Commissioner Of Income Tax-I vs M/S Reliance Energy Ltd (Formerly … on 28 April, 2021


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Supreme Court of India

Commissioner Of Income Tax-I vs M/S Reliance Energy Ltd (Formerly … on 28 April, 2021

Author: L. Nageswara Rao

Bench: L. Nageswara Rao, Vineet Saran

                                                           Reportable

         IN THE SUPREME COURT OF INDIA
          CIVIL APPELLATE JURISDICTION

              Civil Appeal No. 1327 of 2021

Commissioner of Income Tax-I                    .... Appellant(s)
                            Versus

M/s. Reliance Energy Ltd.
(Formerly BSES Ltd.) through its M.D. ….Respondent (s)

                             WITH
                 Civil   Appeal   No.   1328   of   2021
                 Civil   Appeal   No.   1329   of   2021
                 Civil   Appeal   No.   2537   of   2016
                 Civil   Appeal   No.   1408   of   2021
                 Civil   Appeal   No.   1508   of   2021
                 Civil   Appeal   No.   1509   of   2021

                      JUDGMENT

L. NAGESWARA RAO, J.

For the sake of convenience, we are referring to the

facts of Civil Appeal No.1328 of 2021.

Civil Appeal No. 1328 of 2021

1. By an order of assessment dated 31.01.2005, the

Assessing Officer restricted the eligible deduction under

Section 80-IA of the Income Tax Act, 1961 (hereinafter “the

Act”) to the extent of ‘business income’ only. On 23.03.2006,

the Commissioner of Income-Tax (Appeal)-I (hereinafter “the

Appellate Authority”) partly allowed the Appeal filed by the

Assessee and reversed the order of the Assessing Officer on

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the issue of the extent of deduction under Section 80-IA of

the Act. The Income Tax Appellate Tribunal (hereinafter “the

Tribunal”), 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.

Therefore, this Appeal by the Revenue.

2. This Appeal pertains to the assessment year 2002-03

for which the income-tax return was filed by the Assessee on

31.10.2002 declaring the total income as ‘NIL’. The return

was subsequently revised on 06.12.2002 and thereafter, on

30.03.2004. At the time of the assessment proceedings, the

Assessee submitted a revised computation of income by

revising its claim of deduction under Section 80-IA of the Act.

3. The Assessee is in the business of generation of power

and also deals with 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 Act to Rs. 546,26,01,224/-, having admitted that

there was an error in calculation of income-tax depreciation.

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The Assessing Officer considered the revised claim of the

Assessee under Section 80-IA and determined the amount

eligible for deduction under Section 80-IA at Rs.

492,78,60,973/- against the Assessee’s claim of Rs.

546,26,01,224/-. However, the Assessing Officer stated in

the assessment order that the actual deduction allowable

shall be to the extent of ‘income from business’ as per

provisions of Section 80AB of the Act. The ‘business income’

of the Assessee was computed at Rs. 355,74,73,451/- and

the ‘gross total income’ at Rs. 397,37,70,178/-. Inclusion of

‘income from other sources’ of Rs. 41,62,96,727/- in the

‘gross total income’ and deduction claimed under Chapter VI-

A of the Act against such ‘gross total income’ was not

accepted by the Assessing Officer. The Assessing Officer

rejected the claim of the Assessee for allowing deduction

under Section 80-IA of the Act, along with other deductions

available to the Assessee, to the extent of ‘gross total

income’ and restricted the deduction allowed under Section

80-IA at Rs.354,00,75,084/-, by limiting the aggregate of

deductions under Sections 80-IA and 80-IB of the Act to

‘business income’ of the Assessee.

4. The Assessing Officer rejected the contention of the

Assessee that Section 80AB of the Act is not applicable. It

was held that Section 80AB of the Act makes it clear that for

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the purposes of deduction in respect of certain incomes,

deduction had to be given on the income of the nature

specified in the relevant section and allowed against income

of that nature alone. The Assessing Officer 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’. It was held by

the Assessing Officer that deduction computed under Section

80-IA of the Act could not be allowed against any source

other than business. The Assessing Officer also relied upon

the words ‘that nature’ and ‘shall alone’ in Section 80AB of

the Act to hold that deduction under a relevant section has to

be given to the extent of the income from that particular

source only on which deduction is available. In the matter

before us, this would mean that deduction under Section 80-

IA of the Act has to be allowed only to the extent of ‘income

from business’.

5. It was argued by the Assessee before the Appellate

Authority that the conclusion of the Assessing Officer on

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deduction under Section 80-IA of the Act being restricted to

‘business income’ needs to be set aside. The Assessee

contended that the observation of the Assessing Officer that

deduction under a particular section is permissible only

against income under that particular head was erroneous.

Deductions related to various incomes under various sections

of Chapter VI-A have to be quantified in accordance with the

respective sections. The Assessee urged before the

Appellate Authority that the deductions so quantified under

various sections under Chapter VI-A have to be aggregated

and allowed against the ‘gross total income’. Finally, the

submission of the Assessee before the Appellate Authority

was that restricting the deduction under Section 80-IA of the

Act to the extent of ‘business income’ was unjustified. With

reference to Section 80AB, the Assessee contended that the

operation of the said section related only to quantification of

deduction on the basis of net income.

6. The Appellate Authority partly allowed the Appeal filed

by the Assessee by an order dated 23.03.2006 and reversed

the finding of the Assessing Officer on the issue of deduction

under Section 80-IA of the Act for the reasons stated

hereinafter. In respect of Section 80AB of the Act, the

Appellate Authority referred to the background of insertion of

the said section with effect from 01.04.1981. The Appellate

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Authority referred to Circular No. 281 dated 22.09.1980 of

the Central Board of Direct Taxes (CBDT) wherein the reason

for introduction of Section 80AB was explained. The

Supreme Court in the case of Cloth Traders (P) Ltd. v.

Additional CIT, Gujarat-I1 held that deduction under

Section 80M of the Act, which deals with deduction in respect

of certain inter-corporate dividends, was allowable on the

gross amount of the dividends received. It was decided to

undo the decision of this Court as it was contrary to the

legislative intent, which was that deduction under Section

80M was to be allowed on the dividend income as computed

under the Act, i.e., on the net income after deduction of

admissible expenses. The Appellate Authority proceeded to

hold that Section 80AB places a ceiling on the quantum of

deductions in respect of incomes contained in Part-C of

Chapter VI-A. Such deductions are to be computed on the

net eligible income, which will be deemed to be included in

the gross total income. The Appellate Authority observed

that Section 80AB is limited to determining the quantum of

deductible income included in the gross total income.

Following a decision of the Income Tax Appellate Tribunal,

Mumbai dated 25.04.2003 in Royal Cushion Vinyl

Products Ltd. v. Dy. Commissioner of Income Tax,

1 (1979) 3 SCC 538

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Mumbai (ITA No. 770/MUM/98), the Appellate Authority set

aside the order of the Assessing Officer on this count. The

Appellate Authority directed the Assessing Officer not to

restrict the deduction admissible under Section 80-IA of the

Act to income under the head ‘business’. The Assessing

Officer was further directed to aggregate the deduction

under Section 80-IA of the Act with the other deductions

available to the Assessee and then to allow deductions of

such aggregate amount to the extent of ‘gross total income’.

The order of the Appellate Authority was affirmed by the

Tribunal and the High Court on this issue. Aggrieved thereby,

the Revenue has come in Appeal.

7. The contention on behalf of the Revenue before us is

that the Assessing Officer was right in holding that the

deduction under Section 80-IA of the Act should be restricted

to ‘business income’ only. Mr. Arijit Prasad, learned Senior

Counsel appearing on behalf of the Revenue, submitted that

Section 80AB of the Act contemplates deductions in respect

of incomes against income of the nature specified in the

relevant section. He further submitted that Section 80-IA(5)

makes it clear that the determination of quantum of

deduction under sub-section (1) of Section 80-IA should be

on the basis that the source of income from the eligible

business was the only source of income of an assessee and

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therefore, the deduction so determined should be allowed

only against ‘business income’. According to him, the phrase

‘derived … from’ in sub-section (1) of Section 80-IA of the Act

indicates that the computation of deduction is restricted only

to the profits and gains from the eligible business. He relied

upon the judgment of this Court in Cambay Electric Supply

Industrial Co. Ltd. v. CIT 2, followed in Synco Industries

Ltd. v. Assessing Officer, Income Tax, Mumbai & Anr. 3

and Pandian Chemicals Ltd. v. Commissioner of Income

Tax, Madurai4.

8. In response, the Assessee supported the order passed

by the Appellate Authority which was upheld by the Tribunal

and the High Court. It is the argument of Mr. Ajay Vohra,

learned Senior Counsel appearing on behalf of the Assessee,

that Section 80AB of the Act is with reference to computation

of deduction on the basis of net income. He submitted 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 determination of the quantum of

deduction by treating eligible business as the only source of

income of the Assessee. Sub-section (5), therefore, is

2 (1978) 2 SCC 644
3 (2008) 4 SCC 22
4 (2003) 5 SCC 590

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concerned with computation of the deduction, which is at a

stage prior to allowing the deduction so computed. He

submitted that there is no dispute that the computation of

deduction is only from the eligible business. The claim of the

Assessee, as accepted by the Appellate Authority, is that

there is no restriction on taking into account income from

any other source while allowing the deduction computed

under Section 80-IA, subject to the aggregate of all

deductions under Chapter VI-A not exceeding the ‘gross total

income’. He relied upon judgments of this Court in CIT

(Central), Madras v. Canara Workshops (P) Ltd.,

Kodialball, Mangalore5 and Synco Industries (supra) to

argue that sub-section (5) of Section 80-IA of the Act does

not restrict permissible deduction under sub-section (1) to be

allowed against ‘business income’ only. The learned Senior

Counsel for the Assessee relied upon the judgment of the

Bombay High Court in Commissioner of Income-tax v.

Tridoss Laboratories Ltd.6 to argue that the Appeal should

not be allowed.

9. 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

5 (1986) 3 SCC 538
6 [2010] 328 ITR 448 (Bombay)

9 | Page
extent of ‘gross total income’ was rejected by the Assessing

Officer. It is relevant to reproduce Section 80AB of the Act

which is as follows:

“80AB. Deductions to be made with reference to
the income included in the gross total 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.”

As stated above, Section 80AB was inserted in the year

1981 to get over a judgment of this Court in Cloth Traders

(P) Ltd. (supra). The Circular dated 22.09.1980 issued by

the CBDT makes it clear that the reason for introduction of

Section 80AB of the Act was for the deductions under Part C

of Chapter VI-A of the Act to be made on the net income of

the eligible business and not on the total profits from the

eligible business. A plain reading of Section 80AB of the Act

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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. It is relevant to take note of Section 80A(1)

which stipulates that in computation of the ‘total income’ of

an assessee, deductions specified in Section 80C to Section

80U of the Act shall be allowed from his ‘gross total income’.

Sub-section (2) of Section 80A of the Act provides that the

aggregate amount of the deductions under Chapter VI-A shall

not exceed the ‘gross total income’ of the Assessee. 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’.

10. Sub-section (1) and sub-section (5) of Section 80-IA

which are relevant for these Appeals are as under:

“80-IA. Deductions in respect of profits and
gains from industrial undertakings or
enterprises engaged in infrastructure
development, etc.—
(1) 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

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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.

****
(5) 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.”

11. The essential ingredients of Section 80-IA (1) of the Act

are:

a) the ‘gross total income’ of an assessee should include

profits and gains;

b) those profits and gains are derived by an undertaking

or an enterprise from a business referred to in sub-

section (4);

c) the assessee is entitled for deduction of an amount

equal to 100% of the profits and gains derived from such

business for 10 consecutive assessment years; and

d) in computing the ‘total income’ of the Assessee, such

deduction shall be allowed.

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12. The import of Section 80-IA is that the ‘total income’ of

an assessee is computed by taking into account the

allowable deduction of the profits and gains derived from the

‘eligible business’. With respect to the facts of this Appeal,

there is no dispute that the deduction quantified under

Section 80-IA is Rs.492,78,60,973/-. To make it clear, the

said amount represents the net profit made by the Assessee

from the ‘eligible business’ covered under sub-section (4),

i.e., from the Assessee’s business unit involved in generation

of power. The claim of the Assessee is that in computing its

‘total income’, deductions available to it have to be set-off

against the ‘gross total income’, while the Revenue contends

that it is only the ‘business income’ which has to be taken

into account for the purpose of setting-off the deductions

under Sections 80-IA and 80-IB of the Act. To illustrate, the

‘gross total income’ of the Assessee for the assessment year

2002-03 is less than the quantum of deduction determined

under Section 80-IA of the Act. The Assessee contends that

income from all other heads including ‘income from other

sources’, in addition to ‘business income’, have to be taken

into account for the purpose of allowing the deductions

available to the Assessee, subject to the ceiling of ‘gross

total income’. The Appellate Authority was of the view that

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there is no limitation on deduction admissible under Section

80-IA of the Act to income under the head ‘business’ only,

with which we agree.

13. The other contention of the Revenue is that sub-section

(5) of Section 80-IA refers to computation of quantum of

deduction being limited from ‘eligible business’ by taking it

as the only source of income. It is contended that the

language of sub-section (5) makes it clear that deduction

contemplated in sub-section (1) is only with respect to the

income from ‘eligible business’ which indicates that there is a

cap in sub-section (1) that the deduction cannot exceed the

‘business income’. On the other hand, it is the case of the

Assessee that sub-section (5) pertains only to determination

of the quantum of deduction under sub-section (1) by

treating the ‘eligible business’ as the only source of income.

It was submitted by Mr. Vohra, learned Senior Counsel, that

the final computation of deduction under Section 80-IA for

the assessment year 2002-03 as accepted by the Assessing

Officer, was arrived at by taking into account the profits from

the ‘eligible business’ as the ‘only source of income’. He

submitted that, however, 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. To explain the interplay

14 | P a g e
between sub-section (5) and sub-section (1) of Section 80-IA,

it will be useful to refer to the facts of this Appeal. The

amount of deduction from the ‘eligible business’ computed

under Section 80-IA for the assessment year 2002-03 is Rs.

492,78,60,973 /-. There is no dispute that the said amount

represents income from the ‘eligible business’ under Section

80-IA and is the only source of income for the purposes of

computing deduction under Section 80-IA. The question that

arises further with reference to allowing the deduction so

computed to arrive at the ‘total income’ of the Assessee

cannot be determined by resorting to interpretation of sub-

section (5).

14. It will be useful to refer to the judgment of this Court

relied upon by the Revenue as well as the Assessee. In

Synco Industries (supra), this Court was concerned with

Section 80-I of the Act. Section 80-I(6), which is in pari

materia to Section 80-IA(5), is as follows:

“ 80-I(6) Notwithstanding anything contained in any
other provision of this Act, the profits and gains of an
industrial undertaking or a ship or the business of a
hotel or the business of repairs to ocean-going
vessels or other powered craft to which the provisions
of sub-section (1) apply shall, for the purposes of
determining the quantum of deduction under sub-

section (1) for the assessment year immediately
succeeding the initial assessment year or any

15 | P a g e
subsequent assessment year, be computed as if such
industrial undertaking or ship or the business of the
hotel or the business of repairs to ocean-going
vessels or other powered craft were the only source
of income of the assessee during the previous years
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.”

It was held in Synco Industries (supra) that for the

purpose of calculating the deduction under Section 80-I, loss

sustained in other divisions or units cannot be taken into

account as sub-section (6) contemplates that only profits

from the industrial undertaking shall be taken into account as

it was the only source of income. Further, the Court

concluded that Section 80-I(6) of the Act dealt with actual

computation of deduction whereas Section 80-I(1) of the Act

dealt with the treatment to be given to such deductions in

order to arrive at the total income of the assessee. The

Assessee also relied on the judgment of this Court in Canara

Workshops (P) Ltd., Kodialball, Mangalore (supra) to

emphasize the purpose of sub-section (5) of Section 80-IA. In

this case, the question that arose for consideration before

this Court related to computation of the profits for the

purpose of deduction under Section 80-E, as it then existed,

after setting off the loss incurred by the assessee in the

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manufacture of alloy steels. Section 80-E of the Act, as it

then existed, permitted deductions in respect of profits and

gains attributable to the business of generation or

distribution of electricity or any other form of power or of

construction, manufacture or production of any one or more

of the articles or things specified in the list in the Fifth

Schedule. It was argued on behalf of the Revenue that the

profits from the automobile ancillaries industry of the

assessee must be reduced by the loss suffered by the

assessee in the manufacture of alloy steels. This Court was

not in agreement with the submissions made by the

Revenue. It was held that the profits and gains by an

industry entitled to benefit under Section 80-E cannot be

reduced by the loss suffered by any other industry or

industries owned by the assessee.

15. In the case before us, there is no discussion about

Section 80-IA(5) by the Appellate Authority, nor the Tribunal

and the High Court. However, we have considered the

submissions on behalf of the Revenue as it has a bearing on

the interpretation of sub-section (1) of Section 80-IA of the

Act. 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’.

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Sub-section (5) cannot be pressed into service for reading a

limitation of the deduction under sub-section (1) only to

‘business income’. An attempt was made by the learned

Senior Counsel for the Revenue to rely on the phrase

‘derived … from’ in Section 80-IA (1) of the Act in respect of

his submission that the intention of the legislature was to

give the narrowest possible construction to deduction

admissible under this sub-section. It is not necessary for us

to deal with this submission in view of the findings recorded

above. For the aforementioned reasons, the Appeal is

dismissed qua the issue of the extent of deduction under

Section 80-IA of the Act.

Civil Appeal No. 1327 of 2021, Civil Appeal No. 1329 of

2021, Civil Appeal No. 2537 of 2016, Civil Appeal No. 1408 of

2021 and Civil Appeal No. 1508 of 2021 are disposed of in

terms of the above judgment.

Civil Appeal No. 1509 of 2021 is de-tagged as the

questions arising therein are not related to the

aforementioned issue.

……………………………….J.

[ L. NAGESWARA RAO ]

……………………………….J.
[ VINEET SARAN ]

New Delhi,
April 28th 2021.

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