TaxTMI 
TaxTMI 
2011 (8) TMI 845
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.... on brought losses and depreciation. According to the assessing authority, the deduction under section 10A has to be allowed from the total income of the assessee. The total income of the assessee was arrived at as per section 80B(5). Therefore, the exemption under section 10A had to be given after setting off of all brought forward losses within the context of section 32(1) read with section 72(2) of the Act. Accordingly, section 10A benefit was recomputed. After such recomputation, after adjusting the assessee was held to be not entitled for exemption under section 10A and, hence, a sum of Rs. 36,575 was treated as income from other sources. Aggrieved by the said order the assessee preferred an appeal to the Commissioner of Income-tax (Appeals) III, Bangalore. 4. The Appellate Commissioner held that section 10A is placed in Chapter III which deals with incomes which do not form part of the total income. The main object of the section 10A is not to tax export profits from the STP unit. The income of section 10A unit has to be excluded before arriving at the gross total income, otherwise the provisions of section 10A would have been shifted to Chapter VI-A which deals wit....
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....of the Act. Hence, unabsorbed business losses will not be set off against the profit of the undertaking engaged in the export of computer software for the purposes of ascertaining the deduction admissible under section 10A. As per section 72(2), unabsorbed business loss is to be first set off and thereafter the unabsorbed depreciation treated as current years depreciation under section 32(2) is to be set off. For computing deduction under section 10A, only the profit derived from export of computer soft- ware is to be taken into consideration, The unabsorbed business loss of other units cannot be set off and, therefore, the unabsorbed depreciation which is to be set off after the unabsorbed business loss under section 72(2), also cannot be set off for ascertaining the deduction under section 10A. Therefore, the Tribunal upheld the order of the Appellate Commis- sioner and dismissed the appeal. Aggrieved by the same, the Revenue is in appeal. 6. The appeal was admitted to consider the following substantial questions of law : "(i) Whether the appellate authorities failed to take into consider- ation that the amendment to section 10A by the Finance Act of 2000 with....
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....sions and, therefore, it is liable to be set aside and the order of the assessing authority is to be restored. 9. Per contra, the learned senior counsel appearing for the assessee pointed out Chapter III of the Act where section 10A finds a place, deals with the incomes which generally do not form part of the total income. Therefore, the profits derived under section 10A are not to be taken into consideration in arriving at the total income of the assessee. Under section 72(1), what could be set off against the profits earned is the carry forward losses or depreciation which is to be taken into consideration at the stage of computation of income under Chapter VI of the Act. Therefore, the order passed by the Tribunal and the Appellate Commissioner is in con- formity with the scheme of the Act and, therefore, no case for interference with the said order is made out. First substantial question of law 10. The benefit of tax holiday was originally enacted as an absolute exemp- tion under Chapter III of the Income-tax Act, 1961. It remained as exemp- tion for almost two decades. The heading of Chapter III under which the relevant provisions were placed is t....
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....rsion of such free trade zone or export processing zone into a special economic zone, the period of ten consecutive assessment years referred to in this sub- section shall be reckoned from the assessment year relevant to the previous year in which the undertaking began to manufacture or pro- duce such articles or things or computer software in such free trade zone or export processing zone : Provided also that for the assessment year beginning on the 1st day of April, 2003, the deduction under this sub-section shall be ninety per cent. of the profits and gains derived by an undertaking from the export of such articles or things or computer software : Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, 2012, and subsequent years. . . . (4) For the purposes of sub-sections (1) and (1A), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the under- taking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total....
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....ign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder or any other corresponding law for the time being in force ; (iii) 'electronic hardware technology park' means any park set up in accordance with the Electronic Hardware Technology Park (EHTP) Scheme notified by the Government of India in the Ministry of Com- merce and Industry ;" 13. A literal reading of the above provision requires deduction from the total income. There can be a deduction in computing the total income. How- ever, there cannot be deduction from the total income which is the final result of the computation process. The language adopted in section 10A is different from the one adopted in section 80A. Section 10A provides for deduction from the total income. In the scheme of the Act, while various deductions are allowed in 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 deduction in computing the total income but no mechanism for any deduction from the total income already computed is provided under the Act. Once the total income is com- puted, the next step is deter....
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.... a phrase in the context of section 10A, means profits and gains of the STP under- taking as understood in its commercial sense. 16. Chapter IV deals with the computation of total income under various heads of income. Section 14 provides for classification of income under various heads of income for the purposes of charge of income-tax and computation of total income. The purpose of classification of any income under any head of income is to compute the same. The twin conditions of section 14 are that income is subject to charge of income-tax and is includible in the total income. As the relief under section 10A is in the nature of exemption although termed as deduction and the said relief is in respect of commercial profits, such income is neither subject to charge of income-tax nor includible in the total income. Therefore, the twin provi- sions of section 14 are not existing in the case of income of STP under- taking and accordingly such income is not liable to be computed under Chapter IV. Therefore, the correct view would be that the relief under section 10A will have to be given before Chapter IV. The deduction shall be given first and process of computation of "pro....
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....include section 10A. In other words, the gross total income would be arrived at after considering section 10A deduction also. There- fore, it would be inappropriate to conclude that section 10A deduction is to be given effect to after Chapter VI-A deductions are exhausted. 19. It is after the deduction under Chapter VI-A that the total income of an assessee as arrived at. Chapter VI-A deductions are the last stage of giving effect to all types of deductions permissible under the Act. At the end of this exercise, the total income is arrived at. Total income is thus, a figure arrived at after giving effect to all deductions under the Act. There cannot be any further deduction from the total income as the total income is itself arrived at after all deductions. 20. From the aforesaid discussion it is clear that the income of the section10A unit has to be excluded before arriving at the gross total income of the assessee. The income of the section10A unit has to be deducted at source itself and not after computing the gross total income. The total income used in the provisions of section 10A in this context means the glo- bal income of the assessee and not the total ....
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....p; "20. Providing for carry forward of business losses and unabsorbed depreciation to units in special economic zones and 100 per cent. export oriented units : 20.1 Under the existing provisions of sections 10A and 10B, the undertakings operating in a special economic zone (under section 10A) and 100 per cent. export oriented units (EOU's) (under section 10B) are not permitted to carry forward their business losses and unabsorbed depreciation. 20.2 With a view to rationalize the existing tax incentives in respect of such units subA-section (6) in sections 10A and 10B has been amended to do away with the restrictions on the carry forward, of business losses and unabsorbed depreciation. 20.3 The amendments have been brought into effect retrospectively from April 1, 2001, and have been made applicable to business losses or unabsorbed depreciation arising in the assessment year 2001-02 and subsequent years." 23. It is interesting to note that such relaxation has not been made in section 10C which provides for exemption in respect of profits of certain under- takings in north eastern region. This makes clear the legislative intention of providi....
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....section, and, thereafter, at any time before the expiry of the period of three years referred to in that section, such business is re-established, recon- structed or revived by the assessee, so much of the loss as is attributable to such business shall be carried forward to the assessment year relevant to the previous year in which the business is so re-established, reconstructed or revived, and- (a) it shall be set off against the profits and gains, if any, of that business or any other business carried on by him and assessable for that assessment year ; and (b) if the loss cannot be wholly so set off, the amount of loss not so set off shall, in case the business so re-established, reconstructed or revived continues to be carried on by the assessee, be carried forward to the following assessment year and so on for seven assessment years immediately succeeding." 26. In fact, the Bombay High Court in the case of Hindustan Unilever Ltd. v. Deputy CIT [2010] 325 ITR 102 (Bom) interpreting section 10B as amended held as under (page 117) : " . . . section 10B as it stands is not a provision in the nature of an exemption but provides for a deduction. Sect....
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....ompany 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. In this case though the objects of the company as set out in its articles of association cover a variety of objects, the object of the undertaking is only to manufacture lathes and bench grinders as is clear from the licence issued to the company under the Industries (Development and Regulation) Act, 1951." 29. Form No. 1 read with rule 12 of the Income-tax Rules, 1962, provides for return of income and return of fringe benefits. 30. In Schedule 9 at column No. 7 it is clearly mentioned the amount claimed/deductible under section 10A/10AA/10B or 10BA. Dealing with the scheme of the form it is stated that the scheme of this form follows the scheme of the law as outlined above in its basic form and with reference to Schedules 1, 9, 3 and 13 it is stated that "fill out Schedule 9 if you are claiming deducti....
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....lance, if any, thereafter can be carried forward for being set off against profits of the subsequent assessment years in the normal course. Unabsorbed depreciation also merits a similar treatment. 33. As the income of the section10A unit has to be excluded at source itself before arriving at the gross total income, the loss of the non-section 10A unit cannot be set off against the income of the section 10A unit under sec- tion 72. The loss incurred by the assessee under the head "Profits and gains of business or profession" has to be set off against the profits and gains, if any, of any business or profession carried on by such assessee. Therefore, as the profits and gains under section 10A is not be included in the income of the assessee at all, the question of setting off the loss of the assessee of any profits and gains of business against such profits and gains of the undertaking would not arise. Similarly, as per section 72(2), unabsorbed business loss is to be first set off and thereafter unabsorbed depreciation treated as current year's depreciation under section 32(2) is to be set off. As deduction under section 10A has to be excluded from the total income of the ....