2022 (4) TMI 1665 - AT - Income Tax

Loss of eligible unit under Section 80-IC is deductible and can be set off against other profits under Section 70

ITAT Chennai held that loss incurred by an eligible unit in Himachal Pradesh under section 80-IC must be taken into account in computing gross total ... Deduction u/s 80IC - income of the Himachal Pradesh Unit - whether the loss incurred to the assessee from an eligible unit which is eligible for deduction u/s. 80 IC (7) of the Act can be allowed to set off against the profits accrued to the assessee from other non-eligible unit? - HELD THAT:- Hon’ble Supreme Court in the case of M/S Yokogawa India Ltd. [2016 (12) TMI 881 - SUPREME COURT] after considering all the relevant provisions of the Act held that though section 10A of the Act, 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. CIT (A) after considering the relevant provisions of the Act as well as the relevant case laws observed that the provisions of section 80-I provides for deduction in respect of certain undertakings or enterprises in certain special category states such as Himachal Pradesh, Uttaranchal, Sikkim and North Eastern States. The benefit available under the section is not in the nature of any exemption. He noted that in the instant case the profits and gains derived by the Himachal unit is not exempt under Chapter III but are eligible for deduction under Chapter VI-A of the Act. Therefore, the profit or loss of the above undertaking, as the case may be, is to be taken into account for the purpose of computing gross total income of the assessee in view of sub-section(1) of Section 80-IC of the Act and thus, the assessee is eligible for set off of loss of the Himachal unit against profits of other units as per section 70(1) of the Act. He further noted that for allowance of set off of loss for eligible unit out of profits of non-eligible unit, the gross total income of the appellant cannot be computed and since the appellant was not eligible for any deduction because there was loss in the Himachal unit, the appellant has not claimed any such deduction in the computation of income. These facts have not been controverted by ld. CIT DR in any manner. Respectfully following the judgment of Synco Industries Ltd. [2008 (3) TMI 13 - SUPREME COURT], Mohan Brewaries and Distilleries Ltd [2015 (1) TMI 1120 - MADRAS HIGH COURT] and Galaxy Surfactants Ltd. [2012 (3) TMI 101 - BOMBAY HIGH COURT] and the direction of Hon’ble Jurisdictional High Court in [2020 (10) TMI 666 - MADRAS HIGH COURT] and keeping in view the factual matrix of the present case, pertaining to the claim of the assessee to provide the set off of loss of eligible unit from non-eligible unit /tax liable unit has to be decided in favour of the assessee because as per the scheme of the provision of the Act, the income/loss from various sources i.e. eligible units and non-eligible units, under the same head are to be aggregated in accordance with the provision of section 70 of the Act. If after giving effect to the provisions of section 70 & 71 of the Act, there is any income (where there is no brought forward loss to be set off in accordance with the provisions of section 72 of the Act) and the same is eligible for deduction in accordance with the provisions of Chapter-VI-A or section 10A, 10B, etc of the Act, the same shall be allowed in computing the total income of the assessee after computation of gross total income by applying the relevant provisions of the Act and the I.T. Rules 1962 made thereunder. Appeal of the revenue is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether loss incurred by an undertaking eligible for deduction under section 80-IC(7) may be set off against profits of other non-eligible business units of the same assessee under section 70(1) of the Act. 2. Whether the scheme and language of section 80-IC(7) read with section 80-IA(5) operate to treat the eligible undertaking as an independent source so as to prohibit set off of its losses against other units. 3. The legal effect of earlier authorities and administrative guidance (including decisions addressing section 10A/10B and Chapter VI-A deductions, and the CBDT circular) on the question whether losses of an eligible unit can be aggregated under sections 70-71 and thereafter deductions under Chapter VI-A applied. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Allowability of set off of loss of an 80-IC eligible unit against profits of non-eligible units Legal framework: Sections 70-71 provide for set off and aggregation of income and losses from different sources and heads. Chapter VI-A (including section 80-IC) provides for deductions from gross total income. Section 80-IC(7) and reference to section 80-IA(5) create special treatment for eligible undertakings in certain respects. Precedent treatment: The Tribunal considered multiple lines of authority. Some authorities treat tax-exempt income (section 10B/10A context) differently from Chapter VI-A deductions and have held that an exempt unit's loss cannot be set off against taxable units. Other authorities (including decisions applying the concept of gross total income and prior aggregation under sections 70-71) have allowed set off of losses of eligible units against other income when the deduction is one under Chapter VI-A and not an exemption under Chapter III. Interpretation and reasoning: The Tribunal analysed the statutory scheme and administrative guidance. It emphasised that section 80-IC grants a deduction (not an exemption) and that profits and losses of an 80-IC eligible undertaking are to be included in gross total income for computation purposes under Chapter IV and then aggregated under sections 70-71. The CBDT circular directing aggregation under sections 70-71 before allowing Chapter VI-A deductions was treated as significant. The Tribunal distinguished authorities dealing with exemptions under Chapter III (section 10A/10B) where the stage and mechanism of deduction/exemption operate differently and are to be applied as if the eligible undertaking were an independent unit for the purpose of computing its gross total income prior to aggregation. The Tribunal found that those decisions do not govern a deduction under section 80-IC and that no statutory prohibition prevents set off under section 70(1) for Chapter VI-A eligible units. Ratio vs. Obiter: Ratio - where the deduction is under Chapter VI-A (section 80-IC) and the underlying statutory scheme does not create an express prohibition, losses of an eligible unit fall to be aggregated with other sources under section 70 before Chapter VI-A deductions are considered; therefore set off against profits of non-eligible units is allowable. Obiter - observations distinguishing section 10A/10B jurisprudence and discussing policy/contextual materials were ancillary but supported the main ratio. Conclusion: The Tribunal upheld the first appellate authority's conclusion that the assessee was entitled to set off the loss of the 80-IC unit against profits of other non-eligible units in the same assessment year by applying sections 70-71 and Chapter VI-A principles; hence revenue's grounds on this point were dismissed. Issue 2 - Effect of section 80-IC(7) read with section 80-IA(5) and whether they mandate independent treatment preventing set off Legal framework: Section 80-IC(7) incorporates treatment similar to provisions that treat eligible undertakings for some calculations as if they were independent. Section 80-IA(5) provides that, for certain purposes, eligible unit's income should be worked out as if it were the only source of income. Precedent treatment: Courts have applied the 'independent unit' concept in the context of specific provisions (notably certain Chapter III exemptions and section 10A/10B) to determine the stage at which deductions/exemptions operate. However, authorities addressing Chapter VI-A deductions have emphasised computation of gross total income and subsequent allowance of deductions only where gross total income is positive. Interpretation and reasoning: The Tribunal read section 80-IC as a provision granting a deduction under Chapter VI-A rather than creating an exemption under Chapter III; therefore the special-unit conceptual language in section 80-IC(7) does not operate to oust the general aggregation and set off mechanism under sections 70-71 for the purpose of computing gross total income. The Tribunal accepted that while some provisions (e.g., section 10A) require an earlier stage of deduction/exemption, that statutory design is distinct and inapplicable to section 80-IC. The Tribunal relied on contextual analysis and relevant case law which held that Chapter VI-A incentives are profit-linked deductions to be applied after aggregation under sections 70-71 and after arriving at gross total income. Ratio vs. Obiter: Ratio - section 80-IC(7) and reference to section 80-IA(5) do not automatically preclude set off under section 70(1) where the statutory character of the benefit is a Chapter VI-A deduction; the aggregation regime therefore remains applicable. Obiter - specific textual parallels with other provisions and policy commentary were explanatory; the core holding concerns statutory character and sequencing. Conclusion: Section 80-IC(7) read with section 80-IA(5) does not, on the facts, prohibit set off of losses of an 80-IC eligible unit against profits of other units; the unit's loss could be aggregated and set off under section 70(1). Issue 3 - Applicability and weight of authorities dealing with section 10A/10B, CBDT circular and other decisions Legal framework and administrative guidance: The CBDT circular prescribes that income under various heads be computed and aggregated in accordance with Chapter IV and that after applying sections 70 and 71, any income eligible for deduction under Chapter VI-A should be allowed. Decisions concerning section 10A/10B were analysed for their holding that certain deductions/exemptions operate at an earlier stage and treat eligible units independently. Precedent treatment: The Tribunal treated the CBDT circular as supportive of aggregation under sections 70-71 prior to Chapter VI-A deductions. It acknowledged that some higher court decisions relating to section 10A/10B describe a different sequence (deduction/exemption at the undertaking level prior to aggregation) but distinguished them on statutory grounds. It also distinguished authority which addressed an exempt unit's loss set off against taxable income, observing the factual and legal differences where the benefit is an exemption rather than a Chapter VI-A deduction. Interpretation and reasoning: The Tribunal reconciled authorities by focusing on the nature of the legislative benefit (exemption under Chapter III vs deduction under Chapter VI-A) and on the explicit instructions in the CBDT circular. Where the benefit is a Chapter VI-A deduction, aggregation under sections 70-71 applies before allowance of the deduction; where the statutory scheme expressly mandates an earlier, independent computation (as in certain sections of Chapter III/10A etc.), a different approach applies. The Tribunal therefore limited the applicability of decisions concerning chapter III exemptions to their statutory context and treated the CBDT circular and authorities supporting aggregation as determinative for section 80-IC claims. Ratio vs. Obiter: Ratio - administrative guidance and precedent that require aggregation under sections 70-71 before Chapter VI-A deductions are applicable to section 80-IC situations; authorities addressing chapter III exemptions do not control section 80-IC outcomes. Obiter - broader policy comments and comparisons between different incentive schemes were ancillary. Conclusion: The CBDT circular and relevant case law support aggregating eligible and non-eligible unit income under sections 70-71, and subsequently allowing Chapter VI-A deductions if any income remains; consequently decisions on chapter III exemptions were distinguished and not followed as controlling; the Tribunal concluded in favour of aggregation and set off for the facts under adjudication.