Whether when assessee has exercised option of choosing AY 2008-09 as initial AY for purpose of Sec 80-IA(2), losses from such AY alone are to be brought forward as per Sec 80IA(5) - YES: ITAT

THE issue before the Bench is - Whether when assessee has exercised option of choosing AY 2008-09 as initial AY for purpose of Sec 80-IA(2), losses from such AY alone are to be brought forward as per Sec 80IA(5). YES is the answer.

Facts of the case

The assessee is a company. It had put up a wind mill unit qualifying for deduction u/s 80IA. The said unit commenced production in AY 2006-07. As per option provided by Section 80IA (2) the assessee opted to claim deduction u/s 80IA (2) in relation to wind mill unit for ten consecutive AYs starting from AY 2008-09 and accordingly the assessee obtained and filed audit report for first time in AY 2008-09 in support of deduction u/s 80IA claimed in the Return of Income. Section 80IA(5) provided that profit of eligible unit shall be computed as if it was only source of income during previous year relevant to the initial AY and to every subsequent AY up to and including the AY for which the determination was to be made. Section 80IA (2) granted option to the assessee to claim deduction for any ten consecutive AYs out of fifteen years beginning from the year in which the unit generates power. Exercising option granted u/s 80IA(2), the assessee chose to claim deduction u/s 80IA from AY 2008-09. Once the option was exercised, the wind mill unit will be treated as if it was only source of income from year of exercise of option. Hence there does not arise any question of notionally bringing forward losses from earlier AY from of putting up of wind mill which had already been set off against business income. In A.Y. 2008-09 the assessee's claim for deduction u/s 80IA amounting to Rs. 38,30,569/- was allowed in respect of Wind Farm Division while framing assessment u/s 143(3) of the Act. Thereafter, the CIT initiated action u/s 263 wherein A.O. was directed to examine the assessee's claim of eligibility for deduction u/s 80IA(5) after reducing losses in the form of unabsorbed depreciation which had already been set off in earlier years against profit of ineligible units of assessee. In A.Y. 2009-10, the A.O. held that after set off of brought forward losses and depreciation in accordance with section 80IA(5), the eligible deduction works out to be "nil". As per the A.O., the assessee was not entitled to deduction u/s 80IA(5) till such time the unabsorbed losses & depreciation to the extent of Rs. 4,16,91,347/- was fully set off against the income of the eligible unit.

Having heard the matter, the Tribunal held that,

++ section 80IA(5) will operate only during the period of ten years of claim and only from the second year of the claim. The fiction in section 80IA(5) is limited to assuming that during the previous year relevant to the initial assessment year, the eligible business is the only source of income. The provision looks forward to a period of ten years from the initial assessment year (year of option). The fiction does not look backwards to the year beginning referred to in sub-section (2). Sub-section (2) of Section 80IA as substituted w.e.f. 1st April, 2000, gives an option to the assessee for choosing any 10 consecutive assessment years out of 15 years beginning from the year in which the undertaking of the enterprise develops and begins to operate for claiming the deduction. As per sub-section (5) of S. 80-IA, the quantum of deduction under S. 80-IA for the AY immediately succeeding the initial assessment year or any subsequent assessment year is to be computed as if the eligible business is the only source of income. Since the assessee has exercised the option of choosing the asst. yr. 2008-09 as initial assessment year as per sub-section (2) of S. 80-IA, only the losses of the years starting from that initial assessment year alone are to be brought forward as stipulated in S. 80-IA(5). Loss prior to the initial assessment year which has already been set off cannot be brought forward and adjusted in the initial assessment year as chosen by the assessee. It is only when the loss has been incurred in any year beginning from the initial assessment year, that the assessee has to adjust such loss in the subsequent assessment years and the profits have to be computed as if the eligible business is the only source of income and the deduction u/s. 80-IA is to be determined accordingly. This is the true import of section 80-IA(5);

++ therefore the losses of assessment year prior to the A.Y. 2008-09 which has already been set off against income of non-eligible unit could not be notionally carried forward in accordance with section 80IA for setting off against the income of eligible unit for the assessment years 2008-09 & 2009-10 under consideration. In view of the above, we do not find any merit in the action of the lower authorities for allowing the claim of deduction u/s 80IA by reducing the eligible profit by the amount of losses and depreciation pertaining to earlier year which has already been set off against the profit of non-eligible unit. As we have already decided the issue on merit in the A.Y. 2009-10, following the same reasoning, we do not find any merit in the action of CIT u/s 263 for directing the A.O. in the A.Y. 2008-09 to allow deduction u/s 80IA of the Act after reducing the loss and depreciation of earlier year which have already been set off against the profit of non-eligible unit. The other grounds raised in the appeals are not pressed before us, therefore, same are dismissed as not pressed. In the result, both the appeals of the assessee are allowed in part in terms indicated hereinabove.