Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
Civil Appeal No. 1327 of 2021
Commissioner of Income Tax-I .... Appellant(s)
Versus
M/s. Reliance Energy Ltd.
(Formerly BSES Ltd.) through its M.D. ….Respondent (s)
W I T H
Civil Appeal No. 1328 of 2021
Civil Appeal No. 1329 of 2021
Civil Appeal No. 2537 of 2016
Civil Appeal No. 1408 of 2021
Civil Appeal No. 1508 of 2021
Civil Appeal No. 1509 of 2021
J U D G M E N T
L. NAGESWARA RAO, J.
For the sake of convenience, we are referring to the
facts of Civil Appeal No.1328 of 2021.
Civil Appeal No. 1328 of 2021
1. By an order of assessment dated 31.01.2005, the
Assessing Officer restricted the eligible deduction under
Section 80-IA of the Income Tax 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 filed by the
Assessee and reversed the order of the Assessing Officer on
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the issue of the extent of deduction under Section 80-IA of
the Act. The Income Tax Appellate Tribunal (hereinafter “the
Tribunal”), upheld the decision of the Appellate Authority on
the issue of deduction under Section 80-IA. The High Court
refused to interfere with the Tribunal’s order as far 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 which the income-tax return was filed by the Assessee on
31.10.2002 declaring the total income as ‘NIL’. The return
was subsequently revised on 06.12.2002 and thereafter, on
30.03.2004. At the time of the assessment proceedings, the
Assessee submitted a revised computation of income by
revising its claim of deduction under Section 80-IA of the Act.
3. The Assessee is in the business of generation of power
and also deals with purchase and distribution of power. The
Assessee-Company generated power from its power unit
located at Dahanu. In respect of deduction under Section 80-
IA of the Act, the Assessee was asked to explain as to why
the deduction should not be restricted to business income, as
had been the stand of the Revenue for the assessment year
2000-01. The Assessee had revised its claim under Section
80-IA of the Act to Rs. 546,26,01,224/-, having admitted that
there was an error in calculation of income-tax depreciation.
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The Assessing Officer considered the revised claim of the
Assessee under Section 80-IA and determined 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 the actual deduction allowable
shall be to the extent of ‘income from business’ as per
provisions of Section 80AB of the Act. The ‘business income’
of the Assessee was computed at Rs. 355,74,73,451/- and
the ‘gross total income’ 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 claimed under Chapter VIA of the Act against such ‘gross total income’ was not
accepted by the Assessing Officer. The Assessing Officer
rejected the claim of the Assessee for allowing deduction
under Section 80-IA of the Act, along with other deductions
available to the Assessee, to the extent of ‘gross total
income’ and restricted the deduction allowed under Section
80-IA at Rs.354,00,75,084/-, by limiting the aggregate of
deductions under Sections 80-IA and 80-IB of the Act to
‘business income’ of the Assessee.
4. The Assessing Officer rejected the contention of the
Assessee that Section 80AB of the Act is not applicable. It
was held that Section 80AB of the Act makes it clear that for
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the purposes of deduction in respect of certain incomes,
deduction had to be given on the income of the nature
specified in the relevant section and allowed against income
of that nature alone. The Assessing Officer elaborated on this
point by stating that ‘income from business’ alone had to be
considered for allowing any deduction computed on ‘income
from business’ and using the same analogy, deduction
computed on ‘income from other sources’ should be
allowable against ‘income from other sources’ only. As the
deduction under Section 80-IA of the Act pertains to profits
and gains from a business undertaking, the deduction is
allowable only against ‘income from business’. It was held by
the Assessing Officer that deduction computed under Section
80-IA of the Act could not be allowed against any source
other than business. The Assessing Officer also relied upon
the words ‘that nature’ and ‘shall alone’ in Section 80AB of
the Act to hold that deduction under a relevant section has to
be given to the extent of the income from that particular
source only on which deduction is available. In the matter
before us, this would mean that deduction under Section 80-
IA of the Act has to be allowed only to the extent of ‘income
from business’.
5. It was argued by the Assessee before the Appellate
Authority that the conclusion of the Assessing Officer on
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deduction under Section 80-IA of the Act being restricted to
‘business income’ needs to be set aside. The Assessee
contended that the observation of the Assessing Officer that
deduction under a particular section is permissible only
against income under that particular head was erroneous.
Deductions related to various incomes under various sections
of Chapter VI-A have to be quantified in accordance with the
respective sections. The Assessee urged before the
Appellate Authority that the deductions so quantified under
various sections under Chapter VI-A have to be aggregated
and allowed against the ‘gross total income’. Finally, the
submission of the Assessee before the Appellate Authority
was that restricting the deduction under Section 80-IA of the
Act to the extent of ‘business income’ was unjustified. With
reference to Section 80AB, the Assessee contended that the
operation of the said section related only to quantification of
deduction on the basis of net income.
6. The Appellate Authority partly allowed the Appeal filed
by the Assessee by an order dated 23.03.2006 and reversed
the finding of the Assessing Officer on the issue of deduction
under Section 80-IA of the Act for the reasons stated
hereinafter. In respect of Section 80AB of the Act, the
Appellate Authority referred to the background of insertion of
the said section with effect from 01.04.1981. The Appellate
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Authority referred to Circular No. 281 dated 22.09.1980 of
the Central Board of Direct Taxes (CBDT) wherein the reason
for introduction of Section 80AB was explained. The
Supreme Court in the case of Cloth Traders (P) Ltd. v.
Additional CIT, Gujarat-I
1
held that deduction under
Section 80M of the Act, which deals with deduction in respect
of certain inter-corporate dividends, was allowable on the
gross amount of the dividends received. It was decided to
undo the decision of this Court as it was contrary to the
legislative intent, which was that deduction under Section
80M was to be allowed on the dividend income as computed
under the Act, i.e., on the net income after deduction of
admissible expenses. The Appellate Authority proceeded to
hold that Section 80AB places a ceiling on the quantum of
deductions in respect of incomes contained in Part-C of
Chapter VI-A. Such deductions are to be computed on the
net eligible income, which will be deemed to be included in
the gross total income. The Appellate Authority observed
that Section 80AB is limited to determining the quantum of
deductible income included in the gross total income.
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,
1 (1979) 3 SCC 538
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Mumbai (ITA No. 770/MUM/98), the Appellate Authority set
aside the order of the Assessing Officer on this count. The
Appellate Authority directed the Assessing Officer not to
restrict the deduction admissible under Section 80-IA of the
Act to income under the head ‘business’. The Assessing
Officer was further directed to aggregate the deduction
under Section 80-IA of the Act with the other deductions
available to the Assessee and then to allow deductions of
such aggregate amount to the extent of ‘gross total income’.
The order of the Appellate Authority was affirmed by the
Tribunal and the High Court on this issue. Aggrieved thereby,
the Revenue has come in Appeal.
7. The contention on behalf of the Revenue before us is
that the Assessing Officer was right in holding that the
deduction under Section 80-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 in respect
of incomes against income of the nature specified in the
relevant section. He further submitted that Section 80-IA(5)
makes it clear that the determination of quantum of
deduction under sub-section (1) of Section 80-IA should be
on the basis that the source of income from the eligible
business was the only source of income of an assessee and
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therefore, the deduction so determined should be allowed
only against ‘business income’. According to him, the phrase
‘derived … from’ in sub-section (1) of Section 80-IA of the Act
indicates that the computation of deduction is restricted only
to the profits and gains from the eligible business. He relied
upon the judgment of this Court in Cambay Electric Supply
Industrial Co. Ltd. v. CIT
2
, followed in Synco Industries
Ltd. v. Assessing Officer, Income Tax, Mumbai & Anr.
3
and Pandian Chemicals Ltd. v. Commissioner of Income
Tax, Madurai
4
.
8. In response, the Assessee supported the order passed
by the Appellate Authority which was upheld by the Tribunal
and the High Court. It is the argument of Mr. Ajay Vohra,
learned Senior Counsel appearing on behalf of the Assessee,
that Section 80AB of the Act is with reference to computation
of deduction on the basis of net income. He submitted that
there is no indication in sub-section (5) of Section 80-IA that
the deduction under sub-section (1) is restricted to ‘business
income’ only. On the other hand, according to him, subsection (5) deals with determination of the quantum of
deduction by treating eligible business as the only source of
income of the Assessee. Sub-section (5), therefore, is
2 (1978) 2 SCC 644
3 (2008) 4 SCC 22
4 (2003) 5 SCC 590
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concerned with computation of the deduction, which is at a
stage prior to allowing the deduction so computed. He
submitted that there is no dispute that the computation of
deduction is only from the eligible business. The claim of the
Assessee, as accepted by the Appellate Authority, is that
there is no restriction on taking into account income from
any other source while allowing the deduction computed
under Section 80-IA, subject to the aggregate of all
deductions under Chapter VI-A not exceeding the ‘gross total
income’. He relied upon judgments of this Court in CIT
(Central), Madras v. Canara Workshops (P) Ltd.,
Kodialball, Mangalore
5
and Synco Industries (supra) to
argue that sub-section (5) of Section 80-IA of the Act does
not restrict permissible deduction under sub-section (1) to be
allowed against ‘business income’ only. The learned Senior
Counsel for the Assessee relied upon the judgment of the
Bombay High Court in Commissioner of Income-tax v.
Tridoss Laboratories Ltd.
6
to argue that the Appeal should
not be allowed.
9. The controversy in this case pertains to the deduction
under Section 80-IA of the Act being allowed to the extent of
‘business income’ only. The claim of the Assessee that
deduction under Section 80-IA should be allowed to the
5 (1986) 3 SCC 538
6 [2010] 328 ITR 448 (Bombay)
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extent of ‘gross total income’ was rejected by the Assessing
Officer. It is relevant to reproduce Section 80AB of the Act
which is as follows:
“80AB. Deductions to be made with reference to
the income included in the gross total income. —
Where any deduction is required to be made or
allowed under any section included in this Chapter
under the heading “C. — Deductions in respect of
certain incomes” in respect of any income of the
nature specified in that section which is included in the
gross total income of the assessee, then,
notwithstanding anything contained in that section, for
the purpose of computing the deduction under that
section, the amount of income of that nature as
computed in accordance with the provisions of this Act
(before making any deduction under this Chapter)
shall alone be deemed to be the amount of income of
that nature which is derived or received by the
assessee and which is included in his gross total
income.”
As stated above, Section 80AB was inserted in the year
1981 to get 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 the reason for introduction of
Section 80AB of the Act was for the deductions under Part C
of Chapter VI-A of the Act to be made on the net income of
the eligible business and not on the total profits from the
eligible business. A plain reading of Section 80AB of the Act
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shows that the provision pertains to determination of the
quantum of deductible income in the ‘gross total income’.
Section 80AB cannot be read to be curtailing the width of
Section 80-IA. It is relevant to take note of Section 80A(1)
which stipulates that in computation of the ‘total income’ of
an assessee, deductions specified in Section 80C to Section
80U of the Act shall be allowed from his ‘gross total income’.
Sub-section (2) of Section 80A of the Act provides that the
aggregate amount of the deductions under Chapter VI-A shall
not exceed the ‘gross total income’ of the Assessee. We are
in agreement with the Appellate Authority that Section 80AB
of the Act which deals with determination of deductions
under Part C of Chapter VI-A is with respect only to
computation of deduction on the basis of ‘net income’.
10. Sub-section (1) and sub-section (5) of Section 80-IA
which are relevant for these Appeals are as under:
“80-IA. Deductions in respect of profits and
gains from industrial undertakings or
enterprises engaged in infrastructure
development, etc.—
(1) Where the gross total income of an assessee
includes any profits and gains derived by an
undertaking or an enterprise from any business
referred to in sub-section (4) (such business being
hereinafter referred to as the eligible business),
there shall, in accordance with and subject to the
provisions of this section, be allowed, in computing
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the total income of the assessee, a deduction of an
amount equal to hundred per cent. of the profits and
gains derived from such business for ten
consecutive assessment years.
* * * *
(5) Notwithstanding anything contained in any other
provision of this Act, the profits and gains of an
eligible business to which the provisions of subsection (1) apply shall, for the purposes of
determining the quantum of deduction under that
sub-section for the assessment year immediately
succeeding the initial assessment year or any
subsequent assessment year, be computed as if
such eligible business were the only source of
income of the assessee during the previous year
relevant to the initial assessment year and to every
subsequent assessment year up to and including the
assessment year for which 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
profits and gains;
b) those profits and gains are derived by an undertaking
or an enterprise from a business referred to in subsection (4);
c) the assessee is entitled for deduction of an amount
equal to 100% of the profits and gains derived from such
business for 10 consecutive assessment years; and
d) in computing the ‘total income’ of the Assessee, such
deduction shall be allowed.
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12. The import of Section 80-IA is that the ‘total income’ of
an assessee is computed by taking into account the
allowable deduction of the profits and gains derived from the
‘eligible business’. With respect to the facts of this Appeal,
there is no dispute that the deduction quantified under
Section 80-IA is Rs.492,78,60,973/-. To make it clear, the
said amount represents the net profit made by the Assessee
from the ‘eligible business’ covered under sub-section (4),
i.e., from the Assessee’s business unit involved in generation
of power. The claim of the Assessee is that in computing its
‘total income’, deductions available to it have to be set-off
against the ‘gross total income’, while the Revenue contends
that it is only the ‘business income’ which has to be taken
into account for the purpose of setting-off the deductions
under Sections 80-IA and 80-IB of the Act. To illustrate, the
‘gross total income’ of the Assessee for the assessment year
2002-03 is less than the quantum of deduction determined
under Section 80-IA of the Act. The Assessee contends that
income from all other heads including ‘income from other
sources’, in addition to ‘business income’, have to be taken
into account for the purpose of allowing the deductions
available to the Assessee, subject to the ceiling of ‘gross
total income’. The Appellate Authority was of the view that
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there is no limitation on deduction admissible under Section
80-IA of the Act to income under the head ‘business’ only,
with which we agree.
13. The other contention of the Revenue is that sub-section
(5) of Section 80-IA refers to computation of quantum of
deduction being limited from ‘eligible business’ by taking it
as the only source of income. It is contended that the
language of sub-section (5) makes it clear that deduction
contemplated in sub-section (1) is only with respect to the
income from ‘eligible business’ which indicates that there is a
cap in sub-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 final computation of deduction under Section 80-IA for
the assessment year 2002-03 as accepted by the Assessing
Officer, was arrived at by taking into account the profits from
the ‘eligible business’ as the ‘only source of income’. He
submitted that, however, sub-section (5) is a step antecedent
to the treatment to be given to the deduction under subsection (1) and is not concerned with the extent to which the
computed deduction be allowed. To explain the interplay
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between sub-section (5) and sub-section (1) of Section 80-IA,
it will be useful to refer to the facts of this Appeal. The
amount of deduction from the ‘eligible business’ computed
under Section 80-IA for the assessment year 2002-03 is Rs.
492,78,60,973 /-. There is no dispute that the said amount
represents income from the ‘eligible business’ under Section
80-IA and is the only source of income for the purposes of
computing deduction under Section 80-IA. The question that
arises further with reference to allowing the deduction so
computed to arrive at the ‘total income’ of the Assessee
cannot be determined by resorting to interpretation of subsection (5).
14. It will be useful to refer to the judgment of this Court
relied upon by the Revenue as well as the Assessee. In
Synco Industries (supra), this Court was concerned with
Section 80-I of the Act. Section 80-I(6), which is in pari
materia to Section 80-IA(5), is as follows:
“ 80-I(6) Notwithstanding anything contained in any
other provision of this Act, the profits and gains of an
industrial undertaking or a ship or the business of a
hotel or the business of repairs to ocean-going
vessels or other powered craft to which the provisions
of sub-section (1) apply shall, for the purposes of
determining the quantum of deduction under subsection (1) for the assessment year immediately
succeeding the initial assessment year or any
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subsequent assessment year, be computed as if such
industrial undertaking or ship or the business of the
hotel or the business of repairs to ocean-going
vessels or other powered craft were the only source
of income of the assessee during the previous years
relevant to the initial assessment year and to every
subsequent assessment year up to and including the
assessment year for which the determination is to be
made.”
It was held in Synco Industries (supra) that for the
purpose of calculating the deduction under Section 80-I, loss
sustained in other divisions or units cannot be taken into
account as sub-section (6) contemplates that only profits
from the industrial undertaking shall be taken into account as
it was the only source of income. Further, the Court
concluded that Section 80-I(6) of the Act dealt with actual
computation of deduction whereas Section 80-I(1) of the Act
dealt with the treatment to be given to such deductions in
order to arrive at the total income of the assessee. The
Assessee also relied on the judgment of this Court in Canara
Workshops (P) Ltd., Kodialball, Mangalore (supra) to
emphasize the purpose of sub-section (5) of Section 80-IA. In
this case, the question that arose for consideration before
this Court related to computation of the profits for the
purpose of deduction under Section 80-E, as it then existed,
after setting off the loss incurred by the assessee in the
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manufacture of alloy steels. Section 80-E of the Act, as it
then existed, permitted deductions in respect of profits and
gains attributable to the business of generation or
distribution of electricity or any other form of power or of
construction, manufacture or production of any one or more
of the articles or things specified in the list in the Fifth
Schedule. It was argued on behalf of the Revenue that the
profits from the automobile ancillaries industry of the
assessee must be reduced by the loss suffered by the
assessee in the manufacture of alloy steels. This Court was
not in agreement with the submissions made by the
Revenue. It was held that the profits and gains by an
industry entitled to benefit under Section 80-E cannot be
reduced by the loss suffered by any 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 Revenue as it has a bearing on
the interpretation of sub-section (1) of Section 80-IA 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 under sub-section (1) of Section 80-IA of the Act by
treating ‘eligible business’ as the ‘only source of income’.
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Sub-section (5) cannot be pressed into service for reading a
limitation of the deduction under sub-section (1) only to
‘business income’. An attempt was made by the learned
Senior Counsel for the Revenue to rely on the phrase
‘derived … from’ in Section 80-IA (1) of the Act in respect of
his submission that the intention of the legislature was to
give the narrowest possible construction to deduction
admissible under this sub-section. It is not necessary for us
to deal with this submission in view of the findings recorded
above. For the aforementioned reasons, the Appeal is
dismissed qua the issue of the extent 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 Civil Appeal No. 1508 of 2021 are disposed of in
terms of the above judgment.
Civil Appeal No. 1509 of 2021 is de-tagged as the
questions arising therein are not related to the
aforementioned issue.
.....................................J.
[ L. NAGESWARA RAO ]
.....................................J.
[ VINEET SARAN ]
New Delhi,
April 28th 2021.
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