2025 (8) TMI 949 - AT - Income Tax

Deduction under s.80IA(4)(iv) allowed as wind power is a separate undertaking with distinct accounts and tax audit support

ACIT-8 (3) (1), Mumbai Versus M/s. Thirumalai Chemicals Ltd.

ACIT-8 (3) (1), Mumbai Versus M/s. Thirumalai Chemicals Ltd. - TMI 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the generation and sale of wind power, undertaken by the assessee and accounted separately, constitutes a separate industrial undertaking eligible for deduction under section 80IA(4)(iv) of the Income Tax Act, or whether such income is merely incidental to the assessee's main business and therefore not qualifying. 1.2 Whether reliance on earlier Supreme Court decisions holding that income incidental to the main business is not eligible for deduction under section 80IA applies where the wind-power activity is shown as a separate profit centre with separate accounting and an express contract for sale of power. 1.3 Whether the Assessing Officer's adverse reliance on a tax-auditor entry (Form 3CEB/Tax Audit Report) stating that the undertaking 'does not transmit or distribute the power' or an apparent inadvertent auditor mistake can justify denial of deduction under section 80IA where the statutory conditions otherwise stand satisfied and the accounts treat the activity separately. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Eligibility of wind-power generation and sale as a separate industrial undertaking under section 80IA(4)(iv) Legal framework 2.1 Section 80IA(4)(iv) permits deduction for profits of specified undertakings engaged in power generation and supply, subject to statutory conditions (existence of an undertaking, profits relatable to that undertaking, and compliance with prescribed requirements including appropriate audit/reporting). Precedent Treatment (followed/distinguished/overruled) 2.2 The Court considered precedents cited by the AO (noted decisions holding that incidental income to main business is not relatable to an industrial undertaking for s.80IA purposes) but evaluated them against factual matrix; those precedents were distinguished on facts and therefore not followed as applicable. Interpretation and reasoning 2.3 The Tribunal examined the factual matrix: windmills were installed to generate power; a formal agreement existed for sale of power to the State Board at a stipulated per-unit price; income and expenditure pertaining to the wind-power activity were separately accounted in the financial statements; the tax-auditor's report listed 'Production, Collection and Distribution of electricity' as a business; profits from the wind-power activity were reflected as a distinct profit centre. The AO's sole basis for denial was characterization of the activity as 'incidental' to the main chemical/fertilizer business rather than any failure to satisfy statutory conditions of s.80IA(4)(iv). 2.4 On these facts the Tribunal concluded that the wind-power operations amounted to a separate industrial undertaking whose profits are directly relatable to that undertaking and thus fall within the scope of deduction under s.80IA(4)(iv). Ratio vs. Obiter 2.5 Ratio: Where an activity (power generation) is carried out as a discrete undertaking-evidenced by a separate contractual arrangement for sale, separate accounting of income and expenditure, auditor recognition of the activity as a business and treatment as a profit centre-the profits of that activity are directly relatable to the industrial undertaking and eligible for deduction under s.80IA(4)(iv); mere assertion that the activity is incidental is insufficient absent contrary factual or legal findings. Conclusions 2.6 The Tribunal affirmed the CIT(A)'s finding that the wind-power activity qualified as a separate undertaking under s.80IA(4)(iv) and directed deletion of the AO's disallowance; the Revenue's appeal was dismissed on this issue. Issue 2: Applicability of precedents on 'incidental' income to the present facts Legal framework 2.7 Precedents establish that for s.80IA deductions the income must be directly relatable to the industrial undertaking and not merely incidental to the assessee's main business; applicability of such precedents depends on factual similarity. Precedent Treatment (followed/distinguished/overruled) 2.8 The Tribunal distinguished the cited Supreme Court authorities because those cases involved facts where the income was incidental and lacked direct nexus to an identifiable industrial undertaking; by contrast, the present case had an independent undertaking with separate accounts and a direct contractual nexus for sale of power. Interpretation and reasoning 2.9 The Tribunal held that the AO's reliance on the authorities was misplaced because the fundamental factual premise in those authorities-absence of a separate undertaking or direct nexus-did not obtain here. The critical question is factual: whether the income is directly attributable to an identifiable industrial undertaking. Where accounting, contracts and auditor's report establish such identity, the 'incidental income' line of authority does not apply. Ratio vs. Obiter 2.10 Ratio: Precedential rules that incidental income is not eligible are inapplicable where the taxpayer demonstrates a separate undertaking with direct nexus between income and the undertaking (e.g., separate accounting, contractual sale arrangements, auditor recognition). This is the controlling principle applied to the facts. Conclusions 2.11 The Tribunal concluded the precedents cited by the AO did not govern the present facts and therefore could not support the denial of the s.80IA deduction. Issue 3: Effect of tax-auditor statement or apparent inadvertent auditor error on entitlement Legal framework 2.12 Statutory certification/audit reports are material but entitlement under s.80IA ultimately depends on satisfaction of statutory conditions and the factual matrix as reflected in the books, contracts and overall records. Precedent Treatment (followed/distinguished/overruled) 2.13 The Tribunal did not treat an auditor's inadvertent or erroneous statement as determinative where documentary evidence and accounting treatment support the existence of a qualifying undertaking. Interpretation and reasoning 2.14 The AO noted an auditor's remark that the undertaking 'does not transmit or distribute the power' in Form 3CEB; the assessee explained this as possibly inadvertent, produced invoices for sale of power, and demonstrated separate accounting. The Tribunal found no adverse finding that statutory preconditions for s.80IA were otherwise violated; consequently the auditor's apparent slip could not negate the established separate undertaking and direct nexus. Ratio vs. Obiter 2.15 Ratio: An auditor's contrary or inadvertent remark in tax audit documents cannot defeat entitlement to deduction under s.80IA where contemporaneous contracts, separate accounting and other documentation establish that statutory conditions are met and the activity operates as a distinct industrial undertaking. Conclusions 2.16 The Tribunal held the AO's adverse reliance on the auditor's statement was unfounded in the circumstances and reaffirmed allowance of the deduction. Cross-references 3.1 Issue 1 and Issue 2 are interrelated: factual demonstration of a separate undertaking (Issue 1) is the determinative factor that renders the 'incidental income' precedents inapplicable (Issue 2). Issue 3 is subordinate, addressing weight to be accorded to auditor statements where other evidence supports the separate undertaking finding.