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2016 (9) TMI 557 - ITAT MUMBAI

2016 (9) TMI 557 - ITAT MUMBAI - TMI - Deduction claimed u/s 10B - whether loss from non-eligible unit can be set off against the profit of eligible unit or whether only profit of eligible unit is to be considered for computation of deduction u/s 10B? - Held 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 .....

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ess by the assessee are to be set off against the profit of eligible units of the assessee to arrive at the deduction u/s 10B of the Act - 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 Revenu .....

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e 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, defended the conclusion, arrived at in the impugned order passed by learned CIT(A)by placing reliance upon the decision in the case of KEI Industries Ltd. 373 ITR 574 (Del.). 2.2. I have considere .....

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rry forward the loss from ineligible unit without set off against profit of eligible unit , and consequently claiming deduction of entire profit from eligible unit u/s. 10B of the Act. The said claim of the assessee was denied by the ld. Assessing Officer. On appeal, before the Ld. Commissioner of Income Tax (Appeal), the claim of the assessee was allowed. The Revenue is aggrieved and is in appeal before this Tribunal. 2.3. The only question is to be adjudicated by this Tribunal is whether loss .....

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and thus claimed proportionate profit on export sale as full deduction u/s 10B of the Act which was claimed without adjusting loss from ineligible unit. I am of the view 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 .....

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n 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 LOS .....

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continued with some modifications and amendments till 31.03.2001. Section 10A as inserted 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." 2.1 Similarly section 10B as inserted by Fina .....

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tuted. Section 10A as substituted by Finance Act, 2000 reads as under: "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, sha .....

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begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee..." 3.2 The effect of the substitution of sections 10A and 10B of the Act has been elaborated in Circular No. 794 dated 9.8.2000 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 .....

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0A) 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 app .....

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in which the undertaking begins to manufacture or produce such article or thing or computer software. The deduction is to be allowed from the total income of the assessee. The term 'total income' has been defined in section 2 (45) of the IT Act and it means the total amount of income referred to in section 5, computed in the manner laid down in the Income-tax Act. 5.1 All income for the purposes of computation of total income is to be classified under the following heads of income and co .....

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and ineligible units, under the same head are aggregated in accordance with the provisions of section 70 of the Act. Thereafter, the income from one ahead is aggregated with the income or loss of the other head in accordance with the provisions of section 71 of the Act. If after giving effect to the provisions of sections 70 and 71 of the Act there is any income (where there is no brought forward loss to be set off in accordance with the provisions of section 72 of the Act) and the same is elig .....

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he 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 wer .....

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come of the assessee." 2.5. Similarly section 10B as inserted by Finance Act, 1988 read as under: "10B: Special provision in respect of newly established hundred percent export oriented undertakings. - Subject to the provisions of this section, any profits and gains derived by an assessee from a hundred per cent export oriented undertaking (hereafter in this section referred to as the undertaking) to which this section applies shall not be included in the total income of the assessee. .....

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cture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee " 2.7. Similarly, section 10B as substituted by Finance Act, 2000 reads as under:- "10B. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years begin .....

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from export of articles or things or computer software. 2.9. Sub-sections (6) of sections 10A and 10B were amended by Finance Act, 2003 with retrospective effect from 1.4.2001 Circular no.7/2003 dated 05/09/2003 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 s .....

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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 .....

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total income of the assessee both profits as well as losses will have to be taken into consideration. Section 80-AB is relevant. It reads as follows: "80-AB. Where any deduction is required to be made or allowed under any section included in this Chapter under the heading 'C'. Deductions in respect of certain incomes in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained i .....

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s total income computed in accordance with the provisions of the Income Tax Act,1961. 2.13. Section 80-AB is also in Chapter VI-A, which starts with the words "where any deduction is required to be made or allowed under any section included in this Chapter". Section 80-AB further provides that "notwithstanding anything contained in that section". Thus Section 80-AB has been given an overriding effect over all other sections in Chapter VI-A. Decisions of the Bombay High Court .....

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t, 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 .....

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nally 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 undertaking. The earlier provision specifically stipulated that profits and gains derived by an assessee from a hundred percent export oriented undertaking to which the section applies shall not be included in the total income of the assessee. Section 10A as at present stands, came to be substituted by the Fina .....

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h the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be. The deduction has to be allowed from the total income of the assessee. In Hindustan Lever Ltd. v. Dy. CIT [2010] 325 ITR 102 / 191 Taxman 119 (Bom.) a Division Bench of this Court considered the provisions of Section 10B, while considering a petition challenging the action of the Assessing Officer in purport to reopen the assessment under Section 148. The Division Bench noted that .....

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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 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 .....

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gible 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 .....

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e source falling under any head of income (other than capital gains) against income from any other source under the same head. Section 71 provides for the setting off of a loss sustained 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 be .....

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. There is no provision 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. Subsection (7) of Section 10B provides that the provisions of sub-section .....

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determining the quantum of deduction under that sub-section for the assessment year immediately succeeding the initial assessment year or any subsequent assessment year, 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 up to and including the assessment year for which the determination is to be made." A similar provision corresponding to sub-sectio .....

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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 income arising from other units under the same head of profits and gains of business or profession. The Legi .....

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in CIT vs KEI Industries Ltd. (2015) 373 ITR 574 (Del.) concluded that the assessee, who enjoys the tax holiday u/s 10A should not enjoy any other tax concession. Thus, the tax exempt income of the assessee, eligible u/s 10B could not have been set off against the loss from the tax liable income. 2.16. However, we are bound by the decisions of Hon'ble jurisdictional High Court in the cases cited by me as above. My above view and decision in this appeal is fortified by the Hon'ble Apex Co .....

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High Court in the case of CIT vs Himatasingike Seide Ltd. reported in (2006) 156 Taxman 151 (Karn.) which was although rendered under the un-amended provision of Section 10B wherein Hon'ble Karnataka High Court has held as under: 6. Section 10B is a special provision in respect of the newly established 100 per cent export oriented undertaking. It provides for a tax deduction on the turnover on account of 100 per cent export oriented undertaking. In the case on hand, the appellant has submitt .....

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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 e .....

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vailable for subscription of earlier year s depreciation brought forward to this year, the said depreciation will have to be adjusted against the profits and gains of the export oriented undertaking for allowing exemption in respect of such profits and gains. 7. At this stage, we should notice the definition of total income in terms of section 2(45) of the Income-tax Act. Total Income has been defined as the total amount of income referred to in section 5, computed in the manner laid down in thi .....

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(c )accrues or arises to him outside India during such year : Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India." Chapter III provides for incomes which do not form part of total income. Chapter IV provides for computation of total income. Section 32 of the .....

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Act. In fact, the petitioner knowing fully has chosen to take into consideration the allowability of depreciation for the purpose of calculation of total income. But curiously an argument has now been advanced that exemption in terms of section 10B could also be on commercial basis not necessarily in terms of the calculation. We do not accept this submission. Section 10B cannot be read in isolation of other provisions. It is only an exemption provision. Exemption cannot be fanciful and it has s .....

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s 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 .....

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has virtually taken exemption from payment of tax even for other business income in the case on hand. That cannot be allowed as rightly ruled by the Commissioner. The allowance of the depreciation by the Tribunal, in our view, is prejudicial to the interest of revenue as argued by the Department. The Tribunal has taken a narrow view of the matter without taking into consideration, the laudable object of exemption and at the same time providing for tax liability towards other liability. The inte .....

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A of the Income-tax Act. In the said judgment, the Supreme Court has ruled that insofar as sub-section (1) of section 80M of the Income-tax Act is concerned, the deduction required to be allowed under that provision is liable to be calculated with reference to the amount of dividend computed in accordance with the provisions of the Act and forming part of the gross total income and not with reference to the full amount of dividend received by the assessee. 10. In case of Cambay Electric Supply I .....

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e 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 .....

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at the figure exigible to the deduction of 8 per cent. This argument of the assessee was rejected by the court and the court held that the profits and gains exigible to the deduction of 8 per cent were profits and gains computed in accordance with the provisions of the Act and forming part of the total income and hence unabsorbed depreciation and unabsorbed development rebate were liable to be excluded from the profits and gains attributable to the specified business in arriving at the figure e .....

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er deducting unabsorbed loss and unabsorbed depreciation and the income eligible for deduction under section 80HH will be the net income as computed in accordance with the provisions of the Act...." (p. 182) The Rajasthan High Court again in the case of CIT v. Surendra Textiles [2002] 258 ITR 387 ruled that : "The gross total income of the assessee has to be worked out after deducting unabsorbed loss and unabsorbed depreciation and the income eligible for deduction under section 80HH o .....

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ance ought to be deducted while computing the total income for the purposes of deduction under section 80HH." The Bombay High Court noticed the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC). After noticing the Bombay High Court ruled as under: "The scheme of sections 4 and 5 of the Income-tax Act does indicate that income-tax is a tax in respect of income computed as per the provisions of the Act. There is a distinct dichotomy between cases of computa .....

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l 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 assess .....

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while computing profits derived from a newly established undertaking for computing deductions under Chapter VI-A. Therefore, the appellant s claim for allowance of deduction under section 80HH, without taking into consideration the current depreciation will have to be rejected." (p. 107) 14. All these judgments would support the argument that calculation cannot be at the whims and fancies of an assessee for exemption of tax. It has to be in accordance with the provisions of the Act. 15. CIT .....

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eciation in such a way that he has chosen nil liability. 16. He also relies on Second ITO v. Stumpp, Schuele & Somappa (P.) Ltd. [1977] 106 ITR 399 (Kar.). In the said case, it is stated that section 2(9) of the Act provides that the words and expressions used in the Act, but not defined in it and defined in the Income-tax Act, shall have the meanings respectively assigned to them in the Income-tax Act. The Court ruled that the basic material for the computation of surtax is the total income .....

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al income. The contention of the Commissioner could, therefore, not be accepted. A reading of the 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 nilreturn. We therefore, deem it proper to answer the questions of law in favour of the revenue. Consequently .....

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