ITAT Sends Back 80-IA Issue; Capital Subsidy Treated as Non-Taxable

The assessee, Sahajanand Laser Technology Ltd., engaged in manufacturing laser systems and machinery, claimed a deduction under Section 80-IA in respect of its power generation unit for AYs 2017-18 and 2018-19. The Assessing Officer denied the deduction on two counts. First, it held that losses of earlier years prior to the year in which the assessee opted to claim a deduction must be notionally set off against current profits, thereby nullifying the claim. Second, the AO treated the capital investment subsidy received from the Gujarat government as a revenue receipt, taxable in nature, and also sought to reduce it from the cost of assets.

Issue Before Court: Whether the capital subsidy received from the state government is taxable as revenue income?

Tribunal’s Ruling: The Tribunal held that once the assessee exercises the option to choose the “initial assessment year” under Section 80-IA, only losses from that year onwards can be considered. Losses of earlier years cannot be artificially brought forward and set off. The approach adopted by the assessing officer was therefore legally untenable. However, since the exact year of commencement and eligibility of the unit required factual verification, the Tribunal restored the issue to the assessing officer for fresh examination.

On the issue of subsidy, the Tribunal ruled in favour of the assessee, holding that the capital investment subsidy granted by the state government for industrial promotion is a capital receipt. It is not taxable and cannot be treated as revenue income. As regards the penalty for AY 2018-19, the Tribunal deleted the same, observing that when the core issue of deduction itself has been remanded for fresh consideration, the penalty cannot be sustained independently.

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