2005 (11) TMI 176 - AT - Income Tax

Tribunal Rules Business Loss Set Off is Allowed; s. 10A/10B Deduction Not Exemption, Interest Income Considered Relevant.

The Tribunal allowed the appeal, directing the AO to set off the business loss against other income sources under s. 70 and s. 71 of the IT Act. It ... Claimed inter-head set off of business loss against income from other sources as permissible u/s. 71 - exemption u/s 10B - HELD THAT:- Admittedly, in this case, there was loss in the unit eligible for deduction u/s. 10B. The business income of such unit is computed at Rs. 13,40,575 whereas the loss itself is Rs. 4,26,73,854. Thus, the business income can be computed only after set off of business loss against the business income in the same year as per provisions of s. 70 of the Act. Similarly, after setting off of the business loss against the business income, there is still a loss and such loss has to be set off against income from other sources in the same year as per the provisions of s. 71 of the Act. The decision of the Tribunal in the case of Navin Bharat Industries Ltd.[2004 (3) TMI 318 - ITAT BOMBAY-E] also supports our view that the income of unit eligible for deduction u/s 10B is merely a deduction from income and not exemption. Accordingly, the assessee is eligible to set off the loss of such unit under ss. 70 and 71 of the Act. The AO is accordingly directed to set off the loss and compute the income. In the result, the appeal is allowed. Issues:1. Set off of business loss against income from other sources under s. 71 of the IT Act.2. Eligibility of interest income for exemption under s. 10A/10B.3. Interpretation of provisions of s. 10A/10B for complete exemption.4. Applicability of provisions of s. 70 and 71 in setting off business loss against other business income.Analysis:1. The appellant filed a revised return seeking to set off business loss against income from other sources under s. 71 of the IT Act. The AO initially denied the set off, treating certain income as business income chargeable under the Act. The learned CIT(A) upheld the denial, emphasizing that s. 10A/10B provides for complete exemption, not deduction. However, the appellant argued that the business loss should be set off against other business income and income from other sources in the same year, citing provisions of s. 70 and s. 71. The Tribunal agreed, stating that the income eligible for deduction under s. 10A/10B is a deduction from income, not an exemption, allowing for the set off of losses against other income.2. The issue of interest income eligibility for exemption under s. 10A/10B was raised. The appellant argued that interest income was linked to the eligible unit and should be treated as income derived from it. The AO disagreed, treating interest income as business income but not allowing set off against other business income. The learned CIT(A) supported the AO's decision. However, the appellant contended that the interest income should be considered as income derived from the eligible unit. The Tribunal, considering the provisions of s. 10B and the nature of income, directed the AO to set off the loss and compute the income accordingly.3. The interpretation of provisions of s. 10A/10B for complete exemption was debated. The learned CIT(A) held that these provisions provide for complete exemption, not deduction, and thus denied set off of losses. However, the appellant argued that the provisions should be interpreted to allow for set off of losses against other income. The Tribunal, citing precedents and statutory provisions, concluded that the income eligible for deduction under s. 10A/10B is not exempt but deductible, permitting the set off of losses against other income.4. The applicability of provisions of s. 70 and 71 in setting off business loss against other business income was a key issue. The Tribunal analyzed the provisions and held that the business loss of the eligible unit should be set off against other income sources in the same year, as allowed under s. 70 and s. 71. Citing a previous Tribunal decision, the Tribunal emphasized that the income of the unit eligible for deduction under s. 10B is a deduction from income, not an exemption, supporting the set off of losses against other income. Consequently, the Tribunal allowed the appeal, directing the AO to set off the loss and compute the income accordingly.