ACIT 25(3), MUMBAI vs. PUNIT CONSTRUCTIONS, MUMBAI

The first issue that came up our consideration from assessee appeal is deduction under section 80IA of the Act. The facts with regard to impugned dispute are that the assessee has set up five windmills, out of which two windmills has been set up in the financial relevant AY 2005- 06 & 2006-07. During the year under reference, the assessee has set up three windmills. All five windmills are set up at different places. The first two windmills set up in earlier years have generated profit of Rs.9,90,461/- and Rs. 23,34,903/- respectively. The remaining three windmills set up during the year under consideration have incurred losses. The assessee claimed deduction under section 80IA for Rs. & 6980/Mum/2014 1,47,30,311/- in respect of profit of two windmills without setting off of loss incurred in three windmills by considering each windmills as a separate unit eligible for deduction under section 80IA of the Act. The AO denied deduction under section 80IA on the ground that, deduction under chapter VIA can be given only if the gross total income is positive and if total profit derived from all five windmills, there is no positive gross total income therefore, the assessee cannot claim deduction under section 80IA of the Act. The AO further observed that as per the provision of section 80IA(5), for the purpose of determination of deduction, the eligible business shall be considered as the only source of the income of the assessee. According to the AO, the assessee sought to claim each windmill as a separate undertaking/unit for the purpose of section 80IA and profit of each unit shall be considered stand alone without considering profit or loss of other unit which is otherwise not correct. The AO also taken support from the decision of ITAT, Ahmadabad Special Bench in the case of ACIT vs. Goldmine Shares and Finance Pvt. Ltd. (2008) 113 ITD 209.

The ld. AR for the assessee submitted that the ld. CIT(A) has erred in not allowing deduction claimed under section 80IA for profit of two eligible units without appreciating the fact that the deduction under section 80IA would be computed with reference to profits of the eligible unit, unaffected by losses suffered by other units. Section 80IA deduction is available unit-wise and not as a consolidated business. Each unit is a independent unit located in different places and also set up in different period. The assessee has maintained separate books of account for each unit and also filed audit report required to be filed under section 80IA in respect of two eligible units. The ld. AO has mixed up the profit and loss of all the five units ignoring the specific provision provided under section 80IA(5), as per which for the purpose of determining the quantum of deduction under sub-section (1) for the initial AY or in a subsequent AY & 6980/Mum/2014 the profit shall be computed as if such eligible business were the only source of income of the assessee. This view has been recently upheld by Hon’ble Delhi High Court in the case of CIT vs. Deewan Crafts Systems Pvt. Ltd. (supra). The AR further submitted that the AO has misconstrued the ratio laid down by ITAT, Ahmadabad Special Bench so as to consider that each eligible business means the profits generated from all the units under one segment, but not each unit as separate eligible unit. But, the special bench has brought out clear position of law that the deduction under section 80IA would be computed with reference to profits of the eligible unit unaffected by losses suffered by other units. In this regard relied upon the following judgments:

The ld. DR, on the other hand, strongly supported the order of CIT(A). The ld. DR further submitted that the AO as well as the CIT(A) has brought out clear fact to the effect that the claim of the assessee under section 80IA is not in accordance with subsection (5) of section 80IA of the Act, as the assessee sought to stretch the eligible business to & 6980/Mum/2014 the extent of each windmill without appreciating the fact that the provision has specifically provides for deduction for eligible business which means the total business carried out in all units coming under one eligible business. The ld. CIT(A) has further rightly relied upon the decision of Hon’ble Supreme Court in CIT vs. Liberty India (supra), wherein the Hon’ble Supreme Court has clearly said that there has to be profit in the eligible business and such eligible business can be any of the business referred to in sub-section 3(ii) to 11(a). It is highly incorrect to say that deduction under section 80IA is available to each unit within the same segment of business, unaffected by losses suffered by other units. The CIT(A) after considering the relevant provisions has rightly upheld additions made by the AO and his order should be upheld.

We have heard both the parties, perused the material available on record and gone through the orders of authorities below. We have also carefully considered provisions of section 80IA and case laws relied upon by both parties. The facts with regard to eligibility for claiming deduction under section 80IA has not been disputed by the lower authorities. The lower authorities had admitted that the assessee is eligible for claiming deduction under section 80IA in respect of power generation business though setting off of windmills. The only dispute is with regard to computation of quantum of deduction. Whether the profits and gains of the eligible business as per the words of section 80IA(5) have to be considered unit-wise or as a total eligible business comprising of profits of all units. The provisions of section 80IA(5) provided mechanism for determination of quantum of deduction from eligible business and as per which the eligible business shall be considered as if the only source of income of the assessee during the initial year and every subsequent AYs. Therefore, one has to see what eligible business is whether it is the total business as a whole or each unit or undertaking. No doubt the provision of section 80IA speaks about profit and gains from industrial undertakings & 6980/Mum/2014 or enterprises engaged in infrastructure development, etc. Sub-section (5) speaks about eligible business. Now the controversy to be resolved is whether the power generation segment of the assessee is an eligible business or each windmill is a separate unit eligible for deduction without considering profit or loss of other windmill. The assessee claims that each windmill shall be considered as an eligible unit for the purpose of determination of deduction. The assessee also cited certain judicial precedents in support of its arguments.

To understand the eligibility for deduction under section 80IA of the Act, the questions that need to be addresses are whether the gross total income of the assessee is positive, whether the assessee has an eligible business and whether different units in such eligible business are to be taken as one eligible business. To ascertain gross total income, the first step would be to compute income under each head of income separately. In this case admittedly, the assessee does not have any other head of income except income from Business or Profession. The assessee have only two segment of business income i.e. construction business and power generation business. Admittedly, construction business is not eligible business for claiming deduction under section 80IA, therefore, there is controversy about consolidation of profit from construction business activity. The assessee is having power generation segment through windmills. The assessee has set up five windmills. All the five units are part of power generation segment. Now the question is whether deduction provided under section 80IA shall be given on profits and gains derived from power segment business as the only eligible business or profits and gains derived from each windmills as an eligible business without considering profit or loss of other windmills. There is no dispute with regard to deduction to be given under chapter VIA against gross total income computed from all source of income. Even various decisions of the Hon’ble Supreme Court, including in the case of CIT vs. Liberty India & 6980/Mum/2014 (supra) have clearly held that special deduction under chapter VIA has to be computed on the gross total income and such gross total income has to be computed segment wise business after allowing all the deduction allowable under section 32 to 43D. The Hon’ble Bombay High Court in the case of Plastiblends India Ltd. Vs. ACIT (2009) 185 Taxman 187 after considering the ratio of Hon’ble Supreme Court in the case of Liberty India (supra) held that there has to be profit in the eligible business and such eligible business can be any of the business as referred to in sub- section 3(ii) to 11(a) of section 80IA of the Act.

In this case, admittedly the assessee is having two segment of business i.e. one is power generation through five windmills which is eligible business and another is construction segment. The assessee has generated profit from two windmills and incurred losses from three windmills. The assessee also derived profit from construction business. The gross total income computed from two segment of business is positive. If you consider each segment of business stand alone, then there is a loss from the power generation segment, if profit or losses of all five windmills are consolidated. The assessee has considered each wind Mill as a separate unit eligible for deduction under section 80IA, without considering profit or loss of other windmills and accordingly claimed deduction towards profit generated from two windmills. If one considered power generation business as one eligible business, certainly the assessee is not eligible for deduction under section 80IA, as from power generation business the assessee has incurred losses. If you strictly apply the provisions of section 80IA(5), the words used therein are clearly states that each eligible business shall be considered as the only source of income of the assessee for the purpose of determination of deduction. If, one goes by the words used in sub section (5), of section 80IA, then there is logic in the unit wise deduction claimed by the assessee, for the reason that deductions under chapter VIA is a incentive based deduction & 6980/Mum/2014 and period specific. The provisions provides for deduction of profits and gains of eligible business for a certain period starting from the period of initial claim. To understand the issue in a better manner, let us take an example. The assessee is in to the business of manufacturing products from different units located at different places. Meantime, the Govt. has announced incentives for setting up units in some places and within such period. The assessee has set up one eligible unit and starts claiming deduction under that provision. Next year, the assessee has set up one more eligible unit at different place and starts claiming deduction from that year and so on. Now both units are eligible units. The period of deduction specified under the act is 10 years for eligible units. Unit one is claiming deduction from initial assessment year and it may end up in some period. Unit two is claiming deduction from next year and it may end up in different year. If one takes initial assessment year from which unit one claims deduction for ten years, the assessee may loose benefit of deduction for one year for unit two, because it has commenced deduction from next year. If you take initial year of claim from the date on which unit two starts claiming deduction, then the assessee may get the benefit for more than 10 years for unit one, if you consider both units as one eligible business and profit or loss of both units is consolidated. This may not be the true intention of the legislature and for that reason the legislature consciously used the word undertaking or unit so as to give a deduction towards eligible units, in a situation where, the assessee is having more than one units in different locations, out of which one unit may be an eligible unit and another unit may not be eligible unit and also one unit may get deduction for different period and another unit may get deduction for different period. This is why the courts and tribunals has consistently held that deduction provided u/s 80IA has to be given unit wise without considering profit or loss of other units. This legal proposition is strengthened by the decision of ITAT, Ahmadabad, special bench in the case of CIT vs. Goldmine Shares and Finance Pvt. Ltd. & 6980/Mum/2014 (2008) 113 ITD 209 and also the ITAT Bangalore in the case of Jindal Aluminium Ltd. Vs. ACIT (2012) 19 ITR (T) 255.

In this case, the assessee is into two segment of business i.e. construction business which is non eligible and power generation business which is eligible business u/s 80IA of the Act. Admittedly, the assessee has set up 5 wind mills out of which two wind mills are set up in the financial year relevant A.Ys. 2005-06 and 2006-07 and remaining 3 wind mills have been set up during the financial year relevant to A.Y. 2011-12. All 5 wind mills are situated at different locations and commenced production at different point of time. All 5 wind mills are eligible units for deduction u/s 80IA of the Act. The assessee has derived profit from 2 wind mills and incurred losses from 3 wind mills. The assessee has claimed deduction u/s 80IA in respect of profit of 2 wind mills without set off of losses of 3 wind mills, considering each wind mill as a separate unit eligible for deduction u/s 80IA of the Act. Considering the facts and circumstances of this case, we are of the considered view that the assessee’s claim of deduction u/s 80IA is in accordance with the provisions of section 80IA(5) of the Act and also in consonance with the decisions of ITAT, Ahmedabad special Bench and ITAT, Bangalore decision. Hence, we direct the AO to allow deduction claimed u/s 80IA of the Income Tax Act, 1961.

The next issue that came up for our consideration from Revenue appeal is allowability of depreciation on wind mill against income from construction business. The AO denied depreciation claim of wind mills against gross total income on the ground that profit and gains of each business shall be computed separately and deductions provided u/s 30 to 43D shall be allowed before consolidating profit or loss of intra source of income. According to the AO, the assessee cannot claim depreciation of wind mill against income of construction business. It is the contention of the assessee that chapter VIA deduction has to be allowed after allowing & 6980/Mum/2014 depreciation u/s 32 even if not claimed. The assessee further contended that even otherwise the assessee can set off of unabsorbed depreciation of eligible business u/s 80IA against income from other non eligible business carried out by it. The CIT(A) allowed depreciation claimed by the assessee of Rs.14,47,69,215/- by holding that the claim of depreciation of the assessee is justified, but for the purpose of calculation of quantum deduction u/s 80IA of the Act.

Having heard both the sides and considered material on record, we find merits in the arguments of the assessee for the reason that though income from each source of business shall be computed separately after allowing all expenses including depreciation, for the purpose of determination of total income from business or profession, unabsorbed depreciation of other source of business can be set off against income of another source of business within the same financial year. Even otherwise, depreciation loss of one source can be set off against profit of other source within the same head of income. Therefore, we are of the considered view that the AO was erred in disallowing the depreciation of wind mills against income from construction business. The CIT(A) after considering the relevant submissions has rightly deleted additions made by the AO. We do not find any error in the order of the CIT(A). Hence, we are inclined to uphold the findings of the CIT(A) and reject ground raised by the Revenue.

The next issue that came up for our consideration from the assessee’s appeal is addition towards provision for outstanding expenses. The AO made additions of Rs.14,29,49,279/- towards provision created for ULC charges payable to Government of Maharashtra on the ground that the liability for payment has not been crystalised during the relevant financial year. According to the AO such liability has been arised because of order passed by the Additional Collector and competent authority in the financial year relevant to A.Y. & 6980/Mum/2014 2009-10 which is evident from the fact that the assessee needs to pay the amount on or before 31.12.2008. The assessee neither paid the amount before the period nor made provision in the books of accounts during the relevant assessment year, but disputed the liability by challenging the order of competent authority before the Hon’ble High Court of Bombay by filing a writ petition and such writ petition is pending for adjudication. As long as the liability is disputed, it cannot be considered that such liability has been ascertained liability. The AO further observed that since the assessee has disputed the liability before the Hon’ble High Court and the payment of such liability depends upon the outcome of judgment of Hon’ble High Court of Bombay, the liability can be only a contingent liability and hence cannot be allowed as deduction. It is the contention of the assessee that it is a statutory liability arised out of order passed by the competent authority and hence cannot be held to be a contingent liability. The assessee further contended that the liability is related to a particular project of development of apartments and for that project it is following percentage completion method for recognition of revenue. The said project has been completed and it has recoginsed revenue from the project during the period relevant to A.Y. 2011-12 and hence all expenses and liabilities relates to the projects needs to be provided in the books of accounts so as to ascertain correct profit from the project. Since it is following mercantile system of accounting and percentage completion method for the project and also fact that the project is completed during the year it has made provision for ULC charges payable to Government of Maharashtra, therefore, the liability cannot be considered as contingent liability. Merely because the order of the competent authority has been challenged before the court of law, it cannot be said that the liability to pay has been wiped out from existence. In this regard, he relied upon the following judgments:

Having heard both the sides and considered material on record, we find merits in the arguments of the assessee for the reason that the liability to pay ULC charges to Government of Maharashtra has been crystallized and accrued to the assessee on the basis of order passed by the competent authority demanding payment of ULC charges. Though & 6980/Mum/2014 the competent authority has passed order for payment of amount on or before 31.12.2008 the assessee has not made any provision in the books of accounts for the assessment year 2009-10 because the project on which such liability relates is not completed during the relevant period and also fact that the assessee has challenged the order of the competent authority by filing a writ before the Hon’ble High Court of Bombay. But the facts remains that the project has been completed and the revenue from the project has been recognized during the financial year relevant to A.Y. 2011-12 and hence the assessee needs to provide for related expenses of the project whether or not paid during the same financial year. Merely because the order of the competent authority has been challenged before the court of law, it cannot be said that the liability to pay has been wiped out from existence. Therefore, we are of the considered view that when the assessee is following mercantile system of accounting and percentage completion method for recognition of revenue and hence, related expenses of the project shall be provided in the year in which such project has been completed and the Revenue from the project has been recognized. In this case, admittedly, the project on which the liability relates is completed and revenue from the project has been recognized, accordingly the assessee needs to provide all related expenses in respect of the project. Further, the said liability cannot be considered as contingent liability as the liability has been ascertained and crystallized, the moment the competent authority passed order for payment of ULC charges. The writ petition filed before the Hon’ble High Court of Bombay is not relevant to decide whether the said liability is ascertained liability or contingent in nature and what is relevant is the order of the competent authority which is demanding ULC charges. If the assessee gets favourable order from the Hon’ble High Court of Bombay, and liability is no longer payable then the said provision can be reversed and liable to tax u/s 41(1) in the year in which such reversal has been made. Therefore, we are of the considered view that the AO was erred in & 6980/Mum/2014 disallowing the outstanding expenses in respect of ULC charges. The CIT(A) without appreciating the facts simply upheld the findings of the AO. In view of the fact that the assessee is following percentage completion method for recognition of revenue for a project and such project has been completed during the year, provision made for ULC charges in books is in accordance with law. Hence, we reversed the findings of the CIT(A) and direct the AO to allow provision for ULC charges.

In the result, the appeal filed by the assessee is allowed and the appeal filed by the Revenue is dismissed.