The Bombay High Court has dismissed the Income Tax Department’s appeal against Tata Power Company Ltd. In this Tata Power Tax Ruling, the Court held that income from broadband project trial runs and scrap sales before the project’s completion are capital receipts, not taxable income. A Division Bench of Justice B.P. Colabawalla and Justice Firdosh P. Pooniwalla ruled that such receipts directly reduce the project’s construction cost because they arise before commercial operations begin.
Background of the Dispute
The dispute relates to Assessment Year 2003–04. Tata Power earned ₹9.81 crore from trial runs of its broadband project. It also received ₹1.27 crore from selling scrap generated during the project’s installation.
The company treated both amounts as capital work in progress. Therefore, it did not include them as taxable income. However, the Assessing Officer classified both receipts as revenue income. The Commissioner of Income Tax (Appeals) agreed with that view.
Later, the Income Tax Appellate Tribunal (ITAT) reversed the decision. The Tribunal found that both receipts were directly connected with setting up the broadband project. Consequently, it treated them as capital receipts. The Revenue then challenged the ITAT order before the Bombay High Court.
Trial Run Income and Scrap Sale Are Capital Receipts
The main issue before the High Court was whether trial run income and scrap sale proceeds received before commercial operations began should attract income tax.
The ITAT relied on the Supreme Court’s judgment in Commissioner of Income Tax v. Bokaro Steel Ltd. That decision established that receipts directly linked to constructing a capital asset reduce the cost of the project instead of becoming taxable income.
The High Court agreed with the Tribunal. It held that the trial run income and scrap sale proceeds had an inextricable connection with the broadband project’s installation phase. Therefore, they qualified as capital receipts.
Court Rejects Revenue’s Arguments
The Revenue argued that the Bokaro Steel judgment applied only to interest earned during construction. It claimed that the principle should not extend to trial run income or scrap sales.
The High Court rejected this argument. It clarified that the Supreme Court’s principle applies to every receipt directly connected with creating a capital asset, regardless of its source.
The Bench also noted that the Tribunal had already recorded clear factual findings. Since those findings were supported by evidence, no substantial question of law arose for consideration.
Section 80-IA Deduction Upheld
The Revenue also challenged Tata Power’s deduction under Section 80-IA of the Income Tax Act.
The Assessing Officer argued that Tata Power had to adjust earlier years’ unabsorbed depreciation before claiming the deduction. The Tribunal disagreed. It relied on the CBDT Circular issued in 2016 and its earlier decision involving Tata Power.
The High Court affirmed the Tribunal’s reasoning. It held that an eligible assessee may choose the initial assessment year for claiming the deduction under Section 80-IA. The Court also ruled that depreciation relating to years before the chosen assessment year need not be notionally adjusted.
The Bench referred to several precedents, including G.R.T. Jewellers (India), Velayudhaswamy Spinning Mills Pvt. Ltd., Hercules Hoists Ltd., and B.G. Chitale, which support the same principle.
High Court Dismisses Revenue’s Appeal
The Bombay High Court concluded that none of the Revenue’s objections raised any substantial question of law. It dismissed the appeal and upheld the ITAT’s order in full.
The Tata Power Tax Ruling reinforces that receipts generated during a project’s construction phase remain capital receipts when they directly relate to creating the capital asset. It also confirms that eligible taxpayers can select their initial assessment year for claiming deductions under Section 80-IA in accordance with the Income Tax Act and the CBDT Circular.
