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Judgment
Sanjiv Khanna, J
The present appeal by the assessee-M/s RRB Consultants and Engineers Private Limited relates to Assessment Year 1996-97 and arises from the
order of the Income Tax Appellate Tribunal (Tribunal, for short) dated 6th August, 2004 in ITA No. 913/Del/2000. The present appeal was admitted
for hearing vide order dated 23rd January, 2006 on the following substantial question of law:-
“Whether the ITAT was, in the facts and circumstances of the case, right in holding that the appellant was not entitled to the deduction
under Section 80-IA of the Income Tax Act, 1961?â€
We would clarify that the core issue raised in the present appeal relates to computation of deduction under Section 80-IA of the Income Tax Act,
1961 (Act, for short).
The appellant, during the relevant assessment year, had primarily derived income from consultancy and professional services from sale and
installation of wind electricity generators. For this purpose, the appellant had entered into an agreement with their principal company and
manufacturer, namely, M/s Vestas Danish Wind Technology, A/s, Denmark. The appellant had also erected and commissioned wind mills statedly for
demonstration and sale promotion purposes. The power generated from the said erected and commissioned wind generators was sold to Tamil Nadu
State Electricity Board and the appellant had earned income of Rs.22,92,245/- from the said sale.
The appellant had invoked Section 80-IA of the Act in its return of income and had shown the entire receipt of Rs.22,92,245/- as income from
generation of power as exempt under Section 80-IA of the Act.
The Income Tax Officer vide assessment order dated 15th February, 1999 noticed that the appellant had net profit from consultancy of over
Rs.2.98 crores. Further, the assessee was entitled to depreciation of over Rs.3.24 crores on the wind mills erected and commissioned. Accordingly,
this depreciation figure was reduced from income of Rs.22,92,245/- earned from generation of power and as the resultant figure was in negative, it
was held that the appellant was not entitled to any deduction under Section 80-IA. The said order records that unabsorbed depreciation over Rs.3.01
crores would be adjusted from other businesses. The said benefit was granted. Accordingly, the net taxable income was computed at Rs.19,64,824/-.
The said figure was arrived at after the Assessing Officer had made certain other disallowances in the taxable income, as declared in the profit and
loss account.
The appellant in the first appeal partly succeeded as the Commissioner of Income Tax (Appeals) held that the depreciation on wind mills was to be
first allowed, i.e., reduced from the entire income of the assessee and the balance amount thereafter has to be deducted from the income earned by
the assessee from sale of power, for computing benefit under Section 80-IA of the Act. He observed that depreciation was to be allowed under
Section 32, which falls under Chapter IV of the Act relating to computation of business income. Further, depreciation was to be allowed against the
composite business income, i.e., profits earned by the assessee by way of commission from consultation and sale of wind mills as well as sale of
electricity. He held that the wind mills were being used for more than one activity and, therefore, it does not follow that depreciation would be allowed
only against income of one activity and not other.
Aggrieved, the Revenue preferred an appeal before the tribunal, which as is apparent from the fact that the appellant-assessee has filed the present
appeal, has accepted the contention of the Revenue. The Tribunal in the impugned order has held as under:-
“10. A perusal of Section 80-IA(1) makes it very clear that deduction is to be allowed on the profits and gains of the business of generation of
power, viz, the eligible business. Provisions of Section 80-IA (5) which has a non obstante clause even overriding the effect of provisions of Section
80-AB mandates that the profit of the eligible business be computed as if it were the only source of income of the Assessee. In the present case, the
Assessee maintains a single set of books of accounts. The order of the Assessing Officer is silent on the other common expenses. Perusal of the
profit and loss account, a copy of which is placed at page-14 of the Assessee’s paper book would show that there are other common expenses
also. To quote a few Audit Fee, for tax matters, rent, rates and taxes etc. The gross receipts from power generation is shown in the profit and loss
account at Rs.22,92,245/-. We shall now confine ourselves to the depreciation expenses which was in controversy before the revenue authorities. It
cannot be disputed that even going by the provisions of Section 80-IA(5), that the expenditure incurred in earning the income from the eligible business
has to be deducted and only on the net income, deduction under Section 80-IA has to be allowed. The case of the Assessee that the Wind Turbines
(wind mill) through which it generated and sold electricity was not primarily meant for such purpose and it was primarily meant only for the purpose of
demonstrating to the prospective buyers of power turbines manufactured by the Danish Company for which it acted as consultants and for marketing
and sales for their products, cannot be accepted. If one were to act as a marketing and sales agent for manufacturer of a product it is only usual or
normal to expect the principal to provide the necessary infrastructure to carry on the activities by an agent. There is no reference to any specific
agreement between the principal and the assessee that the Assessee would install wind Turbines at their own cost to demonstrate to the prospective
purchasers of the principal’s product. It cannot be disputed that the wind turbines were used in the eligible business. There is no evidence on
record to suggest that the wind turbines were used in the business of providing consultancy service or such use was necessary for the business of
consultancy service. In any event, the use, if any, of these wind turbines in the other business of the Assessee, viz., consultancy, marketing and sale of
wind turbines in our view was only incidental and the primary purpose was to generate power. Even going by the provisions of Section 80-IA(5), the
entire depreciation on these machinery has to be deducted from the receipts generated from the business of generation of power.
If we were to accept the computation of income for the purpose of Section 80-IA as adopted by the assessee, then that would amount to allowing
deduction on the income from the business of consultancy, marketing and sales carried on by the assessee also. That would be against the provisions
of Section 80IA(1), which allows deduction only on the profits derived from the eligible business. This would be against the decision of the Honourable
Supreme Court in the case of Pandian Chemicals (supra). The decisions relied upon by the ld. Counsel for the assessee are on the point that while
allowing deduction of expenses, the expenses can not be bifurcated as between the exempt income and chargeable income and deduction of
expenditure attributable to chargeable income can not alone be allowed. These decisions are not applicable in the context of Section 80 IA of the Act
especially in view of the specific provisions of Section 80 IA(5) of the Act. We also derive support for our conclusions from the decision in the case of
Indian Rayan Corporation Ltd. Vs. CIT, 281 ITR 98 wherein the Hon’ble Bombay High Court has held that deduction under Chapter VI-A has to
be allowed only on the gross total in crossed and therefore one can not exclude depreciation allowance while computing profits derived from newly
established undertaking for computing deduction under Chapter VI-A.
For the reasons given above, we are of the view that the Assessing Officer was justified in treating depreciation on wind turbines as a deduction
from the income of power generation and on that basis holding that there was no income from the eligible business on which deduction under Section
80-IA was to be allowed. The CIT(A) in our view erred in accepting the computation as adopted by the assessee which in our view is against the
provisions of Sec. 80-IA and the law laid down by the Honourable Supreme Court in the case of Pandian Chemicals (supra). The appeal of the
revenue is allowed and the order of the CIT(A) is reversed and that of the Assessing Officer restored.â€
Learned counsel for the appellant-assessee has drawn our attention to sub-section (7) to Section 80-IA of the Act read with sub-section (5) thereof
as applicable to the Assessment Year 1996-97. Counsel for the appellant had also referred to a table relying upon the decision of the Madras High
Court in Velayudhaswamy Spinning Mills Private Limited versus Assistant CIT, 2012 (340) ITR 477 (Mad.).
We have considered the contention of the appellant-assessee, but in the facts of the present case, which are glaring, do not think we are required to
make an in-depth study of and elucidate upon sub-section (7) to Section 80-IA of the Act. The appellant-assessee, as noticed above, had a small
income of Rs.22,92,245/- from sale of electricity, which qualifies for deduction under Section 80-IA. However, deduction is not to be allowed on the
gross receipts. Expenses incurred and depreciation has to be reduced from the gross receipt, to arrive at the figure on which deduction is to be
allowed under Section 80 IA of the Act. Deduction was to be allowed only on the net profits of the said undertaking, which was eligible for deduction
under Section 80-IA. It is an accepted and admitted position that the appellant-assessee was entitled to depreciation of over Rs.3.24 crores on the
wind mills, which were installed and used for generating electricity and also commission income. Thus, the depreciation, which was to be allowed and
given on the wind mills was almost fifteen times the income earned by the appellant-assessee from generation of electricity, which was eligible for
deduction under Section 80-IA. This being the position, we do not think the appellant-assessee would be entitled to deduction on the gross receipt
without reducing depreciation under Section 80-IA regardless of whatever interpretation they want to place on the provisions of Section 80IA. The
view we have taken is in consonance and in conformity with the view expressed by this Court in ITA 579/2007 Dabur India Ltd. versus Commissioner
of Income Tax, Delhi that deduction under Section 80-IA is on the net amount earned by the eligible undertaking, i.e., after computing the income of
the eligible undertaking in terms of Chapter IV of the Act, which includes Section 32 relating to depreciation. Recent decision of the Supreme Court
dated 9th October, 2017 in Civil Appeal No. 238/2012, Plastiblends India Limited versus Additional Commissioner of Income Tax, Mumbai and
Another, also takes the same view. In Plastibends India Limited (supra), the Supreme Court observed and held:-
After removing the applicability of Mahendra Mills [CIT v. Mahendra Mills, (2000) 3 SCC 615 : (2000) 243 ITR 56] on the aforesaid
grounds, the High Court proceeded to consider as to whether it can be said that the quantum of deduction allowable under Section 80-IA
depends upon the assessees claiming or not claiming current depreciation? The Full Bench went on to answer this question with the
observations that it was no longer res integra as the Apex Court had reflected thereupon in Liberty India [Liberty India v. CIT, (2009) 9
SCC 328 : (2009) 317 ITR 218] and quoted the following passage from the said judgment in support of its aforesaid remarks:
“24. Before analysing Section 80-IB, as a prefatory note, it needs to be mentioned that the 1961 Act broadly provides for two types of tax
incentives, namely, investment-linked incentives and profit-linked incentives. Chapter VI-A which provides for incentives in the form of tax deductions
essentially belong to the category of “profit-linked incentivesâ€. Therefore, when Sections 80-IA/80-IB refers to profits derived from eligible
business, it is not the ownership of that business which attracts the incentives. What attracts the incentives under Sections 80-IA/80-IB is the
generation of profits (operational profits).
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On analysing Chapter VI-A, we find that Sections 80-IB/80-IA are the code by themselves as they contain both substantive as well as procedural
provisions. Therefore, we need to examine what these provisions prescribe for “computation of profits of the eligible businessâ€. It is evident that
Section 80-IB provides for allowing of deduction in respect of profits and gains derived from the eligible business. The words “derived from†are
narrower in connotation as compared to the words “attributable toâ€. In other words, by using the expression “derived fromâ€, Parliament
intended to cover sources not beyond the first degree.
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On perusal of sub-section (5) of Section 80-IA, it is noticed that it provides for the manner of computation of profits of an eligible
business. Accordingly, such profits are to be computed as if such eligible business is the only source of income of the assessee. Therefore,
the devices adopted to reduce or inflate the profits of eligible business have got to be rejected in view of the overriding provisions of sub-
section (5) of Section 80-IA, which are also required to be read into Section 80-IB. We may reiterate that Sections 80-I, 80-IA and 80-IB
have a common scheme and if so read it is clear that the said sections provide for incentives in the form of deduction(s) which are linked to
profits and not to investment.
On an analysis of Sections 80-IA and 80-IB it becomes clear that any industrial undertaking, which becomes eligible on satisfying sub-
section (2), would be entitled to deduction under sub-section (1) only to the extent of profits derived from such industrial undertaking after
specified date(s). Hence, apart from eligibility, sub-section (1) purports to restrict the quantum of deduction to a specified percentage of
profits. This is the importance of the words “derived from industrial undertaking†as against “profits attributable to industrial
undertakingâ€.â€
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The aforesaid conclusion of the Full Bench is based on the judgments of this Court and there is no reason to disagree with the same, on finding
that the judgments of this Court are rightly analysed and ratio thereof is correctly understood and applied. We, thus, entirely agree with the Full Bench
judgment of the Bombay High Court in Plastiblends India Ltd. v. CIT [Plastiblends India Ltd. v. CIT, (2009) 318 ITR 352] and the following manner in
which the position has been summed up by the High Court:
“44. To summarise, firstly, the Apex Court decision in Mahendra Mills cannot be construed to mean that by disclaiming depreciation, the
assessee can claim enhanced quantum of deduction under Section 80-IA. Secondly, the Apex Court inD istributors (Baroda) (P) Ltd.
[Distributors (Baroda) (P) Ltd. v. Union of India, (1986) 1 SCC 43 : 1986 SCC (Tax) 159] and in Liberty India [Liberty India v. CIT, (2009)
9 SCC 328 : (2009) 317 ITR 218] has clearly held that the special deduction under Chapter VI-A has to be computed on the gross total
income determined after deducting all deductions allowable under Sections 30 to 43-D of the Act and any device adopted to reduce or
inflate the profits of eligible business has got to be rejected. Thirdly, this Court in Albright Morarji and Pandit Ltd. [CIT v. Albright Moraji
and Pandit Ltd., 1998 SCC OnLine Bom 612 : (1999) 236 ITR 914 ], Grasim Industries Ltd. [Grasim Industries Ltd. v. CIT, 2000 SCC
OnLine Bom 948 : (2000) 245 ITR 677] and Asian Cable Corpn. Ltd. [CIT v. Asian Cable Corpn. Ltd. (No. 2), 2003 SCC OnLine Bom 1279
: (2003) 262 ITR 537] has only followed the decisions of the Apex Court in Distributors Baroda[Distributors (Baroda) (P) Ltd. v. Union of
India, (1986) 1 SCC 43 : 1986 SCC (Tax) 159] . Thus, on analysis of all the decisions referred hereinabove, it is seen that the quantum of
deduction allowable under Section 80-IA of the Act has to be determined by computing the gross total income from business, after taking
into consideration all the deductions allowable under Sections 30 to 43-D of the Act. Therefore, whether the assessee has claimed the
deductions allowable under Sections 30 to 43-D of the Act or not, the quantum of deduction under Section 80-IA has to be determined on
the total income computed after deducting all deductions allowable under Sections 30 to 43-D of the Act.â€
In the facts of the present case, the question of bifurcation of depreciation in view of the two lines of business, etc. wanes, as the amount of
depreciation, even on bifurcation, which would be reduced from the gross receipts of the undertaking eligible for deduction under section 80IA of the
Act, would be significantly higher. We do not, therefore, in the facts of the present case, find any good ground or reason to interfere with the
impugned order passed by the Tribunal. The question of law is accordingly, in the facts of the present case, answered against the appellant-assessee
and in favour of the Revenue. We clarify that if in a future year the relevant provision requires interpretation, we would interpret the same.
The appeal is dismissed. No order as to costs.