TMI Blog2010 (2) TMI 658X X X X Extracts X X X X X X X X Extracts X X X X ..... in s. 72(1) or 74(3) and not the unabsorbed claim under s. 10A. - When the section itself allows 90 per cent of such profit of eligible business, obviously, 10 per cent of the same is be subjected to tax, otherwise what is the meaning of the amendment. Specifically when the provision of the Act does not support the direction of the learned CIT(A) - Decided in favor of revenue. - ORDER PER N. BARATHVAJA SANKAR. VICE PRESIDENT: The Hon'ble President, Income Tax Appellate Tribunal, vide orders dated 24.04.2009 and 08.05.2009 constituted the present Special Bench to dispose of the captioned appeals as well as to adjudicate the following question of law:- "Whether the business losses of a non eligible unit, whose income is not eligible for deduction under section 10A of the Act, have to be set off against the profits of the undertaking eligible for deduction under section 10A for the purposes of determining the allowable deduction under section 10A of the Act?" 2. The brief facts are that the assessee is a private limited company incorporated on July 17, 2000. In respect of assessment year 2003-04, the assessee filed a return claiming relief under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -III) to be carried forward Rs. (50,18,333) The Assessing Officer recomputed the benefit under section 10A as follows:- I Net business profit (profits of the eligible unit reduced by the loss of the Trading unit) Rs. 11,05,021 Less: Deduction under section 10A Restricted to the net business profit Rs. (11,05,021) Income from Business NIL II Income from other sources Rs.27,36,980 Tax on the above Rs. 9,81,891 For both the assessment years, the assessee went in appeal before the CIT(Appeals). Vide order dated 11th October, 2006, the CIT(Appeals) accepted the plea of the assessee that the unit in Delhi was not an eligible unit and was engaged only in trading activity. However, the CIT(Appeals) recomputed the benefit under section 10A as follows:- I Eligible Profits Rs. 3,23,43,230 Less Trading loss Rs. (61,25,224) Net business income Rs. 2,62,18,006 Add Income from other sources Rs. 22,01,134 Total income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Written submissions filed before the Commissioner of Income Tax (Appeals) in respect of A.Y. 2003-04 4. Written submissions filed before the Commissioner of Income Tax (Appeals) in respect of A.Y. 2004-05 And Paper-book III consists of the case laws as indexed therein. By placing the above paper-books on record, the learned counsel for the assessee submitted as under:- 6. Section 10A(1) provides that a deduction of such profits and gains derived by an undertaking from the business of export of computer software shall be allowed from the total income of the assessee. The total income of the assessee would comprise of various items, viz. (a) Trading income/loss (b) Income/loss-from house property (c) Income from the eligible unit (d) Interest income (e) Income from other sources _______________ Total income The sum total of the above (below the line) will be the total income of the assessee. Under section 10A, the income computed as per the formula in section 10A being the income from the eligible undertaking (item (c) above) will be allowed as deduction "from the total income". This means in the above example, the income from the eligible unit would have t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 80T which reads as follows: "Where the gross total income of an assessee not being a company includes any income chargeable under the head "capital gains" relating to capital assets other than short term capital assets (.............) there shall be allowed in computing the total income of the assessee a deduction from such income of an amount equal to..........." The Hon'ble Supreme Court noted that the words used in the section stipulated that the deduction has to be granted from "such income" being the "total income" computed by the Assessing Officer in accordance with the Act. Even so, the Hon'ble Supreme Court rejected the argument of the Revenue that the deduction would be restricted to the "total income", after reduction of the loss incurred. In the instant case, section 10A is not even part of Chapter VIA, but stands as part of Chapter III of the Income-tax Act. Applying the above ruling of the Hon'ble Apex Court, the words "total income" contained in sub-section (1) would not amount to placing any fetters on the allowability of the entire profit of the eligible unit without restriction to the available total income. 8. Deduction under section 10A is available in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Income-tax Act. But in common parlance it is taken as a concern started or formed for a specific purpose or a project engaged in. In the context of section 84(80J), a predecessor to sections 80-l, 80-IA etc. it had been clarified that the tax holiday benefit attaches to an undertaking and not to the assessee. The circular states that "The Board agrees that the benefit of section 84(80J) of the Income-tax Act 1961, attaches to the undertaking and not the owner thereof. The successor will be entitled to the benefit for the unexpired period of five years provided the undertaking is taken over as a " running concern" =[F.No. 15/563-IT(AT) dated 13.12.1963 issued by CBR]." Though issued in the context of section 80J, the ratio would apply with equal force to section 10A as well. Considering the above circular, in the following cases it has been held that deduction under section 80J/80-I/80-IA of the Act is attached to an undertaking and not to the owner thereof:: (a) Kerala State Cashew Dev Corp v. CIT 205 ITR 19 (Ker); (b) CIT v. Tyresoles Concessionaries Pvt. Ltd. 213 ITR 660 (Bom); (c) CIT v. Dandeli Feroy Alloy (P) Ltd. 212 ITR 1 (Bom); (d) P.K. Engineering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. counsel contended that looking at the language of section 10A(1) and section 10A(4) of the Act (both prior and subsequent to amendment to Finance Act, 2001), it can be inferred deduction under section 10A has to be claimed undertaking-wise or unit-wise and not to be computed business wise and is available to the extent of profits derived from export of computer software. Even if an assessee has more than one undertaking, then deduction under section 10A is to be computed for different undertakings. In support of this argument, the ld counsel placed reliance on the following:- 1. Circular Explaining amendments made by Finance Act, 2001 2. Memorandum explaining the Finance Bill, 2001 3. Techspan India (P) Ltd. A Anr v. ITO (283 ITR 212)(Del) 4. Tata Consultancy Services Ltd. The ld. counsel also brought to our attention the CBDT Circular No.014 of 2001 which clarifies as follows:- "21. Rationalization of the provisions relating to undertakings in free trade zones, export processing zones, special economic zones and export oriented units. Under Section 10A of the Income-tax Act, newly established undertakings in free trade zones are entitled to a tax holida ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period, there will be no carry forward of any unabsorbed losses, depreciation, development rebate, investment allowance, tax holiday deficiency or any other deduction or allowance admissible under the Income-tax Act. For the purposes of depreciation, the written down value of the assets used in the industrial undertakings for the assessment years subsequent to the tax holiday period will be determined as if the depreciation allowable under the existing provisions had actually been claimed and allowed. Some of the existing tax concessions, such as, the deduction available in relation to new industrial units set up in backward areas and small-scale industrial undertakings established in rural areas extend over a period exceeding five years. Units availing of the complete tax holiday now proposed will not be entitled to such concessions even after the expiry of the tax holiday period. The industrial units set up during any of the previous year relevant to the assessment years 1977-78 to 1980-81 will, at their option, be entitled to complete tax holiday for the unexpired period of five years. The tax concession in relation to the existing units is being made optional on the considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on'ble Supreme Court for the proposition that any stand contrary to a CBDT circular is illegal and liable to be struck down. (1) Navnit Lal C. Javeri v. K.K.Sen,AAC, Bombay (56 ITR 198) (2) UCO Bank v. CIT (237 ITR 889) 10. On the meaning of total income, the learned counsel for the assessee submitted that the term 'total income' is contextual. One notices difference shades of meaning of the term and its variants as employed in the Act: (i) Section 36(1) (vii) in its erstwhile format provided for a deduction at a percentage of total income, such total income being arrived at before deduction under that section and Chapter VI A. (ii) Section 80G(4) provides for the determination of the qualifying amount with reference to the "adjusted total income". (iii) Section 80B(5) defines Gross total income as the 'total income' arrived at after giving effect to all other provisions of the Act. (iv) Apart from the above, there are certain variants to the phrase 'total income. For example, Explanation (i) to section 44C refers to 'adjusted total income. Sections 111A, 112, 115A etc provide for the total income to be split into two streams, one for being taxed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticles or things, shall be allowed from the total income of the assessee. 10C Subject to the provisions of this section, any profits and gains derived by an assessee from industrial undertaking which has begun or begins to manufacture or produce any article or thing on or after the 1st day of April, 1998 in any Integrated Infrastructure Development Centre or Industrial Growth Centre located in the North- Eastern Region (hereafter in this section referred to as the industrial undertaking), shall not be included in the total income of the assessee 11 Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income............. 13A Any income of a political party which is chargeable under the head "Income from house property" or "Income from other sources" or ["Capital gains" or] any income by way of voluntary contributions received by a political party from any person shall not be included in the total income of the previous year of such political party. The difference in terminology notwithstanding, there is no inheren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... phrase 'such income in 80T has been interpreted to mean and refer to the special category of income alone (in this case, the eligible profits alone) and not the total income. The stand of the Revenue amounts to insertion of Section 80AB and Section 80B into Chapter III, which is impermissible. (b) Section 80AB commences thus, "Where any deduction is required to be made or allowed under any section included in this Chapter under the heading "deductions in respect of certain incomes .............". The overriding effect of Section 80AB and 80B are statutorily applicable only to deductions claimed under Chapter VI-A. The rules of interpretation do not permit insertion of a section or of any words in the statute and a strict interpretation would have to be extended to the section as it stands. (c) Chapter III, admittedly, does not contain any statutory provision in pari meteria with Section 80AB and Section 80B contained in Chapter VI-A. (d) As stated earlier, the words "total income" contained in sub-section (1) of section 10A is defined in sub-section (45) of section 2 to mean the "total amount of income". Section 4 of the Act seeks to charge tax on the total income of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 10A is to be granted at the time of computing income under the head 'profits and gains from business or profession'. An extract of the relevant portions of Part II of Schedule B of Form 1 has been given hereunder:- S.No. Particulars 14. Net profit or loss as per consolidated profit and loss account. .... ............ 18. Is section 10A/10B/10C applicable in your case? ................. Deduct: Amount claimed deductible/not includible in total income not arrived at above. ..... ............... 26 Profits and gains of business or profession other than speculation business The relevance of forms prescribed under Income-tax Rules has been upheld in following precedents: (1) KPIT Cummins Infosystems (Bangalore) Ltd. v. ACIT 26 SOT 529 (Bang) (2) Honeywell International India Pvt. Ltd. v. DCIT 108 TTJ 924 (Delhi) (3) Nous Infosystems (P) Ltd. v. ITO I.T.A No. 1042/Bang/2007 =(4) P.K.Kochammu Amma Peroke 125 ITR 624 (SC) Under section 10A(1), the deduction "shall be allowed from the total income of the assessee." Instruction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtain instances wherein income from property held by a Trust in certain designated situations would not be eligible to the exemption under section 11. It follows therefore, that if the Legislature had intended to place a restriction on the benefit available under section 10A, it would have provided for the same explicitly. In fact, a specific restriction has been carved out vide insertion of provision to section 92C as follows:- "Provided that no deduction shall be allowed under section 10A (or section 10AA) or section 10B or under Chapter VI A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this subsection." The provisions of section 92C have been amended to provide that where the total income of an assessee as computed by the Assessing Officer is higher than that declared by the assessee deduction under section 10A or 10B or under Chapter VIA shall be rejected in respect of amount by which the income has been enhanced by the Assessing Officer. It is only under this specific and special circumstance that the income of an eligible unit can be tampered with or adjusted and no other. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee's stand is that the total income refers to "such profits" in section 10A and the profits should be isolated and the total income of the assessee computed separately and they argue that the loss in the other units should be carried forward as such, and total exemption be granted to the profits of the 10A unit. It is submitted that such an interpretation would amount to ignoring the amendment, and treating the deduction as an exemption as was originally envisaged prior to the amendment. It is well settled that while interpreting a statute, the words of the amended section should be given their clear and plain meaning. In the amended section, clearly, a deduction of the profits derived by the undertaking shall be allowed from the total income of the assessee. The section envisages a total income which is a whole from which the deduction should be made of the profits of the undertaking. The total income can only be calculated as per the provisions of the Act. Section 2(45) defines "total income" to mean the total amount of income referred to in section 5, computed in the manner laid down in this Act". Once the total income so computed is a loss, it would not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... included in our paper-book), the Tribunal has repeatedly held that the loss of the 10A unit can be set off against the profits of the other units. (1) In the case of Mindtree Consulting Pvt. Ltd. v. ACIT (102 TTJ (Bang) 691 = , the Tribunal has held that since the section now talks about deduction and not exemption, loss from the eligible unit can be set off against the profits of the other units. Similar view has been taken in Honeywell International (India) Pvt. Ltd. (108 TTJ 924 (Del); etc. (2) If the profits and gains of the 10A unit are to be isolated (as claimed by the assessee) and are not to be affected by the losses of the other units, such a stand cannot be taken. The interpretation of the section, and computation of the deduction is to be made in a consistent and logical manner, whether the assessee makes a loss or a profit in the 10A unit. 19. The learned Standing Counsel contended that while all the Tribunal decisions cited agree with 10A grants a deduction and not an exemption, divergent stands are being taken on the total income from which the deduction should be granted. It is important that a uniform method of computation be taken, and deduction allowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the total income of the assessee and the items enumerated in Chapter III are not forming part of the total income of the assessee at all. Section 10A falls under Chapter III. This section was introduced into a statute book in the year 1981 and was subsequently substituted in the year 2001. With effect from 1st April 2001, as substituted by Finance Act 2000, a deduction of the profits derived by the undertaking from the export of computer software is allowed from the total income. It is argued that there is no material change in the character of the section so far as the exclusion of income of the nature of section 10A is concerned. The heading of the Chapter III reads as under:- "Incomes which do not form part of total income" and the sub-heading is as under:- "Incomes not included in total income" From sections 10(1) to 10(43) fall under this sub-heading. In other words, it has to be inferred that the incomes mentioned in sections 10(1) to 10(43) are not to be included in the total income. However, section 10A falls under another sub-heading within Chapter III and the said sub-heading reads as under: - "Special provision in respect of newly established undertakin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he reading of the section, it can be easily inferred that what is contemplated is only deduction of profits and gains derived by an undertaking from export of articles or things or computer software. The very fact that the section 10A is brought under separate sub-heading and the specific word "deduction" used in the section would go to show that the intention of the Legislature was to give only deduction and not exclusion from total income. Of course, in the initial years, the entire profits of such undertaking eligible for deduction under section 10A was allowed as deduction. However, with effect from 1st April, 2003, the said deduction was restricted to 90% of such profits and gains derived by undertaking by adding separate proviso to section 10A. Perhaps, the Legislature knowingly or consciously has kept section 10A under a separate sub-heading within Chapter III only with the idea of varying the percentage of deduction from year to year or whenever necessary. The Hon'ble Calcutta High Court in the case of Royal Calcutta Turf Club (1983) 144 ITR 709 observed at page No.714 as under:- "In computing the total income, certain incomes are not included under section 10 of the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of certain incomes" in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income." From the reading of the above "section, it can be seen that the section says that "where any deduction is required to be made or allowed under any section included in this Chapter..........". It is needless to say that section 10A is not included in Chapter VI-A. Hence, as long as section 10A is not falling under Chapter VI-A, section 80AB cannot be applied. Had it been the intention of the Legislature, it would have specifically mentioned in the Act that such deduction is to be given only from the gross total income. We do not find force in the contention of the ld. Standing Counsel of the Revenue that the decision in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cable. 25. Having held that the claim under section 10A is only deduction and the same is not subjected to section 80AB of Chapter VI-A, now, let us consider whether the deduction so to be given under section 10A is undertaking specific or otherwise. 26. It can be noticed from the language of section 10A(1) that a deduction of such profits and gains that as are derived by "an" undertaking qualifies under section 10A is to be given from the total income. Interestingly, the Legislature has mentioned the profits and gains as are derived by an undertaking. It means that the assessee may have more than one undertaking and in such a case, one has to consider the profits and gains of that "particular undertaking" which qualifies for deduction under section 10A. According to section 10A(4), the deduction is to be computed in the same proportion which bears to the profits of the undertaking, the same proportion as the export turnover bears to the total turnover. It may be noticed that again the words used are "Profits and gains of business of the undertaking". In any case, this is not the total profits of the business of the assessee. Thus in computing deduction under section 10A we ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n undertaking from the export of articles or things or computer software." Further, it can be seen that nowhere it is mentioned in the section that such deduction is to be restricted to the total income of the assessee computed under the provisions of the Act, before allowing such deduction. On the other hand, wherever the Legislature wants to restrict the deduction, it has provided such restriction. For example, we can mention section 24 dealing with respect to interest as per proviso to section 24B. 27. Having held that the deduction under section 10A is not an exemption but only a deduction under Chapter III of the Income-tax Act and the provisions of section 80AB of Chapter VIA would not be applicable to such deduction under section 10A, and also that the deduction under section 10A is undertaking specific, we have to answer the question posed before us by holding that the business losses of a non-eligible unit, whose income is not eligible for deduction under section 10A of the Act, cannot be set off against the profits of the undertaking eligible for deduction under section 10A for the purpose of determining the allowable deduction under section 10A of the Act. Of course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee has raised third issue wherein the ground reads as under:- "Consequently, the CIT(A) has erred in not allowing a carry forward of the losses of the Delhi trading unit." 33. The assessee has computed deduction under section 10A as under:- I Net Profit of the eligible unit Less 10A deduction Taxable profits of the eligible unit Rs. 88,28,657 Rs. (88,28,675 Rs. NIL II Loss incurred by the Trading unit at New Delhi Rs. (77,23,636) III Income from other sources Business loss (II-III) to be carried forward Rs. 1,27,05,303 Rs. (50,18,333) As against the above, the Assessing Officer has recomputed the benefit of section 10A by reducing the loss incurred in the trading unit from net profit of eligible unit. He, has come to a net figure of Rs. 11,05,021/- as eligible for deduction under section 10A (Rs.88,28,657 - Rs.77,23,636 = Rs.11,05,021/-). He has treated income from other sources being Rs.27,36,980/- as taxable and thus levied tax of Rs.9,81,891/-. However, the learned CIT(A) has reduced trading loss of Rs.77,23,636/- from eligible profit of Rs.88,28,657/- and has arrived at a net business inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,134/- being income from other sources. Since 90% of profits of eligible unit at Chennai comes to Rs.2,91,08,907/-(90% of Rs.3,23,43,230/-), the remaining profit of Rs.6,87,767/- (Rs.2,91,08,907 - 2,84,19,140) is to be permitted (being unabsorbed claim under section 10A as per section 10A(6)(ii) of the Act). It was argued by the Senior Standing Counsel that even going by the plain reading of section 10A(6)(ii), the direction of ld. CIT(A) to allow carry forward of unabsorbed claim under section 10A is not supported. 38. On the other hand, the learned counsel for the assessee has relied on the finding of the learned CIT(Appeals) and on his paper-book, besides making oral submissions. 39. After considering the rival submissions by written and oral, we deem it fit to reproduce section 10A(6)(ii) which reads as under : - no loss referred to in sub-section (1) of section 72 or sub-section (1) or sub-section (3) of section 74, in so far as such loss relates to the business of the undertaking, shall be carried forward or set off where such loss relates to any of the relevant assessment years [ending before the 1st day of April, 2001]" 40. This provision talks about toss referre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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