My windmill lost money in its first years and those losses were set off against my other business income at the time. Now that the unit is profitable, can the officer bring those same losses back notionally under s.80-IA(5) and wipe out my deduction?
Not on the Madras High Court's view. The fiction in s.80-IA(5) treats the eligible business as the only source of income, but it runs from the initial assessment year, and the initial assessment year is the year the assessee opts for under s.80-IA(2), not the year the undertaking started. Losses of years before that, which were actually absorbed against other income, are not revived: once the set off has taken place the Revenue cannot rework it and bring it back notionally. The Supreme Court dismissed the department's petitions against this judgment on 5 September 2016 without reasons. The Karnataka High Court has taken the opposite view, the Delhi High Court has expressly refused to follow Karnataka, and a Supreme Court appeal on the Karnataka judgment was admitted in October 2016.
Decided by the High Court (High Court of Judicature at Madras, Division Bench; the names of the judges could not be established from any source read for this entry.) on 2010-03-11, reported as (2012) 340 ITR 477 (Mad); (2010) 231 CTR (Mad) 368; T.C.(A) Nos. 909 and 940 of 2009 and 908 of 2008, disposed of by common order. It bears on section 80-IA(5), section 80-IA, section 80IA(2), section 32(2), section 72 of the Income Tax Act 1961, in Deductions & Disallowances matters.
This is the judgment the whole s.80-IA(5) argument is built on, and it is the reason most windmill, captive power and infrastructure claims survive at all. The department's method - reconstruct the undertaking's history from the year it first generated, notionally carry forward losses that were really absorbed a decade ago, and leave nothing to deduct - reduces a great many claims to nil. It is also the judgment behind CBDT Circular No. 1 of 2016 and behind the line of Bombay and Madras decisions that followed. A reader needs it and needs, in the same breath, to know that Karnataka goes the other way and that a Supreme Court appeal on the Karnataka judgment was admitted.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee claimed the deduction under s.80-IA in respect of an eligible undertaking whose early years had been loss-making. Those losses and the unabsorbed depreciation of the undertaking had in fact been set off against the assessee's other income in the years in which they arose, so that by the time the deduction was claimed nothing remained to be carried forward under s.32(2) or s.72. The department nonetheless recomputed the profit of the eligible business by notionally bringing those absorbed losses and depreciation forward and setting them against the undertaking's current profit, relying on the fiction in s.80-IA(5) that the eligible business is the only source of income of the assessee from the initial assessment year onwards. On that footing the deduction was reduced or extinguished. The Tribunal had followed the Special Bench decision in ACIT v. Goldmine Shares and Finance Pvt Ltd, which had answered the same question in the Revenue's favour. Three tax case appeals came before the Madras High Court and were disposed of by a common order.
The assessee succeeded. The words initial assessment year in sub-section (5) are not defined and are not the same as the words beginning from the year in sub-section (2); sub-section (2) gives the assessee the option to choose ten consecutive assessment years out of the eligible window, and that option must be exercised or the benefit is not obtained. The fiction in sub-section (5) operates from the initial assessment year so chosen. A loss of a year earlier than the initial assessment year, which has already been absorbed against the assessee's other income, cannot be notionally brought forward and set off against the profits of the eligible business, because once the set off has taken place in an earlier year the Revenue cannot rework the set-off amount and bring it notionally; the fiction created by the sub-section does not contemplate bringing a set-off amount back notionally.
The Court read sub-sections (1), (2) and (5) together. Sub-section (1) allows a deduction of the specified proportion of the profits and gains derived from the eligible business for ten consecutive assessment years. Sub-section (2) gives the assessee the option to choose which ten consecutive years, out of the longer window measured from the year the undertaking began, it will take, and the Court held that the option has to be exercised and that if it is not exercised the assessee will not get the benefit. Sub-section (5) then says that for the purpose of determining the quantum of the deduction for the assessment year immediately succeeding the initial assessment year, and every later year, the profits of the eligible business are to be computed as if that business were the only source of income of the assessee during the previous year relevant to the initial assessment year and every subsequent year up to the year of determination. The Court's point is textual and narrow: the expression initial assessment year used in sub-section (5) is not defined anywhere and is a different expression from the one used in sub-section (2), and the fiction is anchored to it. Because the fiction begins at the initial assessment year, it has nothing to say about years before that year. In those earlier years the losses were really set off against real other income under the ordinary provisions, and that set off is a completed fact. A deeming provision cannot be used to undo a set off that has already happened. Chapter VI-A incentives of this kind are profit-linked, and the fiction exists to isolate the eligible profit, not to manufacture a loss that no longer exists.
Once the set off is taken place in earlier year against the other income of the assessee, the Revenue cannot rework the set off amount and bring it notionally. A fiction created in sub-section does not contemplates to bring set off amount notionally.
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Handle my notice → Ask a CA on WhatsAppNot on the Madras High Court's view. The fiction in s.80-IA(5) treats the eligible business as the only source of income, but it runs from the initial assessment year, and the initial assessment year is the year the assessee opts for under s.80-IA(2), not the year the undertaking started. Losses of years before that, which were actually absorbed against other income, are not revived: once the set off has taken place the Revenue cannot rework it and bring it back notionally. The Supreme Court dismissed the department's petitions against this judgment on 5 September 2016 without reasons. The Karnataka High Court has taken the opposite view, the Delhi High Court has expressly refused to follow Karnataka, and a Supreme Court appeal on the Karnataka judgment was admitted in October 2016. This was decided by the High Court (High Court of Judicature at Madras, Division Bench; the names of the judges could not be established from any source read for this entry.) and bears on section 80-IA(5), section 80-IA, section 80IA(2), section 32(2), section 72 of the Income Tax Act 1961. It is reported as (2012) 340 ITR 477 (Mad); (2010) 231 CTR (Mad) 368; T.C.(A) Nos. 909 and 940 of 2009 and 908 of 2008, disposed of by common order. This is the judgment the whole s.80-IA(5) argument is built on, and it is the reason most windmill, captive power and infrastructure claims survive at all. The department's method - reconstruct the undertaking's history from the year it first generated, notionally carry forward losses that were really absorbed a decade ago, and leave nothing to deduct - reduces a great many claims to nil. It is also the judgment behind CBDT Circular No. 1 of 2016 and behind the line of Bombay and Madras decisions that followed. A reader needs it and needs, in the same breath, to know that Karnataka goes the other way and that a Supreme Court appeal on the Karnataka judgment was admitted. If it applies to you, the first step is this: Say in the return, and in the audit report, which year you have opted for as the initial assessment year, and keep that choice the same in every later year. The option is yours under s.80-IA(2); the ten consecutive years then run from the year you pick, inside the outer window.
The assessee claimed the deduction under s.80-IA in respect of an eligible undertaking whose early years had been loss-making. Those losses and the unabsorbed depreciation of the undertaking had in fact been set off against the assessee's other income in the years in which they arose, so that by the time the deduction was claimed nothing remained to be carried forward under s.32(2) or s.72. The department nonetheless recomputed the profit of the eligible business by notionally bringing those absorbed losses and depreciation forward and setting them against the undertaking's current profit, relying on the fiction in s.80-IA(5) that the eligible business is the only source of income of the assessee from the initial assessment year onwards. On that footing the deduction was reduced or extinguished. The Tribunal had followed the Special Bench decision in ACIT v. Goldmine Shares and Finance Pvt Ltd, which had answered the same question in the Revenue's favour. Three tax case appeals came before the Madras High Court and were disposed of by a common order. The matter was decided on 2010-03-11 by the High Court (High Court of Judicature at Madras, Division Bench; the names of the judges could not be established from any source read for this entry.). On those facts the High Court held as follows. The assessee succeeded. The words initial assessment year in sub-section (5) are not defined and are not the same as the words beginning from the year in sub-section (2); sub-section (2) gives the assessee the option to choose ten consecutive assessment years out of the eligible window, and that option must be exercised or the benefit is not obtained. The fiction in sub-section (5) operates from the initial assessment year so chosen. A loss of a year earlier than the initial assessment year, which has already been absorbed against the assessee's other income, cannot be notionally brought forward and set off against the profits of the eligible business, because once the set off has taken place in an earlier year the Revenue cannot rework the set-off amount and bring it notionally; the fiction created by the sub-section does not contemplate bringing a set-off amount back notionally.
The Court read sub-sections (1), (2) and (5) together. Sub-section (1) allows a deduction of the specified proportion of the profits and gains derived from the eligible business for ten consecutive assessment years. Sub-section (2) gives the assessee the option to choose which ten consecutive years, out of the longer window measured from the year the undertaking began, it will take, and the Court held that the option has to be exercised and that if it is not exercised the assessee will not get the benefit. Sub-section (5) then says that for the purpose of determining the quantum of the deduction for the assessment year immediately succeeding the initial assessment year, and every later year, the profits of the eligible business are to be computed as if that business were the only source of income of the assessee during the previous year relevant to the initial assessment year and every subsequent year up to the year of determination. The Court's point is textual and narrow: the expression initial assessment year used in sub-section (5) is not defined anywhere and is a different expression from the one used in sub-section (2), and the fiction is anchored to it. Because the fiction begins at the initial assessment year, it has nothing to say about years before that year. In those earlier years the losses were really set off against real other income under the ordinary provisions, and that set off is a completed fact. A deeming provision cannot be used to undo a set off that has already happened. Chapter VI-A incentives of this kind are profit-linked, and the fiction exists to isolate the eligible profit, not to manufacture a loss that no longer exists. In the words reproduced by the source cited on this page: "Once the set off is taken place in earlier year against the other income of the assessee, the Revenue cannot rework the set off amount and bring it notionally. A fiction created in sub-section does not contemplates to bring set off amount notionally." The decision followed or applied ACIT v. Goldmine Shares and Finance Pvt Ltd (ITAT Ahmedabad, Special Bench, 30 April 2008) - the contrary view, displaced by this judgment; CIT-I v. Emerald Jewel Industry P Ltd (Madras High Court, 10 August 2010) - applied this judgment within months of it; CIT v. Eastman Spinning Mills (P) Limited (Madras High Court, 18 February 2015) - applied, reproducing this judgment at length; Pr. CIT-7 v. Sterling Agro Industries Ltd (Delhi High Court, 20 February 2023) - followed, in preference to the Karnataka view; M/s Microlabs Limited v. ACIT (Karnataka High Court, 7 July 2014) - the opposite view; CBDT Circular No. 1 of 2016 dated 15 February 2016 - the Board accepts the option under s.80-IA(2).
It was decided by the High Court on 2010-03-11 and is reported as (2012) 340 ITR 477 (Mad); (2010) 231 CTR (Mad) 368; T.C.(A) Nos. 909 and 940 of 2009 and 908 of 2008, disposed of by common order. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 80-IA(5), section 80-IA, section 80IA(2), section 32(2), section 72, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The assessee succeeded. The words initial assessment year in sub-section (5) are not defined and are not the same as the words beginning from the year in sub-section (2); sub-section (2) gives the assessee the option to choose ten consecutive assessment years out of the eligible window, and that option must be exercised or the benefit is not obtained. The fiction in sub-section (5) operates from the initial assessment year so chosen. A loss of a year earlier than the initial assessment year, which has already been absorbed against the assessee's other income, cannot be notionally brought forward and set off against the profits of the eligible business, because once the set off has taken place in an earlier year the Revenue cannot rework the set-off amount and bring it notionally; the fiction created by the sub-section does not contemplate bringing a set-off amount back notionally. It arises in Deductions & Disallowances matters, on section 80-IA(5), section 80-IA, section 80IA(2), section 32(2), section 72 of the Income Tax Act 1961, and was decided by High Court of Judicature at Madras, Division Bench; the names of the judges could not be established from any source read for this entry.. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Build the year-by-year history of the eligible undertaking and show where each early loss and each instalment of depreciation actually went. The argument is that they were absorbed against other income years ago and there is nothing left to carry forward. Put CBDT Circular No. 1 of 2016 dated 15 February 2016 in front of the officer. The Board has itself accepted the option point and told officers not to pursue litigation on it. Check which High Court binds you before you rely on this. In Karnataka the binding decision goes the other way, and an assessee there should expect the notional set-off to be applied against him at every stage below. Where no High Court binds you, cite this judgment with the Delhi High Court decisions that follow it and say plainly that the Karnataka view exists and why it is not to be preferred. Concealing the conflict from the Bench is how a good point is lost.
High Courts differ on this point. The High Courts are split and a practitioner has to know which side of the line he is on. For the assessee: Madras, in this judgment and in the long line that follows it, and Delhi, which has twice considered both views and preferred this one. In Pr. CIT-7 v. Sterling Agro Industries Ltd (20 February 2023, ITA 105/2023) the Delhi High Court said, in terms, that it was unable to persuade itself to agree with the view taken by the Karnataka High Court in Microlabs Ltd and respectfully agreed with the view taken by the Madras High Court, and the same Bench repeated it in Pr. CIT-7 v. Sil Investments Ltd (5 October 2023). Against the assessee: Karnataka, in M/s Microlabs Limited v. ACIT (7 July 2014, ITA No. 194 of 2011), which preferred the Ahmedabad Special Bench in Goldmine Shares and answered the question in favour of the Revenue and against the assessee. The Supreme Court has touched both sides without deciding the point. It dismissed the department's petitions against this judgment on 5 September 2016 by an order reading, in its entirety, that delay is condoned and the special leave petitions are dismissed - a non-speaking dismissal, which leaves this judgment standing but decides nothing. Six weeks later, on 21 October 2016, in the assessee's petition against the Karnataka judgment, Gogoi and Sapre JJ recited that very dismissal and said the matter "will, nevertheless, require a detailed examination as the order of the Court dismissing the special leave petition does not contain any reasons therefor", before recording "Hence, we grant leave." So the Court has itself said that the unreasoned dismissal decides nothing, which is the answer to anyone citing it as approval of the Madras view. That appeal is Civil Appeal No. 10334 of 2016, Microlabs Ltd v ACIT Circle 12(1), Bangalore. It was still on the registry side of the Court as late as 5 July 2018, when the appellant's affidavit of valuation was taken on record and the registry was directed to process the matter for listing, and no judgment in it has been traced. The conflict therefore stands undecided, and which High Court binds the assessee still decides the case. The department's own position is with the assessee: CBDT Circular No. 1 of 2016 of 15 February 2016 accepts the option point and tells officers not to agitate it. The current text of sub-section (5), which this judgment construes, still stands. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
A warning about reachability, because it affects how this entry is written. The judgment itself is not served on Indian Kanoon and the Madras High Court's own portal cannot be fetched, so it has not been read end to end and no attempt is made here to set out its facts in detail or its framed questions. What has been read, on the courts' own addresses, is this. The Supreme Court order of 5 September 2016 in SLP(C) No. 33475 of 2012 and connected petitions, made by A.K. Sikri and N.V. Ramana, JJ., which recites the judgment appealed from as T.C.A. No. 909 of 2009 of the High Court of Madras dated 11 March 2010 - that recital is where the date and the appeal number in this entry come from, and it is the Court's own. The order granting leave against the Karnataka judgment on 21 October 2016 was made by Ranjan Gogoi and Abhay Manohar Sapre, JJ. The Madras High Court in CIT v. Eastman Spinning Mills (P) Limited of 18 February 2015, which reproduces this judgment as a block extract and is the source of every sentence quoted here. The Madras High Court in CIT-I v. Emerald Jewel Industry P Ltd of 10 August 2010, which gives the full appeal numbers, T.C.(A) Nos. 909 and 940 of 2009 and 908 of 2008 disposed of by common order, and the report at (2010) 231 CTR (Mad) 368. The judges' names are not recorded in any of those and are not given here. The section text quoted is the current sub-section (5) as printed on the department's page for s.80-IA, which names the Act as the Income-tax Act, 1961 and carries a Year stamp of 2026; that page prints no amendment footnote for the section at all, so this entry says nothing about which Finance Act enacted the present sub-section, which is a real gap on a provision whose whole fight is about the words initial assessment year. The section label in this library is hyphenated for most sub-sections and unhyphenated for sub-section (2), and that is not an error. The library already holds a concept page on the initial assessment year and a case record on Pr. CIT v. Tata Power; this entry is the judgment they rest on and the one that carries the conflict. And one trap: searches for the Supreme Court appeal against the Karnataka judgment return ACIT v. Micro Labs Ltd, Civil Appeal No. 7427 of 2012, decided 10 December 2015, where Dave and Misra JJ differed on whether particular receipts are derived from the eligible business and referred that question to a larger Bench, and which was dismissed on 17 September 2018. Different appeal, different question, party spelt as two words. The judgment decides the notional carry-forward question and the identity of the initial assessment year. It does not decide what happens to a loss of the eligible undertaking arising in or after the initial assessment year: on the Court's own logic that loss stays inside the eligible-business silo until it is used up, but the judgment is not addressed to it. It does not tell you how far back the option may be pushed, or whether an option once stated may be changed. It does not deal with the outer window in s.80-IA(4) for any particular class of undertaking. It says nothing about s.80-IA(7), the audit requirement, or about s.80AC and the consequence of a belated return, either of which can defeat the claim before the sub-section (5) argument is reached. And it is a judgment on the text as it then stood; the statutory history of this section, and which Finance Act put the present sub-section (5) into the Act, could not be established from the department's own pages and is not stated here. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The assessee succeeded. The words initial assessment year in sub-section (5) are not defined and are not the same as the words beginning from the year in sub-section (2); sub-section (2) gives the assessee the option to choose ten consecutive assessment years out of the eligible window, and that option must be exercised or the benefit is not obtained. The fiction in sub-section (5) operates from the initial assessment year so chosen. A loss of a year earlier than the initial assessment year, which has already been absorbed against the assessee's other income, cannot be notionally brought forward and set off against the profits of the eligible business, because once the set off has taken place in an earlier year the Revenue cannot rework the set-off amount and bring it notionally; the fiction created by the sub-section does not contemplate bringing a set-off amount back notionally.
TaxSphere, “Velayudhaswamy Spinning Mills v ACIT”, https://taxnotice.vittsphere.com/caselaw/case/velayudhaswamy-spinning-mills-v-acit-80-ia-5-initial-assessment-year/ (validity last checked 2026-09-23)
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Our eligible undertaking made losses in its early years which were absorbed against our other income. Can the officer bring them back notionally under s.80-IA(5), and can we pick which year is the initial assessment year?
My windmill unit's early losses were already set off against my share trading profits. Must I now notionally bring those losses back and reduce the unit's profit before claiming section 80-IA?
My section 80-IA deduction is larger than my business income. Can I set it against my other income too, or only against business income?
The officer has disallowed a receipt on the ground that it is not 'derived from' our undertaking. Does the exact wording of the deduction section decide the point?
