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2016 (6) TMI 690 - ITAT HYDERABAD

2016 (6) TMI 690 - ITAT HYDERABAD - TMI - Revision u/s 263 - CIT(A) directing AO to set off the brought forward depreciation and loss before allowing the deduction u/s 10A of the I.T. Act. - Held that:- We find that the assessee during the relevant financial year, had brought forward business losses and depreciation of earlier years pertaining to the non 10A units. It is also not in dispute that this is the final year of the exemption u/s 10A of the I.T. Act. The decision relied upon by the lear .....

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provision and therefore, the deduction u/s 10A of the I.T. Act has to be allowed from the total income of the assessee and the question of un-absorbed business loss of non 10A Units being set off prior thereto would not arise. See CIT Versus TEI TECHNOLOGIES PVT. LTD. [2012 (9) TMI 47 - DELHI HIGH COURT] and CIT vs. Yokogawa India Ltd [2011 (8) TMI 845 - Karnataka High Court ] - Decided in favour of assessee - ITA No. 766/Hyd/2015 - Dated:- 17-6-2016 - Smt. P. Madhavi Devi, Judicial Member For .....

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he assessee company, engaged in the business of software development, filed its return of income for the A.Y 2010-11 on 24.09.2010 admitting income at Rs. Nil after claiming deduction u/s 10A i.e. ₹ 6,05,63,431. The AO allowed the dedeuctin u/s 10A of the Act of ₹ 6,02,93,581. Subsequently the CIT, on perusal of the assessment records observed that 10A deduction at ₹ 6,02,93,581 has been allowed before setting off the brought forward business loss and depreciation to the extent .....

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siness loss and depreciation is to be set off. The CIT was however, not convinced with the assessee s contentions and observed that sub-section (6) of sections 10A and 10B were amended by Finance Act 2003 with retrospective effect from 1.4.2001 and observed that the deduction u/s 10A or 10B is to be allowed from the total income of the assessee. Thus, according to him, the brought forward loss and depreciation of the non eligible unit is to be first set off from the eligible unit in accordance w .....

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t in the earlier years, the assessee was allowed deduction u/s 10A of the Act as claimed by the assessee and the A.Y before us being the last year, the AO has allowed exemption u/s 10A on the income of the 10A Unit. He submitted that the order of the CIT holding the assessment order erroneous and prejudicial to the interests of the Revenue is not correct as even after set off of brought forward loss and depreciation of the non eligible unit, there was no tax liability on the assessee and thus th .....

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support of his contention, he placed reliance upon the following judgments: a) CIT vs. TEI Technologies P Ltd (2012) 25 Taxmann.com 5 (Delhi) High Court of Delhi. b) CIT vs. Black & Veatch Consulting P Ltd (2012) 20 Taxmann.com 727 (Bom) High Court of Bombay c) CIT vs. Yokogawa India Ltd (2012) 21 Taxmann.com 154 (Karnataka), High Court of Karnataka AND d) The judgment of the Andhra Pradesh High Court dated 28.08.2013 in ITA Nos. 360 of 2011, 407 of 2010, 279 of 2012, 361 of 2011 and 362 of .....

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horities below and placed reliance upon the decision of the Coordinate Bench of this Tribunal in ITA No.800/Hyd/2007 in the case of IIC Technologies Pvt Ltd, Hyderabad and in the case of Asstt. CIT vs. Bodhtree Consulting Ltd (Hyd.Trib.) (2010) 041 SOT 0230, wherein after considering the amended provisions of section 10A and 10B in which exemption has been converted into a deduction, it has been held that the deduction u/s 10B is to be computed after set off of brought forward business loss and .....

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ecision of the Coordinate Bench of the Tribunal dated 21.05.2010 for the A.Y 2004-05, whereas the decisions relied upon by the assessee s Counsel are of the Hon'ble Karnataka and Delhi High Courts for the A.Ys 2001-02 to 2006-07 and 2002-03 respectively. The Hon'ble High Courts have taken into consideration the amendment to section 10A and 10B and also that the earlier exemption provision has been converted into a deduction and even in the present form, section 10A is an exemption provis .....

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n is placed in Chapter III of the Act which is titled "Incomes which do not form part of total income". Sub-section (1) of this section as it stood amended by the Finance Act, 2000 w. e. f. 01.04.2001, however, provides for "a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software……from the total income of the assessee". The language used has given rise to the argument that the section only .....

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total income of the assessee". This phraseology which we have noted earlier to conform to the title of Chapter III of the Act has given rise to the further argument from the department that w.e.f. 01.04.2001 there is a significant change and profits which were earlier exempt from income tax and were not includible in the assessee's total income are now so included, subject to deduction, and once the profits are included, all the provisions of the Act will have to be applied while arriv .....

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III to Chapter VIA of the Act which is titled "deductions to be made in computing total income". This aspect of the matter has been adverted to and discussed by the Karnataka High Court in CIT v. Yokogawa India Ltd. [2012] 341 ITR 385 / 21 taxmann.com 154. It has been observed by the Karnataka High Court as follows: - "The substituted section 10A continues to remain in Chapter III. It is titled as "Incomes which do not form part of total income". It may be noted that whe .....

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like section 80A and section 80AB which was in Chapter VI-A which do not appear in Chapter III. The fact that even after its recast, the relief has been retained in Chapter III indicates that the intention of Parliament it is to be regarded as an exemption and not a deduction. The Act of Parliament in consciously retaining this section in Chapter III indicates its intention that the nature of relief continues to be an exemption. Chapter VII deals with the incomes forming part of the total income .....

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that the deduction "shall be allowed from the total income of the assessee". Under the Income Tax Act, 1961 the income of an assessee under the various heads of income enumerated in Section 14 have to be computed in accordance with the provisions of the Act. The aggregate of such incomes constitutes the "gross total income" of the assessee within the meaning of Section 80B (5) which defines "gross total income" as the total income computed in accordance with the pr .....

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to pay income tax on his total income of the previous year. The determination of the total income is the last point before the tax is charged and once the total income is determined or quantified, there is absolutely no scope for making any further deduction, having regard to the provisions referred to above. If this is the true legal position, as we think it to be, then it is not possible to understand subsection (1) of Section 10A as providing for a "deduction" of the profits of the .....

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kes it impossible for any deduction to be allowed once the total income is determined, then it would be futile to still insist on applying the definition of the expression "total income" under Section 2 (45) to the interpretation of the subsection. In other words the context in which the expression "total income" is used in the sub-section requires us to abandon the definition of that expression as per Section 2 (45). Again this aspect of the matter has been dealt with in the .....

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hile 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. Section 2(45) defines "total incom .....

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ct sense requires computation for the purpose of levy of tax. The computation of total income begins only with Chapter IV and as section 10A is covered in Chapter III, the phrase "total income" used in section 10A cannot be understood in the same sense as in section 2(45). The phrase "total income" has been used in the Income-tax Act in several places with different connotations and shades. The phrase "total income" used in section 10A is one such variant. The phras .....

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undertaking. In other words, the profits of the business of the undertaking cannot be computed in isolation. The profits are computed under the head "Profits and gains of business or profession", as under the above head, the income from business as a whole has to be computed. The phrase "total income" used in section 10A(1) is, therefore, to be understood as the total income of the STP unit. This is clear from the first proviso to section 10A(1) which makes a reference to th .....

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hat Section 10A provides for an exemption and not merely a deduction and this is in the form of return of income prescribed by the Income Tax Rules, 1962. The return of income in Form No.ITR-6 shows that the first step which an assessee is required while computing the income from business or profession is to commence the computation from the profit as per the profit and loss account. The second step is to adjust the profit figure by excluding receipts which are not subject to tax or which are su .....

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e computation of total income. This shows that after aggregating the income from salary, house property, profits and gains from business, capital gains and income from other sources, the total is arrived at and it is from this total that the losses of the current year and the brought forward losses from the past years are to be set off. The resultant figure gives the gross total income of the assessee from which deductions under Chapter VIA are to be made in order to arrive at the total income. .....

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n the judgment cited (supra) in the following manner: - "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 t .....

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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." 20. We may now refer to two judgments of the Bombay High Court on the issue. The first is Hindustan Unileve .....

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1.33 crores and since this unit was exempt from taxation under Section 10B, the losses therein were wrongly set off against the normal business income of the assessee and thus there was escapement of income to the extent of ₹ 1.33 crores. The reopening was challenged before the Bombay High Court which held as follows: - "There is merit in the submission which has been urged on behalf of the assessee that the Assessing Officer has while reopening the assessment ex facie proceeded on th .....

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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 provision as it now stands provides for a deduction of such profits and gains as are derived by a 100 per cent. export oriented undertaking from the export of articles or things or computer software for ten consecutive assessment years beginning with the assessment year relevant to the pr .....

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Crab Stick unit had returned a loss. The assessee was entitled to a deduction in respect of the profits of the three eligible units while the loss sustained by the fourth unit could be set off against the normal business income. In these circumstances, the basis on which the assessment is sought to be reopened is contrary to the plain language of section 10B." 21. It may be observed that in the Bombay High Court case the loss suffered by the eligible unit under Section 10B was set off again .....

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ier provision was in the nature of an exemption. It was thus held that the basis on which the assessment was sought to be reopened was wrong and the reassessment notice was struck down. This decision was followed by the Bombay High Court in the case of CIT v. Black & Veatch Consulting (P.) Ltd. [2012] 208 Taxman 144/20 taxmann.com 727. In this case the precise question which arose under Section 10A was whether the Tribunal was correct in holding that the brought forward unabsorbed depreciati .....

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provisions of Section 10B in Hindustan Unilever Ltd v. Deputy Commissioner of Income Tax [2010] 325 ITR 102at para 24. The submission of the Revenue placed its reliance on the literal reading of Section 10A under which 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 is to be allowed from the total income of the assessee. The deduction under Section 10A, in our view, .....

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of the Chapter, the deductions specified in Sections 80C to 80U. Section 80B(5) defines for the purposes of Chapter VI-A "gross total income" to mean the total income computed in accordance with the provisions of the Act, before making any deduction under the Chapter. What the Revenue in essence seeks to attain is to telescope the provisions of Chapter VI-A in the context of the deduction which is allowable under Section 10A, which would not be permissible unless a specific statutory p .....

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o order as to costs." 22. It is interesting to note that though there is a divergence of opinion between the Karnataka High Court in Yokogawa India Ltd.'s case ( supra) and the Bombay High Court in Hindustan Unilever Ltd. (supra) as to the nature of Section 10A - whether it provides for exemption or deduction of the profits of the eligible unit, the ultimate decision in Black & Veatch Consulting (P.) Ltd. (supra) which purports to follow Hindustan Unilever Ltd. ( supra) was that suc .....

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tion just as the profits also do not enter the field. This, with respect, lends support more to the view that Section 10A and Section 10B are in the nature of exemption provisions, rather than provisions for deduction. In the ultimate analysis it may perhaps be wise to fall back on the observations of Justice Narasimham, J. (as he then was) speaking for a Division Bench of the Orissa High Court in Ramachandra Mardaraj Deo v.Collector of Commercial Taxes [1957] 31 ITR 651 where he described the d .....

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anathan, J. (as he then was) referred to the judgment of E. S. Venkataramiah, J. (as he then was) of the Karnataka High Court in Stumpp, Schuele & Somappa (P.) Ltd. v. Second ITO [1976] 102 ITR 320 where the position was summed up as under: - "(a) Any amount in respect of which deduction is claimed under any of the provisions in sections 80C to 80V is already included in the gross total income of the assessee and, therefore, cannot be stated to be not includible in the income of the ass .....

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apter III of the Act have traditionally been considered as incomes which are exempt from tax rather than as deductions in the computation of the total income. The essential difference between an exemption and deduction seems to be that an exempt income does not enter the computation of total income at all, whereas a deduction, in the very nature of things, is first included in the total income and given a deduction subject to fulfillment of several conditions. The fact that the deduction may be .....

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ncomes which do not form part of total income. Section 10 groups in one place various incomes which are exempt from tax. The incomes enumerated in section 10 are not only excluded from the taxable income of the assessee but also from his total income. The exemption embodied in section 10 can be divided into two categories, namely, exemption to which certain classes of income from their very nature are entitled and the second category concerns exemption which the character of the assessee entitle .....

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port it was observed as under: - "As stated above, there is a vital difference between income not chargeable to tax and not includible in the total income (for example, agricultural income) and income which forms part of total income but which is made tax-free. Deductions under Chapter VI-A fall in the category of tax-free incomes. In fact, history shows that some of the incomes in Chapter VI-A have been transferred from Chapter VII to Chapter VI-A. Chapter VII has been deleted. However, at .....

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t;. 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 "income includible in the total income" has a definite connotation. Similarly, the expression "deduction and allowances" have particular connotation. Therefore, on the one hand we have "agricultural income" which is neither chargeable nor includible in the total income and on the other .....

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fore, they can be used as an aid to construction in case of ambiguity and doubt. The following observations are pertinent: - "114. Chapter headings and the marginal note are parts of the statute. They have also been enacted by the Parliament. There cannot, thus, be any doubt that it can be used in aid of the construction. It is, however, well settled that if the wordings of the statutory provision are clear and unambiguous, construction of the statute with the aid of 'chapter heading .....

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Interpretation" by Justice G. P. Singh on the relevance of Chapter heading, the Supreme Court summarised the position as under: - "120. Chapter heading, therefore, is a permitted tool of interpretation. It is considered to be a preamble of that section to which it pertains. It may be taken recourse to where an ambiguity exists. However, where there does not exist any ambiguity, it cannot be resorted to. Chapter heading and marginal note, however, can be resorted to for the purpose of .....

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4.2001, one cannot deny that there is ambiguity or doubt, because of the language used, as to whether the sub-section provides for an exemption or a deduction. We have earlier referred to the difficulty caused by the language which says that the deduction shall be made from the total income, when the Act contains no provision to allow any deductions from the total income. The section has been interpreted by the Karnataka High Court (supra) as an exemption provision whereas the Bombay High Court .....

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ems to lie in appreciating the difference between a provision which exempts an income and a provision which provides for a deduction of the income or a part thereof in computing the total income of the assessee. We have attempted to outline the difference between the two kinds of provisions in the light of the authorities cited above. The matter is not altogether free from difficulty. However, as S. Ranganathan, J. (as he then was) has pointed out in CIT v. Dalmia Cement (Bharat) Ltd. (supra): - .....

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