losses of non eligible unit can be set off against the profit of eligible unit

[Sucheta Agrawal]

SECTION 10A Special provision in respect of newly established undertakings in free trade zone, etc

1. General: subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software, as the case may be shall be allowed from the total income of the assessee.

Assessees who are eligible for exemption- exemption under this section is available to all categories of assessees viz. individuals, firms, companies, etc. who derive any profits or gains from an undertaking engaged in the export of article or things or computer software.

Issues

Whether losses of non eligible unit can be set off against the profit of eligible unit while determining the tax holiday under section 10A of the Act?

Essential conditions for claiming the exemptions. The exemption shall apply to an undertaking which fulfils all the following conditions.

(i) It has begun or begins to manufacture or produce, article or things or computer software during the previous year relevant to the assessment year.

(ii) It should not be formed by splitting up or reconstruction of an existing business. However, exemption is provided if the unit is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of the undertaking as is referred to and satisfying the conditions in section 33B.

(iii) It should also not be formed by the transfer of machinery or plant, previously used for any purpose, to a new business. However, the following are the two exceptions to this condition.

1) Machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled.

a) The machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose if the following conditions are fulfilled.

b) The machinery or plant should be imported into India from a foreign country.

c) No deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act to any person previously.

2) Exemption u/s 10A will be available if the total value of second hand machinery or plant transferred to the new undertaking does not exceed 20 percent of the total value of machinery or plant used in the industrial unit.

(iv) The sale proceeds of article or things or computer software exported out of India should be received in, or brought into, India by the assessee in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf.

(v) The exemption shall not be admissible for any assessment year beginning on or after the 1st day of April 2001, unless the assessee furnishes in the prescribed form, alongwith the return of income, the report of the accountant certifying that the deduction has been correctly claimed in accordance with the provisions of this section.

(vi) The provisions of sub-section (8) and sub-section (10) of section 80-IA shall, so far as may be, apply in relation to the undertaking referred to in this section as they apply for the purpose of the undertaking referred to in section 80-IA.      

Contentions of the Tax Payer

Tax holiday under section 10A of the Act is undertaking specific and not tax payer specific. An undertaking cannot be equated with the tax payer.

As per the provisions of section 10A, profits and gains that are derived by an eligible unit from the eligible activity would be entitled to the benefit. In case the tax payer has more than one eligible unit, deduction has to claimed separately for each undertaking.

The provisions of section 10A form part of Chapter III under the Act which is titled "Income which do not form part of total income". Therefore, income from the sources specified in Chapter III should not be subject to income tax and is to be excluded from the total income without any restriction.

The deduction under section 10A is to be granted at source level from the total income and not after computing gross total income.

Instructions to the return form are clear that the provisions of the section 10A would operate to eliminate the relevant income from the computation of profits and gains.

There is no specific mention under the provisions of section 10A of the Act that the deduction shall be restricted to the total income of the tax payer computed under the provisions of the Act before allowing such deduction.

Contentions of the Revenue

Section 10A of the Act was originally enacted as an exemption provision where the profits of the unit did not form part of the total income at all. The law was amended by Finance Act 2000 with effect from 1 April 2001, subsequent to which, it was no longer an exemption but a deduction.

When a deduction is granted of any profits and gains from the total income, such profit and gain only refer to a positive figure arrived at after setting off the losses of the other units.

Reliance cannot be placed on the return form, as once the intention is clear from the section, the form would not go beyond the provisions of the Act.

Conclusion

The ITAT answered the question in favour of the tax payer by holding that loss of non eligible unit cannot be set off against the profit of eligible unit at the time of computing deduction under section 10A of the Act for the eligible unit.

Source: Scientific Atlanta India Technology Pvt. Ltd. v The Assistant Commissioner of Income Tax ITA No. 229/Mds/2007, ITA No. 352/Mds/2008 and The Income tax Officer (OSD) v Scientific Atlanta India Technology Pvt. Ltd. ITA No. 536/Mds/2007 (Chennai Special Bench)