2007 (6) TMI 268 - AT - Income Tax

Business Losses and Depreciation Can Offset Profits for Tax Deduction; ITAT Overturns CIT(A) Decision, Orders Reassessment.

Ford Business Services Center (P) Limited. Versus Assistant Commissioner Of Income-Tax.

The ITAT allowed the assessee's appeal, permitting the set off of business losses and unabsorbed depreciation against profits eligible for deduction under ... Remaining profit after claiming deduction u/s 10B - eligible from set off of business loss and unabsorbed depreciation of earlier years? - HELD THAT:- When s.10B was introduced for the first time by the Finance Act, 1988 w.e.f. 1st April, 1989, sub-s. (1) thereof provided for a clear exclusion of the income referred to in the said section from the total income of an assessee. Since these provisions provided for total exclusion from the total income, they were grouped along with s. 10 in Chapter III of the Act. However, later on, the nature of relief provided by these sections underwent a sea change insofar as that total exclusion of the income was removed and only deduction was provided for. This is clear from the language used in s. 10A, s. 10AA, s. 10B and s. 10BA. Once when deduction u/s 10B has to be allowed, the total income of the undertaking will enter the computation and then only deduction will be given to the assessee. If that is the case, then the stand of the CIT(A) that s. 10B is a secluded provision cannot be accepted. Had it been a case where total exclusion from income was provided for, then perhaps, the observation of the CIT(A) that such income cannot be taken into consideration for set off under s. 70, 71 or 72 would have been proper. In the light of these provisions, we are inclined to agree with the contentions of the learned counsel and accordingly we direct the AO to consider the set off of unabsorbed business losses and depreciation after availing deduction u/s 10B of the Act. We also agree with the contention that s. 10B(6) is applicable only for the last year of deduction and not for the earlier years of deduction. Accordingly, the claim of the assessee is allowed. Disallowance on loss - HELD THAT:- In case the expenditure cannot be linked to any assets, to the extent certain expenditure relates to development of a particular software, such expenditure should be taken as cost of development of that particular software and allowed to be set off against the income from that software. In case it is a general expenditure which cannot be apportioned to any asset or any particular software, such expenditure is to be capitalized and allowed over next four years @ 25 per cent. Thus, it can be seen that the CIT(A) did not stop at merely making an observation but went into the computational aspect of four subsequent years to direct the AO to grant deduction at a particular rate for a specific period. This exercise of jurisdiction by the CIT(A) was not warranted because he had no such jurisdiction in terms of several judgments including-those of the Supreme Court particularly in the case of ITO vs. Murlidhar Bhagwan Das[1964 (1) TMI 5 - SUPREME COURT]. Accordingly, we allow the ground of the Department and delete these directions which relate to the subsequent years. In the result, appeal of the assessee is allowed and appeal of the Department is also allowed. Issues Involved:1. Set off of business loss and unabsorbed depreciation against profits eligible for deduction under s. 10B of the IT Act, 1961.2. Treatment of reimbursement received in foreign exchange for deduction under s. 10B.3. Allowance of expenses as business expenditure for a unit under the STP Scheme.Issue 1: Set off of business loss and unabsorbed depreciation:The assessee appealed against the disallowance of set off of business loss and unabsorbed depreciation against profits eligible for deduction under s. 10B. The CIT(A) upheld the disallowance, stating that once profits of the unit are eligible for s. 10B deduction, set off under other provisions like s. 70 or s. 71 cannot be allowed. The ITAT disagreed, noting that s. 10B provides for deduction, not total exclusion, and directed the AO to consider the set off of losses and depreciation after availing deduction under s. 10B. The ITAT also clarified that s. 10B(6) applies only for the last year of deduction.Issue 2: Treatment of reimbursement for deduction under s. 10B:The assessee challenged the direction to exclude reimbursement received in foreign exchange from 'business profits' and 'local turnover' for s. 10B deduction. The ITAT directed the AO to verify if the reimbursement was already excluded by the assessee from turnover and profits, and if so, the AO need not follow the CIT(A)'s direction to exclude it again.Issue 3: Allowance of expenses as business expenditure for STP Scheme unit:The assessee sought to claim total expenses as business expenditure for a unit under the STP Scheme, but the AO disallowed it as no commercial production had commenced. The CIT(A) agreed with the disallowance. The ITAT observed a misunderstanding between software development and normal production, directing the AO to reconsider the matter after giving the assessee an opportunity to present evidence and arguments.In conclusion, the ITAT allowed the assessee's appeal regarding set off of losses and depreciation, upheld the Department's appeal regarding directions for subsequent years, and directed a reconsideration of expenses claimed as business expenditure for the STP Scheme unit.