My windmill ran at a loss for its first few years and I set those losses off against my other business income. Now that it is finally profitable and I have started claiming section 80-IA, the assessing officer says those old losses must be notionally brought forward and knocked off the windmill's profit, so my deduction is nil. Can he do that, and who gets to decide which year is my "initial assessment year"?
No, not where the losses were genuinely absorbed against your other income in the earlier years. Section 80-IA(5) creates a fiction that the eligible business is your only source of income, but the fiction runs from the initial assessment year onwards, and the initial assessment year is the year you choose under section 80-IA(2), not the year the undertaking first switched on. That is what the Madras High Court held in Velayudhaswamy Spinning Mills (P) Ltd v ACIT on 11 March 2010, and it is what the CBDT itself accepted in Circular No. 1/2016 dated 15 February 2016, which tells assessing officers to allow the deduction on that footing and not to pursue pending litigation on the meaning of "initial assessment year". The Supreme Court dismissed the department's special leave petitions against Velayudhaswamy on 5 September 2016 by a one-line order, which leaves the Madras judgment standing but is not itself a ruling on the merits. What the fiction does still do is make losses of the eligible undertaking from the initial assessment year onwards stay inside the eligible-business silo until they are used up.
Section 80-IA gives a hundred per cent deduction of the profits and gains derived by an undertaking or enterprise from an eligible business, for ten consecutive assessment years. The eligible businesses are the ones listed in sub-section (4), which has six clauses, of which clause (vi) has been omitted: infrastructure facilities, telecommunication services, industrial parks and notified special economic zones, the generation, transmission or distribution of power, and an undertaking owned by an Indian company "set up for reconstruction or revival of a power generating plant" where the company was formed before 30 November 2005, notified before 31 December 2005, and the undertaking "begins to generate or transmit or distribute power before the 31st day of March, 2011". Sub-section (2) is the sub-section that matters here. It says the deduction "may, at the option of the assessee, be claimed by him for any ten consecutive assessment years out of fifteen years beginning from the year in which the undertaking or the enterprise develops and begins to operate any infrastructure facility or starts providing telecommunication service or develops an industrial park or develops a special economic zone ... or generates power or commences transmission or distribution of power or undertakes substantial renovation and modernisation of the existing transmission or distribution lines", with a proviso that for an infrastructure facility falling in clause (a), (b) or (c) of the Explanation to sub-section (4)(i) the words "twenty years" stand in place of "fifteen years". Ten years out of a window of fifteen, or twenty. The words quoted are from the department's Year 2026 edition of the section and the Year 2018 edition, which agree.
So the statute hands you two separate things: a fifteen-year (or twenty-year) window that starts when the undertaking starts, and a ten-year run of deduction that you place somewhere inside that window. The window opens on a date fixed by events. The ten-year run opens on a date fixed by you. The whole dispute on this page comes from collapsing those two into one. Section 80-IA(5) reads: "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." Read it slowly. It is a computation rule, not a charging rule. It applies "for the purposes of determining the quantum of deduction". It bites for the year after the initial assessment year and every year after that. And the notional accounting it orders starts at the initial assessment year, not before it. Nothing in the section defines "initial assessment year" — that phrase is used and left undefined, which is the crack the whole fight grew out of.
The department's reading, for years, was this: the initial assessment year is the year the undertaking began to operate, not the year you first claimed, and from the year after that the fiction requires the eligible business's tax history to be rebuilt as though it had never had any other income to lean on. On that reading the depreciation and losses of the loss-making early years are notionally brought forward and set off against the eligible profits, even though those same losses were actually absorbed against your other income at the time and are gone from the real carry-forward. The effect is arithmetical and brutal. Take a windmill that runs accelerated depreciation losses of two crore across its first three years, all of it set off against your textile profits in those years. You treat year four, the first year you claimed, as your initial assessment year; the officer says the initial assessment year was year one, when the windmill started, so the fiction has been running since year two and the two crore has been accumulating inside the eligible-business silo all along. In year four the windmill earns one crore. The two crore meets it: eligible profit nil, deduction nil, and one crore of notional loss still in hand. In year five the windmill earns one crore twenty lakh; the remaining one crore is absorbed and the eligible profit is twenty lakh. So across two profitable years you get a deduction of twenty lakh instead of two crore twenty lakh — and on the officer's own premise four of your ten years have already gone, because the run started in year one. That is the stake, and it is why the two questions on this page are really one. The Ahmedabad Special Bench of the Tribunal accepted the department's reading in *Goldmine Shares and Finance*, which is why the point went to the High Courts.
The leading decision the other way is *Velayudhaswamy Spinning Mills (P) Ltd v ACIT*, a Division Bench of the Madras High Court decided on 11 March 2010 in Tax Case Nos. 909 and 940 of 2009, reported at 340 ITR 477. The Court read the fiction for what it says and no further. Its words, as later judgments of the same Court and of the Tribunal reproduce them, are that "when the assessee exercises the option, the only losses of the years beginning from initial assessment year alone are to be brought forward and no losses of earlier years"; that "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"; and that "a fiction created in sub-section does not contemplates to bring set off amount notionally. The fiction is created only for the limited purpose and the same cannot be extended beyond the purpose for which it is created." The tax cases were allowed and the questions answered in favour of the assessee. The Madras High Court has applied it since, in *CIT v Eastman Spinning Mills (P) Ltd* on 18 February 2015, in *CIT v Prem Textile International* on 1 June 2016, in *CIT v Bannari Amman Sugars Ltd* on 13 June 2016 and in *PCIT v GRT Hotels & Resorts Pvt Ltd* on 27 September 2016.
What happened to *Velayudhaswamy* above the Madras High Court is worth stating precisely, because it is routinely overstated. The department carried it up. On 5 September 2016 a Bench of Sikri and Ramana JJ passed an order in S.L.P.(C) No. 33475 of 2012 and ten connected petitions, directed against the Madras High Court's judgment in T.C.A. No. 909 of 2009 dated 11 March 2010, which reads in full: "Delay condoned. The special leave petitions are dismissed." That is a non-speaking refusal of leave. On *Kunhayammed v State of Kerala*, decided by the Supreme Court on 19 July 2000, an order refusing special leave "does not attract the doctrine of merger" whether it speaks or not, and where it gives no reasons no law is declared under Article 141. So the correct statement is: the Supreme Court declined to interfere, the Madras judgment stands as the judgment of that High Court and binds within its jurisdiction, and there is no Supreme Court ruling on the merits of the notional-loss question. Do not tell a court that the Supreme Court has approved *Velayudhaswamy*. It has not said so, and it has said the opposite in terms. The Karnataka High Court took the contrary view in *M/s Microlabs Limited v. ACIT* on 7 July 2014 in I.T.A. No. 194 of 2011, and the assessee's petition against that judgment came before Gogoi and Sapre JJ on 21 October 2016. Reciting the dismissal of 5 September 2016, the Court 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", and added "Hence, we grant leave." That appeal is Civil Appeal No. 10334 of 2016, *Microlabs Ltd v ACIT Circle 12(1), Bangalore*. The last order on the Supreme Court's record of proceedings in it is of 5 July 2018, when the affidavit of valuation having been filed the Registry was directed to process the matter for listing, and no decision in it is found on the reachable record. So the conflict between Madras and Karnataka is live, the Court has said in its own words that the 2016 dismissal carries no reasons, and which High Court binds you still decides the case. Expect the officer to answer with *Plastiblends India Ltd v Addl CIT*, decided by the Supreme Court on 9 October 2017 by Sikri and Ashok Bhushan JJ in Civil Appeal No. 238 of 2012 and twenty-six connected appeals. That decision is on section 80-IA(5), and it is against the assessee: it holds that "the quantum of deduction allowable under section 80-IA has to be determined by computing the gross total income from business, after taking into consideration all the deductions allowable under sections 30 to 43D of the Act", so depreciation must be deducted in arriving at eligible profits whether or not you claimed it, section 80-IA being a code by itself, and "any device adopted to reduce or inflate the profits of eligible business has got to be rejected". Know exactly what it settles and what it does not. It settles how the eligible profits of a year are computed. It says nothing about whether losses of years before the initial assessment year, already absorbed elsewhere, come back — that question was not before the Court.
The instrument that actually closed the argument is administrative, and it is the one most files are missing. CBDT Circular No. 1/2016, F.No. 200/31/2015-ITA-I, dated 15 February 2016, is headed "Clarification of the term 'initial assessment year' in Section 80IA(5) of the Income-tax Act, 1961". It records the representation that "some Assessing Officers are interpreting the term 'initial assessment year' as the year in which the eligible business/ manufacturing activity had commenced and are considering such first year of commencement/operation etc. itself as the first year for granting deduction, ignoring the clear mandate provided under sub-section (2)". It then says: "It is abundantly clear from sub-section (2) that an assessee who is eligible to claim deduction u/s 80IA of the Act has the option to choose the initial/first year from which it may desire the claim of deduction for ten consecutive years, out of a slab of fifteen (or twenty) years, as prescribed under that sub-section. It is hereby clarified that once such initial assessment year has been opted for by the assessee, he shall be entitled to claim deduction u/s 80IA for ten consecutive years beginning from the year in respect of which he has exercised such option subject to the fulfillment of conditions prescribed in the section. Hence, the term 'initial assessment year' would mean the first year opted for by the assessee for claiming deduction u/s 80IA. However, the total number of years for claiming deduction should not transgress the prescribed slab of fifteen or twenty years, as the case may be and the period of claim should be availed in continuity." And it directs: "The Assessing Officers are, therefore, directed to allow deduction u/s 80IA in accordance with this clarification ... Pending litigation on allowability of deduction u/s 80IA shall also not be pursued to the extent it relates to interpreting 'initial assessment year' as mentioned in sub-section (5) of that section for which the Standing Counsels/D.R.s be suitably instructed." The circular is signed by Deepshikha Sharma, Director to the Government of India.
The circular is still in force so far as I could establish: I found no later circular or instruction withdrawing or superseding it, and the transition to the Income-tax Act, 2025 does not displace it. The Income-tax Act, 2025 came into force on 1 April 2026 and applies from the tax year 2026-27; the Income-tax Act, 1961 continues to govern all tax years beginning before 1 April 2026, and the department's own e-filing portal states that circulars, notifications, instructions and approvals issued under the old Act remain valid so long as they do not conflict with the new Act. That matters in both directions: the years now under assessment, appeal and rectification are 1961 Act years, and an undertaking that began generating power in, say, the financial year 2016-17 has a fifteen- or twenty-year window that runs well past the assessment year 2026-27, so the relief itself continues under the new Act — the department's own section-mapping tool shows section 80-IA carried over to section 138 of the 2025 Act. A circular of this kind binds the assessing officer even though it does not bind you or a court: it is issued under the Board's power to instruct its own officers, and it is issued in your favour. The Tribunal has said so in terms — in *Pragati Power Corporation Ltd v ACIT*, decided by the Delhi Bench on 5 January 2024, that "once the CBDT accepts the decision of the Hon'ble Court and issues a Circular to its subordinate officers to follow the same, the subordinate officers of the department are bound to follow the same in true letter and spirit." Note what the circular does and does not do. It fixes who chooses the initial assessment year. It does not in terms say that pre-initial-year losses already absorbed cannot be brought back. But the two questions are joined at the hip: once the initial assessment year is the year you picked, sub-section (5)'s notional accounting has nothing earlier to reach for, because by its own words it starts at the initial assessment year.
Two limits on all of this. First, the fiction is real for the years it does cover. From the initial assessment year onwards, if the eligible undertaking throws up a loss or unabsorbed depreciation and that loss is set off against your other income, it still has to be notionally carried inside the eligible-business silo and set against the undertaking's later profits before the deduction is computed, because for those years the statute says the eligible business is your only source of income. *Velayudhaswamy* does not free you from that; it only stops the clock being wound back past the year you chose. Second, sub-section (5) governs the quantum of the deduction, not the pool it comes out of. In *CIT v Reliance Energy Ltd*, decided on 28 April 2021 by L. Nageswara Rao and Vineet Saran JJ in Civil Appeal No. 1327 of 2021 and connected appeals, the Supreme Court held 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)" and that "sub-section (5) cannot be pressed into service for reading a limitation of the deduction under sub-section (1) only to 'business income'."
Three other sub-sections decide whether you get the deduction at all, and they are where claims are lost far more often than on the merits. Section 80-IA(7) makes the deduction inadmissible "unless the accounts of the undertaking for the previous year relevant to the assessment year for which the deduction is claimed have been audited by an accountant, as defined in the Explanation below sub-section (2) of section 288, before the specified date referred to in section 44AB and the assessee furnishes by that date the report of such audit in the prescribed form duly signed and verified by such accountant." The prescribed form is Form No. 10CCB under rule 18BBB, furnished electronically under the proviso to rule 12(2). Note the timing, and note that it binds every claimant: the sub-section used to require the report to be furnished "along with his return of income", and section 35 of the Finance Act 2020 (Act No. 12 of 2020), in force from 1 April 2020, substituted the words "before the specified date referred to in section 44AB and the assessee furnishes by that date". The "specified date" is simply a date defined in the Explanation to section 44AB; it applies to every section 80-IA claimant whether or not a section 44AB audit is separately required of him. Section 23 of the same Finance Act moved that date, with effect from the same day, so that it now reads "date one month prior to the due date for furnishing the return of income under sub-section (1) of section 139" in place of the due date itself. In practice the Form 10CCB has to be in a month before the return. Section 80AC then kills the claim outright if the return is late. It was substituted by Act No. 13 of 2018, the Finance Act 2018, with effect from 1 April 2018, and as substituted it applies, for assessment years commencing on or after 1 April 2018, to any deduction admissible "under any provision of this Chapter under the heading 'C.—Deductions in respect of certain incomes'", providing that "no such deduction shall be allowed to him unless he furnishes a return of his income for such assessment year on or before the due date specified under sub-section (1) of section 139". For years before that the bar reached only sections 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID and 80-IE. There is no discretion in section 80AC and no condonation built into it. Section 80-IA(9) caps the stacking: where profits are "claimed and allowed under this section for any assessment year, deduction to the extent of such profits and gains shall not be allowed under any other provisions of this Chapter under the heading 'C.—Deductions in respect of certain incomes', and shall in no case exceed the profits and gains of such eligible business of undertaking or enterprise, as the case may be" — as *Shital Fibers* holds, that operates at the stage of allowance, not of computation.
One practical point about the shape of the section today. Every head in sub-section (4) principally turns on a date by which the undertaking must have started: telecommunication services, for instance, only qualify where the undertaking "has started or starts providing telecommunication services ... on or after the 1st day of April, 1995, but on or before the 31st day of March, 2005", and the reconstruction clause (v) requires power to be generated, transmitted or distributed "before the 31st day of March, 2011". Those cut-offs have all passed. Section 80-IA is now a run-off provision: no new undertaking can enter it, and what is left is the tail of ten-year windows opened by undertakings that started years ago. That is exactly the population in which the initial-assessment-year argument is still being raised — and it is also why the choice you made once, years ago, and the paperwork that records it, are what the case now turns on.
The difference between the two readings is not a matter of a few percentage points. Because the notional loss is set against eligible profits before the deduction is worked out, the department's reading can reduce a full hundred per cent deduction to nothing for several years running — and those years are spent out of a ten-year run that cannot be extended. A claim that is nominally allowed can be worth nothing at all. And if the officer also insists that the first year of operation was your initial assessment year, the ten years may already have expired on paper before you ever made a profit.
The other reason this matters is that the answer now comes as much from a CBDT circular as from a court. Circular No. 1/2016 is an instruction to the officer, issued in your favour, and it tells him in terms not to pursue this point. If it is not on the file and not in the reply, nobody in the department is obliged to go looking for it.
Our captive power plant supplies electricity to our own factory. The officer values that power at the low rate the Electricity Board pays us for surplus, not the tariff the Board charges us. Which is 'market value' under s.80-IA(8)?
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?
Can I count DEPB credits and duty drawback in the profits for my 80-IB deduction?
You forgot to add back something your own audit report flagged. Is that concealment?
The AO ordered a special audit of my books without hearing me first. Is that direction valid?
Where a deduction has been allowed under s.80-IA, does s.80-IA(9) require the other Chapter VI-A deduction, such as s.80-HHC, to be computed on a reduced profit?
I am a registered income-tax practitioner under s.288(2). Can I sign a tax audit report?
I set up a new foundry inside my existing engineering works and it mostly supplies my own divisions. The officer says it is only a reconstruction of my old business. Is he right?
Every page in this library links to what it was written from, so you can check it rather than take our word for it.
