2015 (9) TMI 120 - AT - Income Tax

Setting off brought forward losses before deduction under sec 10A, AO must address objections for proper assessment.

The ITAT Delhi held that brought forward losses from the eligible unit must be set off against the income for the current year before granting deduction ... Deduction under section 10A - Computation of profits for deduction under section 10A - Set-off and carry forward of business losses - Distinction between exemption and deduction provisions - Application of Himatsingike Seide Ltd. precedent - Reopening of assessment and disposal of objections - Requirement to decide objections before framing reassessment (GKN Driveshafts principle)Deduction under section 10A - Set-off and carry forward of business losses - Distinction between exemption and deduction provisions - Computation of profits for deduction under section 10A - Application of Himatsingike Seide Ltd. precedent - Brought forward business loss of an eligible unit must be set off against current year profits before computing deduction under section 10A. - HELD THAT: - Section 10A, as a deduction provision from A.Y. 2001-02 onwards, requires income of the eligible undertaking to be first included in total income and then a deduction allowed; correspondingly a loss from the eligible unit is a normal loss eligible for set off and carry forward. The assessee had a brought forward loss from the eligible unit for A.Y. 2002-03 which was legitimately carried forward. When positive profits arise in A.Y. 2003-04, that brought forward loss must be reduced from the profits of the eligible unit before calculating the section 10A deduction. Treating the carried forward loss as non-existent for deduction purposes would effectively convert the deduction provision into an exemption for that year, which is impermissible. The view is reinforced by the Supreme Court's decision in Himatsingike Seide Ltd., holding that after section 10B became a deduction provision unabsorbed depreciation and b/f business loss of the eligible unit are to be set off before computing relief; the reasoning applies equally to section 10A. Distinction is drawn from decisions concerning set off of losses of non-eligible units, which are inapposite where the loss arises from the eligible unit itself. The Tribunal approved the CIT(A)'s conclusion accordingly. [Paras 7, 8, 9, 10, 11]Appeal in respect of A.Y. 2003-04 dismissed; brought forward loss from eligible unit to be set off before allowing deduction under section 10A.Reopening of assessment and disposal of objections - Requirement to decide objections before framing reassessment (GKN Driveshafts principle) - Assessing Officer must dispose of objections to reasons recorded for reopening by a separate order before proceeding to assess under section 147; failure to do so vitiates the reassessment order. - HELD THAT: - The assessee had filed objections to the reasons recorded for initiation of reassessment. The AO proceeded to frame assessment under section 147 without first disposing of those objections by a separate order, contrary to the law laid down by the Supreme Court in GKN Driveshafts. Because the objections were not adjudicated in a separate order, the reassessment order and the appellate order were set aside and the matter remitted to the AO for disposal of the objections. Only if the AO, after separately adjudicating the objections, concludes that the reasons are valid may he proceed to frame the assessment in accordance with law. In view of this remand, the Tribunal did not decide the merits of the assessment. [Paras 13, 14, 15, 16, 17]Appeal in respect of A.Y. 2004-05 allowed for statistical purposes; assessment order set aside and matter remitted to AO to first dispose of objections to reopening and then proceed as law permits.Final Conclusion: For A.Y. 2003-04 the Tribunal upheld the set-off of brought forward loss of the eligible unit against current year profits before computing deduction under section 10A and dismissed the appeal; for A.Y. 2004-05 the reassessment was set aside because the AO failed to dispose the objections to reopening and the matter was remitted to the AO for fresh disposal of those objections before proceeding. Issues:1. Assessment Year 2003-04: Reduction of brought forward loss for computing deduction u/s 10A.2. Assessment Year 2004-05: Non-disposal of objections before re-opening assessment.Assessment Year 2003-04:The primary issue in this appeal was the reduction of the brought forward loss of Rs. 72,70,234 for the A.Y. 2002-03 from the profits and gains of the undertaking for the current year to compute the deduction u/s 10A of the Income-tax Act, 1961. The key contention revolved around whether the brought forward loss from the eligible business in the preceding year should be deducted from the profits of the current year before allowing the deduction u/s 10A. The tribunal analyzed the provisions of section 10A, emphasizing the shift from an exemption provision to a deduction provision from the assessment year 2001-02 onwards. It was held that the brought forward loss from the eligible unit must be set off against the income for the current year before granting the deduction u/s 10A. The tribunal cited a judgment of the Hon'ble Supreme Court in support of this view and distinguished the applicability of certain decisions relied upon by the assessee's representative.Assessment Year 2004-05:The central issue in this appeal pertained to the non-disposal of objections raised by the assessee against the reasons recorded for re-opening the assessment. The tribunal noted that the Assessing Officer (AO) proceeded to finalize the assessment under section 147 without separately addressing the objections raised by the assessee, contrary to the legal precedent established by the Hon'ble Supreme Court in GKN Driveshafts (I) Ltd. vs. ITO. The tribunal held that the AO must first dispose of the objections raised by the assessee before proceeding to finalize the assessment. Consequently, the assessment order and the impugned order were set aside, and the matter was remitted to the AO for the proper disposal of the assessee's objections. The tribunal allowed the appeal for statistical purposes due to the legal infirmity in the assessment process.In conclusion, the ITAT Delhi, in a consolidated order, addressed the issues raised for the assessment years 2003-04 and 2004-05. The judgment provided a detailed analysis of the legal provisions and relevant case law to determine the appropriate treatment of brought forward losses for calculating deductions under section 10A and the necessity of disposing of objections before finalizing re-assessment proceedings. The tribunal's decision was based on a meticulous examination of the law and established precedents, ensuring a fair and lawful resolution of the disputes presented in the appeals.