Depreciation for computing Section 80-IA/80-IB deductions must be restricted to assets of the specific undertaking.

The Appellant (Revenue) challenged an order passed by the Income Tax Appellate Tribunal (ITAT) on 16.05.2008 regarding Assessment Year 2001-02

The Assessing Officer (AO) had originally denied the Respondent (Assessee) deductions under Section 80-IA (for a captive power plant) and Section 80-IB (for a PAA plant)

The AO’s denial was based on the calculation of "negative profits" resulting from the deduction of total depreciation for all assets (Rs. 26,70,38,995/-) against the specific units

On appeal, the CIT(A) calculated the deductions by applying only unit-specific depreciation—Rs. 5,20,379/- for the power plant and Rs. 2,28,76,991/- for the PAA plant—rather than the aggregate depreciation of the entire company, and capped the total deduction at Rs. 8,49,15,112/- based on the total income

The ITAT upheld the CIT(A)’s order, leading the Revenue to appeal to the High Court

1. Whether the Appellate Tribunal was right in law and on facts in confirming the order passed by the CIT(A) in granting deduction under Section 80-IA/80-IB of Rs. 8,49,15,112/- on the captive power plant and PAA plant by deducting only unit-specific depreciation rather than total corporate depreciation

The Court applied the provisions of Section 80-IA and Section 80-IB of the Income Tax Act, 1961, which provide for deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development

It further relied on Section 80-IA(9) and Section 80-AB of the Act, which mandate that for the purpose of calculating deductions under Chapter VI-A, the profits of a specific unit must be computed as if such unit were the only source of income of the assessee, ensuring that only expenses (including depreciation) pertaining to that specific "eligible business" are deducted from its gross income

The Court reasoned that the Assessing Officer committed a factual and legal error by deducting the global depreciation of all company assets (Rs. 26,70,38,995/-) from the profits of the specific captive power and PAA units to arrive at a negative profit figure

Under the statutory scheme of Sections 80-IA and 80-IB, the "eligible business" must be treated as a separate entity for the purpose of quantifying the deduction. The Bench agreed with the CIT(A)’s re-computation, which correctly isolated the depreciation pertaining specifically to the captive power plant (Rs. 5,20,379/-) and the PAA plant (Rs. 2,28,76,991/-)

By applying unit-specific depreciation, the units showed positive profits eligible for deduction, which were then properly capped in accordance with the total income computed under Chapter VI-A

The Court held that for the purpose of granting deductions under Sections 80-IA and 80-IB, only the depreciation pertaining to the specific eligible units should be considered, not the aggregate depreciation of the entire assessee-company

The Tax Appeal was dismissed