TMI Blog2012 (8) TMI 335X X X X Extracts X X X X X X X X Extracts X X X X ..... the claim u/s 10B is uphold - in favour of assessee. Non inclusion/deducting the amount credited/debited as income/expenses relatable to unit eligible for tax holiday under section 10B for computing book profits u/s 115JB - Held that:- Under the scheme of provisions of section 115JB Minimum Alternate Tax (MAT) is levied with reference to the book profit disclosed in the profit and loss account prepared in accordance with the provisions of Parts II and III of Schedule VI of Companies Act, as opposed to ‘profits or gains of business or profession’ as computed as per the provisions of the Act - Explanation to section 115JB(2) provides for the purposes of this section, ‘book profit’ means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2) as increased by the amount or amounts of expenditure relatable to any income to which section 10 or section 10A or section 10B or section 11 or section 12 apply - - deduction claimed by the assessee under section 80HHE has to be worked out on the basis of adjusted book profit under section 115JA and not on the basis of the profits computed under regular provisions of law applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er was modified under section 154 by AO. Assessee is contesting the issues both on merits as well as on legal principles. For the sake of record, the grounds in assessment year 2005-06 are extracted below: Exemption under section 10B: 1.The learned CIT (A) erred in confirming the action of AO in holding that the deduction under section 10B is to be allowed after set off of brought forward business losses and unabsorbed depreciation. On that basis, the learned CIT (A) erred in upholding the action of AO in disallowing the deduction under section 10B of Rs.11,15,23,091/-. 2. The CIT (A) erred in holding that this is now settled position of law that all brought forward losses and depreciation are first to be set off against the business profits of the current year before deduction are computed. 3. The CIT (A) erred in observing that from the assessment year 2001-02, the provisions of section 10A and 10B have been brought at par with other sections dealing with deductions under Chapter VI-A. Computation of Book Profit under section 115JB: 4.The learned CIT (A) erred in upholding the action of AO of computing book profits under section 115JB at Rs.313,07,040 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Assessing Officer, during the course of the order of assessment under Section 143(3) observed as follows: Under the scheme of the Act, the profits of the unit eligible for deduction under Section 10A of the Act, would form part of the income computed under the head 'Profits and gains of business and profession . However, in order the same does not suffer tax, deduction will have to be made in respect thereof while computing the income under the head 'Profits and gains of business and profession . In other words, the deduction in respect of the profits eligible under Section 10A of the Act is required to be made at the stage of computing the income under the head 'Profits and gains of business or profession . Nonetheless, while computing the total income of the assessee the Assessing Officer took the net profit as per the profit and loss account and after, inter alia, making certain disallowances and allowances, arrived at the total business income at Rs.86.07 lakhs. A set off was effected of the brought forward business loss of AY 2003-04 and AY 2004-05 upon which the Assessing Officer came to the conclusion that there was nil income which would qualify for deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be made. In the absence thereof, such an approach cannot be accepted. In the circumstances, the decision of the Tribunal would have to be affirmed since it is plain and evident that the deduction under Section 10A has to be given at the stage when the profits and gains of business are computed in the first instance. So construed, the appeal by the Revenue would not give rise to any substantial question of law and shall accordingly stand dismissed. There shall be no order as to costs . 8. On similar question, the Hon'ble Karnataka High Court in the batch of cases of ACIT vs. M/s Yokogawa India Ltd and others vide order dated 9th August, 2011 examined this issue elaborately and decided as under: 1st Substantial question of law 9. The benefit of tax holiday was originally enacted as an absolute exemption under Chapter III of the Income-tax Act, 1961. It remained as exemption for almost two decades. The heading of Chapter III under which the relevant provisions were placed is titled as "Incomes which do not form part of the total income". The second heading read as "Special conditions in respect of newly established industrial undertakings in free trade zones". Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous year in which the undertaking began to manufacture or produce 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 any undertaking for the assessment year beginning on the 1st day of April, 2012, and subsequent years. . . . (4) For the purposes of sub-sections (1) and (1A), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the under-taking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. . . (6) Notwithstanding anything contained in any other provision of this Act, in computing the total income of the assessee of the previous year relevant to the assessment year immediately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vernment of India in the Ministry of Commerce and Industry ;" 12. 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 various deductions are allowed in computing the total income, once the total income is computed, no further adjustment to the total income is envisaged. The scheme of the Act provides for deduction in computing the total income but no mechanism for any deduction from the total income already computed is provided under the Act. Once the total income is computed, the next step is determination of tax by applying the applicable rates on the total income. 13. Section 2(45) defines "total income" to mean the total amount of income referred to in section 5 and computed in the manner laid down in the Income-tax Act. Section 5 defines the scope of total income and it is subject to the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 total income. Therefore, the twin provisions of section 14 are not existing in the case of income of STP under-taking and accordingly such income is not liable to be computed under Chapter IV. Therefore, the correct view would be that the relief under section 10A will have to be given before Chapter IV. The deduction shall be given first and process of computation of "profits and gains of business or profession" begins thereafter. This proposition is in line with the form of return. Allowing deduction at the earliest stage of business income computation almost blurs the difference between the commercial profits and tax profits. 16. The substituted section 10A continues to remain in Chapter III. It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 19. From the aforesaid discussion it is clear that the income of the section10A unit has to be excluded before arriving at the gross total income of the assessee. The income of the section10A unit has to be deducted at source itself and not after computing the gross total income. The total income used in the provisions of section 10A in this context means the global income of the assessee and not the total income as defined in section 2(45). Hence, the income eligible for exemption under section 10A would not enter into computation as the same has to be deducted at source level. 2nd substantial question of law 20. Prior to the introduction of sub-section (6) of sections 10A and 10B of the Finance Act, 2000, which came into effect from April 1, 2001, in comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d their business losses and unabsorbed depreciation. 20.2 With a view to rationalize the existing tax incentives in respect of such units sub A-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 arising in the assessment year 2001-02 and subsequent years." 22. It is interesting to note that such relaxation has not been made in section 10C which provides for exemption in respect of profits of certain under-takings in north eastern region. This makes clear the legislative intention of providing relaxation wherever it deems fit and in the present case, such relaxation has been made in section 10A but not in section 10C. 23. It is to be noted that the aforesaid amendment read with the Board circular does not militate against the proposition that the benefit of relief under this section is in the nature of exemption with reference to the commercial profits. However, in order to give effect to the legislative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness 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." 25. In fact, the Bombay High Court in the case of Hindustan Unilever Ltd. v. Deputy CIT [2010] 325 ITR 102 (Bom) interpreting section 10B as amended held as under : " . . . section 10B as it stands is not a provision in the nature of an exemption but provides for a deduction. Section 10B was substituted by the Finance Act of 2000 with effect from April 1, 2001. Prior to the substitution of the provision, the earlier provision stipulated that any profits and gains derived by an assessee from a 100 per cent. export oriented undertaking, to which the section applies 'shall not be included in the total income of the assessee'. The provision, therefore, as it earlier stood was in the nature of an exemption. After the substitution of section 10B by the Finance Act of 2000, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cture lathes and bench grinders as is clear from the licence issued to the company under the Industries (Development and Regulation) Act, 1951." 27. Form No. 1 read with rule 12 of the Income-tax Rules, 1962, provides for return of income and return of fringe benefits. 28. 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 is stated that the scheme of this form follows the scheme of the law as outlined above in its basic form and with reference to Schedules 1, 9, 3 and 13 it is stated that "fill out Schedule 9 if you are claiming deduction under section 10A, 10AA, 10B or 10BA in respect of some specific business". Item 7 of Schedule 1 is to eliminate such income from computation of profits and loss and no separate declaration under section 10A(8) or 10B(8) if any is required to be made. 29. After making all such computations the assessee would be entitled to the benefit of set off or carry forward of loss as provided under section 72 of the Act. That is the benefit which is given to the assessee under the Act irrespective of the nature of business which he is carr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nst 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 off and thereafter unabsorbed depreciation treated as current year's depreciation under section 32(2) is to be set off. As deduction under section 10A has to be excluded from the total income of the assessee the question of unabsorbed business loss being set off against such profit and gains of the undertaking would not arise. In that view of the matter, the approach of the assessing authority was quite contrary to the aforesaid statutory provisions and the Appellate Commissioner as well as the Tribunal were fully justified in setting aside the said assessment order and granting the benefit of section 10A to the assessee Hence, the main substantial question of law is answered in favour of the assessees and against the Revenue . 9. Since the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted as per the provisions of the Act. The book profit gets substituted for the total income as computed under the Act. The book profit has, therefore, to be wholly quarantined from the said total income. For the determination of book profits thus any mode and manner of computation of total income under the Act has not to be applied unless specifically provided, as held by the Apex Court in Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273/ 122 Taxman 562 and as clarified in the memorandum explaining provisions of the Finance Bill, 2000 [242 ITR (St.) 117, 138]. In other words, for the purpose of levy of MAT, reference is to be made only to the annual accounts as prepared for the purpose of the Companies Act. Further, the Explanation to section 115JB(2) provides the manner of computation of book profit. The starting point is the book profit as disclosed in the profit and loss account prepared in accordance with Parts II and III of Schedule VI of the Companies Act, 1956. Such profit is subject to adjustments specified in the Explanation to said section. In terms of clause (ii) of Explanation to section 115JB(2), the amount of income to which provisions, inter alia, section 10A/10B ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aforesaid, exclusion of income net of expenses relatable to units eligible for deduction under section 10A/10B had been taken by the Assessing Officer at Rs. 9,825.14 lakhs as against Rs. 13,343.61 lakhs excluded by the assessee. The action of the Assessing Officer was contrary to the scheme of section 115JB, the unambiguous provisions of clause (f) and clause (ii) of Explanation to section 115JB(2) and the settled judicial precedent in this regard. While computing book profit under section 115JB amount to be reduced is income which is eligible for exemption under section 10A/10B as computed on basis of book profits as per Parts II and III of Schedule VI of the Companies Act and not on basis of provisions of Act. Further, the CBDT vide Circular No. 559, dated 4-5-1990 and also Circular No. 680, dated 21-2-1994 clarified that for the purpose of section 115J (which is pari materia to section 115JB) deduction under section 80HHC that needs to be excluded (from book profits) in terms of clause (iii) of Explanation is to be calculated with reference to book profits. The Special Bench of the Tribunal in the case of Dy. CIT v. Syncome Formulations (I) Ltd. [2007] 106 ITD 193 (Mum.) consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount. [Para 12]. A careful perusal of clause (ii) of the Explanation to section 115JB(2) reveals that, though the said clause speaks about the amount of income , yet it also speaks of if, any such amount is credited in profit loss account . Thus, while reading the said clause as a whole, it becomes clear that the amount of income which can be reduced by the Assessing Officer for computing the book profit under clause (ii) of the Explanation to section 115JB(2), it would be the amount which is credited to the profit loss account and not the amount of income which is claimed by the assessee or determined by the Assessing Officer while assessing the income under the regular provisions of the Income-tax Act. [Para 13] Therefore, the impugned order of the Commissioner (Appeals) was correct and deserved to be upheld . 14. The Hon'ble Supreme Court in the case of Bhari Information Tech. Sys. (P) Ltd considered the issue under the provisions of section 115JA and held as under: The assessee filed its return of income for assessment year 2000-01. The assessee claimed deduction under section 80HHE to the extent of Rs.1,56,33,719 against net profit as per the profit and lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be worked out on the basis of the adjusted book profit [See: Para 61 of the judgment of the Tribunal in Syncome Formulations*.] In the present case, we are concerned with section 80HHE which is referred to in the Explanation to section 115JA, clause (ix). In our view, the judgment of the Special Bench of the Tribunal in Syncome Formulations* squarely applies to the present case. Following the view taken by the Special Bench in Syncome Formulations*, the Tribunal in the present case came to the conclusion that deduction claimed by the assessee under section 80HHE has to be worked out on the basis of adjusted book profit under section 115JA and not on the basis of the profits computed under regular provisions of law applicable to computation of profits and gains of business. The judgment of the Tribunal has been upheld by the High Court. We see no reason to interfere with the impugned judgment. We agree with the view taken by the Special Bench of the Tribunal in the case of Syncome Formulations1 vide Para 61 of the judgment. Accordingly, the special leave petition filed by the Department stands dismissed with no order as to costs . 15. Since the principles laid down by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computation. It was the contention that these two amounts are to be allowed. While arguing it was informed that as far as wealth tax is concerned, the same is not covered by provisions of section 115JB and submitted that AO has added an amount of Rs.90 lakhs as against Rs.90,000/- offered by assessee. The learned Counsel submitted that the above mistake can be rectified. With reference to provisions of FBT, it was submitted that the decision of ITAT in the case of ACIT vs. Balarampur Chini Mills Ltd, 109 ITD 146 (Cal.) and Income Tax Officer vs. Vintage Distillers Ltd,(130 TTJ 79) (Delhi) are applicable and CBDT Circular No.8 dated 29th August, 2005 is also applicable. However, the CIT (A) did not agree to the above arguments. 19. We have considered the issue. As far as the wealth tax is concerned, the same cannot be considered as part of Income Tax and assessee itself offered the income at Rs.90,000/- for disallowance in the working of income under section 115JB. As seen from the order of the assessment, AO mentioned an amount of Rs.90.00 lakhs against the provision of wealth tax which seems to be a typographic error as the amounts added was at Rs.90,000/- only. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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