2016 (12) TMI 881 - SC - Income Tax

Court clarifies Section 10A Income Tax Act: Deductions for eligible undertakings

C.I.T. & Another Versus M/s Yokogawa India Ltd.

The Court determined that Section 10A of the Income Tax Act, post-amendment, provides for deductions from the gross total income of the eligible ... Exemption / deduction u/s 10A or 10B - when to be allowed - before determination of gross total income or computing the net total income i.e. chapter IV or VI - introduction of the word ‘deduction’ - amendment made by Finance Act, 2003 with retrospective effect from 1.4.2001 - scope of total income as defined u/s 2(45) - Held that:- The introduction of the word ‘deduction’ in Section 10A by the amendment, in the absence of any contrary material, and in view of the scope of the deductions contemplated by Section 10A as already discussed, it has to be understood that the Section embodies a clear enunciation of the legislative decision to alter its nature from one providing for exemption to one providing for deductions. The difference between the two expressions ‘exemption’ and ‘deduction’, though broadly may appear to be the same i.e. immunity from taxation, the practical effect of it in the light of the specific provisions contained in different parts of the Act would be wholly different. From a reading of the relevant provisions of Section 10A it is more than clear to us that the deductions contemplated therein is qua the eligible undertaking of an assessee standing on its own and without reference to the other eligible or non-eligible units or undertakings of the assessee. The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee. Though Section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of the total income under Chapter VI. Issues Involved:1. Whether Section 10A of the Income Tax Act is beyond the purview of the computation mechanism of total income.2. Whether the phrase 'total income' in Section 10A is akin to Section 2(45) of the Act.3. Whether Section 10A continues to remain an exemption section after the amendment effective from 1.04.2001.4. Whether losses of other 10A Units or non-10A Units can be set off against the profits of 10A Units before deductions under Section 10A.5. Whether brought forward business losses and unabsorbed depreciation of 10A Units or non-10A Units can be set off against the profits of another 10A Unit.Issue-wise Detailed Analysis:1. Whether Section 10A of the Act is beyond the purview of the computation mechanism of total income:The Court examined the transformation of Section 10A from an exemption provision to a deduction provision post the amendment by the Finance Act, 2000. The Court noted that the term 'deduction' introduced by the amendment signifies a legislative intent to alter the nature of Section 10A from providing exemption to providing deductions. The retention of Section 10A in Chapter III, which deals with incomes not forming part of total income, was deemed suggestive but not determinative. The Court concluded that Section 10A, as amended, provides for deductions from the gross total income of the eligible undertaking.2. Whether the phrase 'total income' in Section 10A is akin and pari materia with the said expression as appearing in Section 2(45) of the Act:The Court clarified that the phrase 'total income' in Section 10A should be understood as the 'total income of the undertaking' rather than the 'total income of the assessee' as defined in Section 2(45). This interpretation aligns with the legislative intent and the specific provisions of Section 10A, which focus on the profits and gains of the eligible undertaking independently of other units or undertakings of the assessee.3. Whether Section 10A continues to remain an exemption section after the amendment effective from 1.04.2001:The Court highlighted that the amendment by the Finance Act, 2000, introduced the concept of 'deduction' in Section 10A, which signifies a shift from an exemption provision to a deduction provision. The Court noted the practical implications of this change, emphasizing that the deductions under Section 10A are to be made at the stage of computation of the gross total income of the eligible undertaking under Chapter IV, not at the stage of total income computation under Chapter VI.4. Whether losses of other 10A Units or non-10A Units can be set off against the profits of 10A Units before deductions under Section 10A:The Court determined that the deductions under Section 10A are specific to the eligible undertaking and should be computed independently of other units or undertakings of the assessee. Therefore, losses of other 10A Units or non-10A Units cannot be set off against the profits of 10A Units before the deductions under Section 10A are effected.5. Whether brought forward business losses and unabsorbed depreciation of 10A Units or non-10A Units can be set off against the profits of another 10A Unit:The Court concluded that the brought forward business losses and unabsorbed depreciation of 10A Units or non-10A Units cannot be set off against the profits of another 10A Unit. The deductions under Section 10A are to be computed independently for each eligible undertaking, and the provisions for set off and carry forward under Sections 70, 72, and 74 are not applicable at the stage of computing the profits and gains of the eligible undertaking.Conclusion:The Court held that Section 10A, as amended, is a provision for deduction, and the stage of deduction is while computing the gross total income of the eligible undertaking under Chapter IV of the Act, not at the stage of computation of the total income under Chapter VI. The appeals were disposed of accordingly.