Relief to Reliance: Deductions for Profits and Gains from Industrial Undertakings not to be confined to 'Business Income' Only, rules Supreme Court

The Supreme Court of India has ruled that the Deductions for profits and gains from industrial undertakings under Section 80-IA must not be confined to 'Business Income' only.

The Assessing Officer restricted the eligible deduction under Section 80-IA of the Income Tax Act, 1961 to the extent of ‘business income’ only. The Commissioner of Income-Tax (Appeal)-I partly allowed the Appeal filed by the Assessee and reversed the order of the Assessing Officer on the issue of the extent of deduction under Section 80-IA of the Act. The Income Tax Appellate Tribunal, upheld the decision of the Appellate Authority on the issue of deduction under Section 80-IA. The High Court refused to interfere with the Tribunal’s order as far as the issue on deduction under Section 80-IA is concerned.

The Assessee, M/s. Reliance Energy Ltd. is in the business of generation of power and also deals with purchase and distribution of power. The Assessee-Company generated power from its power unit located at Dahanu. In respect of deduction under Section 80-IA of the Act, the Assessee was asked to explain as to why the deduction should not be restricted to business income, as had been the stand of the Revenue for the assessment year 2000-01. The Assessee had revised its claim under Section 80-IA of the Act to Rs. 546,26,01,224/-, having admitted that there was an error in calculation of income-tax depreciation.

The Assessing Officer rejected the contention of the Assessee that Section 80AB of the Act is not applicable. It was held that Section 80AB of the Act makes it clear that for

The Assessing Officer elaborated on this point by stating that ‘income from business’ alone had to be considered for allowing any deduction computed on ‘income from business’ and using the same analogy, deduction computed on ‘income from other sources’ should be allowable against ‘income from other sources’ only. As the deduction under Section 80-IA of the Act pertains to profits and gains from a business undertaking, the deduction is allowable only against ‘income from business’.

The Assessee supported the order passed by the Appellate Authority which was upheld by the Tribunal and the High Court. It is the argument of Mr. Ajay Vohra, learned Senior Counsel appearing on behalf of the Assessee, that Section 80AB of the Act is with reference to computation of deduction on the basis of net income. He submitted that there is no indication in sub-section (5) of Section 80-IA that the deduction under sub-section (1) is restricted to ‘business income’ only. On the other hand, according to him, sub- section (5) deals with determination of the quantum of deduction by treating eligible business as the only source of income of the Assessee.

The controversy in this case pertains to the deduction under Section 80-IA of the Act being allowed to the extent of ‘business income’ only. The claim of the Assessee that deduction under Section 80-IA should be allowed to the extent of ‘gross total income’ was rejected by the Assessing Officer.

The division bench of Justices L.Nageshwara Rao and Vineet Saran highlighted the essential ingredients of Section 80-IA (1) of the Act.

Firstly, the 'gross total income' of an assessee should include profits and gains.

Secondly those profits and gains are derived by an undertaking or an enterprise from a business referred to in sub-section (4).

Thirdly, the assessee is entitled for deduction of an amount equal to 100% of the profits and gains derived from such business for 10 consecutive assessment years.

Lastly, in computing the ‘total income’ of the Assessee, such deduction shall be allowed.

The Apex court held that the scope of sub-section (5) of Section 80- IA of the Act is limited to determination of quantum of deduction under sub-section (1) of Section 80-IA of the 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'."

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