Bombay High Court Upholds ITAT Order, Says Tata Power's Broadband Trial Run Income, Scrap Sale Not Taxable

The Bombay High Court has recently dismissed an appeal filed by the Income Tax Department against The Tata Power Company Ltd. It held that income from trial runs of its broadband project and the sale of scrap generated before the project's installation were capital receipts not liable to tax.

Observing that income generated before the commencement of business that is "inextricably connected with the setting up of a capital asset" is capital in nature and serves to reduce the cost of construction, the court held that the ITAT's order did not give rise to any substantial question of law.

A Division Bench of Justice B.P. Colabawalla and Justice Firdosh P. Pooniwalla upheld the tribunal's finding that the income from trial runs of the broadband project and the sale of scrap generated before the project's installation were capital receipts.

The appeal arose from Assessment Year 2003-04. Tata Power had earned ₹9.81 crore from trial runs of its broadband project and ₹1.27 crore from the sale of scrap generated before the project's installation. Treating both receipts as capital work-in-progress, it did not offer them to tax. The Assessing Officer treated the receipts as revenue income, a view that was upheld by the Commissioner of Income Tax (Appeals) before being reversed by the tribunal.

The tribunal found that both receipts were inextricably linked to the broadband project, which was still in the installation phase. It held that the assessee had rightly treated the receipts as capital work-in-progress.

Referring to the Supreme Court's ruling in CIT v. Bokaro Steel Ltd., which held that receipts intrinsically connected with the construction of a plant are capital in nature and reduce the cost of construction, the bench observed, "The ratio of the aforesaid decision is that any income generated before the commencement of the business, which is inextricably connected with the setting up of a capital asset, is capital in nature and serves to reduce the cost of construction and the same cannot constitute taxable income. Therefore, the ITAT has recorded a categorical finding of fact and concluded that the income from the broadband project during the trial runs, and sale of scrap before the commencement of business, is a capital receipt and not liable to be taxed. Hence, no substantial question of law arises in so far as questions (i) and (ii) are concerned."

The Revenue sought to distinguish Bokaro Steel Ltd. It argued that the decision dealt with the capitalisation of interest and not the capitalisation of income received by an assessee.

The court rejected the contention. It found no error in the tribunal's conclusion that the income earned from the broadband project's trial runs and the sale of scrap before commencement of business were capital receipts that could not be brought to tax.

The court also examined the Revenue's challenge to the deduction claimed by the assessee under Section 80-IA of the Income Tax Act. The assessing officer held that the deduction could be allowed only after setting off the brought-forward unabsorbed depreciation of the eligible unit. This reduced the eligible income to nil. The tribunal disagreed. It relied on a 2016 CBDT circular and its earlier decision in the Tata Power's own case for Assessment Year 2002-03.

Relying on the circular, it clarified that an eligible assessee can choose the initial assessment year from which it wishes to claim the deduction.

The bench observed, "Having regard to the aforesaid CBDT Circular and the decisions referred to hereinabove, we are of the considered opinion that the ITAT rightly allowed the deduction from the initial assessment year as opted for by the Assessee. Consequently, even as far as question (iii) is concerned, no substantial question of law arises for consideration."

The court also referred to CIT v. G.R.T. Jewellers (India), Velayudhaswamy Spinning Mills Pvt. Ltd., CIT v. Hercules Hoists Ltd., and CIT v. B.G. Chitale. It held that the tribunal had rightly allowed the deduction from the initial assessment year chosen by the assessee.

Finding that none of the questions raised by the Revenue gave rise to any substantial question of law, the bench dismissed the appeal. There was no order as to costs.

For Appellant (Revenue): Advocate Abhishek R. Mishra, 

For Respondent: Advocate Srihari Iyer