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2015 (3) TMI 618 - DELHI HIGH COURT

2015 (3) TMI 618 - DELHI HIGH COURT - [2015] 373 ITR 574 (Del) - Set off of loss suffered in a unit entitled for exemption under Section 10B against income from any other unit not eligible for such exemption - ITAT allowed he claim - Held that:- This court is of the opinion that Tei Technologies (2012 (9) TMI 47 - DELHI HIGH COURT) applies wherein held held that even if Section 10A/ Section 10B are treated as exemption provisions, Section 80A (4) cannot defeat that interpretation. The object of .....

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her provision of the Act. The only object of the sub-section is to ensure that there is no double benefit arising to the assessee in respect of the same income.

The tax-exempt income of the assessee, eligible under Section 10-B could not have been set off against the losses from tax-liable income. - Decided in favour of revenue. - ITA 386/2013 - Dated:- 13-3-2015 - S. Ravindra Bhat And R. K. Gauba,JJ. For the Appellant : Sh. Balbir Singh, Sr. Standing Counsel and Sh. Abhishek Singh B .....

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ection 260A of the Income Tax Act, 1961 (hereinafter the Act ) are as follows. M/s. Kei Industries Ltd., (hereinafter the Assessee ) is a Public Limited company, engaged in the business of manufacturing cables, wires and stainless steel wires selling them to public sector companies and Electricity Board. It filed its return of income on 29.09.2008 declaring ₹ 1,49,18,516/- as income for the year under consideration. It was assessed under the provisions of Section 143(3) of the Act. The Ass .....

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st the income of the other units. 3. The assessee was asked to explain as to why the set-off of this loss should not be disallowed, as the income of this unit was exempt from tax. In response, the Assessee furnished its detailed submissions, which, however, were rejected by the AO who was of the opinion that as Section 10B was in Chapter-III of the Act, under the heading incomes which do not form part of total income , legislative intent was clear that such income was exempt. The AO also held th .....

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Section 10B provide for carry forward and set off of losses pertaining to the 100% export oriented units eligible for deduction under the said section. Therefore, if what the ld. Counsel (for the Assessee) is arguing is to be accepted, then the provisions of section sub-clause(ii) of sub-section (6) shall become redundant. It has to be appreciated that when there is a specific provision for carrying forward and set off of losses sustained by the unit eligible for deduction under Section 10B, the .....

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that, Section 10B cannot be read in isolation of other provisions. It is only an exemption provision. It may be true that even after taking into consideration the unabsorbed depreciation, the Assessee may get exemption but nonetheless it could not take only a portion of depreciation just to suit its income for the purposes of NIL liability and adjust the balance of unabsorbed depreciation against other business income once again to show NIL liability. The intention of the legislature was to pro .....

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e to be set off against the profits of such eligible units in the subsequent years. 5. The ITAT, which the assessee approached, allowed the appeal. In doing so, it essentially relied on the ruling of a Division Bench of the Bombay High Court in CIT vs. Galaxy Surfactants Ltd. (343 ITR 102). The impugned order, inter alia, held that: 11. We have heard both the sides in detail. We find that the decision of Hon'ble Bombay High Court in the case of CIT vs. Galaxy Surfactants Ltd. cited supra, is .....

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dred per cent EOU was reduced. The loss in the EOU was principally on account of current depreciation which was set-off against the profits of the EOU. After reducing the loss sustained by the EOU against the profits of other units, the assessee disclosed a net taxable income of ₹ 10.76 crores. The Assessing Officer held that a deduction under Section 10B had to be given in respect of the profits of the undertaking independently. The Assessing Officer held that a loss sustained by the elig .....

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alling under any head of income (other than capital gain) against income from any other source under the same head. Section 71 provides for the setting off of a loss with reference to one head of income against income from another head (save and except for capital gains). Under section 72, a provision has been made for carry forward and setting off of a loss sustained against the head of profits and gains of business or profession. Under section 72, where a loss which has been sustained under th .....

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on in section 10B by which a prohibition has been introduced by the Legislature in setting off of a loss which is sustained from one source falling under the head of profits and gains of business against income from any other source under the same head. On the other hand, there is intrinsic material in section 10B to indicate that such a prohibition was not within the contemplation of the Legislature. Sub-section (7) of section 10B provides that the provisions of sub-section (8) and sub-section .....

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of determining the quantum of deduction to be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year. A provision akin to sub-section (5) of section 80-IA or for that mailer akin to sub-section (6) of section 80-I has not been introduced by the Legislature when it enacted section 10B. The fact that unabsorbed depreciation can be carried forward to a subsequent ye .....

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s argued that Galaxy Surfactants (supra) noted the previous ruling of the same High Court in Hindustan Lever Ltd. vs. Deputy Commissioner of Income Tax (2010) 325 ITR 102 (Bom) and yet did not give much importance to the fact that unlike other provisions, Section 10B income was exempt and did not fall within the description of income which could be assessed or enter the field of taxation for the relevant year. It was submitted that CIT v. Himatasingike Side Ltd. 286 ITR 255, the Karnataka High C .....

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47/2011 & 2067/2010; decided on 27-08-2012; reported in [2014] 361 ITR 36). 7. Counsel for the assessee argued that the impugned judgment of the ITAT is sound and should not be upset. He relied on the decision of the Bombay High Court in Galaxy Surfactants (supra) and submitted that the previous ruling in Hindustan Unilever Ltd. (supra) also ruled that Section 10B is in the nature of deduction. Counsel highlighted that textually, Section 80A (4) of the Act affirms that provisions of Section .....

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assessment year, deduction in respect of, and to the extent of, such profits and gains shall not be allowed under any other provisions of this Act for such assessment year and shall in no case exceed the profits and gains of such undertaking or unit or enterprise or eligible business, as the case may be. Counsel also submitted that another judgment of the Bombay High Court in CIT v. Black and Veatch Consulting Pvt. Ltd. (decided on 09.04.2012; [2012] 348 ITR 72 (Bom)) affirms that in fact Secti .....

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ity of carry forward adjustment is available for a limited period. Analysis and Conclusions 8. Section 2(45) of the Income-tax Act defines total income as the total amount of income referred to in section 5, computed in the manner laid down in this Act . Section 4 provides for charge of income-tax. Section 5 defines the scope of total income. Section 5 (1) states that subject to the provisions of the Act, the total income of any previous year of a person who is a resident includes all income fro .....

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nued with some amendments till 31.03.2001. Section 10A as enacted by Finance Act, 1981 read as under: "10A. Special provision in respect of newly established industrial undertakings in the free trade zones.-(1) Subject to the provisions of this section, any profits and gains derived by an assessee from an industrial undertaking to which this section applies shall not be included in the total income of the assessee." Likewise, Section 10B, inserted by the Finance Act, 1988 read as under .....

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: "10A. (1) 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 for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee...." Substit .....

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may be, shall be allowed from the total income of the assessee..." 9. What the assessee argued successfully in this case was that income from a Section 10B unit is in the nature of deduction, rather than exemption. If this contention is accepted, certain inevitable consequences would follow. Under the scheme of the Act, income computed under various heads - in accordance with provisions of Chapter IV of the Act has to be aggregated in terms of Chapter VI of the Act. Consequently, the first .....

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for deduction in terms of the Act, the same shall be allowed in computing the total income of the assessee. In the last step, if after aggregation of income in accordance with the provisions of sections 70 and 71 of the Act, there is a loss (in respect of assessment year 2001-02 and any subsequent year) from an eligible unit, it shall be eligible for carry forward and set off under Section 72 of the Act. Likewise, any loss from an ineligible unit can be carried forward and may be set off agains .....

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t retrospective amendment was the one which was made in sub-section (6) of Section 10A. This subsection contained provisions for ensuring that an assessee who enjoys the tax holiday under Section 10A does not enjoy any other tax concession. This aspect was earlier taken care of by sub-section (4), but when the entire Section was substituted and recast by the Finance Act, 2000 with effect from 1st April, 2001, sub-section (4) became subsection (6) but the essence and substance of the provisions o .....

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ts of Section 10A, they should not enjoy any further reliefs or benefits which are available under the provisions of the Act. We have already referred to this aspect when we referred to para 6.6 of the Circular No.308 dated 29.06.1981 (supra) which explained sub-section (4) of Section 10A when the section was introduced by the Finance Act, 1981. The same rationale holds good for sub-section (6) also. If the profits of the eligible undertaking do not enter the field of taxation for a particular p .....

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ideration after the tax holiday period. The amendment made by the Finance Act, 2003 to sub-section (6) with retrospective effect from 01.04.2001 made a significant departure from the legislative thinking outlined above. It provided that from the assessment year 2001-02, the right to carry forward the losses will be recognized. The result of this retrospective amendment is that even the bar on claiming the benefits of carried forward losses and allowances after the period of tax holiday is over w .....

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ection 10A, even after substantial amendment by the Finance Act, 2000, was retained in Chapter III of the Act, despite change in the language of sub-section (1). The court ruled that it was open to the legislature to transpose the section from Chapter III to Chapter VIA of the Act which is titled deductions to be made in computing total income . In this context, the Court approved the line of reasoning of the Karnataka High Court in CIT v. Yokogawa India Ltd., (2012) 341 ITR 385 which held as fo .....

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exemption. Chapter VII deals with the incomes forming part of the total income on which no income-tax is payable. These are the incomes which are exempted from charge, but are included in the total income of the assessee. Parliament, despite being conversant with the implications of this Chapter, has consciously chosen to retain section 10A in Chapter III. 11. The court then took note of various provisions which dealt with computation of total income, viz Section 2 (45); Section 14 and Section .....

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we think it to be, then it is not possible to understand sub-section (1) of Section 10A as providing for a deduction of the profits of the eligible unit from the total income of the assessee . The definition of the expression total income given in Section 2(45) cannot be imported into the interpretation of sub-section (1) having regard to the context in which it is used and the scheme of the Act relating to the charge of the tax. It has to be kept in mind that the definition section would not a .....

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tion of that expression as per Section 2 (45). Tei Technologies (supra) also noticed that though there was divergence of opinion between the Karnataka and Bombay High Courts as to whether Section 10A or Section 10B were in the nature of exempt income or deductions, there was agreement in both the opinions as to the manner of computation and that such profits have to be eliminated at the first stage itself, that is, as soon as they are computed, suggesting that it is an exemption provision. It wa .....

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nature of exemption provisions, rather than provisions for deduction. 12. At this stage, it would also be necessary to recollect the Supreme Court s judgment in Commissioner of Income-tax v. Williamson Financial Services and Ors., (2008) 297 ITR 17 (SC), which was taken note of in Tei Technologies (supra). In Williamson Financial Services (supra), the Supreme Court held that: At this stage we have to analyse Chapter III which deals with incomes which do not form part of total income. Section 10 .....

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me whereas in the second category of exempted income is the income of local authorities and diplomatic officers. We are concerned with the first category. In addition to the above two categories there is a third kind of income. These incomes are wholly or partly tax-free incomes on account of special deductions under Chapter VI-A. We are essentially concerned with these tax-free incomes. XXXXXX XXXXXX XXXXXX …. As stated above, there is a vital difference between income not chargeable to .....

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why we have stated that there is a difference between exempted incomes and tax-free incomes . This distinction is of some importance. As stated above, section 5 provides what the total income shall include. Chapter III refers to incomes which do not form part of total income . Chapter IV deals with computation of total income . It classifies the income under different heads and the deductions to be made in respect of each of the different heads of income. In the Income-tax Act, the expression in .....

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