Supreme Court: Deductions for Profits and Gains from Industrial Undertakings cannot Be Confined to 'Business Income'
The Supreme Court (SC) on 28 April 2021, in the case titled Commissioner of Income Tax [Appellant(s)] v. M/s. Reliance Energy Ltd. (Formerly BSES Ltd.) [Respondent (s)] ruled that the Deductions for profits and gains from industrial undertakings under Section 80-IA of the Income Tax Act, 1961, (IT Act) must not be confined to 'Business Income' only.
The SC division bench comprising of Justices L. Nageswara Rao and Vineet Saran highlighted the essential ingredients of Section 80-IA (1) of the IT Act:
- The 'gross total income' of an assessee should include profits and gains;
- Those profits and gains are derived by an undertaking or an enterprise from a business referred to in sub-section (4);
- The assessee is entitled to deduction of an amount equal to 100% of the profits and gains derived from such business for 10 consecutive assessment years;
- In computing the 'total income' of the Assessee, such deduction shall be allowed.
The factual background of the case is that the Assessee- M/s. Reliance Energy Ltd. has been engaged in the business of generation of power and also deals with the 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 IT Act to Rs. 546,26,01,224/-, having admitted that there was an error in the calculation of income-tax depreciation.
The Assessing Officer (AO) rejected the contention of the Assessee that Section 80AB of the Act is not applicable. The AO restricted the eligible deduction under Section 80-IA of the IT Act to the extent of 'business income' only.
The Commissioner of Income-Tax (Appeal) [CIT(A)] has partly allowed the Appeal filed by the Assessee and reversed the order of the Assessing Officer on the issue of the extent of deduction under Section 80-IA of the Act.
The Income Tax Appellate Tribunal (ITAT) 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.
It was held that Section 80AB of the Act makes it clear that for the AO 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'.
On behalf of the Assessee, it was argued that Section 80AB of the Act is with reference to computation of deduction on the basis of net income.
It was contended 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, sub- section (5) deals with the determination of the quantum of deduction by treating eligible business as the only source of income of the Assessee.
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 extent of 'gross total income' was rejected by the AO.
The Top Court held that the scope of sub-section (5) of Section 80- IA of the Act is limited to the 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'.
It added that "Sub-section (5) cannot be pressed into service for reading a limitation of the deduction under sub-section (1) only to 'business income'."