In order to boost manufacturing and encourage setting up of industries in backward areas or designated areas, various tax benefits have been rolled out over a period of time by giving deduction of profit and gains under section 80-I / section 80-IA / section 80-IB / section 80-IC etc. and section 10A / section 10AA / section 10B etc. These deductions/exemptions are profit linked incentives i.e., the profits and gains arising from the eligible business will be allowed as deduction while computing the total income. Where the taxpayer has income from only one eligible unit and does not have any other income, the computation of deduction is very easy. However, where the taxpayer has both – eligible and non-eligible units – and the non-eligible unit has incurred a loss, a question may arise as to whether one should consider the loss from a non-eligible unit while computing the deduction under section 80-IA of the IT Act.
In this regard, recently, the Supreme Court1 had an occasion to examine whether the deduction under section 80-IA of the IT Act shall be allowed to the extent of gross total income of the eligible undertaking or it would be restricted to income under the head Income from Business or Profession.
We, at BDO in India, have summarised the ruling of the Supreme Court and provided our comments on the impact of this decision hereunder.
FACTS OF THE CASE
The taxpayer is in the business of generation of power and also deals with purchase and distribution of power. In respect of deduction under section 80-IA of the IT Act, the taxpayer was asked to explain as to why the deduction should not be restricted to business income, as had been the stand of the revenue authorities for previous years. The tax officer was of the opinion that in terms of section 80AB of the IT Act, the deduction under section 80-IA of the IT Act cannot exceed the ‘income from business’. The tax officer relied on the term ‘that nature’ and ‘shall alone’ in section 80AB of the IT Act to support his contention. Accordingly, the tax officer restricted the deduction claimed by the taxpayer to the extent of ‘business income’. Aggrieved, the taxpayer filed an appeal before the First Appellate Authority who directed the tax officer not to restrict the deduction admissible under section 80-IA of the IT Act to income under the head ‘business’. The order of First-Appellate Authority was affirmed by the jurisdictional Tax Tribunal and High Court. Aggrieved thereby, the revenue authorities filed an appeal with the Supreme Court (SC).
The Apex Court affirmed the ruling of High Court and held that the deduction under section 80-IA of the IT Act is not restricted to the ‘Business Income’ but shall be allowed to the extent of ‘gross total income’. While coming to this conclusion, it made the following observations:
- Circular2 issued by CBDT makes it clear that the reason for introduction of Section 80AB of the IT Act was for the deductions under Part C of Chapter VI-A of the IT Act 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 of the IT Act shows that the provision pertains to determination of the quantum of deductible income in the ‘gross total income’. Section 80AB of the IT Act cannot be read to be curtailing the width of section 80-IA of the IT Act.
- Section 80A(1) of the IT Act stipulates that in computation of the ‘total income’ of a taxpayer, deductions specified in section 80C to section 80U of the IT Act shall be allowed from his ‘gross total income’. Further, section 80A(2) of the IT Act provides that the aggregate amount of the deductions under Chapter VI-A of the IT Act shall not exceed the ‘gross total income’ of the taxpayer.
- The essential ingredients of Section 80-IA(1) of the IT Act are:
- The ‘gross total income’ of the taxpayer should include profits and gains.
- Such profits and gains are derived by an undertaking / enterprise from a business referred to in Section 80-IA(4) of the IT Act.
- The taxpayer is entitled for deduction of an amount equal to 100% of the profits and gains derived from such business for 10 consecutive fiscal years.
- In computing the ‘total income’ of the taxpayer, such deduction shall be allowed.
- The import of Section 80-IA is that the ‘total income’ of taxpayer is computed by taking into account the allowable deduction of the profits and gains derived from the ‘eligible business’.
- The scope of Section 80-IA(5) of the IT Act is limited to determination of quantum of deduction under section 80-IA(1) of the IT Act 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.
- An attempt is made by revenue authorities to interpret the intention of legislature in the narrowest possible construction to deduction admissible by relying on a phrase ‘derived…from’ in section 80-IA(1) of the IT Act. This submission is not dealt in view of the above findings.
This is a welcome ruling. While the sunset clause under section 80-IA of the IT Act has already expired, the taxpayers can rely on this Ruling with respect to their past matters. The taxpayer, armed with this Ruling, could evaluate making an application with its tax officer to rectify the orders where the deduction was limited to the extent of business income. Apart from section 80-IA of the IT Act, this Ruling could be helpful for taxpayers claiming profit-linked deductions under other sections such as section 80-IAC, section 80-IBA of the IT Act etc.
Also, this will bring an end to the litigation relating to set off of loss from non-eligible unit against the income from eligible units. This Ruling will also help the taxpayer to claim deduction from income from Other Sources where the taxpayer has incurred loss from non-eligible business.
1CIT-1 vs. M/s. Reliance Energy Ltd., Civil Appeal No. 1328 of 2021 (Supreme Court)
2Circular No. 281, dated 22 September 1980