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2008 (5) TMI 457 - AT - Income TaxEligibility for deduction u/s 10B - Loss arising from Industrial Unit - set off against the other income - Treatment of interest income, training fees and income from sale and purchase of software - Determination of preliminary expenses u/s 35D - Computation of Book profit u/s 115JB. Eligibility for deduction u/s 10B - Loss arising from Industrial Unit - 100 per cent export oriented undertaking - business of software development - Whether the loss incurred in the business eligible u/s 10B can be set off against the other incomes of the assessee u/s 70 or 71 of the Act? - CIT(A) held that profits and gains derived from the business eligible u/s 10B did not form part of total income and since profits and gains include losses also, neither profits nor the loss from such business could be considered for the purpose of computing total income - Consequently, the losses arising from such unit could not be set off under the provisions of sections 70 and 71 of the Act. HELD THAT:- On perusal of Sec.10B clearly reveals that a deduction is allowed to the assessee in respect of the profits derived from the undertaking eligible under this section from the total income of the assessee. That means the total income of the assessee would include the profits or losses derived from such unit and if there is any profit, then the eligible amount shall be deducted in computing the total income. Accordingly, it is held that the CIT(A) was not legally justified in holding that profits and gains of the business eligible u/s 10B of the Act do not form part of the total income. The view taken by us is also fortified by the decision of the Tribunal in the case of Mindtree Consulting (P.) Ltd. v. Asstt. CIT[2005 (11) TMI 176 - ITAT BANGALORE-B]. Having held that the income from the eligible business u/s 10B is to be taken into consideration in computing the total income of the assessee, we are of the view that all the provisions of the Act would be applicable for the purpose of computing the total income of the assessee unless expressly excluded by the Legislature. It is pertinent to note that provisions of section 70 or 71 have not been included in the non-obstante provisions and, therefore, it cannot be said that provisions of section 70 or 71 cannot be applied in computing the income of the assessee. Had the Legislature intended that the provisions of sections 70 and 71 should not be applied in respect of loss incurred in business eligible under section 10B, it could have specifically provided so as provided in respect of section 72 or section 74. The view taken by us is also fortified by the unreported decision of the Third Member in the case of Navin Bharat Industries Ltd. [2004 (3) TMI 318 - ITAT BOMBAY-E], held that provisions of section 70 or 71 are applicable even in respect of loss incurred in the business eligible, u/s 10B or 10A. Therefore, it is held that the assessee is entitled to set off the loss incurred in the industrial unit at Pune which is eligible u/s 10B of the Act against the other incomes earned by him. The order of the CIT(A) is, therefore, set aside on this issue and consequently, the Assessing Officer is directed to allow the set off of the business loss incurred by the assessee in the aforesaid unit against the other incomes. Treatment of interest income - training fees and income from sale and purchase of software - Whether these incomes form part of the income derived from the industrial unit eligible u/s10B of the Act ? - HELD THAT:- Following the decision of Tribunal in assessee’s own case pertaining to AY's 1998-99 and 2000-01 - it is held that interest income is to be treated as business income but cannot be treated as derived from the industrial unit eligible u/s 10B of the Act. However, the training income would be considered as income from the unit eligible u/s 10B. As far as the profit on the purchase and sale of software is concerned, the learned counsel for the assessee has not been able to submit as to how such income could be treated as income derived from industrial unit u/s 10B. Section 10B applies only to the income which is derived from the export of articles or things or computer software which are manufactured or produced in the said unit. Therefore, in our opinion, the profit arising from purchase and sale of software cannot be treated as income derived from industrial unit u/s 10B of the Act. The order of the CIT(A) is, therefore, modified accordingly. Disallowance u/s 35D - incurred an expenditure which was amortised over a period of five years and thus 1/5th of such expenditure was claimed - HELD THAT:- In our view, the alternate contention of the assessee requires fresh adjudication as the AO had disallowed the same without ascertaining the nature of the expenditure. AO in a summarily manner held that the expenditure was capital in nature without giving any reasons. Accordingly, we set aside the order of the CIT(A) on this issue and remit the matter to the file of AO for fresh adjudication after ascertaining the real nature of expenditure incurred by the assessee. Book profit u/s 115JB - HELD THAT:- In our opinion, gross injustice has been caused to the assessee by not applying the provisions of section 115JB correctly. AO has conveniently added the expenditure relating to section 10B unit but failed to ignore the provisions of clause (ii) of the said Explanation which provides that income relating to such unit credited to the Profit & Loss Account should also be reduced. Accordingly, we are of the view that the matter requires fresh adjudication. The order of the CIT(A) is, therefore, set aside on this issue and the matter is remitted to the file of AO for fresh adjudication after applying the provisions of the Explanation to section 115JB correctly as observed by us. The quantum of expenditure relatable to section 10B unit shall be re-worked out after giving fair opportunity of being heard to the assessee. In the result, appeal is partly allowed.
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