TMI Blog2016 (9) TMI 557X X X X Extracts X X X X X X X X Extracts X X X X ..... t - Decided in favour of revenue - ITA No.4620/Mum/2015 - - - Dated:- 3-8-2016 - Shri Joginder Singh, Judicial Member For The Assessee : Shri Sharad A. Shah For The Revenue : Shri Ajay Pratap Singh-DR ORDER The Revenue is aggrieved by the impugned order dated 20/05/2015 of the Ld. First Appellate Authority, Mumbai. The only ground raised in this appeal, by the Revenue, is with respect to the learned CIT(A) holding that deduction claimed u/s 10B of the Income Tax Act, 1961 (hereinafter the Act) is an exemption, thus do not form part of the total income and further the learned CIT(A) not following the direction contained in the order of CIT vs Black Veatch Consulting Pvt. Ltd. 348 ITR 72 (Bom.), Hindustan Lever Ltd. vs DCIT 325 ITR 102 and CIT vs Galaxy Surfacatants Ltd. 343 ITR 108 and circular number 07/DV/2013 dated 16-07-2013 . 2. During hearing, the ld. DR, Shri Abhishek Sharma advanced identical arguments as contained in the grounds, raised by the Revenue. The crux of the argument is in support to denial of deduction and consequent stand taken in the assessment order. 2.1. On the other hand, the ld. counsel for the assessee, Shri Sharad A Shah, de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pter, the deduction specified in section 80C to 80U. Section 80B(5) defines the purposes of section VIA gross total income to mean the total income computed in accordance with the provisions of the Act before making any deduction under the chapter. The deduction u/s 10B, in my view, has to be given effect to at the stage of computing the profit gains of the business. Admittedly, there were divergent views among the Courts. The matter was clarified by Circular No.07/DV/2013 dated 16/07/2013 which is reproduced below : CIRCULAR NO. 7/DV/2013 [FILE NO.279/MISC. /M-116/2012 SECTION 10A, READ WITH SECTIONS 10AA 10B OF THE INCOME-TAX ACT, 1961 - FREE TRADE ZONE - CLARIFICATION ON ISSUES RELATING TO APPLICABILITY OF CHAPTER IV OF THE ACT AND SET OFF AND CARRY FORWARD OF BUSINESS LOSSES CIRCULAR NO. 7/DV/2013 [FILE NO.279/MISC./M-116/2012-ITJ], DATED 16-7-2013 It has been brought to the notice of the Board that the provisions of 10A/10AA/10B/10BA of the Income-tax Act, with regard to applicability of Chapter IV of the Act and set off and carry forward of losses, are being interpreted differently by the Officers of the Department as well as by different High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which clearly provides that the new provisions provide for deduction in respect of profits and gains derived by an undertaking from export of articles or things or computer software. 4. Sub-section (6) of sections 10A and 10B were amended by Finance Act, 2003 with retrospective effect from 1-4-2001. Circular No. 7/2003, dated 5-9-2003 explains the amendments brought by Finance Act, 2003. The relevant paragraph is reproduced below: 20. Providing for carry forward of business losses and unabsorbed depreciation to units in Special Economic Zones and 100% 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% 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, sub-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 1- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sequent year) from eligible unit it shall be eligible for carry forward and set off in accordance with the provisions of section 72 of the Act. Similarly, if there is a loss from an ineligible unit, it shall be carried forward and may be set off against the profits of eligible unit or ineligible unit as the case may be, in accordance with the provisions of section 72 of the Act. 6. The provisions of Chapter IV and Chapter VI shall also apply in computing the income for the purpose of deduction under sections 10AA and 10BA of the Act subject to the conditions specified in the said sections. 2.4. Section 10A and 10B of the Act were initially placed on statute in 1981 and 1988 respectively and continued with some modifications and amendments till 31/03/2001. Section 10A as inserted by Finance Act 1981, reads as under:- Section 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 i ncome of the assessee. 2.5. Similarly sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % 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% 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, sub- 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 1-4-2001 and have been made applicable to business losses or unabsorbed depreciation arising in the assessment year 2001-02 and subsequent years. 2.10. From the above it is evident that irrespective of their continued placement in Chapter III, section 10A and 10B as substituted by Finance Act, 2000 provide for deduction of the profits and gains derived from the export of articles or things or computer software for a period of 10 consecutive assessment years beginning with the assessment year relevant to the previous year in which the under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , then not only profits but also losses have to be taken into consideration. 2.14. The Hon'ble jurisdictional High Court in Hindustan Unilever Ltd. vs DCIT (2010) 325 ITR 102 (Bom.); (2011) 237 CTR 287 (Bom.) held that section 10B, as it now stands, is not a provision in the nature of exemption but provides for a deduction and the loss sustained by the unit eligible for deduction u/s 10B could be set off against the normal business income and therefore, the assessment could not be reopened on the ground that loss of that unit was wrongly set off against the normal business income of the assessee. The Hon'ble Bombay High Court in the case of CIT v Galaxy Surfactants Limited reported in 343 ITR 108 has also taken similar view that loss of the EOU unit is to be allowed to be set off against the profits of the other units as under:- 5. At the outset, while dealing with the submission which has been urged on behalf of the Revenue, it must be noted that Section 10B when it was originally introduced by the Finance Act, 1988, with effect from 1 April 1989, provided for an exemption of the profits and gains derived by the assessee from a hundred percent export oriented u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to the previous year in which the undertaking begins to manufacture or produce. Consequently, it is evident that the basis on which the assessment has sought to be reopened is belied by a plain reading of the provision. The Assessing Officer was plainly in error in proceeding on the basis that because the income is exempted, the loss was not allowable. All the four units of the assessee were eligible under Section 10B. Three units had returned a profit during the course of the assessment year, while the 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. This decision of the Division Bench has been followed by another Division Bench of this Court in the case of CIT v. Patni Computers Systems Ltd . [IT Appeal 2177 of 2010, dated on 1-7-2011]. 6. Quite apart from the fact that the issue stands covered against the Revenue by the view taken by the Division Benches in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ligible 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 up to and including the assessment year for which the determination is to be made. A similar provision corresponding to sub-section (5) of Section 80- IA is to be found in sub-section (6) of Section 80-I. Under subsection (5) of Section 80-IA which begins with overriding nonobtante provisions, profits and gains of an eligible business to which sub-section (1) applies are for the purposes 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 matter 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 year does not militate against the entitlement of the assessee to set off a loss which is sustained by an eligible unit against the incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ption under section 10B of the Act. The same has been accepted by the department. However, he has derived business income from other sources. The said amount works out to ₹ 41,09,479. Even for this income from other business sources, he has chosen to take unabsorbed depreciation of assessment year 1988-89. Totally the very amount thereby he has shown as taxable income nil for the relevant assessment year. The Assessing Officer has chosen to accept the same. The Commissioner of Income-tax noticing the nil income issued a notice under section 263 of the Income-tax Act, obtained reply and thereafter, he comes to a conclusion that the Assessing Officer failed to apply the provisions of sections 29 to 43 especially section 32(2) and sub-section (3) of section 32A in the case on hand. He was of the view that the orders are erroneous and prejudicial to the interest of the revenue, insofar as the exemption under section 10B was allowed on an inflated amount without deducting the unabsorbed depreciation and unabsorbed investment allowance in the case on hand. When the matter was taken to the Tribunal, the Tribunal in its order states that there is no force in the argument that whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his submission. Section 10B cannot be read in isolation of other provisions. It is only an exemption provision. Exemption cannot be fanciful and it has some rational with other provisions of the Act. There- fore, a combined reading of the definition of exemption, total income-tax liability deductibility etc., one has to come to a conclusion that calculation as far as possible is to be in terms of the Income-tax Act. That is exactly what has been done by the assessee. Having calculated in a particular manner, now it does not lie in the mouth of the assessee to contend contra in these proceedings. It cannot be argued that calculation so provided is on a mistaken basis or that could be on commercial basis. We are not prepared to accept this argument advanced by the assessee. Exemption also has to be scrutinized by the Department as otherwise there is every chance of exemption being misused by an assessee. It may be true that even after taking into consideration, the unabsorbed depreciation, the assessee may get exemption but nonetheless he cannot take only a portion of depreciation just to suit his income for the purpose of nil liability and adjust the balance of unabsorbed deprecia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee was precisely the same as the one advanced in the present case, namely, that the words such profits and gains in the latter part of sub-section (1) of section 80E were intended to refer only to the category of profits and gains referred to in the earlier part of that provision, namely, profits and gains attributable to the business of generation or distribution of electricity or any other form of power or of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule and not to the quantum of the profits and gains included in the total income, so that the profits and gains exigible to the deduction of 8 per cent were the profits and gains attributable to the specified business in their entirety and not the profits and gains as computed in accordance with the provisions of the Act. The assessee contended that, in the circumstances, unabsorbed depreciation and unabsorbed development rebate were not liable to be deducted from the profits and gains attributable to the specified business for arriving at the figure exigible to the deduction of 8 per cent. This argument of the assessee was rejected by the court an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of normal income under the Act de hors Chapter VI-A and computation of taxable income where the assessee claims the benefit of deduction under Chapter VI-A because the Legislature has intended that these special deductions should be restricted to the profits derived from a newly established undertaking. The Court ruled ultimately reading as under: That Chapter VI-A, for the purposes of computing such deductions, constituted a separate code by itself. In order to compute the total taxable income of the assessee, deductions computed under section 80HH have to be reduced from the gross total income of the assessee. The question basically in this matter is concerning computation of deduction under Chapter VI-A in which section 80HH falls. Profits and gains of a newly established undertaking, therefore, have got to be computed as per the provisions of section 29 to section 43A and if the assessee claims relief under Chapter VI-A of the Act, then it is not open to the assessee to disclaim depreciation allowance. This is because Chapter VI-A is an independent code by itself for computing these special types of deductions. In other words, one must first calculate the gross total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said judgment would show that it was rendered in totally different circumstances. 17. Taking into consideration, various aspects of the matter including the object of providing exemption in our view, the Commissioner is fully justified in holding that the assessee is not justified in showing nil return. We therefore, deem it proper to answer the questions of law in favour of the revenue. Consequently, the order of the Tribunal has to be set aside and the order of the Commissioner has to be accepted. No costs. 2.17. Keeping in my foregoing discussions and reasoning as set out above in preceding para s of this order, I hereby reiterate and conclude that deduction u/s 10A/10B, has to be given effect at the stage of computing the profit gains of the business under the head income from business or profession which shall be arrived at after adjusting loss of ineligible unit with the profit of the eligible unit i.e. giving effect to the provisions of Section 70 and 71 of the Act. This view is consistent with the circular no. 7/DV/2013 [FILE NO.279/MISC./M-116/2012] dated 16-07- 2013 as well interpretation accorded to Section 10B of the Act by the Hon'ble jurisdictional H ..... X X X X Extracts X X X X X X X X Extracts X X X X
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