Supreme Court clarifies scope of deduction under Section 80-IA of the Income Tax Act in power generation business: Commissioner of Income Tax vs. Reliance Energy Ltd. (28 April 2021)

Date of the Judgment: 28 April 2021
Citation: 2021 INSC 243
Judges: L. Nageswara Rao, J. and Vineet Saran, J.
Can deductions under Section 80-IA of the Income Tax Act be limited to ‘business income’, or can they be set off against the ‘gross total income’? The Supreme Court of India recently addressed this crucial question in a case involving a power generation company. The court clarified that deductions under Section 80-IA, which pertain to profits from eligible businesses, are not limited to ‘business income’ alone but can be claimed against the ‘gross total income’, thereby impacting how businesses calculate their tax liabilities. This judgment was delivered by a two-judge bench comprising Justice L. Nageswara Rao and Justice Vineet Saran.

Case Background

The case revolves around M/s. Reliance Energy Ltd. (formerly BSES Ltd.), an assessee engaged in the generation, purchase, and distribution of power. The company generated power from its unit in Dahanu. For the assessment year 2002-03, the assessee initially filed a return declaring ‘NIL’ income, which was later revised multiple times. During assessment proceedings, the assessee claimed a deduction of Rs. 546,26,01,224 under Section 80-IA of the Income Tax Act, 1961, after admitting an error in the calculation of income-tax depreciation.

The Assessing Officer (AO) limited the deduction under Section 80-IA to the extent of ‘business income,’ which was computed at Rs. 355,74,73,451, while the ‘gross total income’ was Rs. 397,37,70,178. The AO rejected the assessee’s claim that deductions under Chapter VI-A of the Act could be claimed against the ‘gross total income’, restricting the deduction under Section 80-IA to Rs. 354,00,75,084. The AO’s decision was based on Section 80AB of the Act, which, according to the AO, stipulates that deductions should be allowed only against income of the same nature.

The assessee appealed against this decision, arguing that deductions under Chapter VI-A should be aggregated and allowed against the ‘gross total income’. The assessee contended that Section 80AB only relates to the quantification of deduction based on net income, not the overall limit of deduction.

Timeline

Course of Proceedings

The Assessing Officer (AO) initially restricted the deduction under Section 80-IA of the Income Tax Act to the extent of ‘business income’ only. The Commissioner of Income-Tax (Appeals) partly allowed the appeal filed by the assessee, reversing the AO’s order on the extent of deduction under Section 80-IA. The Income Tax Appellate Tribunal (Tribunal) upheld the decision of the Appellate Authority. The High Court refused to interfere with the Tribunal’s order regarding the deduction under Section 80-IA. The Revenue then appealed to the Supreme Court.

Legal Framework

The key legal provisions at play in this case are:

• Section 80-IA of the Income Tax Act, 1961: This section provides deductions for profits and gains from industrial undertakings or enterprises engaged in infrastructure development. Sub-section (1) allows a deduction of 100% of the profits and gains derived from such businesses for ten consecutive assessment years. Sub-section (5) states that the profits and gains of an eligible business shall be computed as if such eligible business were the only source of income of the assessee.
  “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 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.”
  “Notwithstanding anything contained in any other provision of this Act, the profits and gains of an eligible business to which the provisions of sub-section (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.”
• Section 80AB of the Income Tax Act, 1961: This section specifies that deductions under Chapter VI-A should be made with reference to the income included in the gross total income. It was introduced to ensure that deductions are computed on net income after admissible expenses, not gross 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.”
• Section 80A of the Income Tax Act, 1961: This section states that deductions specified in Sections 80C to 80U shall be allowed from the ‘gross total income’ of the assessee. It also stipulates that the aggregate amount of deductions under Chapter VI-A shall not exceed the ‘gross total income’ of the assessee.

Arguments

The Revenue argued that:

• Section 80AB of the Income Tax Act mandates that deductions should be allowed only against income of the nature specified in the relevant section.
• Section 80-IA(5) of the Income Tax Act clarifies that the deduction under sub-section (1) should be determined as if the eligible business were the only source of income. Therefore, the deduction should be limited to ‘business income’.
• The phrase ‘derived … from’ in Section 80-IA (1) of the Act indicates that the computation of deduction is restricted only to the profits and gains from the eligible business.
• The Assessing Officer was correct in restricting the deduction under Section 80-IA to ‘business income’.

The Assessee contended that:

• Section 80AB of the Income Tax Act pertains only to the computation of deduction on the basis of net income and does not restrict the deduction to ‘business income’ only.
• Section 80-IA(5) of the Income Tax Act deals only with the determination of the quantum of deduction by treating the eligible business as the only source of income, and not with the extent to which the deduction can be allowed.
• Deductions under Chapter VI-A should be allowed against the ‘gross total income’, subject to the aggregate of all deductions not exceeding the ‘gross total income’.
• There is no restriction on taking into account income from any other source while allowing the deduction computed under Section 80-IA.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

• Whether the deduction under Section 80-IA of the Income Tax Act should be restricted to the extent of ‘business income’ only, or whether it can be allowed against the ‘gross total income’.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

• Cloth Traders (P) Ltd. v. Additional CIT, Gujarat-I [1979] 3 SCC 538: This case was related to Section 80M of the Act, which deals with inter-corporate dividends. The court held that deduction under Section 80M was allowable on the gross amount of dividends received. This decision was later addressed by the insertion of Section 80AB.
• Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 2 SCC 644: This case was cited by the Revenue to support their argument that deduction should be restricted to business income.
• Synco Industries Ltd. v. Assessing Officer, Income Tax, Mumbai & Anr. [2008] 4 SCC 22: This case was cited by both parties. The Court held that Section 80-I(6), which is similar to Section 80-IA(5), deals with the actual computation of deduction, whereas Section 80-I(1) deals with the treatment of such deductions.
• Pandian Chemicals Ltd. v. Commissioner of Income Tax, Madurai [2003] 5 SCC 590: This case was cited by the Revenue to argue for restricting deduction to business income.
• CIT (Central), Madras v. Canara Workshops (P) Ltd., Kodialball, Mangalore [1986] 3 SCC 538: This case was cited by the Assessee to emphasize the purpose of Section 80-IA(5). The Court held that profits from an industry entitled to benefit under Section 80-E cannot be reduced by the loss suffered by any other industry owned by the assessee.
• Commissioner of Income-tax v. Tridoss Laboratories Ltd. [2010] 328 ITR 448 (Bombay): This case was cited by the Assessee to argue against restricting the deduction to business income.

The Court also considered the following provisions of the Income Tax Act, 1961:

• Section 80-IA: Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development.
• Section 80AB: Deductions to be made with reference to the income included in the gross total income.
• Section 80A: General provisions related to deductions under Chapter VI-A.

Judgment

How each authority was viewed by the Court?

• Cloth Traders (P) Ltd. v. Additional CIT, Gujarat-I [1979] 3 SCC 538: The Court noted that Section 80AB was introduced to negate the effect of this judgment.
• Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 2 SCC 644: The Court did not follow this judgment as it was not in line with the current interpretation.
• Synco Industries Ltd. v. Assessing Officer, Income Tax, Mumbai & Anr. [2008] 4 SCC 22: The Court relied on this judgment to differentiate between computation of deduction and treatment of deduction.
• Pandian Chemicals Ltd. v. Commissioner of Income Tax, Madurai [2003] 5 SCC 590: The Court did not follow this judgment.
• CIT (Central), Madras v. Canara Workshops (P) Ltd., Kodialball, Mangalore [1986] 3 SCC 538: The Court followed this judgment to emphasize the purpose of sub-section (5) of Section 80-IA.
• Commissioner of Income-tax v. Tridoss Laboratories Ltd. [2010] 328 ITR 448 (Bombay): The Court agreed with the ratio of this case.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Interpretation of Section 80AB: The Court emphasized that Section 80AB of the Income Tax Act is only concerned with the computation of deduction on the basis of net income. It does not restrict the deduction to ‘business income’ only. The court observed that Section 80AB places a ceiling on the quantum of deductions in respect of incomes contained in Part-C of Chapter VI-A and such deductions are to be computed on the net eligible income, which will be deemed to be included in the gross total income.
• Interpretation of Section 80-IA(5): The Court clarified that Section 80-IA(5) is limited to determining the quantum of deduction by treating the eligible business as the only source of income. It does not restrict the deduction under sub-section (1) to ‘business income’ only. The court observed that sub-section (5) is a step antecedent to the treatment to be given to the deduction under sub-section (1) and is not concerned with the extent to which the computed deduction be allowed.
• Purpose of Chapter VI-A: The Court noted that the deductions under Chapter VI-A are to be allowed from the ‘gross total income’, subject to the aggregate of all deductions not exceeding the ‘gross total income’.

The court’s reasoning was primarily based on a legal interpretation of the provisions of the Income Tax Act, emphasizing the distinction between the computation of deduction and the treatment of deduction. The court also considered the legislative intent behind Section 80AB, which was to ensure that deductions are computed on net income and not gross income.

The court did not consider any alternative interpretations, as its decision was based on a straightforward reading of the relevant provisions. The court’s decision was unanimous.

The Supreme Court held that the deduction under Section 80-IA of the Income Tax Act is not limited to the extent of ‘business income’ only. It can be allowed against the ‘gross total income’, subject to the aggregate of all deductions under Chapter VI-A not exceeding the ‘gross total income’. The Court reasoned that Section 80AB only pertains to the computation of deduction on the basis of net income, and Section 80-IA(5) is limited to determining the quantum of deduction by treating the eligible business as the only source of income.

The Court quoted the following from the judgment:

• “A plain reading of Section 80AB of the Act 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.”
• “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’.”
• “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’. Sub-section (5) cannot be pressed into service for reading a limitation of the deduction under sub-section (1) only to ‘business income’.”

Key Takeaways

The key practical implications of this judgment are:

• Businesses engaged in power generation or other eligible businesses under Section 80-IA can now claim deductions against their ‘gross total income’ and not just their ‘business income’.
• This will allow companies to reduce their tax liability more effectively by setting off deductions against all sources of income.
• The judgment clarifies that Section 80AB is only for computation of deduction on net income, and Section 80-IA(5) is limited to the determination of quantum of deduction.
• This ruling may lead to a re-evaluation of tax strategies by businesses that were previously restricting their deductions to ‘business income’.

Directions

No specific directions were given by the Supreme Court in this judgment.

Development of Law

The ratio decidendi of this case is that the deduction under Section 80-IA of the Income Tax Act is not limited to ‘business income’ but can be set off against the ‘gross total income’. This judgment clarifies the scope of deduction under Section 80-IA, ensuring that eligible businesses can claim deductions against their ‘gross total income’.

Conclusion

In conclusion, the Supreme Court’s judgment in the case of Commissioner of Income Tax vs. M/s. Reliance Energy Ltd. clarifies that deductions under Section 80-IA of the Income Tax Act are not restricted to ‘business income’ alone. The court held that these deductions can be claimed against the ‘gross total income’, subject to the aggregate of all deductions under Chapter VI-A not exceeding the ‘gross total income’. This decision provides significant relief to businesses engaged in power generation and other eligible sectors, allowing them to optimize their tax liabilities.