Disallowance of set-off of unabsorbed depreciation and losses under Section 80IA(4)(iv) affirmed by Tribunal.

The Tribunal upheld the CIT(A)'s decision to delete the disallowance of Rs. 66,79,702/- under Section 80IA(4)(iv), affirming that unabsorbed depreciation and losses from earlier years, already set off against other income, cannot be notionally brought forward for set-off against the windmill's income in the current year. The appeal of the Revenue was dismissed, confirming the assessee's entitlement to the claimed deduction.

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Issues Involved:
1. Disallowance of deduction under Section 80IA(4)(iv) of the Income Tax Act.
2. Treatment of unabsorbed depreciation and brought forward losses in the context of Section 80IA(4).

Detailed Analysis:

1. Disallowance of Deduction under Section 80IA(4)(iv):
The core issue in this appeal is the disallowance of Rs. 66,79,702/- claimed by the assessee as a deduction under Section 80IA(4)(iv) of the Income Tax Act. The assessee, engaged in manufacturing and operating a windmill for power generation, filed its return declaring a total income of Rs. 4,68,723/- after claiming the deduction. The Assessing Officer (AO) disallowed this deduction on the grounds that the assessee had claimed heavy depreciation on the windmill, resulting in losses from the undertaking, and hence, it could not claim any deduction under Section 80IA(4). The AO noted that the assessee had unabsorbed depreciation and brought forward losses from the windmill's first three years of operation, which were set off against the profits of other businesses. The AO contended that under Section 80IA(4), such losses/unabsorbed depreciation could only be set off against the income generated from the windmill itself. Consequently, the AO disallowed the claim and added the same to the income of the assessee.

2. Treatment of Unabsorbed Depreciation and Brought Forward Losses:
The assessee appealed against the AO's decision, and the Commissioner of Income Tax (Appeals) [CIT(A)] deleted the disallowance, following the decision of his predecessor on a similar issue for the Assessment Year (AY) 2011-12. The Revenue then appealed to the Tribunal, arguing that the CIT(A) erred in deleting the addition. The Tribunal noted that the issue was similar to the one raised in AY 2010-11 and 2011-12, where the Tribunal had upheld the CIT(A)'s decision in favor of the assessee.

The Tribunal examined the dispute, which revolved around the AO's notional bringing forward of business losses and depreciation of earlier years to set off against the windmill's income. The assessee argued that under Section 80IA(5), if the depreciation and business losses had already been set off against other income before selecting the initial year for claiming the deduction under Section 80IA(iv), such unabsorbed depreciation should not be notionally brought forward and set off against the current year's income. The CIT(A) accepted this contention, relying on the Madras High Court's decision in Velayudhaswamy Spinning Mills (P) Ltd. vs. ACIT, which held that losses and depreciation of years prior to the initial assessment year, already absorbed against other business income, cannot be notionally brought forward for computing the deduction under Section 80IA.

The Tribunal concurred with this view, emphasizing that once the assessee has selected the initial year for claiming the deduction, only the unabsorbed depreciation and losses of that year and subsequent years could be carried forward for set-off against the income of those years. The AO's action of bringing forward depreciation from earlier years, already set off against regular income, was contrary to the legal principles established by the Madras High Court. The Tribunal found no error in the CIT(A)'s order and dismissed the Revenue's appeal.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to delete the disallowance of Rs. 66,79,702/- under Section 80IA(4)(iv), affirming that unabsorbed depreciation and losses from earlier years, already set off against other income, cannot be notionally brought forward for set-off against the windmill's income in the current year. The appeal of the Revenue was dismissed, confirming the assessee's entitlement to the claimed deduction.

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