Pr. CIT v. Tata Power Company Ltd.

Case snapshot

Sections / provisions: 4; 80-IA

Questions before the Court / Tribunal

• Trial-run/scrap receipts before commencement of business: One issue in the Tata Power judgment concerns receipts generated before commercial commencement. The reported holding treats the character of trial-run or pre-commencement receipts in the context of project cost and capital-versus-revenue principles.
• Section 80-IA; choice of initial assessment year: A second issue arising from the same judgment concerns the taxpayer's choice of the initial assessment year for section 80-IA. This record is intentionally grouped with the capital-receipts issue to prevent duplicate case pages.

Material facts and background

IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 21 OF 2020 Pr. Commissioner of Income Tax-2

the Income Tax Act, 1961 (for short “IT Act”) challenging the order dated 21.05.2019 passed by the Income Tax Appellate Tribunal, Mumbai (for short “ITAT”) in I.T.A. No. 3080/Mum/2009 relating to Assessment Year 200304. According to the Revenue, the impugned order of the ITAT gives rise to the following substantial questions of law. i. On the facts and in the circumstances of the case and in law, whether Hon’ble ITAT was right in holding that preinstallation period broadband income of Rs. 9,81,38,257/- and income from sale of scrap of Rs. 1,27,67,139/- is capital in nature Page 1 of 9 JULY 23, 2026 Darshan Patil

instead of revenue in nature when the whole of income has been earned on account of setting up the business and the income is primarily in the nature of business income earned from running the business? ii. On the facts and in the circumstances of the case and in law, whether Hon’ble ITAT was right in holding that preinstallation period broadband income and income from sale of scrap is capital in nature by relying upon the decision of Hon’ble SC in the case of CIT Vs. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC), since instant case is distinguishable with that of Bokaro Steel Plant wherein the issue was of interest and rent income generated from setting up the plant? iii. Whether, on the facts and in the circumstances of the case and in law, the Tribunal erred in interpreting the import of Sec. 80 IA(5) in calculation of deduction available u/s. 80IA?

the line of business of generation and distribution of power. During the relevant Assessment Year, the Assessee earned income from trial runs of its broadband project and sale of scrap generated prior to the installation of the project and treated the income as capital work in progress and claimed depreciation.

Assessing Officer treated these receipts as revenue receipts and brought them to tax. On appeal, the Commissioner of Income Tax (Appeals) [for short “CIT(A)”] upheld the order of the Assessing Officer. Aggrieved by the order of the CIT(A), the Assessee preferred an Appeal before the ITAT.

a finding of fact that the Assessee’s broadband unit was under trial runs and had not yet been installed when the income of Rs. 9,81,38,257/- arose from the said project. Similarly, scrap was generated prior to the installation of the broadband project and the sale thereof generated income of Rs. 1,27,67,139/-. Hence, the ITAT concluded that both these incomes were inextricably linked with the broadband project, which was in the installation phase, and that the Assessee had rightly treated the income as capital work-in-progress. Consequently, the same could not be brought to tax, was the conclusion. In arriving at this conclusion, the ITAT placed reliance upon the decision of the Supreme Court in the case of CIT Vs. Bokaro Steel reported in 236 ITR 315.

Revenue, sought to distinguish the decision of the Supreme Court in Bokaro Steel by contending that it dealt only with the capitalisation of interest and not with the capitalisation of income received by the Assessee.

Appellant / assessee submissions

The judgment copy does not separately set out this component in a distinct section; refer to the full order and the reasoning section below.

Revenue / respondent submissions

eligible business/ manufacturing activity had commenced and are considering such first year of commencement/operation etc. itself as the first year for granting deduction, ignoring the clear mandate provided under sub-section (2) which allows a choice to the assessee for deciding the year from which it desires to claim deduction out of the applicable slab of fifteen (or twenty) years. The matter has been examined by the Board. It is abundantly clear from sub-section (2) that an assessee who is eligible to claim deduction u/s 80IA has the option to choose the initial/ first year from which it may desire the claim of deduction for ten consecutive years, out of a slab of fifteen (or twenty) years, as prescribed under that sub-section. It is hereby clarified that once such initial assessment year has been opted for by the assessee, he shall be entitled to claim deduction u/s 80IA for ten consecutive years beginning from the year in respect of which he has exercised such option subject to the fulfillment of conditions prescribed in the section. Hence, the term 'initial assessment year' would mean the first year opted for by the assessee for claiming deduction u/s 80IA. However, the...

Court / Tribunal analysis and reasoning

that the arrangements which were made between the Assessee and the contractors pertaining to these three receipts, were arrangements which are intrinsically connected with the construction of its plant. The receipts have been adjusted against the charges payable to the contractors and have gone to reduce the cost of construction. Therefore, they have been rightly held to be capital receipts and not income of the Assessee. The Hon’ble Supreme Court further held that the same reasoning would apply to the fourth category of income, namely, the royalty received by the Assessee. To the extent of such Page 4 of 9 JULY 23, 2026 Darshan Patil

royalty received, the cost of the plant to the Assessee stands reduced. Therefore, the royalty is required to be treated as a capital receipt.

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.

eligible business/ manufacturing activity had commenced and are considering such first year of commencement/operation etc. itself as the first year for granting deduction, ignoring the clear mandate provided under sub-section (2) which allows a choice to the assessee for deciding the year from which it desires to claim deduction out of the applicable slab of fifteen (or twenty) years. The matter has been examined by the Board. It is abundantly clear from sub-section (2) that an assessee who is eligible to claim deduction u/s 80IA has the option to choose the initial/ first year from which it may desire the claim of deduction for ten consecutive years, out of a slab of fifteen (or twenty) years, as prescribed under that sub-section. It is hereby clarified that once such initial assessment year has been opted for by the assessee, he shall be entitled to claim deduction u/s 80IA for ten consecutive years beginning from the year in respect of which he has exercised such option subject to the fulfillment of conditions prescribed in the section. Hence, the term 'initial assessment year' would mean the first year opted for by the assessee for claiming deduction u/s 80IA. However, the...

Operative decision and relief

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 impugned order of the ITAT does not give rise to any substantial question of law. The appeal is accordingly dismissed. However, there shall be no order as to costs. Page 8 of 9 JULY 23, 2026 Darshan Patil

Personal Assistant of this Court. All concerned will act on production by fax or email of a digitally signed copy of this order.

Authorities and precedents appearing in the judgment

• This Court has also taken a similar view in CIT v. Hercules
• CIT v. B.G

This list is machine-assisted from the judgment text and is not a substitute for checking the full citation chain in the PDF.

Ratio and legal principle

The decision turns on Trial-run/scrap receipts before commencement of business; Section 80-IA; choice of initial assessment year. The operative result is classified as Revenue appeal dismissed; section 80IA deduction view sustained; no costs. Read the rule only with the statutory version, factual findings and precedent chain recorded in the full judgment.

Why this judgment matters

The case is relevant to taxpayers, advisers and litigators dealing with Trial-run/scrap receipts before commencement of business; Section 80-IA; choice of initial assessment year. Its practical value lies in the interaction between the statutory text, the evidentiary record and the procedural route followed in this case.

Practitioner action points

• Use the judgment as a fact-specific precedent: match the statutory version, assessment period, procedural stage and evidentiary record before relying on the result.
• Check whether a later High Court/Supreme Court order has affirmed, reversed, distinguished or rendered the decision academic.
• For litigation, attach the full judgment/order to the working paper and cite the paragraph/page supporting the proposition rather than relying on a headnote alone.

Full judgment and source trail

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