COMMISSIONER OF INCOME TAX-I versus M/S. RELIANCE ENERGY LTD. (FORMERLY BSES LTD.) THROUGH ITS M.D. on 28 April 2021

1. By an order of assessment dated 31.01.2005, the AssessingOfficer restricted the eligible deduction under Section 80-IA of the IncomeTax Act, 1961 (hereinafter “the Act”) to the extent of ‘business income’only. On 23.03.2006, the Commissioner of Income-Tax (Appeal)-I(hereinafter “the Appellate Authority”) partly allowed the Appeal filedby the Assessee and reversed the order of the Assessing Officer on theissue of the extent of deduction under Section 80-IA of the Act. TheIncome Tax Appellate Tribunal (hereinafter “the Tribunal”), upheld thedecision of the Appellate Authority on the issue of deduction under Section80-IA. The High Court refused to interfere with the Tribunal’s order asfar as the issue on deduction under Section 80-IA is concerned. Therefore,this Appeal by the Revenue.

2. This Appeal pertains to the assessment year 2002-03 for whichthe income-tax return was filed by the Assessee on 31.10.2002 declaringthe total income as ‘NIL’. The return was subsequently revised on06.12.2002 and thereafter, on 30.03.2004. At the time of the assessmentproceedings, the Assessee submitted a revised computation of incomeby revising its claim of deduction under Section 80-IA of the Act.

3. The Assessee is in the business of generation of power andalso deals with purchase and distribution of power. The Assessee-Company generated power from its power unit located at Dahanu. Inrespect of deduction under Section 80-IA of the Act, the Assessee wasasked to explain as to why the deduction should not be restricted tobusiness income, as had been the stand of the Revenue for the assessmentyear 2000-01. The Assessee had revised its claim under Section 80-IAof the Act to Rs. 546,26,01,224/-, having admitted that there was anerror in calculation of income-tax depreciation. The Assessing Officerconsidered the revised claim of the Assessee under Section 80-IA anddetermined the amount eligible for deduction under Section 80-IA at Rs.492,78,60,973/- against the Assessee’s claim of Rs. 546,26,01,224/-.However, the Assessing Officer stated in the assessment order that theactual deduction allowable shall be to the extent of ‘income from business’as per provisions of Section 80AB of the Act. The ‘business income’ ofthe Assessee was computed at Rs. 355,74,73,451/- and the ‘gross totalincome’ at Rs. 397,37,70,178/-. Inclusion of ‘income from other sources’of Rs. 41,62,96,727/- in the ‘gross total income’ and deduction claimedunder Chapter VI-A of the Act against such ‘gross total income’ was B

C

D

E

F

G

H

B

C

D

E

F

G

H

Anot accepted by the Assessing Officer. The Assessing Officer rejectedthe claim of the Assessee for allowing deduction under Section 80-IA ofthe Act, along with other deductions available to the Assessee, to theextent of ‘gross total income’ and restricted the deduction allowed underSection 80-IA at Rs.354,00,75,084/-, by limiting the aggregate ofdeductions under Sections 80-IA and 80-IB of the Act to ‘businessBincome’ of the Assessee.

4. The Assessing Officer rejected the contention of the Assesseethat Section 80AB of the Act is not applicable. It was held that Section80AB of the Act makes it clear that for the purposes of deduction inrespect of certain incomes, deduction had to be given on the income ofCthe nature specified in the relevant section and allowed against incomeof that nature alone. The Assessing Officer elaborated on this point bystating that ‘income from business’ alone had to be considered forallowing any deduction computed on ‘income from business’ and usingthe same analogy, deduction computed on ‘income from other sources’Dshould be allowable against ‘income from other sources’ only. As thededuction under Section 80-IA of the Act pertains to profits and gainsfrom a business undertaking, the deduction is allowable only against‘income from business’. It was held by the Assessing Officer thatdeduction computed under Section 80-IA of the Act could not be allowedagainst any source other than business. The Assessing Officer also reliedEupon the words ‘that nature’ and ‘shall alone’ in Section 80AB of theAct to hold that deduction under a relevant section has to be given to theextent of the income from that particular source only on which deductionis available. In the matter before us, this would mean that deductionunder Section 80-IA of the Act has to be allowed only to the extent of F‘income from business’.

5. It was argued by the Assessee before the Appellate Authoritythat the conclusion of the Assessing Officer on deduction under Section80-IA of the Act being restricted to ‘business income’ needs to be setaside. The Assessee contended that the observation of the AssessingGOfficer that deduction under a particular section is permissible onlyagainst income under that particular head was erroneous. Deductionsrelated to various incomes under various sections of Chapter VI-A haveto be quantified in accordance with the respective sections. The Assesseeurged before the Appellate Authority that the deductions so quantifiedunder various sections under Chapter VI-A have to be aggregated andH

allowed against the ‘gross total income’. Finally, the submission of theAssessee before the Appellate Authority was that restricting the deductionunder Section 80-IA of the Act to the extent of ‘business income’ wasunjustified. With reference to Section 80AB, the Assessee contendedthat the operation of the said section related only to quantification ofdeduction on the basis of net income.

6. The Appellate Authority partly allowed the Appeal filed by theAssessee by an order dated 23.03.2006 and reversed the finding of theAssessing Officer on the issue of deduction under Section 80-IA of theAct for the reasons stated hereinafter. In respect of Section 80AB ofthe Act, the Appellate Authority referred to the background of insertionof the said section with effect from 01.04.1981. The Appellate Authorityreferred to Circular No. 281 dated 22.09.1980 of the Central Board ofDirect Taxes (CBDT) wherein the reason for introduction of Section80AB was explained. The Supreme Court in the case of Cloth Traders(P) Ltd. v. Additional CIT, Gujarat-I[1] held that deduction under Section80M of the Act, which deals with deduction in respect of certain inter-corporate dividends, was allowable on the gross amount of the dividendsreceived. It was decided to undo the decision of this Court as it wascontrary to the legislative intent, which was that deduction under Section80M was to be allowed on the dividend income as computed under theAct, i.e., on the net income after deduction of admissible expenses. TheAppellate Authority proceeded to hold that Section 80AB places a ceilingon the quantum of deductions in respect of incomes contained in Part-Cof Chapter VI-A. Such deductions are to be computed on the net eligibleincome, which will be deemed to be included in the gross total income.The Appellate Authority observed that Section 80AB is limited todetermining the quantum of deductible income included in the gross totalincome. Following a decision of the Income Tax Appellate Tribunal,Mumbai dated 25.04.2003 in Royal Cushion Vinyl Products Ltd. v.Dy. Commissioner of Income Tax, Mumbai (ITA No. 770/MUM/98),the Appellate Authority set aside the order of the Assessing Officer onthis count. The Appellate Authority directed the Assessing Officer notto restrict the deduction admissible under Section 80-IA of the Act toincome under the head ‘business’. The Assessing Officer was furtherdirected to aggregate the deduction under Section 80-IA of the Act withthe other deductions available to the Assessee and then to allow deductions AB

C

D

E

F

G

Aof such aggregate amount to the extent of ‘gross total income’. Theorder of the Appellate Authority was affirmed by the Tribunal and theHigh Court on this issue. Aggrieved thereby, the Revenue has come inAppeal.

7. The contention on behalf of the Revenue before us is that theBAssessing Officer was right in holding that the deduction under Section80-IA of the Act should be restricted to ‘business income’ only. Mr.Arijit Prasad, learned Senior Counsel appearing on behalf of the Revenue,submitted that Section 80AB of the Act contemplates deductions inrespect of incomes against income of the nature specified in the relevantsection. He further submitted that Section 80-IA(5) makes it clear thatCthe determination of quantum of deduction under sub-section (1) of Section80-IA should be on the basis that the source of income from the eligiblebusiness was the only source of income of an assessee and therefore,the deduction so determined should be allowed only against ‘businessincome’. According to him, the phrase ‘derived … from’ in sub-sectionD(1) of Section 80-IA of the Act indicates that the computation of deductionis restricted only to the profits and gains from the eligible business. Herelied upon the judgment of this Court in Cambay Electric SupplyIndustrial Co. Ltd. v. CIT[2], followed in Synco Industries Ltd. v.Assessing Officer, Income Tax, Mumbai & Anr.[3]and PandianChemicals Ltd. v. Commissioner of Income Tax, Madurai[4].E

8. In response, the Assessee supported the order passed by theAppellate Authority which was upheld by the Tribunal and the HighCourt. It is the argument of Mr. Ajay Vohra, learned Senior Counselappearing on behalf of the Assessee, that Section 80AB of the Act iswith reference to computation of deduction on the basis of net income.FHe submitted that there is no indication in sub-section (5) of Section 80-IA that the deduction under sub-section (1) is restricted to ‘businessincome’ only. On the other hand, according to him, sub-section (5) dealswith determination of the quantum of deduction by treating eligible businessas the only source of income of the Assessee. Sub-section (5), therefore,Gis concerned with computation of the deduction, which is at a stage priorto allowing the deduction so computed. He submitted that there is nodispute that the computation of deduction is only from the eligible business.

2 (1978) 2 SCC 6443 (2008) 4 SCC 22H4 (2003) 5 SCC 590

The claim of the Assessee, as accepted by the Appellate Authority, isthat there is no restriction on taking into account income from any othersource while allowing the deduction computed under Section 80-IA,subject to the aggregate of all deductions under Chapter VI-A notexceeding the ‘gross total income’. He relied upon judgments of thisCourt in CIT (Central), Madrasv.Canara Workshops (P) Ltd.,Kodialball, Mangalore[5] and Synco Industries (supra) to argue thatsub-section (5) of Section 80-IA of the Act does not restrict permissiblededuction under sub-section (1) to be allowed against ‘business income’only. The learned Senior Counsel for the Assessee relied upon thejudgment of the Bombay High Court in Commissioner of Income-taxv. Tridoss Laboratories Ltd.[6] to argue that the Appeal should not beallowed.

9. The controversy in this case pertains to the deduction underSection 80-IA of the Act being allowed to the extent of ‘business income’only. The claim of the Assessee that deduction under Section 80-IAshould be allowed to the extent of ‘gross total income’ was rejected bythe Assessing Officer. It is relevant to reproduce Section 80AB of theAct which is as follows:

“80AB. Deductions to be made with reference to the incomeincluded in the gross total income. — Where any deduction isrequired to be made or allowed under any section includedin this Chapter under the heading “C. — Deductions in respectof certain incomes” in respect of any income of the naturespecified in that section which is included in the gross totalincome of the assessee, then, notwithstanding anythingcontained in that section, for the purpose of computing thededuction under that section, the amount of income of thatnature as computed in accordance with the provisions of thisAct (before making any deduction under this Chapter) shallalone be deemed to be the amount of income of that naturewhich is derived or received by the assessee and which isincluded in his gross total income.”

As stated above, Section 80AB was inserted in the year 1981 toget over a judgment of this Court in Cloth Traders (P) Ltd. (supra).The Circular dated 22.09.1980 issued by the CBDT makes it clear that 5 (1986) 3 SCC 538

6 [2010] 328 ITR 448 (Bombay)

AB

C

D

E

F

G

H

Athe reason for introduction of Section 80AB of the Act was for thedeductions under Part C of Chapter VI-A of the Act to be made on thenet income of the eligible business and not on the total profits from theeligible business. A plain reading of Section 80AB of the Act shows thatthe provision pertains to determination of the quantum of deductibleincome in the ‘gross total income’. Section 80AB cannot be read to beBcurtailing the width of Section 80-IA. It is relevant to take note of Section80A(1) which stipulates that in computation of the ‘total income’ of anassessee, deductions specified in Section 80C to Section 80U of the Actshall be allowed from his ‘gross total income’. Sub-section (2) of Section80A of the Act provides that the aggregate amount of the deductionsCunder Chapter VI-A shall not exceed the ‘gross total income’ of theAssessee. We are in agreement with the Appellate Authority that Section80AB of the Act which deals with determination of deductions underPart C of Chapter VI-A is with respect only to computation of deductionon the basis of ‘net income’.

D10. Sub-section (1) and sub-section (5) of Section 80-IA whichare relevant for these Appeals are as under:

“80-IA. Deductions in respect of profits and gains fromindustrial undertakings or enterprises engaged in—infrastructure development, etc.

E

(1) Where the gross total income of an assessee includes anyprofits and gains derived by an undertaking or an enterprisefrom any business referred to in sub-section (4) (such businessbeing hereinafter referred to as the eligible business), thereshall, in accordance with and subject to the provisions of thisFsection, be allowed, in computing the total income of theassessee, a deduction of an amount equal to hundred percent. of the profits and gains derived from such business forten consecutive assessment years.

* * * *

G

G(5) Notwithstanding anything contained in any other provisionof this Act, the profits and gains of an eligible business towhich the provisions of sub-section (1) apply shall, for thepurposes of determining the quantum of deduction under thatsub-section for the assessment year immediately succeedingthe initial assessment year or any subsequent assessment year,H

be computed as if such eligible business were the only sourceof income of the assessee during the previous year relevantto the initial assessment year and to every subsequentassessment year up to and including the assessment year forwhich the determination is to be made.”

11. The essential ingredients of Section 80-IA (1) of the Act are:

a)the ‘gross total income’ of an assessee should include profitsand gains; b)those profits and gains are derived by an undertaking or anenterprise from a business referred to in sub-section (4);

c)the assessee is entitled for deduction of an amount equal to100% of the profits and gains derived from such businessfor 10 consecutive assessment years; and d)in computing the ‘total income’ of the Assessee, suchdeduction shall be allowed.

12. The import of Section 80-IA is that the ‘total income’ of anassessee is computed by taking into account the allowable deduction ofthe profits and gains derived from the ‘eligible business’. With respect tothe facts of this Appeal, there is no dispute that the deduction quantifiedunder Section 80-IA is Rs.492,78,60,973/-. To make it clear, the saidamount represents the net profit made by the Assessee from the ‘eligiblebusiness’ covered under sub-section (4), i.e., from the Assessee’s businessunit involved in generation of power. The claim of the Assessee is that incomputing its ‘total income’, deductions available to it have to be set-offagainst the ‘gross total income’, while the Revenue contends that it isonly the ‘business income’ which has to be taken into account for thepurpose of setting-off the deductions under Sections 80-IA and 80-IB ofthe Act. To illustrate, the ‘gross total income’ of the Assessee for theassessment year 2002-03 is less than the quantum of deduction determinedunder Section 80-IA of the Act. The Assessee contends that incomefrom all other heads including ‘income from other sources’, in additionto ‘business income’, have to be taken into account for the purpose ofallowing the deductions available to the Assessee, subject to the ceilingof ‘gross total income’. The Appellate Authority was of the view thatthere is no limitation on deduction admissible under Section 80-IA of theAct to income under the head ‘business’ only, with which we agree.

A

B

C

D

E

F

G

H

A13. The other contention of the Revenue is that sub-section (5) ofSection 80-IA refers to computation of quantum of deduction being limitedfrom ‘eligible business’ by taking it as the only source of income. It iscontended that the language of sub-section (5) makes it clear thatdeduction contemplated in sub-section (1) is only with respect to theincome from ‘eligible business’ which indicates that there is a cap inBsub-section (1) that the deduction cannot exceed the ‘business income’.On the other hand, it is the case of the Assessee that sub-section (5)pertains only to determination of the quantum of deduction under sub-section (1) by treating the ‘eligible business’ as the only source of income.It was submitted by Mr. Vohra, learned Senior Counsel, that the finalCcomputation of deduction under Section 80-IA for the assessment year2002-03 as accepted by the Assessing Officer, was arrived at by takinginto account the profits from the ‘eligible business’ as the ‘only sourceof income’. He submitted that, however, sub-section (5) is a stepantecedent to the treatment to be given to the deduction under sub-section (1) and is not concerned with the extent to which the computedDdeduction be allowed. To explain the interplay between sub-section (5)and sub-section (1) of Section 80-IA, it will be useful to refer to thefacts of this Appeal. The amount of deduction from the ‘eligible business’computed under Section 80-IA for the assessment year 2002-03 isRs. 492,78,60,973 /-. There is no dispute that the said amount representsEincome from the ‘eligible business’ under Section 80-IA and is the onlysource of income for the purposes of computing deduction under Section80-IA. The question that arises further with reference to allowing thededuction so computed to arrive at the ‘total income’ of the Assesseecannot be determined by resorting to interpretation of sub-section (5).

F14. It will be useful to refer to the judgment of this Court reliedupon by the Revenue as well as the Assessee. In Synco Industries(supra), this Court was concerned with Section 80-I of the Act. Section80-I(6), which is in pari materia to Section 80-IA(5), is as follows:

“ 80-I(6) Notwithstanding anything contained in any otherGprovision of this Act, the profits and gains of an industrialundertaking or a ship or the business of a hotel or the businessof repairs to ocean-going vessels or other powered craft towhich the provisions of sub-section (1) apply shall, for thepurposes of determining the quantum of deduction under sub-section (1) for the assessment year immediately succeedingH

the initial assessment year or any subsequent assessment year,be computed as if such industrial undertaking or ship or thebusiness of the hotel or the business of repairs to ocean-goingvessels or other powered craft were the only source of incomeof the assessee during the previous years relevant to the initialassessment year and to every subsequent assessment year upto and including the assessment year for which thedetermination is to be made.”

It was held in Synco Industries (supra) that for the purpose ofcalculating the deduction under Section 80-I, loss sustained in otherdivisions or units cannot be taken into account as sub-section (6)contemplates that only profits from the industrial undertaking shall betaken into account as it was the only source of income. Further, theCourt concluded that Section 80-I(6) of the Act dealt with actualcomputation of deduction whereas Section 80-I(1) of the Act dealt withthe treatment to be given to such deductions in order to arrive at the totalincome of the assessee. The Assessee also relied on the judgment ofthis Court in Canara Workshops (P) Ltd., Kodialball, Mangalore(supra) to emphasize the purpose of sub-section (5) of Section 80-IA. Inthis case, the question that arose for consideration before this Courtrelated to computation of the profits for the purpose of deduction underSection 80-E, as it then existed, after setting off the loss incurred by theassessee in the manufacture of alloy steels. Section 80-E of the Act, asit then existed, permitted deductions in respect of profits and gainsattributable to the business of generation or distribution of electricity orany other form of power or of construction, manufacture or productionof any one or more of the articles or things specified in the list in theFifth Schedule. It was argued on behalf of the Revenue that the profitsfrom the automobile ancillaries industry of the assessee must be reducedby the loss suffered by the assessee in the manufacture of alloy steels.This Court was not in agreement with the submissions made by theRevenue. It was held that the profits and gains by an industry entitled tobenefit under Section 80-E cannot be reduced by the loss suffered byany other industry or industries owned by the assessee.

15. In the case before us, there is no discussion about Section 80-IA(5) by the Appellate Authority, nor the Tribunal and the High Court.However, we have considered the submissions on behalf of the Revenueas it has a bearing on the interpretation of sub-section (1) of Section 80- AB

C

D

E

F

G

H

AIA of the Act. We hold that the scope of sub-section (5) of Section 80-IA of the Act is limited to determination of quantum of deduction undersub-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 intoservice for reading a limitation of the deduction under sub-section (1)only to ‘business income’. An attempt was made by the learned SeniorBCounsel for the Revenue to rely on the phrase ‘derived … from’ inSection 80-IA (1) of the Act in respect of his submission that the intentionof the legislature was to give the narrowest possible construction todeduction admissible under this sub-section. It is not necessary for us todeal with this submission in view of the findings recorded above. For theCaforementioned reasons, the Appeal is dismissed qua the issue of theextent of deduction under Section 80-IA of the Act.

Civil Appeal No. 1327 of 2021, Civil Appeal No. 1329 of 2021,Civil Appeal No. 2537 of 2016, Civil Appeal No. 1408 of 2021 and CivilAppeal No. 1508 of 2021 are disposed of in terms of the above judgment.

DCivil Appeal No. 1509 of 2021 is de-tagged as the questions arisingtherein are not related to the aforementioned issue.

Devika Gujral

Appeals disposed of.

E

F

G

H