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

The ITAT allowed the assessee's appeal, permitting the set off of business losses and unabsorbed depreciation against profits eligible for deduction under s. 10B of the IT Act, 1961, contrary to the CIT(A)'s disallowance. It directed the AO to verify the exclusion of reimbursement in foreign exchange for s. 10B deduction and reconsider the disallowance of expenses as business expenditure for the STP Scheme unit. The ITAT clarified that s. 10B(6) applies only in the last year of deduction and upheld the Department's appeal regarding directions for subsequent years.

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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.

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