Bombay High Court on Taxability of Broadband Trial Run Income and Scope of Section 80-IA Deduction

Introduction

The Bombay High Court in PCIT-2 Vs Tata Power Company Ltd. (Income Tax Appeal No. 21 of 2020, judgment dated 23/07/2026) has delivered an important ruling on:

• Characterisation of income arising from:
  • Trial runs of a broadband project, and
  • Sale of scrap generated before installation of the project, and
• Computation of deduction under Section 80-IA of the Income Tax Act 1961, particularly the meaning of “initial assessment year”.

The Revenue’s appeal under Section 260A was ultimately dismissed, with the High Court affirming the Income Tax Appellate Tribunal’s (ITAT) findings in favour of the assessee.

Issues Raised by the Revenue

The Revenue contended that the ITAT’s order gave rise to the following substantial questions of law:

1. Whether, in the facts and circumstances, the ITAT was justified in holding that:

   • Pre-installation broadband income of Rs. 9,81,38,257/-, and
   • Income from sale of scrap of Rs. 1,27,67,139/-
     constituted capital receipts instead of revenue receipts, when such amounts were connected with the business of the assessee?

2. Whether the ITAT correctly relied on CIT Vs. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC) to treat the above receipts as capital in nature, given that Bokaro Steel involved interest and rent linked to setting up a plant?

3. Whether the ITAT erred in law in interpreting Section 80-IA(5) while allowing deduction under Section 80-IA?

The High Court examined all three questions and found that none of them gave rise to a substantial question of law warranting interference under Section 260A.

Factual Background on Broadband Trial Run Income and Scrap Sale

Nature of Business and Receipts

The assessee is engaged in the business of generation and distribution of power. During the relevant Assessment Year 2003-04, the assessee was implementing a broadband project. In the course of this project:

• The broadband unit was in the trial run phase and had not yet been finally installed or commercially commissioned.
• During this pre-installation period:
  • The assessee earned income amounting to Rs. 9,81,38,257/- from trial runs of the broadband project.
  • Scrap generated during the installation process was sold, yielding income of Rs. 1,27,67,139/-.

The assessee treated both these receipts as capital work-in-progress and claimed depreciation on the capitalised amounts. Consequently, it did not offer these receipts as taxable income.

Assessment and First Appeal

• The Assessing Officer (AO) treated both the trial run receipts and scrap sale income as revenue receipts and brought them to tax.
• On appeal, the CIT(A) confirmed the AO’s view and upheld the taxability of these amounts as business income.

The assessee then approached the ITAT, which turned the matter in its favour.

ITAT’s Findings on Broadband Trial Runs and Scrap Receipts

The ITAT, after examining the evidentiary record, recorded clear findings of fact:

1. The broadband undertaking was still under trial and had not reached the stage of installation or commercial operation when the income of Rs. 9,81,38,257/- accrued.
2. The scrap generating income of Rs. 1,27,67,139/- arose prior to installation of the broadband project and was a by-product of the installation phase.
3. Both streams of income were inextricably connected with the broadband project while it was being set up and not with an already running business activity.
4. The assessee had correctly treated these receipts as capital work-in-progress, effectively going to reduce the cost of the broadband project.

Relying on the Supreme Court judgment in CIT Vs. Bokaro Steel Ltd. 236 ITR 315, the ITAT concluded that such receipts, arising during the setting up of a capital asset and prior to commencement of commercial operations, are capital receipts, not liable to tax as income.

Revenue’s Argument on Distinguishing Bokaro Steel

Before the High Court, learned counsel for the Revenue argued that:

• `CIT Vs.