Wind-Power Company Need Not Revive Pre-Claim Losses Already Set Off Against Other Income, Gujarat HC Holds on 80-IA Deduction

The assessee operated windmills and claimed deductions under Section 80-IA for profits from power generation.

Before its chosen initial assessment year for the deduction, losses and unabsorbed depreciation of the eligible business had been set off against the assessee’s other income.

The Assessing Officer nevertheless treated those amounts as notionally carried forward and deducted them when calculating eligible-business profits for Section 80-IA.

The CIT(A) allowed the assessee’s appeals, but the Tribunal’s Special Bench reversed that decision.

The assessee appealed to the Gujarat High Court.

Section 80-IA(7), as it stood before 1 April 2000, and Section 80-IA(5), thereafter, require eligible-business profits to be computed as if that business were the assessee’s only source of income for determining the deduction.

The deeming fiction is limited to that purpose and does not authorise the revival of losses or depreciation already set off against other income before the initial assessment year.

Section 80-IA(2) permits the assessee to choose the initial assessment year within the prescribed period; CBDT Circular No. 1/2016 clarifies that the deduction period begins with the year so chosen.

The Court followed the approach in Velayudhaswamy Spinning Mills (P.) Ltd. v. Assistant Commissioner of Income-tax and CIT v. Mewar Oil and General Mills Ltd., and relied on the Delhi High Court’s consideration of the issue in PCIT v. Sterling Agro Industries Ltd.

It declined to follow the contrary approach in Microlabs Ltd. v. Assistant Commissioner of Income-tax.

The Court held that the words “as if” the eligible business were the only source of income create a limited fiction for computing the deduction; they do not create a further fiction that previously absorbed losses must be treated as outstanding and carried forward notionally.

Because the assessee’s losses and depreciation had already been set off against other income before its chosen initial assessment year, they could not be reopened and deducted from later eligible-business profits.

The non-obstante clause did not justify extending the statutory fiction beyond its stated purpose.

It held that losses and depreciation already set off before the initial assessment year could not be notionally carried forward to reduce the Section 80-IA deduction, and allowed the appeals.