ITAT Bangalore Allows Section 80-IA Deduction on Generation Based Incentive for Wind Power Units

Background of the Dispute

The Bangalore bench of the Income Tax Appellate Tribunal (ITAT) in the case of Sokke Kaliveerappa Shivaraj Vs ACIT examined whether the Generation Based Incentive (GBI) received by an assessee engaged in wind power generation constitutes profits “derived from” an eligible business for the purposes of deduction under Section 80-IA of the Income Tax Act 1961.

The core controversy revolved around an incentive of Rs. 25,91,626, received under a Central Government Generation Based Incentive (GBI) scheme implemented through the Ministry of New and Renewable Energy (MNRE). The assessee treated this amount as part of the eligible profits of the wind power undertaking and claimed Section 80-IA deduction. The Department, however, denied the benefit.

Facts of the Case

Business Profile and Claim of Deduction

  • The assessee, an individual, was engaged in the business of wind power generation.
  • For Assessment Year 2017-18, the assessee claimed deduction under Section 80-IA in respect of profits from the eligible wind power undertaking.
  • In addition to revenues from sale of electricity, the assessee had received Rs. 25,91,626 as “Power Generation Incentive” under the GBI scheme framed by the Central Government.
  • The assessee included this incentive in the eligible business profits while computing deduction under Section 80-IA.

Assessment Proceedings and Disallowance

During scrutiny assessment, the Assessing Officer (AO):

  1. Accepted that the assessee’s wind power unit otherwise qualified for Section 80-IA(4).
  2. Noted that the assessee had received GBI in addition to the tariff income from sale of electricity.
  3. Examined whether such GBI constituted profits and gains “derived from” the eligible business under Section 80-IA.

The AO concluded that:

  • Section 80-IA covers only income directly derived from the eligible undertaking.
  • The expression “derived from” has a narrow and restricted meaning, as contrasted with “attributable to”.
  • Judicial precedents such as:
    • Cambay Electric Supply Co. Ltd. (113 ITR 84)
    • Sterling Foods (237 ITR 53)
    • Pandian Chemicals Ltd. (262 ITR 278)
      were relied upon to interpret the phrase “derived from”.

Based on this reasoning, the AO held:

  • The immediate source of the GBI is the Government scheme, not the assessee’s core business operations.
  • The incentive is additionally subject to specific policy conditions, including a requirement to forego accelerated depreciation.
  • Therefore, the receipt was treated as income merely “attributable to” the business and not “derived from” it in the sense required under Section 80-IA.

Accordingly, the AO:

  • Excluded Rs. 25,91,626 from the eligible profits for Section 80-IA deduction.
  • Added the same to the total income as business income under the head “Profits and Gains of Business or Profession”, but without granting Section 80-IA benefit on this portion.

First Appeal Before CIT(A)

The assessee carried the matter in appeal to the CIT(A) at the National Faceless Appeal Centre (NFAC).

Assessee’s Submissions Before CIT(A)

The assessee argued as follows:

  1. Direct nexus with power generation

    • The GBI is calculated strictly on the basis of units of electricity generated and fed into the grid.
    • No electricity generation → no GBI.
    • Hence, the incentive is inseparably linked to the business of power generation and is not an extraneous or incidental receipt.

  2. Nature and mechanics of the scheme

    • The MNRE’s GBI Scheme was designed to:
      • Encourage investment in wind energy,
      • Promote efficient and sustained power generation, and
      • Create a level playing field for wind energy producers.
    • Under the scheme, a fixed amount per unit of electricity fed into the grid was paid as incentive, thereby augmenting operational revenue from the same activity of power generation.

  3. Not a lump-sum or capital subsidy

    • The GBI is not a one-time grant or a capital-based subsidy.
    • It is computed proportionately and periodically based on actual generation, thereby reflecting a revenue nature and operational linkage.

  4. Effect of condition to forego accelerated depreciation

    • The requirement to forego accelerated depreciation is a regulatory safeguard aimed at preventing dual benefits.
    • This condition does not alter the intrinsic character of the incentive as income arising from power generation.