S. 80-IA(5): Absorbed losses pre “initial assessment year” need not be set off

The assessee set up a Wind Mill and commenced operations on 29.09.2006 (AY 2007-08). In that year the assessee suffered a loss of Rs. 3.5 crores on account of depreciation and interest which was set-off against the other income. In AY 2008-09, the assessee earned profit of Rs. 7 lakhs from the Wind Mill and claimed 100% deduction u/s 80-IA by treating AY 2008-09 as the “initial assessment year”. The AO allowed the claim. However the CIT, relying on Goldmine Shares 302 ITR (AT) 208 (SB) (Ahd) & Hyderabad Chemical Supplies 137 TTJ 732 (Hyd), revised the order u/s 263 on the ground that as u/s 80-IA(5), the eligible unit was deemed to be the “only source of income”, the earlier years’ losses of the unit had to be set-off against the profits before allowing s. 80-IA deduction. On appeal by the assessee, HELD reversing the CIT:

The fiction created by s. 80-IA(5) is that the eligible business is the only source of income and the deduction would be allowed from the initial assessment year or any subsequent assessment year. It nowhere defines as to what is the “initial assessment year”. Prior to 1.4.2000, s. 80-IA(12) defined the “initial assessment year” for various types of eligible assessees. However, after the amendment by the Finance Act, 1999, the definition of “initial assessment year” has been specifically taken away. Now, when the assessee exercises the option of choosing the initial assessment year as culled out in s. 80-IA(2) from which it chooses its’ 10 years of deduction out of 15 years, then only the losses of the years starting from the initial assessment year alone are to be brought forward as stipulated in s. 80IA(5). The loss prior to the initial assessment year which has already been set-off cannot be brought forward and adjusted into the period of ten years from the initial assessment year as contemplated or chosen by the assessee. It is only when the loss have been incurred from the initial assessment year, then the assessee has to adjust loss in the subsequent assessment years and it has to be computed as if the eligible business is the only source of income and then only deduction u/s 80-IA can be determined. This is the true import of s. 80-IA(5) (Velayudhaswamy Spinning Mills 340 ITR 477 (Mad), Emerala Jewel Industry 53 DTR 262 (Mad) followed, Goldmine Shares 302 ITR (AT) 208 (SB) (Ahd), Hyderabad Chemical Supplies 137 TTJ 732 (Hyd) & Pidilite Industries 46 SOT 263 (Mum) distinguished)