, and has points of agreement with the decision by the special bench, it also has material differences there-with, i.e., the special bench, which in fact favors the Revenue, and has not been considered by it. Again, the said decisions, to the extent they are in agreement, as for carry forward of notional loss/allowance (of the eligible business/es) and qua initial assessment year, are at variance with that by the Honorable high courts in the case of Velayudhaswamy Spinning Mills (P) Ltd. v. ACIT (supra) and CIT vs. Mewar Oil and General Mills Ltd. (supra), inasmuch as the two proscribe such notional carry forward. The initial assessment year has also been considered as the year of determination of deduction u/s.80-IA(1) for the first time. While the tribunal in the aforesaid cases understands the scope of section 80-IA(5) to be limited only to determining the quantum of deduction u/s.80-IA(1), so that the depreciation/losses of the eligible units would stand to, despite set off against the other income in terms of the regular provisions, be notionally carried forward for the purpose of adjustment against the income of the eligible business for the years subsequent to such set off, the hon’ble high courts have held otherwise, stating that the scope of section 80- IA(5) cannot be extended to include or permit a notional carry forward and set off. In other words, while the tribunal advocates an overriding effect of section 80-IA(5) over the other applicable provisions of the Act, viz. sections 32(2), 70, 71 and 72, even though for the limited purpose set out in the provision itself, the Honorable courts have held otherwise. Apparently, their view must prevail over that by the tribunal. We are not prepared to accept the assessee’s argument that this aspect of the matter, involve as it does, and clearly, the interpretation of section 80-IA(5), has no bearing on the issue at hand, which would even otherwise be apparent from the reading of the said decisions. The matter must, therefore, necessarily engage us more acutely, and we cannot rest by relying on the decision in the case of Swarnagiri Wire Insulations Pvt. Ltd. (supra), or by the special bench for that matter. The question as to the applicability of section 80-IA(5) for a year for which deduction u/s.80-IA(1) is admittedly being not claimed, as the current year in the instant case, would, therefore, have to be examined and answered first.
4.2 The sum and substance of the provision, reproduced herein above (refer para 2.1), as we understand from the plain reading of the provision, is to extend the tax shelter under the provision only to the profits of the eligible business/unit, by the deeming the same (eligible business/unit) as the assessee’s only source/s of income for the previous year relevant to the initial assessment year, and up to the (assessment) year of determination of deduction u/s.80-IA(1).The deeming, thus, commences with the previous year relevant to the initial assessment year. The same is not defined under the provision. The same must no doubt be determined first, or else it cannot be said if the year under consideration falls within the period for which deeming is to be applied and have effect, for section 80-IA(5) to be operative and applicable for the said year. Our first observation in the matter is that the same may precede the year of determination of deduction u/s.80-IA(1) for the first time, signifying a positive income of the eligible business for that (latter) year. This is clear from the fact that the deeming as to the single source, as contemplated, is to continue right from the initial assessment year, and continue without break up to every subsequent year for which deduction under the provision is to be determined, including, therefore, the first of such year/s. There is no question, thus, of the first year of such determination as being necessarily the initial assessment year. In fact, were it so, i.e., the initial assessment year being the first year of such determination, the Legislature would have or ought to have provided so, while what stands provided clearly contemplates of at least one year preceding such a year. It may be relevant to reproduce the relevant part of the Circular No.281 dated 22.09.1980 issued by the Board on introduction of sec.80-I (by Finance (No.2) Act, 1980), which contained a like provision (to s. 80-IA(5)) in sec.80-I(6):
Deduction in respect of profits and !ains from industrial undertakin!s, etc., established after a certain date – New section 80-I [The Finance (No.2) Act, 1980]
“19.4 The new “tax holiday” scheme differs from the existing scheme in the following respects, namely:-
(i)
(ii)
(iii) In computing the quantum of “tax holiday” profits in all cases, taxable income derived from the new industrial units, etc., will be determined as if such unit were an independent unit owned by an assessee who does not have any other source of income. In the result, the losses, depreciation and investment allowance of earlier years in respect of the new industrial undertaking, ship or approved hotel will be taken into account in determining the quantum of eduction admissible under the new section 80-I even though they may actually have been set off against the profits of the assessee from other sources.”
[emphasis supplied]
The whole purport and intent of section 80-IA(5), even as explained by the Board vide its said Circular, being relied upon both by the assessee and the Revenue, is towards providing a separate and parallel basis for the aggregation and carry forward of unabsorbed depreciation and/or loss of the eligible business for the purpose of determination of quantum of deduction admissible under the said section. To the same effect and purport are the ‘Notes on clauses’ (reported at 123 ITR (Statutes) 126) and the ‘Memorandum explaining the provisions of the Bill, vide clause 30 thereof qua section 80-I (appearing at 123 ITR (Statutes) 154)), clarifying the legislative intent.
If the first year of claim of deduction u/s.80-IA(1) is itself taken as a initial assessment year, the whole purpose of the provision gets defeated; rather, botched, where there is an unabsorbed deprecation / loss incurred prior to that year, so that there is no scope for the same being carried forward and set off. There is no rationale for such an embargo or restriction, which is thus incomprehensible in-as-much as it is neither borne out by the clear language of the provision nor by its rationale; rather, goes against its grain, besides being inconsistent with the Memorandum, Explanatory Notes and the Board Circular explaining the provision, which operate as a contemporanea exposito inasmuch as they clarify the legislative intent that the aggregation would be applicable for the initial, loss years. True, the said circular is not binding on the higher courts of law, or the tribunal for that matter, but only on the Revenue authorities. So, however, the question that remains unanswered is the legal or the logical basis for ignoring the same. What, one may ask, could be the purpose in excluding the losses for the initial years for aggregation; for which though we see no reason, given the legislative intention as expressed and noted herein above, and the fact that no deduction would even otherwise be available in case of a loss. After all, there is no question or reason for the assessee to opt for the year of loss as the ‘initial assessment year’, and of which the Legislature could not but be considered to be aware of. This is assuming that the provision confers that option to the assessee. In other words, some infirmity therein (the Circular and the Memorandum explaining the provisions as well as Notes on clauses) has to be shown so as to disregard the same as not valid or acceptable. It is in fact not merely a case of a circular, even as pointed out by the special bench at para 59 (also read paras 16 to 18) of its Order. In fact, the assessee in the instant case itself relies on the said Circular to press for its claim for the impugned set off.
Further, let us consider the losses incurred after such a year, i.e., the first year of determination of deduction u/s. 80IA(1) (treating it as the initial assessment year), the scope of which, though remote, cannot be excluded. The same, going by the assessee’s contention before us (refer para 3.1 of this order), would not stand to be considered u/s. 80IA(5) as there is no question of computing deduction u/s. 80-IA(1) for such year. Further, even ignoring the said argument, so that s. 80-IA(5) applies, the question that arises is: What is a rationale in including some losses while disregarding others? In fact, empirically speaking, the unabsorbed depreciation and losses would only be during the initial years over which the charge of depreciation is more and the business is yet to stabilise, so that the possibility of unabsorbed depreciation or losses after the Unit’s coming into profits, where the business is successful, returning profits (only where-upon the question of deduction u/s.80-IA(1) would arise), is even otherwise remote. So, however, such losses/allowance, where so, would stand to be carried forward, as much as the loss/allowance incurred prior to the first year of deduction, to the subsequent years for set off. The more basic question that though arises is the absence of any legal or logical (the raison de ’tre) basis for artificially segregating the losses/unabsorbed depreciation for the years prior and subsequent to the first year aforesaid. The two, therefore, cannot be segregated or treated separately, but have to be so only uniformly, and in a manner consistent and in harmony with the object and the language of the provision.
4.3 Continuing further, though the period of deduction u/s.80-IA(1) over which the deeming of section 80-IA(5) is to be applied commences with the previous year relevant to the initial assessment year, and up to the year of determination of deduction, its stated purpose is for the determination of quantum of deduction u/s. 80IA(1) for the year immediately succeeding the initial assessment year (and not the initial assessment itself) and for every subsequent year. Why? The reason is simple. There could be no brought forward allowance or loss prior to the initial (assessment) year. The first year for which there could be, if so, a loss or unabsorbed depreciation, is the first year of operations, so that the question of aggregation of income for the purpose of determination of quantum of deduction could, at the earliest, be the immediately succeeding assessment year. It is for this reason that while the aggregation is applicable from the initial assessment year itself (of-course, up to the year of determination of deduction), the determination of quantum of deduction, which is the stated purpose of the provision, is to be for or begins from the year immediately succeeding the initial assessment year. Also, once the deeming commences with the initial assessment year, the aggregation of income is to continue over every subsequent year, i.e., irrespective of whether the deduction under the provision is exigible for the said year or not. The deeming would thus continue to be operative, and is not dependent on whether deduction for a particular year is being claimed or not.
The first year of determination of deduction u/s. 80IA(1), or of returning profits of the eligible business, ignoring the losses, if any, incurred prior to that year, or assuming the same as having been absorbed against any other income, can not, thus, be considered as the initial assessment year. This emanates clearly from the language employed and the rationale of the provision, as explained, besides being endorsed by the decisions by the tribunal cited and relied upon by the parties before us.
4.4 Further on, section 80-I contains a provision similar to sub-section (5) of s.80-IA, and which bears the identification of the initial assessment year as the year of commencement of operations of the eligible undertaking. Section 80-I is a pre-cursor to both, section 80-IA and s. 80-IB, and thus relevant. In fact, the Circular No. 281 dated 22.09.1980 issued by the Board explaining the said provision, and referred to in their decisions by the Honorable courts, is only in the context of section 80-I. It also cannot be overlooked that the initial assessment year stood clearly defined by way of an Explanation to section 80-IA as it stood prior to substitution by Finance Act, 1999 w.e.f. 0 1.04.2000 and, further, could have been easily defined, either per section 80-IA(5) itself or by way of an Explanation to the section, as a first year of determination of deduction u/s.80-IA(1), for which the section itself grants option to the assessee (per section 80- IA(2)). The omission, thus, is deliberate and, further, leads to two direct inferences. One, that the Legislature did not intend to extend any option to the assessee in the matter. Secondly, the amendment, which is by way of substitution, is to be read in a purposive manner, looking at what stands provided for as also what has been omitted to be. That the mischief that the law seeks to curb and prevent is a dominant consideration in interpreting a provision of law, particularly a subsequent amendment, is a settled principle of interpretation of statutes, so that it would be required to be seen if the interpretation accorded actually advances the remedy (refer: Goodyear India Ltd. vs. State of Haryana [1991] 188 ITR 402 SC; K.P. Varghese vs. ITO [1981] 131 ITR 597 (SC)).
In fine, the absence of definition of the initial assessment year in section 80-IA, as amended by Finance Act, 1999 w.e.f 0 1.04.2000, even as its earlier version bore the same (per section 80-IA(12)), is not an ‘omission’ (which in any case cannot be lightly inferred), but deliberate. Further, the understanding of the year marking the commencement of operations of the eligible undertaking or enterprise (as specified in section 80-IA(4)) as the initial assessment year, is one which satisfies both the test of the clear language of the provision and internal consistency. It is also in harmony with the purpose as well as the scope of the provision as explained by the Board, which, therefore, must be regarded as a contemporaneous exposition, and is also in alignment with the intent and purpose of the provision. Any other reading of the initial assessment year would render the provision internally inconsistent, besides considerably diluting its purport of giving tax shelter only to the profits of the eligible undertaking/business. It may be borne in mind that it is only the initial years that bear the additional charge on account of depreciation and the pressure on profits due to inadequate capacity utilization and/or non-stabilization of operations, so that the possibility of the undertaking returning losses once it starts yielding profits, i.e., as per the example taken up by us, is even otherwise remote and stood taken up only to cover an extreme situation, only to find it as of no moment.
The initial assessment year in the instant case would thus be the assessment year 2005-06 (refer the assessee’s revised statement of income at para 3 of the assessment order, and its reply dated 03/12/2009 reported at pg. 3 to 6 of the assessment order). This also conforms with the view expressed by the tribunal in the two cases cited, including by the special bench (supra), which has considered and distinguished the decision by the hon’ble rajasthan high court in Mewar Oil and General Mills Ltd. (supra). The view in this regard as expressed in Velayudhaswamy Spinning Mills (P) Ltd. (supra), though in line with that by the Honorable rajasthan high court, is not the ratio of the said decision. As would be apparent from its reading, the Revenue had accepted the finding by the ld. CIT(A) as to the initial assessment year, and which was held as having barred it from contesting the same in the assessee’s appeal. Our decision, rendered under the substituted provision of s. 80-IA, however, is with reference to its plain language as also legislative intent, which is to be the foundational basis of any interpretative exercise (refer: CIT vs. Baby Marine Exports [2007] 290 ITR 323 (SC)). In support, we further rely on the decision in the case of CIT vs. Thane Electricity Supply Ltd. [1994] 206 ITR 727 (Bom).
4.5 It may be argued that the provision provides the assesse an option to choose a period of 10 consecutive years out of a block of 15 years, beginning with the year in which it commences operations, so that the initial assessment year could be the year which the assessee, at its option, so chooses. We have already explained our reasons for being unable to read the provision thus (refer paras 4.2 to 4.4 (supra)). The said year has in fact been identified in the section itself as the year of determination of deduction, and could, if that were the case, easily further clarified as the first year of such claim/determination. Nothing can be read into a provision, and there is no scope for applying the principle of casus omissus (refer: Padmasundara Rao (Decd.) & Others vs. State of Tamil Nadu [2002] 255 ITR 147 (SC)). In fact, the very concept of aggregation as conceived in section 80-IA(5) (or section 80-I(6) for that matter) becomes relevant and meaningful only upon considering losses for the years prior to the year of determination of deduction under consideration. It may not be that all such years are loss years (as was only Yr. 1 in the example cited in the case of Swarnagiri Wire Insulations Pvt. Ltd. (supra)), but that is largely irrelevant, for what is sought to be achieved is the absorption of such losses, and which would only be on the unit turning positive (in Yr. 3 in the example). The Act contemplates aggregation of income by carrying forward of losses/unabsorbed allowance, and does not envisage or permit carry backward thereof, and which principle would continue to govern the aggregation of income from this source as well. The absorption of losses/allowance could thus only be against future profits, so that the deduction u/s. 80IA(1), once granted, could not be withdrawn on the basis of having incurred losses subsequently, which would only stand to be carried forward for set off against future profits.
Coming to the option to the assesse to choose a period of ten consecutive years from a block of fifteen years commencing the year in which the undertaking begins its operations. The same, i.e., the said option, is on a different footing altogether. The Legislature, cognizant of the fact that fiscal support is required to be extended in a meaningful manner, effectively extends the period over which the Unit can turn positive without paying tax, i.e., the tax holiday period. The same has nothing to do with the quantum of deduction per se, which is the stated purpose of s. 80-IA(5). A large Unit and, in fact, a new Unit may take some time to stabilize and start returning profits. The next few years may be consumed in absorbing the accumulated losses or unabsorbed depreciation, so that the period of tax holiday is exhausted, or substantially so, without any of its benefits inuring or being actually availed of. It is with this in mind that the Legislature effectively extended the time period over which the tax holiday could be availed of, so that the beneficial character of the provision is not lost, or to quite an extent, aligning the incentive to the business exigencies, so that it serves its intended purpose and retains the character of an economic incentive, which may otherwise not be the case. However, at the same time, it cannot be lost sight of that the principle guiding the incentive is that the tax shelter is available only to the profits of the eligible undertaking. The Legislature, it may be appreciated, while proposing and/or sanctioning legislation, cannot possibly presume – being even otherwise a matter which would vary from assesse to assessee, existence of an alternate or other source/s of income with the assessee for the relevant years and, further, of the same being sufficient and adequate enough, so that the losses and/or depreciation would in any case stand to be absorbed against the other income from the non-eligible business or source/s. On the contrary, it makes it abundantly clear that the deduction under the provision is to be computed considering the eligible source to be the only source of income throughout. The same (i.e., the tax holiday period) has nothing to do with the aggregation principle per se, the whole purport of which is to extend the tax shelter only to the profits of the eligible undertaking or enterprise over the tax holiday period.
It may also be relevant to state that rather than enabling the said objective, existence of such an alternate source of income, given the interpretation sought to be placed on the term ‘initial assessment year’ (i.e., as the year of determination of deduction u/s.80-IA(1) for the first time), causes an abuse of the provision. This is as instead of providing tax shelter to the profits from the priority sector, as the Windmill/s in the instant case, the same extends to income from other sources. The priority sector losses firstly stand to be set off against such other income, while the priority sector profits are reckoned, for the purpose of computation of deduction u/s.80-IA(1), without reference to the losses sustained earlier on the premise that the deeming of the ‘stand alone’ principle does not apply to the initial years or that no notional carry forward is envisaged. Turning, effectively, the logic and the object of the provision on its head. Reference in this context may also be made to the decision in the case of CIT vs. Himatasingike Seide [2006] 286 ITR 255 (Kar). The decision involves the interpretation of section 10-B, which also carries a similar provisions in section 10B(6). In the facts of that case, the unit commenced operations in the assessment year 1988-89. The assessee claimed benefit u/s. 10B for a period of five years beginning A.Y. 1992-93. For the A.Y. 1994-95, it sought to adjust the unabsorbed depreciation of the eligible unit for A.Y. 1988-89 against its other income, on the premise that no exemption u/s. 10B stood claimed for that year, so that the said unabsorbed depreciation was available for set off. The Honorable high court negated the claim, reversing the order by the tribunal, stating that the same would imply availing exemption from tax against other business (non-eligible) income. The interpretation of a statute has to be meaningful and acceptable, and it cannot be against the intention of the legislation.
It is this, as it appears, that also led the special bench of the tribunal in the case of Gold Mine Shares & Finance (P.) Ltd. (supra) to hold that the losses of the eligible business are to be notionally set off against income from the other business. Though we shall come to that aspect of the matter later, the special bench, as noted earlier as well, has also considered the initial assessment year as the year of commencement of operations (refer para 41 of its Order). The two concepts, i.e., ‘the tax holiday period’, as enumerated in sec. 80IA(2), and the ‘stand alone’ principle, as incorporated per sec. 80IA(5), seeking to preserve the sanctity of the tax shelter, are separate and distinct, and may not be confused with each other; rather, are to be read and applied harmoniously and purposively.
4.6 In sum, there is firstly nothing in the language of the section to suggest its applicability only for the year/s the eligible business returns profits. The losses/unabsorbed depreciation, irrespective of the year to which these pertain, are placed at par under the provision. Further, placing such an interpretation, as afore-stated, the losses and/or unabsorbed depreciation for the years prior to such year/s would stand to be excluded for aggregation, to no good reason, and in consequence defeat the clear object of the provision – as imminent from its language, i.e., to confine the benefit of deduction there under only to the income from such business, which would stand to be breached if the negative income (losses and depreciation allowance) is ignored or excluded. Rather, existence of an alternate source of income vitiates the application of the provision further by extending the tax shelter to such income as well. We are thus of the clear view that the year of commencement of operations is the initial assessment year, with effect from which year, irrespective of the years which the assessee may choose to opt for as the holiday period, the loss or unabsorbed depreciation, if any, incurred, is to be taken into account, i.e., aggregated, for the purpose of determination of the quantum of deduction under the provision, of course up to the last of the years for which the deduction is to be determined. The whole premise of the provision is to include such losses for the purpose of determination of the deduction by introducing the ‘stand alone’ principle, providing for its super session over the other applicable provisions of the Act. The tax shelter u/s. 80IA(1), it may be emphasized, is to be accorded only to the profits from the eligible source, and which is all what s. 80IA(5) seeks to achieve. This understanding emanates from the reading the statute, i.e., the relevant provision as a whole, in consistence with the purpose it sets out to seek, as explained and gathered from the clear language of the provision, including the amendments to the provision; Notes on clauses; the Memorandum explaining the provisions and the Board Circular. The decisions by the tribunal, including by the special bench, also confirm and endorse this view. This is also not in conflict with the assessee’s argument – which is otherwise valid, that, the future being uncertain, there may be no profits from the eligible source for the subsequent years, so that the set off of the losses/depreciation against positive income from other sources could not be denied. This is as the aggregation prescribed by the section is limited only to quantify the deduction u/s. 80IA(1), and which would only be on the unit turning positive, returning profits. As a corollary, the losses/unabsorbed depreciation would stand to be set off against the other incomes under the regular provisions of the Act.
5.1 The question that next confronts us is: Section 80IA(5) being applicable for the current year, whether the assessee ’s claim for set off of loss/allowance u/ss. 32(2), 70 and 71, i.e., against other income, admittedly from a non-eligible business/source, sustainable in law?
5.2 Toward this, the assessee has placed reliance on the decisions in the case of Mewar Oil and General Mills Ltd. (supra); Velayudhaswamy Spinning Mills (P.) Ltd. (supra) and Gold Mine Shares & Finance (P.) Ltd. (supra). However, even as noted earlier, the former two, which are on the same footing and in harmony, are in contradiction to Gold Mine Shares & Finance (P.) Ltd. (supra), as also noted by the tribunal in the case of Anil H. Lad vs. Dy. CIT (in ITA No. 1262/Bang/2010, vide order dated 07.01.2011), with in fact the special bench discussing and distinguishing the decision in the case of Mewar Oil and General Mills Ltd. (supra). In fact, we do not find the said two decisions to be supportive of the assessee’s case. This is for the simple reason that all that the Honorable courts have held that once the depreciation/loss of an eligible unit is set off against the assessee’ s other income (non-eligible business income), the same is no longer available for being carried forward and set off, i.e., on a notional basis. As explained by the hon’ble court in the case of Mewar Oil and General Mills Ltd. (supra), which stands approved in the case of Velayudhaswamy Spinning Mills (P.) Ltd. (supra), the question of giving overriding effect to section 80-I(6) (it reading an identically worded provision) would arise only if there was brought forward unabsorbed depreciation/loss/development rebate of priority nature. That is, the law, per section 80- IA(5), does not restore ‘life’ to a non-existent allowance/loss so as to permit a set off thereof on a notional basis. In other words, the overriding effect of section 80-IA(5), so that it would prevail over sections 32(2), 70, 71 and 72, and though agreeably only for the purpose of determination of quantum of deduction u/s.80-IA(1), would yet only be limited to where the same does not stand already set off against the other income, i.e., the unabsorbed deprecation or loss is ‘alive’. This is precisely what the Revenue seeks to do by denying the assessee set off of loss/unabsorbed depreciation of the eligible business in terms of section 32(2), 70 and 71. How could that be faulted, given an overriding effect to section 80-IA(5), even as confirmed by the Honorable courts, so that it would prevail over the other sections in-as-much as it is again trite that a special provision is to be given precedence and overrides the general provisions. Put differently, the decision in the case of Velayudhaswamy Spinning Mills (P.) Ltd. (supra), while holding carry forward of notional loss, i.e., which stands already set off, as unavailable for aggregation despite section 80-IA(5), yet does not speak of any bar against set off of such loss against the assessee’s other income, as done by the special bench of the tribunal in the case of Gold Mine Shares & Finance (P.) Ltd. (supra). We have already expressed our reasons for being unable to follow the said decisions, and which could not be done selectively, i.e., following for one aspect of the matter and not for the other; the same arising out of the interpretation of the same provision.
Coming to the decisions by the tribunal, while that in the case of Swarnagiri Wire Insulations Pvt. Ltd. vs. ITO (supra) is in support of the assessee’s case, that by the special bench favours the Revenue; it categorically holding against set off of the positive income from one source against negative income from another. Though the decision in the case of Swarnagiri Wire Insulations Pvt. Ltd. (supra) is in agreement with the view expressed by us (refer para 4.6 supra) and, further, supported by the Board’s circular, etc. which is relevant in-as-much as these are useful aides to interpretation, the decision by the special bench would have precedence.
5.3 At this stage, we may refer to the decision in the case of Synco Industries Ltd. vs. AO [2002] 254 ITR 608 (Bom.), which finds reference in the decision in the case of Gold Mine Shares & Finance (P.) Ltd. (supra) (refer paras 14, 26, 42 to 45 thereof). In the facts of that case, the assessee had two businesses, a Chemical Division (CD) and Oil Division (OD), both of which were eligible for deduction u/s.80-HH and section 80-I (which has a para materia provision to section 80-IA(5) in section 80-I(6)), which are profit linked incentives, at the rate of 20% each. While there was profit in CD, there was loss in OD, which exceeded the positive income from CD, so that the ‘gross total income’ (GTI) was nil. While the assessee claimed deductions u/s.80-HH and 80-I with reference to the profit of CD, the Revenue disallowed it on the ground of the GTI being nil. The Revenue’s stand was upheld by the Honorable court. It was explained that the deeming of section 80-I(6) is for a limited purpose, i.e., to quantify the deduction. However, once that is computed, one has fall back on section 80-I(1) inasmuch as it is only the eligible income, to the extent included in GTI, on which the deduction could be allowed; the opening words of s. 80-I(1) (as in s.80-IA(1)), reading as :
“Where the gross total income of an assessee includes any profit or gains derived by an (industrial) undertaking…………………… ”
The opening words of the section, it was explained, describe the condition which must be fulfilled in order to attract the applicability of the provision. The GTI is defined u/s.80-B(5), and which being nil, the essential condition of section 80-I(1) (corresponding to s. 80-IA(1)) remained unfulfilled, so that no deduction whatsoever on the profits of CD was exigible either under s.80-HH or u/s.80-I. Section 80-A(2) of the Act, which restricts the total deduction under Chapter VI-A to the GTI, was also found applicable; the GTI being at nil, no deduction was exigible. Sections 80-I(6) and 80-I(1) (r/w ss. 80-B(5) and 80-A(2)) were held to operate in different spheres. The decision in the case of Synco Industries Ltd. (supra) stands since affirmed by the Honorable apex court (reported at [2008] 299 ITR 444 (SC)). The decision by the apex court in the case of CIT vs. Kotagiri Industrial Coop. Tea Factory Ltd. [1997] 224 ITR 604 (SC) was also noticed. The Honorable court in that case, relying on the decision by its constitution Bench in the case of Baroda (Distributors) Pvt. Ltd. vs. Union of India [1985] 155 ITR 120 (SC), and H. H. Sir Rama Verma vs. CIT [1994] 205 ITR 433 (SC), upheld the principle of determination of GTI after giving effect to the provision of s. 72, i.e., which allows carry forward and set off of unabsorbed business loss. The decision in the case of Synco Industries Ltd. (supra), though rendered in a different fact setting, in our view, effectively answers all the questions arising in respect of the issue under reference in this appeal.
Firstly, that section 80-IA(5) (s. 80-I(6) in that case) is a separate provision, which stands co-opted on the statute with a specific purpose, treating the profits from the defined (eligible) source as the only source of income to determine the quantum of deduction that could be allowed under the provision. All the other applicable provisions of the Act, including ss. 32(2) and 72, would apply in the computation of such income. The same, thus, presents a parallel method for arriving at the profits of the eligible business, and is to be given full play. That being the mandate of the section, carry forward and set off of the loss for earlier years from such a source would hold, considering it as the only source of income, in terms of section 72. The same may or may not have been already set off against other income, but that is irrelevant. A deeming provision or a legal fiction, it is even otherwise trite, to be taken to its logical end/conclusion (refer, inter alia, A.S. Glittere & Ors. v. CIT (1997) 225 ITR 739 (at 744); Builders Association of India v. Union of India (1994) 209 ITR 877 (SC); and Chidambaram Mulraj & Co. Pvt. Ltd. vs. CIT, 58 ITR 206 (Bom)). This also agrees with the avowed objective of the provision, i.e., to restrict the tax shelter under the provision only to the profits from the eligible source. It is, it may be emphasized, also well settled that a deeming provision, as s. 80-IA(5) in the instant case, has to be interpreted in light of the object of the provision (refer: Ishikawajma-Harima Heavy Industries Ltd. v. DIT (2007) 288 ITR 408 (SC)).
The grant of the deduction is, however, circumscribed by the condition of section 80-IA(1), which must in any case be satisfied; the two operating in different spheres. The computation of GTI (section 80-B(5)); the condition of the relevant income being comprised in GTI (section 80-IA(1)), and to the extent it is actually so (s.80-AB); and the overall cap u/s.80-A(2), could neither be impinged nor breached in any manner. To do so, it stood explained, would render the said provisions, which are declaratory and applicable to all the sections falling under Chapter VI-A, nugatory. In other words, the GTI would continue to be computed in terms of s. 80B(5), and would not stand restricted by section 80-IA(5) in any manner. The apex court in the case of Ipca Laboratory vs. Dy. CIT [2004] 266 ITR 521 (SC) has clarified of an overriding effect of section 80-AB, which provides that the deduction under any provision has to be computed with reference to the total income covered under that provision as included in the GTI, on all the deduction provisions contained in Chapter VI-A. In the facts of Synco Industries Ltd. (supra), the hon’ble court upheld the computation of GTI by set off of loss from one priority industry against the income from another. When the income from two priority industries was not considered as being precluded for being set off in computing the GTI u/s.80-B(5), there is no question of the same being not applicable where the income includes that from the non priority sector also.
Coming back to the example cited by the tribunal in the case of Swarnagiri Wire Insulations Pvt. Ltd. vs. ITO (supra) (at para 6.6 to 6.9); the same is in agreement with that which would arise on the application of the decision by the Honorable jurisdictional high court in the case of Synco Industries Ltd. (supra), since affirmed by the apex court. The same is also in conformity with the Board’s Circular as well as the notes on clauses and Memoranda explaining the provisions, in respect of which, as afore-noted, no infirmity has been observed or pointed out. In fact, all these decisions have been rendered without reference thereto, and which clearly exhibits, if one was required, the clarity and the absence of any ambiguity in the language employed by the statute. It may appear that sanctioning set off of loss against income from another source in the computation of taxable income, and then again against the future profits from the same source, where it is a specified, priority industry/enterprise, eligible for tax benefit, would amount to a double jeopardy. The argument or apprehension, whichever way one may see it, is false. The whole purport of the provision of sec. 80-IA(5) (s. 80-I(6)), is to confine the tax holiday to the profit of the eligible source alone – nothing more, nothing less. And this is what the application of the said decisions ensures. On the other hand, a loss, even of a priority sector, ought not to be ignored for computing the assessee’s taxable income and, consequently, tax liability for any year. And which would result following the decisions in the case of Velayudhaswamy Spinning Mills (P.) Ltd. (supra); Mewar Oil and General Mills Ltd. (supra); and Gold Mine Shares & Finance (P.) Ltd. (supra). A priority sector loss is a loss none-the-less, and cannot be relegated to any inferior status by postulating its non-set off/non-adjustment, as long as it is otherwise permissible under the regular provisions of the Act. That the decision by the Honorable jurisdictional high court as well as the apex court in the case of Synco Industries Ltd. (supra) operates against the assessee’s case in those cases, while works to its advantage in the instant case, is an altogether different and extraneous issue, being only incidental.
5.4 We are aware that the decision in the case of Sonakaya Steering Systems Ltd. (supra), rendered after considering the decision by the apex court in the case of Synco Industries Ltd. (supra), relied upon by the Revenue (refer para 2.2 of this order), takes a different view of the matter, i.e., that the deduction u/s. 80-I(1) is to be computed for one of the two eligible units, ignoring the loss incurred in the other unit in view of s. 80-I(6); both the assesse- respondents’s ‘steering’ and ‘axle’ units being eligible for deduction u/s. 80-I in the facts of that case. The decision by the apex court stands distinguished by the Honorable Delhi high court on the basis that the GTI is not nil, as was the case in the case before the apex court. In-as-much the said decision explains the decision by the apex court and, besides, is a decision by a higher court, we are obliged to accord due deference thereto. However, with respect, we find that the Honorable court has not considered the facts of the case before the apex court (stated at para 4 of the Judgment) before holding its decision to be distinguishable. In the case before the apex court, each of the assesse appellant’s two eligible units, the CD and the OD, had profits for the relevant years, being assessment years 1990-91 and 1991-92. However, OD had suffered losses for the earlier years. It was these losses of OD, brought forward u/s. 72 of the Act, which were sought to be adjusted against the income of CD for the current year, which was exigible to deduction u/s. 80-I(1). While the Revenue sought to adjust those losses, denying deduction on the profits of CD on the ground that the GTI was nil; the assessee contended for the said profits to be computed independently and de hors the income of OD. The Revenue’s stand was upheld, firstly, by the tribunal, and then successively by the high court and the apex court. How far different are the facts of the said case from the case before the Honorable Delhi high court? The fact of the GTI being nil is a mathematical incident; the moot question is: How is the same to be computed? And the answer, as provided, is: by following the mandate of s. 80B(5), so that the provisions of ss. 32(2), 70, 71 & 72, et. al. are to be given effect to. Surely, if GTI is nil, nothing further is required to be looked into, as there is no question of any deduction under any provision of Chapter VI-A being allowed from a nil GTI. The Honorable high court distinguished the decision by the apex court on the basis that the GTI in the case before it was not nil. The moot point, however, is not whether GTI was nil, but whether any income of the nature specified in sec. 80-I(1)/80-IA(1) could be said to be included in the GTI computed as per sec. 80-B(5)? If the GTI was to be, on being worked out according to s. 80-B(5), at a positive figure, the next question that would arise is the extent of the eligible income comprised therein, which would constitute the qualifying amount satisfying the condition of s. 80-I(1), on which deduction there under could be allowed. This we consider to be clear mandate of decisions by both, the Honorable jurisdictional high court and the Honorable apex court, which provide a complete answer to the question under reference. In the case before the Honorable Delhi high court, the set off of loss of one of the two eligible units against the income from the other would only yield the GTI in terms of s. 80-B(5) (assuming absence of any other income), and which would thus be the qualifying amount on which deduction would stand to be allowed inasmuch as it is only the income included therein that satisfies the condition set out in s.80-I(1). It may be noted that s.80-IA (5) does not prescribe any specific method for computing deduction under the section (as, for example, s.80-HHC(3)), but only the manner in which the income, on which the deduction is to be allowed, is to be computed, and which we have referred to as the ‘stand alone’ principle. Section 80-AB of the Act, it may be noted, also provides a limitation in this regard, eliminating scope for any doubt in the matter. The fact of the GTI being nil in the facts of the case before the Honorable apex court, is thus purely incidental, which would not disturb or alter the ratio or the principle underlying the decision. In fact, the apex court has abundantly clarified in the said decision of the primacy of the sections 80-A, 80-AB and 80-B in computing the deduction/s under Chapter VI-A of the Act, referring to and approving several decisions by the Honorable high courts, further stating that it was settled that it was bound to take cognizance of, and lean in favour of the predominant view of the high courts. The facts of the case before the Honorable Delhi high court were, thus, in our humble view, clearly amenable to the application of the ratio of the decision by the apex court, which is binding on us. The reliance by the Revenue on the said decision would thus not be much assistance in the facts of the case.
At this juncture, we cannot refrain from, and are obliged to refer, once again, to the decision by the tribunal in the case of Swarnagiri Wire Insulations Pvt. Ltd. (supra), including the example cited therein. Firstly, to state that irrespective of the facts of the case, which are bound to vary and exhibit some difference in each case, it is the ratio of the decision, arising from a holistic interpretation of the provision, rendered on the relevant parameters, that ought to obtain. Questions as to, or aspects as the computation of GTI; the years of the deeming qua the only source of income; the impact of the said deeming on the other relevant provisions, viz. ss. 32(2), 70 to 72; the notional carry forward of losses, assuming the said sections would continue to be operative as in the normal course, etc. arise, and require being addressed, when an issue qua the application of s. 80-IA(5), as in the instant case, comes to be considered. It is thus neither possible nor desirable to adopt a segmented and fragmented approach to the matter. No wonder, the tribunal in the cited cases considered the matter holistically, answering questions which do not appear to arise directly before it. Secondly, the treatment, as advocated per paras 6.6 to 6.10 of its order by the tribunal in the case of Swarnagiri Wire Insulations Pvt. Ltd. (supra), in our view, though rendered without reference to the binding decisions, as CIT vs. Himatasingike Seide (supra) and Gold Mine Shares & Finance (P.) Ltd. (supra), as well as by the apex court in the case of Synco Industries Ltd. (supra), is in conformity therewith, and to the extent that by the special bench and the Honorable apex court are inconsistent, with that by the latter [Synco Industries Ltd. (supra)], as ought to be the case. The said decision by the tribunal, thus, reflects the correct position in the matter, including in respect of the issue as to the notional carry forward of loss/es, which it suggests per the computation of income and that of deduction u/s. 80-IA for Year 2 and Year 3 of the example. Finally, it would also be by now abundantly clear from the host of case law referred to, as well as that cited by the parties themselves, enabling the issue being viewed in its different dimensions, that the concept of aggregation, as sought to be projected per the ‘stand alone’ principle, is only toward removing the aberration/s that stand to arise if the losses of the eligible source are ignored and not carried forward in computing the tax benefit available to it in the year/s of profit.
8.1 Before us, the assessee sought to advance its case with reference to the order by the tribunal in its own case for assessment year 2005-06 (in ITA No.4129/Mum/2009 dated 10.10.2012/copy on record), where it had been allowed vacancy allowance u/s. 23(1)(c) on proportionate basis; the property remaining vacant from 24.04.2004 to the end of the year (3 1.03.2005), relying on the decision in the case of Vivek Jain vs. ACIT, (2011) 337 ITR 74 (AP). On being pointed out by the Bench that the ratio of the same would not hold in the instant case as the property did not remain vacant for a part of the year, but there had been no letting for any part of the year, and it remained vacant throughout the year, the ld. AR would submit that vacancy allowance u/s 23(1)(c) would in any case apply, further relying on the order by the tribunal in the case of Premsudha Exports (P.) Ltd. vs. ACIT [2008] 110 ITD 158 (Mum). In fact, the property remained vacant as the assessee could not find a suitable tenant, and the property was used for its own purpose, so that there was no question of application of section 23 in the instant case. On being questioned as to any evidence in support of such a claim, as by way of claim for depreciation on the said premises, and of it being made before the authorities below, it was submitted by him that the depreciation had been claimed and allowed, and which is a matter of record.
8.2 The ld. DR, on the other hand, would submit that the decision in the case of Vivek Jain (supra), also relied upon by the tribunal in the assessee’s own case for an earlier year (A.Y. 2005-06), comprehensively decides the issue at hand against the assessee. It stands clarified therein that where the property has not been let out at all during the year, there is no question of any vacancy allowance in terms of s. 23(1)(c), which was inserted in the statute only to given protection to the assessee where, on account of vacancy, rent received or receivable of a house property is lower than the amount referred to in section 23(1)(a). The said case law squarely covers the present case. Further, there is no merit in the assessee’s claim qua the house property under reference being occupied by the assessee for the purpose of its own business, as being now made before the tribunal, inas-much as no such plea stands raised by it before the authorities below, nor is there, consequentially, any ground in this respect. As regards the assessee’s reliance on the decision in the case of Premsudha Exports Pvt. Ltd. vs. ACIT (supra), apart from the fact that the same would no longer hold in view of the decision by the hon’ble high court in the case of Vivek Jain (supra), the same cannot be said to be uniform view by the tribunal; it not holding the same view in the case of Indra S. Jain vs. ITO [2012] 52 SOT 270 (Mumbai), which, being dated 16.05.20 12, represents its most recent view. The same would, therefore, obtain.
9. We have heard parties, and perused the material on record as well as the case law cited.
9.1 We find the stand of both the parties to be only partly correct. Firstly, qua the assessee’s claim of the property being used for the purposes of its business; the same only needs to be stated to be rejected. The same is not only not borne out by the record, and stands advanced before us for the first time de hors any material, introducing a new dimension to the case, but is also contrary to assessee’s consistent stand throughout that the property was vacant since April, 2004 as it could not find a suitable tenant. Could a property which remains vacant for want of a suitable tenant, could be at the same time be used for own purposes? If so, where is the question of vacancy allowance? And all that the assesse was required to do in that case, was to establish the user of the said house property for the purpose of its business, while, as afore-noted, there was not even any claim in this respect. In fact, the ld. AR, in order to respond to the Bench’s query regarding evidence as to user, as for example a claim for depreciation, which would ordinarily only follow user of the asset for the purpose of business, had to obtain clarification from his client, only to give an indefinite reply. The said claim is rejected.
9.2 With regard to the issue of claim for allowance for vacancy, we begin by reproducing the relevant part of the provision, which reads as under:
Annual value how determined.
“23. (1) For the purposes of section 22, the annual value of any property shall be deemed to be—
(a) the sum for which the property might reasonably be expected to let from year to year; or
(b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable; or
(c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable:
Provided that the taxes levied by any local authority in respect of the property shall be deducted (irrespective of the previous year in which the liability to pay such taxes was incurred by the owner according to the method of accounting regularly employed by him) in determining the annual value of the property of that previous year in which such taxes are actually paid by him.
Explanation.—For the purposes of clause (b) or clause (c) of this sub-section, the amount of actual rent received or receivable by the owner shall not include, subject to such rules as may be made in this behalf, the amount of rent which the owner cannot realize.”
9.3 The question under reference stands dealt with comprehensively by the Honorable high court in the case of Vivek Jain (supra). On the plea of the property under reference being a let out property, the Honorable court makes it abundantly clear that a property intended to be let cannot be considered as actually let, so as to qualify for its ALV or annual value (AV) being determined with reference to s. 23(1)(b) and, consequently, u/s. 23(1)(c). The plea that that ‘the property is let’ and that ‘it is vacant for whole year’ were found by it as inconsistent in-as-much as it is only the property that is let that could be vacant, for the provision of s. 23(1)(c) to apply in relation thereto. In other words, the vacancy allowance u/s. 23(1)(c), which is inbuilt in the working of the AV, is only in respect of a property the value of which would otherwise stand to be brought to tax u/s. 23(1)(b), i.e., on the basis of actual letting and, further, at a rent higher than the fair market rent, and not u/s.23(1)(a), i.e., on the basis of notional letting. It needs to be emphasized that the provision of s. 23(1)(a), i.e., of the AV being determined on the basis of notional letting, is applicable even where the property is actually let, though would hold only where it is at a rent lower than the fair rent. The same view stands unequivocally expressed by the tribunal in the case of Ramesh Chand vs. ITO [2009] 29 SOT 570 (Agra), stating that the concept of vacancy follows a condition or state of ‘actual letting’, and not ‘notional letting’, as contemplated u/s. 23(1)(a), where-under the assessee’s income from house property is being sought to be assessed in the instant case. Further, that the AV of a let property, depending on the facts of the case, could be computed under either of the clauses of section 23(1), and it is not necessary that the same would be computable only with reference to s. 23(1)(b) or s. 23(1)( c), as the case may be. Reference in this context is made to paras 4.4 to 4.6 of the said order. It needs to be appreciated that the provision of s. 23(1)(c) saves the assessee a jeopardy, i.e., of its income from house property being determined at a higher actual rent (than the fair market rent), even as the said (higher) rent would not stand to materialize in view of vacancy. On the other hand, if the concept of vacancy was to be incorporated in the concept of notional letting, the latter would stand defeated and incapable of being applied.
9.4 Finally, it being the admitted position that the property was not let for the relevant year, there is no question of application of section 23(1)(b) and, consequently, section 23(1)(c), and the AV would have to necessarily be determined only with reference to section 23(1)(a). This represents the clear view on the basis of the decisions in the case of Vivek Jain (supra), which being by a higher court would hold. In fact, this also represents the predominant view of the tribunal, as in the case of Ramesh Chand (supra); Indra S. Jain vs. ITO (supra); and Vivek Jain (by the tribunal). As such, what is relevant is the rent for which the property may reasonably be let from year to year.
Toward this, the assessee claims an ALV based on the municipal rateable value on the basis that the property under reference is subject to rent control legislation. There is no evidence in this regard. Rather, it is indeed surprising and unexplained as to how a property subject to rent control regulation was let, and for years together, at rent exponentially higher than the standard rent or the rateable value, even as rentals would ordinarily witness an increase with the passage of time. The same also clearly exhibits the inappropriateness of the claim pressed with reference to municipal valuation. In fact, even the two, i.e., the ‘standard rent’ and the ‘municipal valuation’, cannot be considered at par. This is as while the rent control places a restriction – by way of standard rent, on the rent that a property can fetch on being let, and is thus binding, the municipal value is only a surrogate measure of the rent that the property can fetch on being let from year to year in the open market, i.e., on an arm’s length basis, uninfluenced by any extraneous consideration, the ALV by definition. The rate able value could be relevant, particularly where the relevant provision bears the same attributes, and is worked out properly, but cannot be regarded as binding. It is determined for a specific purpose, i.e., for property tax (which is rather deductible on payment in arriving at the ALV), and, further, circumscribed by the rules framed in this respect. The Act, however, places no bar (except of course as to reason ability in such estimation), so that except where the property cannot be actually let beyond a particular rate under law, the A.O. is entitled; rather, obliged under law to take into account all the relevant factors in arriving at such value, i.e., the rent at which the house property can reasonably be excepted to be let on a year to year basis. This represents trite law, for which the tribunal has in the case of Indra S. Jain (supra) referred to, among others, the decisions in the case of Motichand Hirachand & Ors. v. Bombay Municipal Corporation AIR 1968 SC 441,442 and CIT v. J.K. Investors (Bombay) Ltd. (2001) 248 ITR 273 (Bom.). In the facts of that case, there being nothing on record to suggest the appropriateness of the annual value as adopted by the Revenue, the matter was set aside to the file of the AO to determine the fair rental value with regard to the comparable cases, i.e., the rentals obtaining in the locality for similarly placed properties for the relevant period. The matter is factual, rather than legal. There is no merit in the assessee’s argument that the property being not actually let, the notional rent could not be brought to tax; it being trite that it is not the income actually realized, but that which could, fairly speaking, be, or the income potential of the property that is brought to tax u/s.23 of the Act as its annual value (AV). The provision of section 23(1)(b) come into play only where the property (or part thereof) is actually let out, and which exceeds the fair rental value u/s.23(1)(a). In fact, the assessee does not dispute this position, advancing its case with reference to its claim for vacancy allowance u/s. 23(1)(c), discussed herein above.
9.5 In the instant case, the property was let at a monthly rent of Rs. 1,54,843/- (annual rent: Rs. 18,58,116/-) continuously from the year 1997 to 2004. What better proof of the same representing its AV could possibly be? There is nothing on record to show or infer that the property, which, as late as April, 2004, yielded a rent to the tune of Rs. 18 lakhs p.a., became incapable of fetching as much and, rather, plummeted to about 1% thereof. That is, an erosion in rental capacity by nearly 99%, and almost overnight. The A.O. in the instant case has kept the AV (at Rs. 13,00,681/-), i.e., net of standard deduction at 30%, constant for all the years, i.e., up to A.Y. 2008-09, and which we consider as reasonable, satisfying the only condition placed by law on an otherwise totally factual matter. We decide accordingly, upholding the Revenue’s action.
10. The third issue in these appeals (i.e., AY 2007-08 & 2008-09) is toward dis-allowance u/s. 14A, which has been worked out with reference to Rule 8D by the A.O. Section 14A being applicable for each of the relevant years, a dis allowance of the expenditure that could reasonably be attributed to the exempt income, could be validly made. The A.O. worked out the dis allowance u/r. 8D, which has been held by the hon’ble jurisdictional high court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. Dy.CIT [2010] 328 ITR 81 (Bom), as not retrospective in its operation (so that it would apply from A.Y. 2008-09 on wards), though has upheld the retrospective application of section 14A (w.e.f. 01.04.1962), as well as of a reasonable dis allowance with reference thereto. The matter, thus, again falls in the realm of a factual determination. The ld. CIT(A) has in this regard directed the A.O. to work out the disallowance qua the interest expenditure incurred by the assessee in the proportion of the ratio of the tax-exempt investments to the total assets, i.e., the same prescription which rule 8D(2)(ii) provides. The assessee disputes the same, seeking to substitute it with a percentage (at 0.5%) of the average investment. We observe the A.O. to have applied the said percentage as well, i.e., apart from the proportionate interest expenditure, as directed by the ld. CIT(A). The said percentage is only toward general administrative or indirect expenses. The dispute, thus, essentially is in respect of the disallowance u/s. 14A qua the interest expenditure. Rule 8D, though not mandatory up to AY 2007-08, yet provides a reasonable basis for imputing the interest expenditure attributable to the exempt income on the basis of the proportionate investment, reckoned on an average basis for the relevant years.
So, however, in our opinion, both for the years up to A.Y. 2006-07, i.e., prior to the insertion of sub-sections (2) and (3) to section 14A, as well as thereafter, i.e., for A.Y. 2007-08, it is open for the assessee to claim that the average formula is not applicable, and subject to its proving that it had sufficient funds to finance the tax-exempt investment/s, specifying the avenues where it funds were utilized for the relevant period, no disallowance qua the interest expenditure would arise on the basis of the general pool of funds hypothesis. This is so as funds are fungible. Also, a subsequent repayment of borrowings by own capital, for instance, would lead to a substitution of the source of finance, with investments even generally being made for parking or investing surpluses. The matter is factual, and no presumption in this regard could obtain, and which would only be on no evidence being led by the assesse, validating the application of the general pool of funds basis. For A.Y. 2008-09, r. 8D becomes applicable. The same is mandatory. However, in our view, this would only impact the burden of proof on the assessee, which thus becomes more stringent, so that rather than showing existence of sufficient capital, the matter would be required to be examined from the stand-point of utilization of the borrowed interest bearing funds. That is, the asssessee would have to exhibit that no interest cost has, as a matter of fact, been incurred in respect of the said investment, if the prescription of the rule is not to apply. The matter thus hinges on the ability of the assesse to establish its claim/s in this regard with reference to its accounts. We say so as the AO has, prior to the application of s. 14A(1), meet the bar or stipulation of s. 14A(2), even as explained by the hon’ble court in Godrej & Boyce Mfg. Co. Ltd. (supra). Businesses normally have dedicated funds, as for financing projects or asset acquisition or for financing working capital, so that where shown to be so used for the relevant year, the same would (alongside the corresponding assets) merit exclusion in applying the proportionate method. Needless to add, general borrowings, as for ‘business purposes’, would only stand to be considered as forming part of the general pool of funds.
Under the circumstances, we only consider it fit and proper that the matter for all the years is restored back to the file of the A.O. to allow the assessee an opportunity to show as why the interest disallowance u/s. 14A(1) should not be worked out following the proportionate method, as directed by the ld. CIT(A). We decide accordingly.
11. The appeals for AYs 2005-06 (ITA No. 7944/Mum/201 1) and 2006-07 (ITA No. 7946/Mum/201 1) also contain a ground (Gd. No.1) disputing the reopening of the assessments. The same is on the basis of change of opinion; there being full and true disclosure of all the relevant facts. The same was found not acceptable by the Revenue as the initiation of the reassessment proceedings for both the said years was before the expiry of four years from the end of the relevant assessment years. Further, there was nothing to indicate in the respective assessment orders, though framed u/s. 143(3), that the relevant issue, i.e., whether the provision of s. 80-IA(5) would have precedence over the other sections, viz. ss. 32(2), 70 & 71 of the Act, so that the unabsorbed depreciation and losses of the assessee’s two eligible units would in law stand to be set off against its other income assessable for the relevant years or not? The question of change of opinion would arise only where there has in fact been an expression of opinion by the AO in the first place. Sufficiency of the reasons is not a matter that could be examined or gone into at the time of issue of notice u/s. 148, and what all is required and relevant is the existence of a ‘reason/s to believe’ that income chargeable to tax had escaped assessment. Several decisions, viz. Piaggio Vehicles (P.) Ltd. v. CIT (2007) 290 ITR 377 (Bom.); Consolidated Photo & Finvest Ltd. v. Asst. CIT (2006) 281 ITR 394 (Del.); and Multiscreen Media (P.) Ltd. v. Union of India (2010) 324 ITR 54 (Bom.); the last one being rendered by relying and drawing on the decision by the apex court in the case of CIT v. Kelvinator of India Ltd. (2010) 320 ITR 561 (SC), were cited and relied upon by the ld. CIT(A). Aggrieved, the assesse is in second appeal.
12. We have heard the parties, and perused the material on record as well as the case law cited. The reopening of assessments in the instant case is decidedly before the expiry of a period of four years from the end of the relevant assessment years, so that the first proviso to s. 147 is not applicable. The true and full disclosure of all the material facts, which the ld. AR was at pains to show to us, is thus not a relevant consideration. The question of change of opinion, which though would bar reopening of an assessment, would come into play only where there has indeed been an expression or formation of opinion by assessing authority while framing the assessment being subject to reassessment, which we find as conspicuous by its absence. This is as the assessment must show an application of mind and a conscious decision by the AO in the matter.
There is nothing to show of the consideration of provision of s. 80-IA(5) by the AO while framing the original assessments. The only condition, where an assessment is sought to be reopened within a period of four years from the end of the relevant assessment year, as the assessments under reference, is the existence of a reason/s to believe, which must be bona fide and held in honesty, having a live and rational nexus with the belief that the income chargeable to tax to the stated extent had escaped assessment in terms of Explanation 2 to sec. 147. The sufficiency of the reason/s is something that falls within the realm of subjective satisfaction of the AO and, thus, not liable to be agitated. The information leading to the formation of the said belief may come from an external source or even the record, or be with regard to the correct position of law itself (Kalanji Mavji v. CIT (1976) 102 ITR 287 (SC)).Questions, both with regard to fact and law, could be examined by the assessing authority in the reopened proceedings, and no finality in its respect is contemplated at the time of initiation thereof. The decisions by the apex court in the case of Raymond Woollen Mills Ltd. v. ITO (1999) 236 ITR 34 (SC) and Asst. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. (2007) 291 ITR 500 (SC)(refer paras 16 & 17) are also relevant in this regard. Further, the aspect of assessment that remained to be deliberated or considered by the assessing authority, i.e., scope and ambit of s.80-IA(5), is undoubtedly a matter which is debatable, having been discussed variously in its different dimensions by different appellate authorities before whom it travelled to on being agitated. In the facts and circumstances of the case, in our clear view, the reassessment proceedings stood rightly initiated in law. We decide accordingly.
13. In the result, all the appeals by the assessee are partly allowed and that for AYs 2007-08 & 2008-09 are also partly allowed for statistical purposes.
Order pronounced in open court on this 13th day of February, 2013
