2020 (3) TMI 234 - HC - Income Tax

Court rules Section 79 losses can't be carried forward for Section 80IA deduction.

The Court held that the Assessing Officer, CIT(Appeals), and the Tribunal were not justified in applying Section 80IA(5) to ignore the provisions of ... Carry forward and set off of losses - change in shareholding (operation of section 79) - deduction under Chapter VIA - section 80IA - non obstante clause and statutory override - gross total income computation before Chapter VIA deductions - standalone computation of profits of eligible business under section 80IA(5)Change in shareholding (operation of section 79) - deduction under Chapter VIA - section 80IA - non obstante clause and statutory override - gross total income computation before Chapter VIA deductions - Whether losses lapsed under section 79 can be ignored when computing the quantum of deduction under section 80IA read with section 80IA(5). - HELD THAT: - The Court held that computation of 'gross total income' must first give effect to carry forward and set off provisions under Chapter VI; losses that have lapsed by operation of section 79 cannot be notionally revived for computing the deduction under section 80IA. Section 80IA(5) requires that profits of the eligible business be computed on a standalone basis for determining the quantum of deduction, but it does not permit ignoring losses already rendered non operative by section 79. The scheme of the Act contemplates computing gross total income (after applying Chapter VI) and only then allowing Chapter VIA deductions; permitting section 80IA(5) to override section 79 would subvert that scheme and enable revival of losses which have already lapsed. Consequently the authorities below erred in applying section 80IA(5) so as to negate the effect of section 79. [Paras 9, 10, 11, 12, 22]Losses lapsed by operation of section 79 cannot be disregarded by invoking section 80IA(5); the claim for deduction under section 80IA must give effect to section 79 and the deductions allowed by the authorities were set aside.Deduction under Chapter VIA - section 80IA - standalone computation of profits of eligible business under section 80IA(5) - Whether assessment year 2005-2006 was the initial assessment year for exercise of option under section 80IA(2) (and consequence of Circular No.1/2016). - HELD THAT: - The Court recorded that the assessee had opted to treat assessment year 2005-2006 as the first year in the block of ten consecutive years for claiming deduction under section 80IA(1), and that this fact was not disputed by the Assessing Officer. Accordingly Circular No.1/2016, clarifying the concept of 'initial assessment year', is applicable on the facts, but that factual finding does not override the legal conclusion on the applicability of section 79. [Paras 9]Assessment year 2005-2006 was treated as the initial assessment year for the block of ten years; the circular is applicable, but this does not permit ignoring losses lapsed under section 79.Final Conclusion: Appeals allowed; impugned Tribunal orders quashed and set aside. The substantial question answered in favour of the assessee: losses which have lapsed by operation of section 79 cannot be notionally carried forward or ignored under section 80IA(5) for computing the deduction under section 80IA. Issues Involved:1. Applicability of Section 79 of the Income Tax Act, 1961 for calculating deduction under Section 80IA.2. Interpretation of Section 80IA(5) in relation to Section 79.3. Determination of 'initial assessment year' for the purpose of Section 80IA.4. Computation of gross total income and its impact on deductions under Chapter VIA.Issue-wise Detailed Analysis:1. Applicability of Section 79 for Calculating Deduction under Section 80IA:The core issue was whether the Income Tax Appellate Tribunal (ITAT) was justified in holding that the appellant was not entitled to deduction under Section 80IA due to the non-applicability of Section 79 for calculating such deduction. The appellant, a telecommunication service provider, had a change in shareholding in the previous years, leading to the application of Section 79, which resulted in the lapse of accumulated losses from assessment years 1997-1998 to 2001-2002.2. Interpretation of Section 80IA(5) in Relation to Section 79:The Tribunal held that the unabsorbed losses and depreciation from earlier years must be considered for determining the quantum of deduction under Section 80IA(1), even if these losses were set off against profits from other sources. The Tribunal's interpretation was based on the non obstante clause in Section 80IA(5), which overrides other provisions, including Section 79. The Tribunal relied on precedents like ACIT v. Goldmines Shares and Finance Pvt. Ltd., IPCA Laboratories Ltd. v. DCIT, and Additional CIT v. Ashok Alco Chem Limited.3. Determination of 'Initial Assessment Year' for Section 80IA:The appellant argued that the initial assessment year for claiming deduction under Section 80IA was 2005-2006, as clarified by the Central Board of Direct Taxes (CBDT) Circular No. 1/2016. The Tribunal, however, did not accept this argument, leading to the appellant's contention that losses prior to 2001-2002 should not be considered for deduction computation.4. Computation of Gross Total Income and Impact on Deductions:The Revenue argued that the non obstante clause of Section 80IA(5) overrides Section 79, and hence, two separate calculations of profit and gains are necessary: one for aggregate total income under Chapter VI and another for computing deductions under Chapter VIA. The Revenue relied on decisions like Synco Industries Ltd. v. Assessing Officer, IPCA Laboratories Limited, and others to support their argument.Analysis:Applicability of Section 79:The Court analyzed the provisions of the Income Tax Act, including Sections 2(45), 66, 72, 79, 80A, 80AB, 80B(5), and 80IA. It concluded that Section 79, which deals with the carry forward and set off of losses in case of a change in shareholding, starts with a non obstante clause, indicating its overriding effect within Chapter VI.Interpretation of Section 80IA(5):The Court noted that Section 80IA(5) requires computation of profits and gains of eligible business on a standalone basis, ignoring other provisions of the Act. However, it does not explicitly state that losses lapsed under Section 79 should be considered again for deduction purposes.Determination of Initial Assessment Year:The Court accepted the appellant's argument that the initial assessment year was 2005-2006, as per CBDT Circular No. 1/2016, and therefore, the losses prior to 2001-2002 should not be considered for deduction computation.Computation of Gross Total Income:The Court found that the Revenue's interpretation of separate calculations for total income and deductions was contrary to the legislative intent. It emphasized that the gross total income should be computed after setting off carry forward losses, and if the resultant income is positive, deductions under Chapter VIA can be claimed.Conclusion:The Court held that the Assessing Officer, CIT(Appeals), and the Tribunal were not justified in applying Section 80IA(5) to ignore the provisions of Section 79. The losses that had already lapsed under Section 79 should not be notionally carried forward for computing the quantum of deduction under Section 80IA(1). The appeals were allowed, and the impugned orders of the Tribunal were set aside. The substantial question was answered in favor of the assessee and against the Revenue.