2008 (1) TMI 480 - AT - Income Tax

Tribunal Upholds Tax Deduction Rules: Set Off Business Losses Before Deductions u/s 10B of Income Tax Act.

Sword Global (I) (p) Limited. Versus INCOME TAX OFFICER.

The tribunal dismissed the assessee's appeal, upholding the order of the Commissioner of Income-tax (Appeals). It held that under section 10B of the ... Computation of deduction u/s 10B - setting off of carried forward business loss - profits and gains derived by the undertaking - 100 per cent subsidiary - HELD THAT:- We do not agree with the contention of the learned counsel for the assessee that the second proviso to s. 10B of the Act has to be applied directly and immediately on the gross business profit before taking into consideration the brought forward unabsorbed business losses. If this procedure of computation is adopted, it will result in absurd results because 10 per cent of taxable income gets worked out even before considering the set off of brought forward losses against the business profits. If this procedure is applied and upheld by the Courts, this will result in the taxation of much higher income in the hands of various assessees for the asst. yr. 2003-04, if such assessees do not have any brought forward losses/depreciation. Such a situation is not contemplated under the provisions of s. 10B of the Act. We find that the provisions of s. 10B of the Act are very clear on this issue and if there is any doubt, the same gets clarified if this provision is understood in the light of the position of law applicable to the similar other provisions of the Act. The situation contemplated by the assessee could have been possible only in the period before 1st April, 2001 when there was controversy whether brought forward losses are allowable to be set off against eligible profits under s. 10A/10B or not. The aforesaid controversy is no more after 1st April, 2001, because these provisions have now been amended and brought them on par with the other exemptions/deductions allowed under Chapter VI-A of the Act. As per the settled law, all the brought forward losses and depreciations are first required to be set off against the business profits of the current year before computing any deduction/exemption under the Act. Thus, we are of the considered opinion that the CIT(A) was justified in confirming the finding of the AO. Accordingly, we uphold the impugned order. In the result, the appeal of the assessee is dismissed. Issues:Setting off of carried forward business loss against profits and gains derived by the undertaking under section 10B of the Income-tax Act, 1961.Analysis:Issue 1: Setting off of carried forward business loss against profits and gains under section 10BThe case involved the appeal of an assessee against the order of the Commissioner of Income-tax (Appeals) regarding the setting off of carried forward business loss against profits and gains derived by the undertaking under section 10B of the Act. The assessee claimed that the deduction under section 10B should be restricted to ninety per cent of the profits and gains derived by the undertaking, and the brought forward loss should be set off against the remaining portion. The assessee argued that the Assessing Officer's computation method was not justified and referred to a circular emphasizing a construction most beneficial to the assessee in cases of setting off losses. The assessee also cited a Tribunal decision supporting the exclusion of profits and gains derived by an industrial undertaking for the eligible period. However, the Departmental representative contended that all brought forward losses and depreciation must be set off against the business profits of the current year before computing any deduction or exemption. The representative cited legal precedents and highlighted that deductions under Chapter VI-A are required to be reduced from business profits before computing specific deductions. The tribunal held that the computation of income should align with the provisions of the Act and other High Court decisions, emphasizing that section 10B cannot be read in isolation. The tribunal rejected the assessee's arguments, upheld the order of the Commissioner of Income-tax (Appeals), and dismissed the appeal.In conclusion, the tribunal affirmed that the provisions of section 10B require the computation of deduction with reference to profits derived from exports, which should be calculated in accordance with the Act before considering set off of losses. The tribunal disagreed with the assessee's contention that the second proviso to section 10B should be applied directly on gross business profit before considering brought forward losses. It emphasized that brought forward losses must be set off against current year business profits before computing deductions. The tribunal found the Commissioner of Income-tax (Appeals) justified in confirming the Assessing Officer's finding, thereby upholding the impugned order and dismissing the assessee's appeal.