Reportable IN 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 sake of convenience, we are referring to facts of Civil Appeal No.1328 of 2021. Civil Appeal No. 1328 of 2021 1. By order of assessment dated 31.01.2005, Assessing Officer restricted eligible deduction under Section 80-IA of Income Tax Act, 1961 (hereinafter Act ) to extent of business income only. On 23.03.2006, Commissioner of Income-Tax (Appeal)-I (hereinafter Appellate Authority ) partly allowed Appeal filed by Assessee and reversed order of Assessing Officer on 1 | Page issue of extent of deduction under Section 80-IA of Act. Income Tax Appellate Tribunal (hereinafter Tribunal ), upheld decision of Appellate Authority on issue of deduction under Section 80-IA. High Court refused to interfere with Tribunal s order as far as issue on deduction under Section 80-IA is concerned. Therefore, this Appeal by Revenue. 2. This Appeal pertains to assessment year 2002-03 for which income-tax return was filed by Assessee on 31.10.2002 declaring total income as NIL . return was subsequently revised on 06.12.2002 and thereafter, on 30.03.2004. At time of assessment proceedings, Assessee submitted revised computation of income by revising its claim of deduction under Section 80-IA of Act. 3. Assessee is in business of generation of power and also deals with purchase and distribution of power. Assessee-Company generated power from its power unit located at Dahanu. In respect of deduction under Section 80- IA of Act, Assessee was asked to explain as to why deduction should not be restricted to business income, as had been stand of Revenue for assessment year 2000-01. Assessee had revised its claim under Section 80-IA of Act to Rs. 546,26,01,224/-, having admitted that there was error in calculation of income-tax depreciation. 2 | Page Assessing Officer considered revised claim of Assessee under Section 80-IA and determined amount eligible for deduction under Section 80-IA at Rs. 492,78,60,973/- against Assessee s claim of Rs. 546,26,01,224/-. However, Assessing Officer stated in assessment order that actual deduction allowable shall be to extent of income from business as per provisions of Section 80AB of Act. business income of Assessee was computed at Rs. 355,74,73,451/- and gross total income at Rs. 397,37,70,178/-. Inclusion of income from other sources of Rs. 41,62,96,727/- in gross total income and deduction claimed under Chapter VI- of Act against such gross total income was not accepted by Assessing Officer. Assessing Officer rejected claim of Assessee for allowing deduction under Section 80-IA of Act, along with other deductions available to Assessee, to extent of gross total income and restricted deduction allowed under Section 80-IA at Rs.354,00,75,084/-, by limiting aggregate of deductions under Sections 80-IA and 80-IB of Act to business income of Assessee. 4. Assessing Officer rejected contention of Assessee that Section 80AB of Act is not applicable. It was held that Section 80AB of Act makes it clear that for 3 | Page purposes of deduction in respect of certain incomes, deduction had to be given on income of nature specified in relevant section and allowed against income of that nature alone. 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 same analogy, deduction computed on income from other sources should be allowable against income from other sources only. As deduction under Section 80-IA of Act pertains to profits and gains from business undertaking, deduction is allowable only against income from business . It was held by Assessing Officer that deduction computed under Section 80-IA of Act could not be allowed against any source other than business. Assessing Officer also relied upon words that nature and shall alone in Section 80AB of Act to hold that deduction under relevant section has to be given to extent of income from that particular source only on which deduction is available. In matter before us, this would mean that deduction under Section 80- IA of Act has to be allowed only to extent of income from business . 5. It was argued by Assessee before Appellate Authority that conclusion of Assessing Officer on 4 | Page deduction under Section 80-IA of Act being restricted to business income needs to be set aside. Assessee contended that observation of Assessing Officer that deduction under 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 respective sections. Assessee urged before Appellate Authority that deductions so quantified under various sections under Chapter VI-A have to be aggregated and allowed against gross total income . Finally, submission of Assessee before Appellate Authority was that restricting deduction under Section 80-IA of Act to extent of business income was unjustified. With reference to Section 80AB, Assessee contended that operation of said section related only to quantification of deduction on basis of net income. 6. Appellate Authority partly allowed Appeal filed by Assessee by order dated 23.03.2006 and reversed finding of Assessing Officer on issue of deduction under Section 80-IA of Act for reasons stated hereinafter. In respect of Section 80AB of Act, Appellate Authority referred to background of insertion of said section with effect from 01.04.1981. Appellate 5 | Page Authority referred to Circular No. 281 dated 22.09.1980 of Central Board of Direct Taxes (CBDT) wherein reason for introduction of Section 80AB was explained. Supreme Court in case of Cloth Traders (P) Ltd. v. Additional CIT, Gujarat-I1 held that deduction under Section 80M of Act, which deals with deduction in respect of certain inter-corporate dividends, was allowable on gross amount of dividends received. It was decided to undo decision of this Court as it was contrary to legislative intent, which was that deduction under Section 80M was to be allowed on dividend income as computed under Act, i.e., on net income after deduction of admissible expenses. Appellate Authority proceeded to hold that Section 80AB places ceiling on quantum of deductions in respect of incomes contained in Part-C of Chapter VI-A. Such deductions are to be computed on net eligible income, which will be deemed to be included in gross total income. Appellate Authority observed that Section 80AB is limited to determining quantum of deductible income included in gross total income. Following decision of 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 6 | Page Mumbai (ITA No. 770/MUM/98), Appellate Authority set aside order of Assessing Officer on this count. Appellate Authority directed Assessing Officer not to restrict deduction admissible under Section 80-IA of Act to income under head business . Assessing Officer was further directed to aggregate deduction under Section 80-IA of Act with other deductions available to Assessee and then to allow deductions of such aggregate amount to extent of gross total income . order of Appellate Authority was affirmed by Tribunal and High Court on this issue. Aggrieved thereby, Revenue has come in Appeal. 7. contention on behalf of Revenue before us is that Assessing Officer was right in holding that deduction under Section 80-IA of Act should be restricted to business income only. Mr. Arijit Prasad, learned Senior Counsel appearing on behalf of Revenue, submitted that Section 80AB of Act contemplates deductions in respect of incomes against income of nature specified in relevant section. He further submitted that Section 80-IA(5) makes it clear that determination of quantum of deduction under sub-section (1) of Section 80-IA should be on basis that source of income from eligible business was only source of income of assessee and 7 | Page therefore, deduction so determined should be allowed only against business income . According to him, phrase derived from in sub-section (1) of Section 80-IA of Act indicates that computation of deduction is restricted only to profits and gains from eligible business. He relied upon 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, Assessee supported order passed by Appellate Authority which was upheld by Tribunal and High Court. It is argument of Mr. Ajay Vohra, learned Senior Counsel appearing on behalf of Assessee, that Section 80AB of Act is with reference to computation of deduction on basis of net income. He submitted that there is no indication in sub-section (5) of Section 80-IA that deduction under sub-section (1) is restricted to business income only. On other hand, according to him, sub- section (5) deals with determination of quantum of deduction by treating eligible business as only source of income of Assessee. Sub-section (5), therefore, is 2 (1978) 2 SCC 644 3 (2008) 4 SCC 22 4 (2003) 5 SCC 590 8 | Page concerned with computation of deduction, which is at stage prior to allowing deduction so computed. He submitted that there is no dispute that computation of deduction is only from eligible business. claim of Assessee, as accepted by Appellate Authority, is that there is no restriction on taking into account income from any other source while allowing deduction computed under Section 80-IA, subject to aggregate of all deductions under Chapter VI-A not exceeding 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 Act does not restrict permissible deduction under sub-section (1) to be allowed against business income only. learned Senior Counsel for Assessee relied upon judgment of Bombay High Court in Commissioner of Income-tax v. Tridoss Laboratories Ltd.6 to argue that Appeal should not be allowed. 9. controversy in this case pertains to deduction under Section 80-IA of Act being allowed to extent of business income only. claim of Assessee that deduction under Section 80-IA should be allowed to 5 (1986) 3 SCC 538 6 [2010] 328 ITR 448 (Bombay) 9 | Page extent of gross total income was rejected by Assessing Officer. It is relevant to reproduce Section 80AB of Act which is as follows: 80AB. Deductions to be made with reference to income included in gross total income. Where any deduction is required to be made or allowed under any section included in this Chapter under heading C. Deductions in respect of certain incomes in respect of any income of nature specified in that section which is included in gross total income of assessee, then, notwithstanding anything contained in that section, for purpose of computing deduction under that section, amount of income of that nature as computed in accordance with provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be amount of income of that nature which is derived or received by assessee and which is included in his gross total income. As stated above, Section 80AB was inserted in year 1981 to get over judgment of this Court in Cloth Traders (P) Ltd. (supra). Circular dated 22.09.1980 issued by CBDT makes it clear that reason for introduction of Section 80AB of Act was for deductions under Part C of Chapter VI-A of Act to be made on net income of eligible business and not on total profits from eligible business. plain reading of Section 80AB of Act 10 | P g e shows that provision pertains to determination of quantum of deductible income in gross total income . Section 80AB cannot be read to be curtailing width of Section 80-IA. It is relevant to take note of Section 80A(1) which stipulates that in computation of total income of assessee, deductions specified in Section 80C to Section 80U of Act shall be allowed from his gross total income . Sub-section (2) of Section 80A of Act provides that aggregate amount of deductions under Chapter VI-A shall not exceed gross total income of Assessee. We are in agreement with Appellate Authority that Section 80AB of Act which deals with determination of deductions under Part C of Chapter VI-A is with respect only to computation of deduction on 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 gross total income of assessee includes any profits and gains derived by undertaking or enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as eligible business), there shall, in accordance with and subject to provisions of this section, be allowed, in computing 11 | P g e total income of assessee, deduction of amount equal to hundred per cent. of profits and gains derived from such business for ten consecutive assessment years. **** (5) Notwithstanding anything contained in any other provision of this Act, profits and gains of eligible business to which provisions of sub- section (1) apply shall, for purposes of determining quantum of deduction under that sub-section for assessment year immediately succeeding initial assessment year or any subsequent assessment year, be computed as if such eligible business were only source of income of assessee during previous year relevant to initial assessment year and to every subsequent assessment year up to and including assessment year for which determination is to be made. 11. essential ingredients of Section 80-IA (1) of Act are: a) gross total income of assessee should include profits and gains; b) those profits and gains are derived by undertaking or enterprise from business referred to in sub- section (4); c) assessee is entitled for deduction of amount equal to 100% of profits and gains derived from such business for 10 consecutive assessment years; and d) in computing total income of Assessee, such deduction shall be allowed. 12 | P g e 12. import of Section 80-IA is that total income of assessee is computed by taking into account allowable deduction of profits and gains derived from eligible business . With respect to facts of this Appeal, there is no dispute that deduction quantified under Section 80-IA is Rs.492,78,60,973/-. To make it clear, said amount represents net profit made by Assessee from eligible business covered under sub-section (4), i.e., from Assessee s business unit involved in generation of power. claim of Assessee is that in computing its total income , deductions available to it have to be set-off against gross total income , while Revenue contends that it is only business income which has to be taken into account for purpose of setting-off deductions under Sections 80-IA and 80-IB of Act. To illustrate, gross total income of Assessee for assessment year 2002-03 is less than quantum of deduction determined under Section 80-IA of Act. 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 purpose of allowing deductions available to Assessee, subject to ceiling of gross total income . Appellate Authority was of view that 13 | P g e there is no limitation on deduction admissible under Section 80-IA of Act to income under head business only, with which we agree. 13. other contention of 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 only source of income. It is contended that language of sub-section (5) makes it clear that deduction contemplated in sub-section (1) is only with respect to income from eligible business which indicates that there is cap in sub-section (1) that deduction cannot exceed business income . On other hand, it is case of Assessee that sub-section (5) pertains only to determination of quantum of deduction under sub-section (1) by treating eligible business as only source of income. It was submitted by Mr. Vohra, learned Senior Counsel, that final computation of deduction under Section 80-IA for assessment year 2002-03 as accepted by Assessing Officer, was arrived at by taking into account profits from eligible business as only source of income . He submitted that, however, sub-section (5) is step antecedent to treatment to be given to deduction under sub- section (1) and is not concerned with extent to which computed deduction be allowed. To explain interplay 14 | P g e between sub-section (5) and sub-section (1) of Section 80-IA, it will be useful to refer to facts of this Appeal. amount of deduction from eligible business computed under Section 80-IA for assessment year 2002-03 is Rs. 492,78,60,973 /-. There is no dispute that said amount represents income from eligible business under Section 80-IA and is only source of income for purposes of computing deduction under Section 80-IA. question that arises further with reference to allowing deduction so computed to arrive at total income of Assessee cannot be determined by resorting to interpretation of sub- section (5). 14. It will be useful to refer to judgment of this Court relied upon by Revenue as well as Assessee. In Synco Industries (supra), this Court was concerned with Section 80-I of 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, profits and gains of industrial undertaking or ship or business of hotel or business of repairs to ocean-going vessels or other powered craft to which provisions of sub-section (1) apply shall, for purposes of determining quantum of deduction under sub- section (1) for assessment year immediately succeeding initial assessment year or any 15 | P g e subsequent assessment year, be computed as if such industrial undertaking or ship or business of hotel or business of repairs to ocean-going vessels or other powered craft were only source of income of assessee during previous years relevant to initial assessment year and to every subsequent assessment year up to and including assessment year for which determination is to be made. It was held in Synco Industries (supra) that for purpose of calculating 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 industrial undertaking shall be taken into account as it was only source of income. Further, Court concluded that Section 80-I(6) of Act dealt with actual computation of deduction whereas Section 80-I(1) of Act dealt with treatment to be given to such deductions in order to arrive at total income of assessee. Assessee also relied on judgment of this Court in Canara Workshops (P) Ltd., Kodialball, Mangalore (supra) to emphasize purpose of sub-section (5) of Section 80-IA. In this case, question that arose for consideration before this Court related to computation of profits for purpose of deduction under Section 80-E, as it then existed, after setting off loss incurred by assessee in 16 | P g e manufacture of alloy steels. Section 80-E of Act, as it then existed, permitted deductions in respect of profits and gains attributable to 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 articles or things specified in list in Fifth Schedule. It was argued on behalf of Revenue that profits from automobile ancillaries industry of assessee must be reduced by loss suffered by assessee in manufacture of alloy steels. This Court was not in agreement with submissions made by Revenue. It was held that profits and gains by industry entitled to benefit under Section 80-E cannot be reduced by loss suffered by any other industry or industries owned by assessee. 15. In case before us, there is no discussion about Section 80-IA(5) by Appellate Authority, nor Tribunal and High Court. However, we have considered submissions on behalf of Revenue as it has bearing on interpretation of sub-section (1) of Section 80-IA of Act. We hold that scope of sub-section (5) of Section 80- IA of Act is limited to determination of quantum of deduction under sub-section (1) of Section 80-IA of Act by treating eligible business as only source of income . 17 | P g e Sub-section (5) cannot be pressed into service for reading limitation of deduction under sub-section (1) only to business income . attempt was made by learned Senior Counsel for Revenue to rely on phrase derived from in Section 80-IA (1) of Act in respect of his submission that intention of legislature was to give narrowest possible construction to deduction admissible under this sub-section. It is not necessary for us to deal with this submission in view of findings recorded above. For aforementioned reasons, Appeal is dismissed qua issue of extent of deduction under Section 80-IA of 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 above judgment. Civil Appeal No. 1509 of 2021 is de-tagged as questions arising therein are not related to aforementioned issue. .....................................J. [ L. NAGESWARA RAO ] .....................................J. [ VINEET SARAN ] New Delhi, April 28th 2021. 18 | P g e Commissioner of Income-tax-I v. Reliance Energy Ltd. (Formerly BSES Ltd.)