Section 10A deduction is unit-specific; non-eligible unit losses can't offset eligible unit profits; s.10A(6)(ii) limits carryforward

ITAT, CHENNAI held that deduction u/s 10A is a Chapter III deduction and unit-specific, so business loss of a non-eligible unit cannot be set off against profits of the eligible unit for computing the 10A deduction; the AO was directed to set off the trading loss against other income and permit carry-forward of the remaining loss (decision for assessee). On carry-forward of unabsorbed 10A claim, the bench held s.10A(6)(ii) deals with losses under ss.72/74, not unabsorbed 10A claims, and that the amended scheme taxing 10% must be given effect (decision for revenue).

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Issues Involved:
1. Whether the business losses of a non-eligible unit must be set off against the profits of an eligible unit for determining allowable deduction under section 10A of the Income Tax Act.
2. Whether the loss of a non-eligible unit can be set off against interest income.
3. Whether the remaining loss of a non-eligible unit should be carried forward.
4. Whether the carry forward of unabsorbed section 10A claim is permissible.

Issue-wise Detailed Analysis:

1. Set-off of Business Losses of Non-Eligible Unit Against Profits of Eligible Unit:
The central question was whether business losses of a non-eligible unit should be set off against the profits of an eligible unit under section 10A. The Tribunal held that section 10A provides a deduction for profits derived by an eligible undertaking from the export of articles or things or computer software. It was emphasized that section 10A is undertaking-specific and not business-specific. The Tribunal noted that the deduction under section 10A should be computed for each eligible undertaking separately and not for the business as a whole. It was concluded that the business losses of a non-eligible unit cannot be set off against the profits of an eligible unit for the purpose of determining the allowable deduction under section 10A.

2. Set-off of Loss of Non-Eligible Unit Against Interest Income:
The Tribunal addressed whether the loss of the non-eligible unit (Delhi Unit) could be set off against interest income. It was held that since the loss from the non-eligible unit cannot be set off against the profits of the eligible unit, the loss should be allowed to be set off against the interest income. The Assessing Officer was directed to allow the set-off of the loss of the non-eligible unit against the interest income.

3. Carry Forward of Remaining Loss of Non-Eligible Unit:
The Tribunal considered whether the remaining loss of the non-eligible unit should be carried forward. It was held that since the business loss of the non-eligible unit cannot be set off against the profits of the eligible unit, the remaining loss should be carried forward. The Tribunal directed the Assessing Officer to set off the trading loss against income from other sources and to allow the remaining loss to be carried forward.

4. Carry Forward of Unabsorbed Section 10A Claim:
The Tribunal examined whether the carry forward of unabsorbed section 10A claim is permissible. The Revenue argued that section 10A(6)(ii) does not support the carry forward of unabsorbed claims under section 10A. The Tribunal found that section 10A(6)(ii) talks about the loss referred to in section 72(1) or 74(3) and not the unabsorbed claim under section 10A. It was concluded that the provision of section 10A allows deduction up to 90% alone, and the remaining 10% is to be subjected to tax. The Tribunal set aside the CIT(A)'s direction to allow the carry forward of unabsorbed claims under section 10A, as it was not supported by the provision of the Act.

Conclusion:
The Tribunal held that the business losses of a non-eligible unit cannot be set off against the profits of an eligible unit for determining the allowable deduction under section 10A. The loss of the non-eligible unit should be set off against interest income, and the remaining loss should be carried forward. The carry forward of unabsorbed section 10A claims is not permissible as per the provisions of the Act. The assessee's appeals were allowed, and the Revenue's appeal was also allowed.

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