Tax Alert | Delivering clarity

11 May 2021

Deduction from eligible undertaking computed under section 80-IA can be set off to the extent
of gross total income, cannot be restricted to business income
The Hon’ble Supreme Court has held that deduction from eligible undertaking computed under
section 80-IA of the Income-tax Act, 1961, can be set off to the extent of gross total income and
cannot not be restricted to business income.

Background:
• The taxpayer1 is an Indian company engaged in the business of generation of power and also deals with
purchase and distribution of power.
• During the Financial Year (FY) 2001-02, corresponding to Assessment Year (AY) 2002-03, the taxpayer
derived business income eligible for deduction / incentive under section 80-IA of the Income-tax Act,
1961 (ITA) as well as income from other sources. The taxpayer had considered the following while filing
its income-tax return for the said FY 2001-02:
─ Claim of deduction under section 80-IA of the ITA : ~INR 5.46 billion;
─ Business income: ~INR 3.55 billion;
─ Income from Other Sources (IFOS): ~INR 0.42 billion;
─ Gross Total Income (GTI): ~INR 3.97 billion;
• During the course of audit proceedings for the year under consideration, the Assessing Officer (AO):
─ Held that, deduction computed under section 80-IA of the ITA could not be allowed against any
source other than business and thus, had to be allowed only to the extent of ‘income from
business’ of the taxpayer;
─ Restricted the deduction allowed under section 80-IA of the ITA to ~INR 3.54 billion; by limiting the
deduction under sections 80-IA and 80-IB of the ITA to the ‘business income’ of the taxpayer;
─ Rejected the claim of the taxpayer for allowing deduction under section 80-IA of the ITA, along with
other deductions available to the taxpayer, to the extent of GTI.
• The matter in the course of appeal proceedings reached the Hon’ble Supreme Court (SC).

Certain provisions in brief:

• Section 80AB of the ITA Where any deduction is required to be made or allowed under any section
included in Chapter VI-A 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 GTI of the taxpayer, then,

1 CIT v. Reliance Energy Ltd [2021] 127 taxmann.com 69 (SC)

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 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
ITA (before making any deduction under Chapter VI-A) shall alone be deemed to be the amount of
income of that nature which is derived or received by the taxpayer and which is included in his GTI.
• Section 80-IA of the ITA provides for deduction in respect in respect of profits and gains from industrial
undertakings or enterprises engaged in infrastructure development (including generation or generation
and distribution of power).
─ As per section 80-IA(1) of the ITA, where the GTI of a taxpayer includes any profits and gains
derived by an undertaking or an enterprise from any business referred to in sub-section (4) there
shall be allowed in computing the total income of the taxpayer, a deduction of an amount equal to
100% of the profits and gains derived from such business for ten consecutive AY’s.
─ As per section 80-IA(5) of the ITA, notwithstanding anything contained in any other provision , 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 taxpayer during the
previous year relevant to the initial AY and to every subsequent AY up to and including the AY for
which the determination is to be made

Decision of the SC:

• The SC noted the following:
─ The controversy in this case pertained to the deduction under Section 80-IA of the ITA being
allowed to the extent of ‘business income’ only. The claim of the taxpayer was that deduction
under section 80-IA of the ITA should be allowed to the extent of GTI.
─ Section 80-AB of the ITA pertains to determination of the quantum of deductible income in the
GTI and could not be read to be curtailing the width of section 80-IA of the ITA. It is with respect
only to computation of deduction on the basis of net income.
─ The import of section 80-IA of the ITA was that the ‘total income’ of a taxpayer is computed by
taking into account the allowable deduction of the profits and gains derived from the ‘eligible
business’.
─ The SC in an earlier decision2 [rendered in the context of section 80-I of the ITA and wherein the
provisions of 80-I(6) of the ITA were pari materia to 80-IA(5) of the ITA], had held the following
with respect to interplay between sub-sections 1 and 5 to section 80-IA of the ITA:
o For the purpose of calculating the deduction under section 80-I of the ITA, loss sustained in
other divisions or units could not be taken into account as sub-section (6) contemplated that

2 Synco Industries Ltd. v. AO [2008] 4 SCC 22 (SC)

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 only profits from the industrial undertaking were to be taken into account as it was the only
source of income.
o Section 80-I(6) of the ITA dealt with actual computation of deduction, whereas Section 80-
I(1) of the ITA dealt with the treatment to be given to such deductions in order to arrive at
the total income of the taxpayer.
─ The SC in an earlier decision3 (rendered in the context of section 80E of the ITA (relating to,
amongst others, deductions in respect of profits and gains attributable to the construction,
manufacture or production of any one or more qualifying article or thing) had held that the
profits and gains by an industry entitled to benefit under Section 80-E of the ITA could not be
reduced by the loss suffered by any other industry / industries owned by the taxpayer.
In view of the above, the SC held that:
─ The scope of sub-section (5) to Section 80- IA of the ITA was limited to determine the quantum
of deduction under sub-section (1) of Section 80-IA of the ITA by treating ‘eligible business’ as
the ‘only source of income’.
─ The provisions of section 80-IA(5) of the ITA could not be pressed into service for reading a
limitation of deduction under section sub-section (1) to section 80-IA of the ITA only to business
income.

Comment:
The ruling lays to rest the controversy relating to restricting deduction under section 80-IA of the ITA to
business income. It has held that deduction from eligible undertakings, computed under section 80-IA of
the ITA, can be set off to the extent of gross total income and cannot be restricted to business income
for arriving at the total income.
Taxpayers with similar facts may want to evaluate the impact of this ruling to the specific facts of their
cases.

3 CIT v. Canara Workshops (P) Ltd [1986] 3 SCC 538.

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