The Bombay High Court has dismissed the Revenue’s appeal against Tata Power Company Ltd. and upheld the decision of the Income Tax Appellate Tribunal, Mumbai, on two significant income-tax issues. The Court ruled that receipts arising during the pre-installation stage of a project, where they are inextricably connected with the setting up of the capital asset, are capital in nature. It also affirmed that an assessee eligible for deduction under Section 80-IA of the Income Tax Act, 1961, may choose the initial assessment year from which the deduction is to commence, subject to the statutory period.
The appeal was filed by the Revenue under Section 260A of the Income Tax Act against the ITAT’s order dated 21 May 2019 in relation to Assessment Year 2003-04. The Revenue proposed questions concerning the taxability of income earned from trial runs of Tata Power’s broadband project, proceeds from the sale of scrap generated before installation, and the computation of deduction under Section 80-IA.
Pre-installation Broadband and Scrap Receipts
Tata Power was engaged in the generation and distribution of electricity. During the relevant assessment year, it received ₹9,81,38,257 from trial runs of its broadband project and ₹1,27,67,139 from the sale of scrap generated before the project had been installed.
The company treated both amounts as part of capital work-in-progress and did not offer them to tax as revenue income. The Assessing Officer treated the receipts as taxable revenue receipts, and the Commissioner of Income Tax (Appeals) upheld that view.
The ITAT, however, recorded a factual finding that the broadband unit was still undergoing trial runs and had not been installed when the receipts arose. It further found that the scrap had also been generated before installation of the project. Since both receipts were directly and inextricably connected with the project during its installation phase, the Tribunal held that they were capital receipts that reduced the cost of the project.
The Bombay High Court approved this reasoning. It relied upon the principle laid down by the Supreme Court in CIT v. Bokaro Steel Ltd., under which receipts generated before commencement of business may be treated as capital where they are intrinsically connected with the construction or setting up of the capital asset.
The Court rejected the Revenue’s attempt to distinguish Bokaro Steel on the ground that the case concerned interest and other specific receipts. It clarified that the controlling principle is not the label attached to the receipt but its connection with the establishment of the capital asset.
Accordingly, the Court held that the income from the broadband project during trial runs and the income from the sale of scrap before commencement of business were capital receipts and were not liable to tax as revenue income.
Deduction Under Section 80-IA
The second major issue concerned Tata Power’s 67.5 MW power generation project at Jojobera, which was eligible for a 100 per cent deduction under Section 80-IA.
The project commenced operations in Assessment Year 1997-98. However, the assessee exercised its statutory option to treat Assessment Year 2002-03 as the initial assessment year for claiming the deduction.
The Assessing Officer took the view that brought-forward unabsorbed depreciation relating to the eligible unit had to be set off against its income before computing the deduction under Section 80-IA. After making such an adjustment, the Assessing Officer treated the eligible income as nil. The CIT(A) upheld the assessment.
The ITAT decided the issue in favour of the assessee by relying upon its order for the immediately preceding assessment year, CBDT Circular No. 1 of 2016 dated 15 February 2016 and judicial precedents interpreting the expression “initial assessment year”.
The CBDT Circular clarified that an eligible assessee has the option to choose the first year from which it desires to claim deduction under Section 80-IA, provided that the deduction is claimed for ten consecutive years within the prescribed block of fifteen or twenty years, as applicable.
The Bombay High Court also referred to the decisions in CIT v. G.R.T. Jewellers (India), Velayudhaswamy Spinning Mills P. Ltd. v. ACIT, CIT v. Hercules Hoists Ltd. and CIT v. B.G. Chitale. It noted that these authorities supported the assessee’s right to select the initial assessment year for claiming the deduction.
The Court therefore held that the ITAT had correctly allowed the deduction from the initial assessment year selected by Tata Power. It found no substantial question of law on this issue.
Decision of the Bombay High Court
The Bombay High Court concluded that the ITAT’s order did not give rise to any substantial question of law.
The Court accordingly dismissed the Revenue’s appeal without any order as to costs.
Legal Principle
Receipts earned before commencement of business are capital in nature where they are inextricably linked with the construction, installation or setting up of a capital asset. Such receipts reduce the cost of the project and cannot be taxed merely because they arise in the form of income during the pre-operative period.
Further, for the purposes of Section 80-IA, the “initial assessment year” is the first year selected by the assessee for claiming the deduction and need not necessarily be the year in which the eligible undertaking first commenced operations.
Why This Judgment Matters
The judgment is relevant for infrastructure companies, power-generation undertakings and businesses implementing large capital projects. It reinforces the distinction between ordinary income earned from an established business and project-linked receipts arising during the construction or installation phase.
It also provides clarity on the computation of deductions under Section 80-IA by confirming that the assessee’s statutory option to select the initial assessment year must be respected. The ruling is particularly useful for advocates, Chartered Accountants, tax consultants, corporate tax teams and businesses dealing with pre-operative receipts, capital work-in-progress and infrastructure deductions.