100% EOU cannot be forced to claim Section 10B deduction under Income Tax Act

The Karnataka HC held that a 100% EOU cannot be compelled to claim deduction under Section 10B of the Income Tax Act. The petitioner, holding EOU status until March 2013, filed declarations with the Income Tax Office stating Section 10B provisions were not applicable. The court ruled that while Section 70 applies to the assessee, it has the choice to seek non-application of Section 10B through declaration. Since no mandatory Form-56G audit report was filed for claiming Section 10B deduction, the benefit cannot be thrust upon the assessee against its wishes. The writ petition was allowed.

---

---

Issues Involved:
1. Validity of notices issued u/s 148 of the Income Tax Act.
2. Validity of notices issued u/s 143(2) of the Income Tax Act.
3. Legality of orders passed against objections to notices u/s 148.
4. Legality of set-off of unabsorbed depreciation and net loss of 100% EOU.
5. Legality of invoking provisions of section 147 based on suspicion.

Summary:

1. Validity of Notices Issued u/s 148 of the Income Tax Act:
The petitioner challenged the notices issued u/s 148 dated 28.03.2014 for assessment years 2008-09 and 2009-10 (Annexures A1 and A2). The court noted that the petitioner, a 100% Export Oriented Unit (EOU), had declared that Section 10B was not applicable for the relevant assessment years. The Joint Commissioner did not properly consider the petitioner's status and the declaration filed, thus the notices were not justified.

2. Validity of Notices Issued u/s 143(2) of the Income Tax Act:
The petitioner also challenged the notices issued u/s 143(2) dated 22.09.2014 for assessment years 2008-09 and 2009-10 (Annexures B1 and B2). The court found that since the primary notices u/s 148 were invalid, the subsequent notices u/s 143(2) were also invalid.

3. Legality of Orders Passed Against Objections to Notices u/s 148:
The petitioner contested the orders passed against objections to the notices u/s 148 (Annexures C1 and C2). The court held that the Joint Commissioner's orders were against the provisions of the Act and did not consider the petitioner's status as a 100% EOU, thereby quashing the orders.

4. Legality of Set-Off of Unabsorbed Depreciation and Net Loss of 100% EOU:
The petitioner sought a declaration that the set-off of unabsorbed depreciation and net loss for assessment years 2008-09 and 2009-10 was lawful. The court referenced the Division Bench judgment in 'Karle International (P) Ltd. v. Assistant Commissioner of Income Tax' and upheld that the petitioner's claim for set-off was valid, as Section 10B did not automatically apply when a declaration was filed.

5. Legality of Invoking Provisions of Section 147 Based on Suspicion:
The petitioner argued that the invocation of Section 147 was based on mere suspicion without any substantial reason to believe. The court agreed, stating that the Joint Commissioner's actions were not supported by valid reasons to believe as required u/s 147, thus quashing the notices.

Conclusion:
The writ petition was allowed, and the notices and orders (Annexures A1, A2, C1, and C2) were quashed. The court reaffirmed the petitioner's right to declare non-applicability of Section 10B and to set off unabsorbed depreciation and net loss as per the relevant provisions of the Income Tax Act.

---