2026 (1) TMI 990 - AT - Income Tax

Disallowance under 80IA and 14A: initial assessment year does not bar setting off notional losses; 14A limited to exempt income

Disallowance under the concept of initial assessment year was considered only for determining the duration of deduction and not as a basis to deny setting ... Disallowance u/s 80IA - concept of 'initial assessment year' - AO disallowed the deduction u/s 80IA on the concept of ‘initial Assessment Year’ as mentioned in Section 80IA(5) is only to determine the period of deduction available for a consequent period of 10/15/20 years - CIT(A) observed that the concept of 'Initial assessment year' and 'First year' is not relevant to the facts of the present case for the relevance to the issue of setting off of (notional) losses of earlier years with the profit of the eligible undertaking/business/enterprises. HELD THAT:- CIT(A) has considered the CBDT Circular 1/2016 dated 15.02.2016, which it does not address/comment on the issue of setting off of (notional) losses of eligible undertaking/business/enterprises. During the proceedings before the CIT(A), it was also contended by the Assessee that the notional carried forward losses since the year of commencement in eligible undertaking is not in accordance with the provisions of law as clarified by CBDT vide circular No.1/2016. CIT(A) while adjudicating the Appeal, considered the Judgment of Prabhu spinning Mills (P) Ltd [2016 (3) TMI 1309 - MADRAS HIGH COURT] wherein after considered the CBDT circular No.01/2016 and sub section (5) of Section 80-IA of the Act for understanding the definition of ‘initial assessment year’ which provides a choice to the assessee for deciding the year from which it desires to claim the deduction u/s 80-IA of the Act. In the absence of any contrary judicial precedents brought on record and in view of the above facts and circumstances, we find no merits in the Ground No. 1 to 3 of the Revenue. Disallowance u/s 14A r.w. Rule 8D - Limitation of exempt income - HELD THAT:- It is well settled law that disallowance u/s 14A of the Act cannot be more than the exempt income as held in the case of Joint Investment Private Limited Vs CIT [2015 (3) TMI 155 - DELHI HIGH COURT] and CIT Vs. Holcim India (P) Ltd [2014 (9) TMI 434 - DELHI HIGH COURT] Issues: (i) Whether the deletion of disallowance of deduction under section 80-IA (amounting to specified sums) was legally sustainable in view of the concept of 'initial assessment year' and set-off of notional/carry forward losses; (ii) Whether the deletion of disallowance under section 14A read with Rule 8D was legally sustainable where exempt income and investment characterization were in dispute.Issue (i): Deletion of disallowance of deduction claimed under section 80-IA in respect of eligible undertaking/profits, in light of section 80-IA(5), CBDT Circular No.1/2016 and prior judicial decisions.Analysis: The issue was examined with reference to the statutory concept of 'initial assessment year' under section 80-IA(5) and the effect of notional/carry forward losses on computation of eligible business profits. Consideration was given to CBDT Circular No.1/2016 and relevant High Court authority addressing the definition and choice of initial assessment year. The reasoning applied in a prior jurisdictional High Court decision in the assessee's own case was followed and the position that an assessee may choose the year from which to claim the deduction under section 80-IA was applied mutatis mutandis to the assessment years before the Tribunal.Conclusion: In favour of Assessee.Issue (ii): Deletion of disallowance under section 14A read with Rule 8D regarding expenditure in relation to exempt income and characterization of investments.Analysis: The issue was considered in light of settled principle that disallowance under section 14A cannot exceed the amount of exempt income and relevant precedents constraining computation under Rule 8D. The limitation on disallowance relative to exempt income was applied to the facts of the assessment year.Conclusion: In favour of Assessee.Final Conclusion: The appeals filed by the Revenue against the deletion of disallowances under section 80-IA and under section 14A read with Rule 8D are dismissed and the lower authority's grant of relief to the Assessee is upheld for the assessment years considered.Ratio Decidendi: Where an assessee is permitted by section 80-IA(5) to choose the initial assessment year for claiming deduction, notional or carried-forward losses from earlier years do not, as a matter of law, automatically negate the entitlement to deduction under section 80-IA; and disallowance under section 14A is limited by the quantum of exempt income.