TaxTMI 
TaxTMI 
2010 (2) TMI 658
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.... assessee filed a return claiming relief under section 10A of the Income-tax Act. During the years under appeal, the assessee had carried out business from two locations, viz. Chennai and Delhi. The Chennai Unit is eligible unit which was situated at Tidel Park, Taramani and registered with Software Technology Parks of India, was engaged in the business of software development. The Delhi Unit of the assessee carried out trading activities of various products in the field of video communication. For the assessment year 2003-04, the profit as per the memo of total income of the eligible unit (Chennai Unit) amounts to Rs.3,23,43,230/-. The trading Unit (Delhi Unit) reported a loss of Rs.61,25,224/-. The assessee's computation of deduction under section 10A was as under- I Net profit of the eligible unit Rs.3,23,43,230 Less 90% of the above amount claimed as exempt (Statutory eligibility for this AY) Rs. (2,91,08,907) Taxable profits of the eligible unit Rs. 32,34,323 II Loss incurred by the Trading unit at New Delhi Rs. (61,25,224) Less Taxable profits of the eligible unit Rs. 32,34,323 Rs. (28,9....
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....he CIT(Appeals) recomputed benefit under section 10A as under- I Rs.88,28,657 Less Trading loss Rs. (77,23,636) Net business income Rs. 11,05,021 Add Income from other sources Rs.27,05,303 Total income Eligible Profits Rs. 38,10,324 Eligible deduction under section 10A restricted to total income of Rs.38,10,324. Further, the CIT(A) has not specifically made any observation with respect to the carry forward of the remaining losses. 3. For the assessment year 2003-04, appeals by both - the assessee and Revenue and for the assessment year 2004-05 the assessee's appeal are before us. 4. In the above facts and circumstances, let us first decide the question referred by the Hon'ble President to the Special Bench, namely, "Whether the business losses of a non eligible unit, whose income is not eligible for deduction under section 10A of the Act, have to be set off against the profits of the undertaking eligible for deduction under section 10A for the purposes of determining the allowable deduction under section 10A of the Act?" 5. The learned counsel for the assessee placed on record pape....
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....uting the total income of a previous year of any person, any income falling within any of the following clauses shall not be included". The placement of section 10A in Chapter III leads to an inescapable conclusion that the income from the enumerated sources should not be subject to income-tax and is to be excluded from the total income, without any restriction whatsoever. Had the intention of legislature been that the profits derived from the eligible unit be subject to a restriction or a reduction in the manner provided under Chapter VIA, section 10A would have been part of Chapter VIA of the Income-tax Act, thus making it subject to the provisions of section 80AB and section 80B of the IT. Act. In this connection, the judgement of the Hon'ble Supreme Court in the case of CIT v. V. Venkataehalam reported in 201 ITR 737 (SC) may be referred. This decision is in the context of section 80T of the Income-tax Act. Section 80T, which until 1st of April, 1993 was a part of Chapter VIA of the income-tax Act provided for deductions to be made from capital gains. The assessee, in this case had derived capital gains during the relevant previous year. A deduction was claimed under section 80....
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....ualify for deduction; (ii) Sub-section (2) prescribes certain conditions to be fulfilled by the undertaking for being eligible to the benefits of section 10A; (iii) Under sub-section (4), it is profits of the business of the undertaking that qualify for deduction. Similarly, the definition of export turnover refers to the sale proceeds to the exports made by the undertaking; (iv) Under sub-section (5), an audit report is to be furnished in support of claim of deduction. Such an audit report is to be submitted for each eligible undertaking. In its structure and application, section 10A is undertaking specific. Circular No.528 dated 16.12.1998 (1989) 176 ITR (St.) 154 also mentions about the profit of the undertaking being exempt. In Circular No.1 of 2005 (2005) 272 ITR (St.) 6, the CBDT has considered various situations and given a clarification on the applicability or otherwise of section 10B in those situations. The examples considered by the CBDT are undertaking specific. The ratio of Circular No.1 and the answers to the examples thereunder would be equally applicable to section 10A. The assessee may have many undertakings. An undertaking cannot be equated with an ....
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....TD 282 (Bom) Considering the above circular/decisions, the Chennai ITAT in the following cases has held that deduction under section 10A would be available to the transferee of the eligible undertaking for the unexpired period of tax holiday:- (1) Premier Mills Pvt. Ltd. v. ACIT I.T.A. No. 2551/Mds/2005 AY 1999-2000 & Premier Fine Yarns Pvt. Ltd: v. ACIT I.T.A. No. 2552, 2553. 2554, 2555 A 2556/Mds/2005 AY's 2000-01 to 2004-05 decision dated 26.09.2008. (2) ITO v. Heartland KG Information Ltd. I.T.A. No. 1884/Mds/2006 AY 04-05 decision dated 21.11.2008 9. The learned counsel for the assessee submitted that the Revenue has attempted to restrict the deduction available under section 10A to the total income of the assessee and brought to our attention the provisions of sub-section (1) of section 10A which reads as follows:-. "10A. Special provision in respect of newly established undertakings in free trade zone, etc. - (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment....
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....y an undertaking from export of products or articles or things or computer software for a period of ten consecutive assessment years in a manner that the deductions are gradually phased out over the subsequent period. The definition of "export turnover" has been amended to clarify that the working of the proportionate deduction on export profits are meant to be of the undertaking, and of the business, as a whole." The learned counsel vehemently argued that what is relevant and is to be taken into consideration for the purpose of computation of deduction under section 10A is the profit of the undertaking specifically and not the business as a whole. This indicates clearly that legislature intended the eligible undertaking to be a separate island, unconnected to the rest of the assessee's business. The ld. counsel further added that it is also clear that the spirit and intention behind the introduction section 10A in 1981 as seen from Circular 308/1981 continues notwithstanding the substitution of the section in 2001 and any interpretation contrary to the same may not be permitted. Section 10A was introduced into the Income-tax Act vide Finance Act 1981. Circular No.308 dated 29.6....
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....s amendment will take effect from 1st April 1981 and will accordingly apply in relation to the assessment year 1981-82 and subsequent years". The learned counsel also placed reliance on circular No.8 of 2002 dated 27.8.2002. Para 19 of the said circular sets out the amendment to the provisions relating to deduction under section 10A units in free trade zones, etc and section 10B of the Act. "19. Under the existing provisions of section 10A a deduction is given of 100 per cent of profits and gains from export earnings of new undertakings established in Free Trade Zones, Software Technology Parks, Electronic Hardware Technology Parks or Special Economic Zones (SEZs), which are engaged in manufacture or production of articles or things or computer software. 91.1 ........... 19.4 In view of the need for resource mobilization in the short run, the Finance Act, 2002 seeks to restrict the 100% deduction under sections 10A and 10B, for one assessment year, i.e. 2003-04 to 90% of such profits and gains as are derived by an undertaking from the export of articles or things or computer software." The ld. counsel further added that sub-para 4 of para 19 above specifies an isolat....
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....uted in accordance with the provisions of the Act. The relief under this section is with reference to the STP undertaking and not the assessee. In other words, the relief travels with the undertaking irrespective of who owns the same. The computation of relief as provided in section 10A(4) is also with reference to the undertaking. A business may have several undertakings and section 28 does not envisage computation of income of each such undertaking. In other words, under the head 'profits and gains of business or profession', income from a business as a whole has to be computed and not that of the individual undertaking. The phrase 'total income' used in section 10A(1) is therefore to be understood as the total income of the STP unit. This is clear from the first proviso to section 10A(1) which makes a reference to the total income of the undertaking and not to the total income of the assessee. The counsel highlighted the terminology in various sections under Chapter III as follows: Section Operative portion 19A(1A) The deduction, in computing the total income of an undertaking, which begins to manufacture or produce articles or things or computer software during the ....
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.... computing the total income, once the total income is computed, no further adjustment to the total income is envisaged. The scheme of the Act provides for deductions in computing total income and provides no mechanism for any deduction from the total income already computed. Once the total income is computed, the next step determination of tax by applying the applicable rates on the total income. Deduction under section 10A thus cannot be from the total income. Section 2(45) defines "total income" as follows: "(45) "total income" means the total amount of income referred to in section 5, computed in the manner laid down in this Act." "Total income" is therefore defined to mean the total of the income referred to in section 5, computed in the manner laid down in the Act. The total amount of income cannot therefore be confused with or replaced by the concept of gross total income contained in section 80AB and section 80B. This is for a multitude of the reasons. (a) Firstly, the restriction placed by the Department in the interpretation of section 10A would apply only if section 80AB and section 80B in Chapter VI-A are made applicable to section 10A, while there is no provisi....
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....nowledged in the case of KPIT Cummins (26 SOT 529). It is a trite law that a head-on-clash between two provisions should be avoided and the sections should be interpreted in a harmonious manner as to best fit in the whole setting of the Act. Accordingly, the total amount of income in respect of which the assessee would be entitled to the benefit of Section 10A would be such profits that are derived by the eligible unit from the eligible activity. (e) Chapter III deals with incomes that are excluded from total income. The marginal note therefore supports the argument advanced to the effect that the interpretation of the words "total income" in Section 10A would be neither as defined under section 2(45) of the Act nor be influenced by the concept of gross total income as set out in section 80AB and section 80B in Chapter VI of the Act. Reliance is placed on the following judicial precedents: (i) Enercon Wind Farms (Krishna) Ltd. v. ACIT 21 SOT 29(Mum) (ii) Tyco Electronics Corporation India (P) Ltd. I.T.A. No. 1229/2007 (Bang) (iii) KPIT Cummins Infosystems (Bangalore) Ltd. v. ACIT 26 SOT 529 (Bang) 11. The learned counsel further submitted that deduction under section....
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.... shall be allowed while computing or arriving at the total income of the assessee." Section 10A(1) provides deduction of such profits and gains derived by an undertaking. Profits and gains of business an undertaking are to be computed in accordance with provisions pertaining to head of income 'profits and gains of business or profession' i.e. section 30 to section 43D while the setting off a loss from one source against income from another source under the same head of income is governed by section 70. Therefore the loss of any other unit cannot be set off before allowing deduction under section 10A of the Act. This has been upheld in the decision of Yokogawa India Ltd 111 TTJ Bang) 548 . 12. While stressing, the exceptions specifically carved out under section 10A, the learned counsel for the assessee submitted that there is no specific mention that the deduction should be restricted to the total income of the assessee computed under the provisions of the Act before allowing such deduction. Wherever the legislature wanted to restrict the deduction, the legislature has provided such restrictions. For eg. In section 24, deduction in respect of interest is restricted as per ....
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....ling the benefit intended by the Legislature and cannot therefore be upheld. The Hon'ble Supreme Court in the case of Bajaj Tempo has reiterated that the statutory provisions inserted with the avowed object of benefiting the assessee should be likewise interpreted and construed beneficially. As per the principle of harmonious construction, the applicable provisions should be read harmoniously to arrive at the intended object. 14. Per contra, the learned Standing Counsel submitted that section 10A which finds a place in Chapter III of the Income-tax Act was originally enacted as an exemption provision, in that its profits and gains did not form part of total income at all. Section 10A(1) read in 1981, when it was first introduced: "Subject to the provisions of this section, any profits and gains derived by an assessee from an industrial undertaking to which this section applies shall not "be included in the total income of the assessee." As such, regardless of whether there is profit or loss in the total income of the assessee, the income from the 10A unit will not included in the total income. 15. She also brought to our attention that after the amendment to the section, sect....
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....ed at after setting off the losses of other units. (1) In the case of IPCA Laboratory Ltd. v. DCIT (2004) 266 ITR 521, the Supreme Court has held that profits and gains can only refer to a positive profit, and as such, the losses have to be set off to see whether the resultant figure is a positive profit or a loss; and deduction will be available only in the case of positive profit. (2) In ITO v. Induflex Products Pvt. Ltd. (2006) 280 ITR 0001 the Supreme Court has once again reiterated that deduction under section 80HHC would be available only after adjusting losses. (3) Although these judgements are with reference to section 80HHC, they would be equally applicable to deduction under section 10A/10B, inspite of the fact that there is no section similar to section 80AB in Chapter III. (4) The fact that section 10A talks about deduction from total income, and 'total income has been defined under section 2(45) of the Act to mean the total amount of income referred to in section 5, computed in the manner laid down in the Act, make it clear that the total income from which the profits and gains of the eligible undertaking are to be deducted have to be computed only after se....
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....the present case, after the amendment, it is very clear from the provisions that the profits of the eligible undertaking is to be deducted from the total income, which is computed as per the provisions of the Act. Computation as per the provisions of the Act will include setting off of losses. 21. Finally, the learned Standing Counsel summed up her argument as under- (1) Profits and gains derived from eligible unit under section 10A are to be deducted from the total income. (2) Total income is to be arrived at by computation as per the Act, which includes setting off of losses. (3) Once the section specifies that the deduction shall be made from the total income, it should be seen that if the total income is negative, deduction from the same may only result in reducing the carry forward loss. (4) Reliance cannot be placed on the return form, as once the intention is clear from the section, the form could not go beyond the provisions of the Act [314 ITR 231(Mad)] 22. We have heard the rival submissions and considered the facts and materials on record including the contents of the paper-book filed before us. We have also considered the principle arising out of the p....
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....ewly established undertakings in free trade zone, etc.- (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software as the case may be, shall be allowed from the total income of the assessee: Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to deduction referred to in this sub-section only for the unexpired period of the aforesaid ten consecutive assessment years: Provided further that where an undertaking initially located in any free trade zone or export processing zone is subsequently located in a special economic zone by reason of conversion of such free trade zone or export processing zone into a speci....
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.... under Chapter III, it has been mentioned in the section itself that what is to be given is only a deduction and not exemption. Under the scheme of the Act, the profits of the unit eligible for deduction under section 10A of the Act, would form part of the income computed under the head "Profits and gains of business and profession". However, in order the same will not suffer tax, deduction will have to be made in respect of such profits while computing the income under the head "Profits and gains of business and profession". In other words, a deduction in respect of profits eligible under section 10A is required to be made at the stage of computing the income under the head "Profits and gains of business or profession". Thus, we find that what is contemplated by the Legislature is that profits and gains of the undertakings from the export of articles or things or computer software are to be deducted while computing the profits and gains of business or profession (at hundred per cent upto assessment year 2002-03 and ninety per cent thereafter). Even though it is a deduction to be given, it is to be deducted while arriving at the profits of business and profession and not from th....
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....on, the same cannot be subjected to provisions of section 80AB which falls under different, chapter, namely, Chapter VI-A, so long as the Legislature has not specifically mentioned so, to apply they provisions of section 80AB of the Act, to the claim of deduction under section 10A. It can be noticed that even though there is a mention about sections 80HH, 80HHA, 80-I, 80-IA and 80-IB in section 10A(6), no mention about sections 80AB, 80HHC and 80HHE been made. The Bombay High Court in the case of Siemens Information System Ltd. v. ACIT And Others (2007) 293 ITR 548 (Bom), has held as under- "Total income" means the total amount of income referred to in section 5, computed in the manner laid down in this Act. Next, our attention is invited-to what is gross total income under section 806(5). The gross total income has been described to be the total income computed in accordance with the provisions of the Act before making any deduction under the relevant Chapter. A perusal of section 10A(1), as it stood at the relevant time, clearly sets out that subject to the provisions of this section, any profits and gains derived by an assessee from an industrial undertaking to which the sect....
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....it of section 84 and others may not be so entitled. It is not, therefore, possible to equate the undertaking with the company. When a company owns more than one undertaking the application of section 84 has to be with respect to the particular undertaking and not to the company in general. When we apply section 84 to a particular undertaking it has to be seen when that undertaking commenced the manufacture or production of articles. It is true that the word "undertaking" has not been defined under the Income-tax Act. But in common parlance it is taken as a concern started or formed for a specific purpose or a project engaged in." We also note that in the Circular F.No.15/563-IT(AT) dated 13.12.1963 issued by CBR in the context of section 80J, the Board agrees that the benefit of section 84(80J) of the Income-tax Act, 1961, attaches to the undertaking and not the owner thereof. We also find that in the CBDT Circular No. 308 dated 29.06.1981 also it is mentioned that complete tax exemption in respect of the profits and gains derived from undertakings set up in Free Trade Zones are available to export oriented industries. In Circular No. 8 of 2002 dated 27.8.2002, para No. 19 reads....
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.... section 10A. 28. In ITA No. 229/Mds/2007, for the assessment year 2003-04, the assessee has raised another ground vide ground No. 2 which reads as under : - "Consequently, the CIT(A) has erred in not allowing a set off of Delhi unit's losses against the interest income." 29. As we have already held that the loss from non-eligible unit cannot be set off against the profit of eligible unit while computing deduction under section 10A, we find force in the contention of the learned counsel for the assessee that the CIT(Appeals) ought to have allowed the set off of Delhi Unit (non-eligible unit) losses against the interest income. Hence, we direct the Assessing Officer to allow the set off of loss of non-eligible unit, namely, Delhi Unit against the interest income. Thus, the assessee's appeal in I.T.A. No. 229/Mds/2007 is allowed. 30. Turning to I.T.A. No. 352/Mds/2008 for assessment year 2004-05, the assessee has raised the issue of deduction under section 10A as first ground. Similar arguments were made by both sides in respect of this issue as made for assessment year 2003-04. For the reasons stated in our order in I.T.A. No. 229/Mds 2007, this issue is allowed in favou....
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.... from profits of eligible unit cannot be upheld. Now, specific prayer of the assessee's counsel is that the trading loss should be set off against income from other sources and the remaining loss should be carried forward. We find force in the contention of the learned counsel and we are inclined to allow the claim of the assessee. Hence, we direct the Assessing Officer to set off the trading loss against income from other sources and to allow remaining loss to carry forward. 35. Thus, the appeal of the assessee in IT.A. No. 352/Mds/2008 is allowed in favour of the assessee. 36. Now, let us turn to Revenue's appeal in I.T.A. No. 536/Mds/2007. The Revenue's grounds read as under:- 2.1 The learned CIT(A) erred in holding that carry forward of unabsorbed u/s. 10A amounting to Rs.6,89,767/- is permissible, relying upon the provisions of sec.10A(6)(ii) of the I.T. Act. 2.2 It is submitted that a plain reading of clause (ii) of sub-section (6) of Sec.10A of the I.T. Act does not support the learned CIT(A)'s direction of allowing carry forward of unabsorbed claim u/s. 10A of the IT Act. 2.3 The CIT(A) ought to have seen that the explanatory notes to the Finance Act, 2003 (P....