TMI Blog2011 (8) TMI 845X X X X Extracts X X X X X X X X Extracts X X X X ..... nu- facture and trading of process control instruments. The assessee filed return of income on October 31, 2002, declaring a total loss of Rs.5,07,03,098. The return was processed and a refund of Rs. 23,10,536 was issued. 3. The case was selected for scrutiny under section 143(3) of the Income- tax Act, 1961 (hereinafter referred to as "the Act" for short). Notice under section 143(2) was issued on August 7, 2006. The assessee-company claimed exemption of Rs. 3,95,99,100 under section 10A, for its STP unit. The exemption had been claimed before set off on brought losses and depreciation. According to the assessing authority, the deduction under section 10A has to be allowed from the total income of the assessee. The total income of the assessee was arrived at as per section 80B(5). Therefore, the exemption under section 10A had to be given after setting off of all brought forward losses within the context of section 32(1) read with section 72(2) of the Act. Accordingly, section 10A benefit was recomputed. After such recomputation, after adjusting the assessee was held to be not entitled for exemption under section 10A and, hence, a sum of Rs. 36,575 was treated as income from o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business losses of the undertaking whose income is not exempt under section 10A cannot be set off to ascertain the profit and gains derived by an undertaking from export of computer software. Hence, business losses of other units will not be set off against the profits of the undertaking engaged in the export of com- puter software for the purposes of determining the allowable deduction under section 10A of the Income-tax Act. Unabsorbed business loss is to be set off under section 72 of the Act and the same is not mentioned under section 29 of the Act. Hence, unabsorbed business losses will not be set off against the profit of the undertaking engaged in the export of computer software for the purposes of ascertaining the deduction admissible under section 10A. As per section 72(2), unabsorbed business loss is to be first set off and thereafter the unabsorbed depreciation treated as current years depreciation under section 32(2) is to be set off. For computing deduction under section 10A, only the profit derived from export of computer soft- ware is to be taken into consideration, The unabsorbed business loss of other units cannot be set off and, therefore, the unabsorbed depreci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set off where such loss relates to any of the relevant assessment years ending before April 1, 2001. Therefore, according to him, a harmonious reading of these provisions makes it clear that subsequent to April 1, 2001, the carry forward losses of the business have to be set off against the profits of the undertaking before arriving at the total income of the assessee. Therefore, he submits that the interpretation placed by the Appellate Com- missioner and the Tribunal is contrary to the statutory provisions and, therefore, it is liable to be set aside and the order of the assessing authority is to be restored. 9. Per contra, the learned senior counsel appearing for the assessee pointed out Chapter III of the Act where section 10A finds a place, deals with the incomes which generally do not form part of the total income. Therefore, the profits derived under section 10A are not to be taken into consideration in arriving at the total income of the assessee. Under section 72(1), what could be set off against the profits earned is the carry forward losses or depreciation which is to be taken into consideration at the stage of computation of income under Chapter VI of the Act. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the provisions of this section, as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to deduction referred to in this sub-section only for the unexpired period of the aforesaid ten con- secutive assessment years : Provided further that where an undertaking initially located in any free trade zone or export processing zone is subsequently located in a special economic zone by reason of conversion of such free trade zone or export processing zone into a special economic zone, the period of ten consecutive assessment years referred to in this sub- section shall be reckoned from the assessment year relevant to the previous year in which the undertaking began to manufacture or pro- duce such articles or things or computer software in such free trade zone or export processing zone : Provided also that for the assessment year beginning on the 1st day of April, 2003, the deduction under this sub-section shall be ninety per cent. of the profits and gains derived by an undertaking from the export of such articles or things or computer software : Provided also that no deduction under this section shall be allowed to an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of the undertaking shall be computed as if the assessee had claimed and been actually allowed the deduction in respect of depreciation for each of the relevant assessment year . . . Explanation 2.-. . . (ii) 'convertible foreign exchange' means foreign exchange which is for the time being treated by the Reserve Bank of India as con- vertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder or any other corresponding law for the time being in force ; (iii) 'electronic hardware technology park' means any park set up in accordance with the Electronic Hardware Technology Park (EHTP) Scheme notified by the Government of India in the Ministry of Com- merce and Industry ;" 13. A literal reading of the above provision requires deduction from the total income. There can be a deduction in computing the total income. How- ever, there cannot be deduction from the total income which is the final result of the computation process. The language adopted in section 10A is different from the one adopted in section 80A. Section 10A provides for deduction from the total income. In the scheme of the Act, while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 10A(1) which makes a reference to the total income of the undertaking and not to the total income of the assessee. The definition of any term given in section 2 will apply only when the context does not otherwise require. The placement, language and setting of section 10A cannot mean the total income com- puted in accordance with the provisions of the Act. Instead, such a phrase in the context of section 10A, means profits and gains of the STP under- taking as understood in its commercial sense. 16. Chapter IV deals with the computation of total income under various heads of income. Section 14 provides for classification of income under various heads of income for the purposes of charge of income-tax and computation of total income. The purpose of classification of any income under any head of income is to compute the same. The twin conditions of section 14 are that income is subject to charge of income-tax and is includible in the total income. As the relief under section 10A is in the nature of exemption although termed as deduction and the said relief is in respect of commercial profits, such income is neither subject to charge of income-tax nor includible in the to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s total income" is defined in section 80B(5) to mean the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter. As per the definition of gross total income, the other provisions of the Act will have to be first given effect to. There is no reason why reference to the provisions of the Act should not include section 10A. In other words, the gross total income would be arrived at after considering section 10A deduction also. There- fore, it would be inappropriate to conclude that section 10A deduction is to be given effect to after Chapter VI-A deductions are exhausted. 19. It is after the deduction under Chapter VI-A that the total income of an assessee as arrived at. Chapter VI-A deductions are the last stage of giving effect to all types of deductions permissible under the Act. At the end of this exercise, the total income is arrived at. Total income is thus, a figure arrived at after giving effect to all deductions under the Act. There cannot be any further deduction from the total income as the total income is itself arrived at after all deductions. 20. From the aforesaid discussion it is clear that the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... post-tax holiday. This is supported by Circular No. 7 of 2003 wherein the Board has stated that the purpose of amendment is to entitle an assessee to the benefit of carry forward of depreciation and loss suffered during the tax holiday period. The circular dated September 5, 2003, reads as under ([2003] 263 ITR (St.) 62, 77) : "20. Providing for carry forward of business losses and unabsorbed depreciation to units in special economic zones and 100 per cent. export oriented units : 20.1 Under the existing provisions of sections 10A and 10B, the undertakings operating in a special economic zone (under section 10A) and 100 per cent. export oriented units (EOU's) (under section 10B) are not permitted to carry forward their business losses and unabsorbed depreciation. 20.2 With a view to rationalize the existing tax incentives in respect of such units subA-section (6) in sections 10A and 10B has been amended to do away with the restrictions on the carry forward, of business losses and unabsorbed depreciation. 20.3 The amendments have been brought into effect retrospectively from April 1, 2001, and have been made applicable to business losses or unabsorbed depreciation ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o set off shall be carried forward to the following assessment year and so on : Provided that where the whole or any part of such loss is sustained in any such business as is referred to in section 33B which is discontinued in the circumstances specified in that section, and, thereafter, at any time before the expiry of the period of three years referred to in that section, such business is re-established, recon- structed or revived by the assessee, so much of the loss as is attributable to such business shall be carried forward to the assessment year relevant to the previous year in which the business is so re-established, reconstructed or revived, and- (a) it shall be set off against the profits and gains, if any, of that business or any other business carried on by him and assessable for that assessment year ; and (b) if the loss cannot be wholly so set off, the amount of loss not so set off shall, in case the business so re-established, reconstructed or revived continues to be carried on by the assessee, be carried forward to the following assessment year and so on for seven assessment years immediately succeeding." 26. In fact, the Bombay High Court in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entitled. It is not, therefore, possible to equate the undertaking with the company. When a company owns more than one undertaking the application of section 84 has to be with respect to the particular undertaking and not to the company in general. When we apply section 84 to a particular undertaking it has to be seen when that undertaking commenced the manufacture or production of articles. It is true that the word 'undertaking' has not been defined under the 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 this case though the objects of the company as set out in its articles of association cover a variety of objects, the object of the undertaking is only to manufacture lathes and bench grinders as is clear from the licence issued to the company under the Industries (Development and Regulation) Act, 1951." 29. Form No. 1 read with rule 12 of the Income-tax Rules, 1962, provides for return of income and return of fringe benefits. 30. In Schedule 9 at column No. 7 it is clearly mentioned the amount claimed/deductible under section 10A/10AA/10B or 10BA. Dealing with the scheme of the form it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rse subject to various provisions of the Act including those of Chapter VI-A. If in such a year, the assessee has suffered losses, such losses would be subject to inter source and inter head set off. The balance, if any, thereafter can be carried forward for being set off against profits of the subsequent assessment years in the normal course. Unabsorbed depreciation also merits a similar treatment. 33. As the income of the section10A unit has to be excluded at source itself before arriving at the gross total income, the loss of the non-section 10A unit cannot be set off against the income of the section 10A unit under sec- tion 72. The loss incurred by the assessee under the head "Profits and gains of business or profession" has to be set off against the profits and gains, if any, of any business or profession carried on by such assessee. Therefore, as the profits and gains under section 10A is not be included in the income of the assessee at all, the question of setting off the loss of the assessee of any profits and gains of business against such profits and gains of the undertaking would not arise. Similarly, as per section 72(2), unabsorbed business loss is to be first set ..... X X X X Extracts X X X X X X X X Extracts X X X X
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