2012 (4) TMI 345 - AT - Income Tax

Section 10B(1) and 10B(4): 'undertaking' means separate independent production unit; export incentives included as deductible profits

ITAT held for the assessee that an 'undertaking' under section 10B means a separate, independent production unit with distinct infrastructure, plant, ... Eligibility for Extended Exemption/deduction u/s 10B - extended period of ten years - meaning and scope of the term undertaking - assessee initially established spinning unit in A.Y. 1992-93 and one more spinning unit was added in each of two years namely A.Y. 1996-97 & A.Y. 1999-2000 - company engaged in manufacturing and exporting cotton yarn, fabrics, and garments, had three units claiming exemption u/s 10B - application of circular no. 621 of CBDT - Prospective Or retrospective. Held that:- The expression 'undertaking' has not been defined u/s 10B of the Act. The said expression has been explained by the Courts in the context of similar other provisions of IT Act viz. section 15C of 1922 Act, section 80J, 80HH, 80I, 80IA and 80IB of 1961 Act. - an undertaking means a unit/business which has a separate and independent existence distinct from the other units/business; having independent infrastructure, separate plant and machinery being set up with substantial capital investment and having an identifiable output and the profits attributable thereto can be determined. The undertaking existing prior to 1.4.1999 claiming exemption u/s 10B of the Act would be entitled to exemption for the extended period of ten years and deduction under the said sections would be admissible in respect of unit no. 3 and unit no. 4 as well for ten years from the year of start of production in these new units since these units were separate and independent production units. - Decided in favor of assessee. Deduction u/s 10B(4) on export incentives - held that:- Once an income forms part of the business of the income of the eligible undertaking of the assessee, the same cannot be excluded from the eligible profits for the purpose of computing deduction u/s 10B of the Act. As per the computation made by the Assessing Officer himself, there is no dispute that both these incomes have been treated by the Assessing Officer as business income. - the undertaking is eligible for deduction on export incentive received by it in terms of provisions of Section 10B(1) read with Section 10B(4) of the Act - Decided in favor of assessee. Issues Involved:1. Eligibility for exemption/deduction under Section 10B of the Income Tax Act, 1961, for the extended period of ten years as per the amended provisions effective from 01.04.1999.2. Eligibility for deduction on export incentives received by the undertaking under Section 10B(1) read with Section 10B(4) of the Act.Issue-Wise Detailed Analysis:1. Eligibility for Extended Exemption/Deduction under Section 10B:The primary issue was whether an undertaking claiming exemption under Section 10B before 01.04.1999 could benefit from the extended ten-year period introduced by the amendment effective from 01.04.1999. The assessee, a company engaged in manufacturing and exporting cotton yarn, fabrics, and garments, had three units claiming exemption under Section 10B. The original unit started production in the assessment year (AY) 1992-93, Unit III in AY 1996-97, and Unit IV in AY 1999-2000.The Assessing Officer (AO) argued that the claim for exemption beyond five consecutive years out of eight years was invalid as per the pre-amended Section 10B. However, the Commissioner of Income Tax (Appeals) [CIT(A)] allowed the claim, stating that the amendment effective from 01.04.1999 extended the exemption period from five to ten years, and this benefit was available from AY 1999-2000 onwards.The CIT(A) emphasized that the amended Section 10B allowed existing units to claim exemption for the unexpired period of ten years. This interpretation was supported by explanatory notes and legislative intent, which aimed to boost exports by extending the tax holiday period.The Tribunal upheld the CIT(A)'s decision, noting that the law as applicable to any assessment year must be applied for that year. The amended provisions effective from 01.04.1999 and 01.04.2001 allowed the appellant's claim under Section 10B for ten years. The Tribunal also referenced the Karnataka High Court's decision in DSL Software Ltd., which supported the extended tax holiday for ten years from the commencement of production if the period had not expired before the amendment.2. Eligibility for Deduction on Export Incentives:The second issue was whether the assessee was eligible for deduction on export incentives under Section 10B(1) read with Section 10B(4). The AO denied the claim, arguing that such income was not derived from the undertaking's export activities. However, the CIT(A) allowed the claim, following the Tribunal's earlier decision in the assessee's case.Section 10B(4) provides a formula for computing profits derived from export, which includes apportioning the profits of the business in the ratio of export turnover to total turnover. The Tribunal noted that this formula does not require establishing a direct nexus with the business of the undertaking. Therefore, once an income forms part of the business of the eligible undertaking, it is included in the profits of the business for the purpose of computing the deduction under Section 10B.The Tribunal distinguished this case from the Supreme Court's decision in Liberty India, which dealt with Section 80IA and did not have a similar formula for computing eligible profits. The Tribunal concluded that the assessee was eligible for deduction on export incentives under Section 10B(1) read with Section 10B(4).Conclusion:The Tribunal ruled in favor of the assessee on both issues. The assessee was entitled to the extended exemption period of ten years under the amended Section 10B and eligible for deduction on export incentives received by it.