Generation Based Incentive for power generation, linked to units produced, qualifies as profits 'derived from' eligible business under section 80-IA due to direct nexus with core operations, despite Government source.

ORDER

PER WASEEM AHMED, ACCOUNTANT MEMBER:

The present by the assessee for the A.Y. 2017-18 is directed against the order passed under section of 250 of the Income Tax Act 1961 (hereafter the Act) dated 2nd September 2025 by the learned Commissioner of Income Tax-Appeal (hereafter- learned CIT-A) at National Faceless Appeal Centre-NFAC.

2. The assessee in the appeal memo has raised as many as 12 grounds of appeal. However, the issues raised therein are interconnected and pertain of disallowances of deduction under section 80-IA of the Act on “Power Generation Incentive”.

3. The facts in brief are that the individual assessee is engaged in the business of wind power generation and claimed deduction u/s 80-IA of the Act. During the assessment proceedings, the AO noticed that the assessee had received an amount of Rs. 25,91,626 as “Power Generation Incentive” under the Generation Based Incentive (GBI) scheme of the Central Government, in addition to income from sale of power. The assessee claimed that such incentive formed part of the business income derived from the eligible undertaking and accordingly included the same for deduction u/s 80-IA of the Act.

4. The AO examined the claim of the assessee and observed that the provisions of section 80-IA of the Act allow deduction only in respect of profits and gains directly derived from the eligible undertaking and not for all receipts connected with the business. The AO relied on the distinction between the expressions “derived from” and “attributable to” as laid down by the Hon’ble Supreme Court in the cases of Cambay Electric Supply Co. Ltd. (113 ITR 84), Sterling Foods (237 ITR 53) and Pandian Chemicals Ltd. (262 ITR 278). It was noted that the term “derived from” has a narrow meaning and requires a direct nexus with the business activity, whereas receipts which are only incidental or arise from external sources do not qualify. Applying the above principle, the AO held that the GBI incentive is not an operational profit arising from the activity of power generation. The source of such income is the scheme of the Central Government and not the business of the assessee. The AO further observed that the incentive is granted subject to certain conditions such as foregoing accelerated depreciation and hence, it is only incidental to the scheme and not directly linked to the generation activity. Accordingly, the AO concluded that the incentive income does not have a direct nexus with the eligible business and therefore, the same does not qualify as profits derived from the undertaking. Hence, the AO held that the assessee’s contention that the incentive forms part of business income is not acceptable. On this basis, the AO reduced the eligible profit for deduction u/s 80-IA by Rs. 25,91,626/- and added the same back to the total income under the head “Profits and Gains of Business or Profession”.

5. The aggrieved assessee preferred an appeal before the learned CIT(A).

6. The assessee before the learned CIT(A) submitted that the incentive is directly linked to the business of power generation. It is granted based on the units of electricity generated and supplied to the grid. Therefore, the incentive has a direct nexus with the core business activity and forms part of business income derived from the eligible undertaking.

6.1 It was further submitted that the incentive is not a lump sum subsidy but is proportionate to the actual power generated. The scheme clearly provides that the incentive is calculated per unit of electricity generated and fed into th