2016 (6) TMI 690 - AT - Income Tax

Tribunal quashes CIT order under Section 263, allows deduction under Section 10A before setting off losses

The Tribunal quashed the CIT's order under Section 263, ruling that the assessment order was not erroneous and prejudicial to the Revenue's interests. The ... Revision u/s 263 - CIT(A) directing AO to set off the brought forward depreciation and loss before allowing the deduction u/s 10A of the I.T. Act. - Held that:- We find that the assessee during the relevant financial year, had brought forward business losses and depreciation of earlier years pertaining to the non 10A units. It is also not in dispute that this is the final year of the exemption u/s 10A of the I.T. Act. The decision relied upon by the learned DR is the decision of the Coordinate Bench of the Tribunal dated 21.05.2010 for the A.Y 2004-05, whereas the decisions relied upon by the assessee’s Counsel are of the Hon'ble Karnataka and Delhi High Courts for the A.Ys 2001-02 to 2006-07 and 2002-03 respectively. The Hon'ble High Courts have taken into consideration the amendment to section 10A and 10B and also that the earlier exemption provision has been converted into a deduction and even in the present form, section 10A is an exemption provision and therefore, the deduction u/s 10A of the I.T. Act has to be allowed from the total income of the assessee and the question of un-absorbed business loss of non 10A Units being set off prior thereto would not arise. See CIT Versus TEI TECHNOLOGIES PVT. LTD. [2012 (9) TMI 47 - DELHI HIGH COURT] and CIT vs. Yokogawa India Ltd [2011 (8) TMI 845 - Karnataka High Court ] - Decided in favour of assessee Issues Involved:1. Whether the assessment order dated 26.03.2013 was erroneous and prejudicial to the interests of the Revenue.2. Whether the deduction under Section 10A of the Income Tax Act should be allowed before setting off the brought forward business loss and depreciation.Issue-Wise Detailed Analysis:1. Erroneous and Prejudicial Assessment Order:The assessee, engaged in software development, filed its return for the Assessment Year (A.Y.) 2010-11, claiming a deduction under Section 10A of Rs. 6,05,63,431, which the Assessing Officer (AO) allowed at Rs. 6,02,93,581. The Commissioner of Income Tax (CIT) issued a show cause notice under Section 263, arguing that the AO's order was erroneous and prejudicial to the interests of the Revenue because the deduction under Section 10A was allowed before setting off the brought forward business loss and depreciation of Rs. 1,26,68,529.The CIT contended that as per the amended provisions of Section 10A and 10B by the Finance Act 2003, the deduction should be from the total income, implying that brought forward losses and depreciation should first be set off against the eligible unit's income. The CIT set aside the AO's order and directed the AO to recompute the income accordingly.2. Deduction Under Section 10A Before Setting Off Losses:The assessee argued that the deduction under Section 10A should be allowed before setting off brought forward business losses and depreciation. The assessee cited several judgments to support this contention, including:- CIT vs. TEI Technologies P Ltd (Delhi High Court)- CIT vs. Black & Veatch Consulting P Ltd (Bombay High Court)- CIT vs. Yokogawa India Ltd (Karnataka High Court)- M/s. CCL Products (India) Ltd (Andhra Pradesh High Court)These judgments held that the business loss of non-eligible units should not be set off against the income of the undertakings eligible for exemption under Section 10A during the period of 10 years when the deduction is claimed.The Revenue, represented by the Departmental Representative (DR), relied on the decisions of the Coordinate Bench of the Tribunal in the cases of IIC Technologies Pvt Ltd and Asstt. CIT vs. Bodhtree Consulting Ltd, which concluded that the deduction under Section 10B (similar to Section 10A) should be computed after setting off brought forward business losses and depreciation.Tribunal's Analysis:The Tribunal considered the rival contentions and the material on record. It noted that the decisions cited by the assessee were from High Courts, which took into account the amendments to Section 10A and 10B and concluded that these sections are exemption provisions. Therefore, the deduction under Section 10A should be allowed from the total income, and the question of unabsorbed business loss and depreciation being set off prior thereto does not arise.The Tribunal reproduced relevant portions of the judgments to emphasize that Section 10A, even after the amendment, is an exemption provision. The Tribunal found merit in the assessee's argument that the deduction should be allowed before setting off brought forward losses and depreciation.Conclusion:The Tribunal quashed the CIT's order under Section 263, holding that the assessment order was not erroneous and prejudicial to the interests of the Revenue. The assessee’s appeal was allowed, and the order was pronounced in the Open Court on 17th June 2016.