THE COMMISSIONER OF INCOME TAX vs. PATSPIN INDIA LTD.
What did the High Court hold?
The High Court allowed the appeals filed by the Revenue, reversing the orders of the Tribunal. The Court held that the computation of business profit for the purpose of determining the deduction under Section 10B(4) must be done in accordance with Sections 30 to 43D of the Act, which necessarily includes the set-off of unabsorbed depreciation carried forward from earlier years under Section 32(2). The Court found that the Tribunal's reliance on other ITAT Benches was incorrect, as the primary step is to determine the total business profits after all allowable deductions, including depreciation. The Court agreed with the Karnataka High Court's decision in *CIT vs. Himatasingike Seide Ltd.* and found that sub-section (6) of Section 10B, contrary to the Tribunal's observation, actually supports the Revenue's contention by acting as an embargo against claiming carried forward benefits in subsequent years after the tax holiday. The Court restored the orders of the CIT under Section 263 for the first four assessment years and upheld the order of the CIT(Appeals) for the assessment year 2005-2006. No issue was expressly left undecided.
What were the facts?
The Revenue filed appeals against the assessee, M/s. Patspin India Limited, for assessment years 2001-2002 to 2005-2006. The dispute concerned the computation of deduction for export profits under Section 10B(4) for 100% export-oriented units (EOUs). Initially, assessments were completed accepting the assessee's claims. However, the Commissioner of Income Tax (CIT) initiated revision proceedings under Section 263 for assessment years 2001-02 to 2004-05, holding that unabsorbed depreciation carried forward from earlier years under Section 32(2) must be set off before calculating the deduction under Section 10B(4). For assessment year 2005-2006, the original assessment already incorporated this set-off, and the CIT(Appeals) upheld it. The assessee's appeals to the Income Tax Appellate Tribunal (ITAT) focused on whether the deduction under Section 10B(4) should be computed before or after setting off unabsorbed depreciation. The assessee also initially claimed interest income as business income and excess deduction under Section 35D, but these claims were later abandoned.
What were the issues?
1. Whether the deduction admissible under Section 10B(4) of the Income Tax Act, 1961, on the export profit earned by 100% export-oriented industrial units has to be determined based on the "business income" computed under Sections 30 to 43D of the Act, including the set-off of carried forward unabsorbed depreciation under Section 32(2)? Assessee's Contention: The assessee argued that Section 10B is an exemption clause, and therefore, the eligible deduction should be computed first, and only thereafter should unabsorbed depreciation be set off. The Tribunal, following decisions from the Hyderabad and Chennai Benches of the ITAT in *ITC Technologies Pvt. Ltd. vs. Dy. CIT* and *Ford Business Services Centre Pvt. Ltd.*, accepted this contention. Revenue's Contention: The Revenue contended that business profit must be computed in accordance with Sections 28 to 43D of the Act, which includes setting off unabsorbed depreciation carried forward. The Revenue relied on the Karnataka High Court's decision in *Commissioner of Income Tax vs. Himatasingike Seide Ltd.*, which held that business profit must be computed first, including the set-off of unabsorbed depreciation. The Revenue also argued that sub-section (6) of Section 10B supports their case.
Which sections of the Income-tax Act were involved?
Section 10B,Section 10B(4),Section 32(2),Section 29,Section 30,Section 43D,Section 28,Section 35D,Section 115JB,Section 154,Section 263,Section 80HHC(3),Section 10B(6)
AI-generated summary — verify with the full judgment below
Cause title — parties, addresses and appearances
JUDGMENT Ramachandran Nair, J. The short question arising in all the connected appeals filed by the Revenue against the very same assessee is whether deduction of export profit for 100% export oriented industrial unit has to be granted with reference to the profit of the industrial unit computed under the provisions of the Act which includes set off of unabsorbed depreciation carried forward from earlier years as provided under Section 32(2) of Income Tax Act, (hereinafter called "the Act"). The assessments involved are for the years 2001-2002 to 2005-2006 (5 assessment years). The assessee filed returns for regular assessment on the profit determined under the provisions of the Act and in the alternative, for assessment on book profit as provided under Section 115JB of the Act. The controversy arose in the determination of deduction admissible under Section 10B(4) to both of the industrial units run by the assessee which are admittedly 100% EOUs eligible for deduction on export profits under the Act. The assessee computed eligible deduction of export profit under Section 10B from both the units without setting off unabsorbed depreciation as provided under Section 32(2) of the Act and besides this, assessee treated “interest income” as business income and also claimed excess benefit under Section 35D of the Act. The assessments for the first four years were completed accepting the claims made by the assessee. However, the Assessing Officer himself proposed to rectify the assessments under Section 154 for correcting mistakes in the assessments. When this proposal was pending, the Commissioner of Income Tax issued notice under Section 263 of the Act and ordered revision of assessments for 2001-02 to 2004-2005 holding that deduction under Section 10B(4) on export profit of both the 100% EOUs have to be computed after setting off carried forward unabsorbed depreciation as provided under Section 32(2) of the Act. Similarly, the Commissioner held that the treatment of “interest income” as “business income” is incorrect and excess deduction allowable under Section 35D was also ordered to be corrected. So far as the assessment year 2005-2006 is concerned, the original assessment itself was completed by computing deduction under Section 10B with reference to profit obtained after setting off carried forward unabsorbed depreciation, against which assessee filed first appeal before the CIT (Appeals), who dismissed the same. The assessee filed second appeals before the Tribunal against the suo moto revisional orders issued by the Commissioner under Section 263 for the first four years and for the year 2005-2006 second appeal was filed against the order of the CIT (Appeals) confirming the regular assessment. Even though several grounds were raised before the Tribunal, the assessee gave up their claim that interest income is business income and gave up claim of excess deduction under Section 35D by limiting the claim to the extent declared as eligible by the Commissioner of Income Tax and Commissioner of Income Tax (Appeals) etc. Ultimately the assessee pressed only one ground of appeal before the Tribunal i.e. whether as held by the Commissioner in the order issued under Section 263 that the deduction admissible under Section 10B(4) of the Act on the export profit earned by 100% export oriented industrial units has to be determined based on “business income” computed under Sections 30 to 43D of the Act including setting off of carried forward unabsorbed LTD. allowed the assessee's claim by declaring that assessee is entitled to deduction under Section 10B(4) on the profit of eligible industrial units determined under the provisions of the Act but before setting off unabsorbed depreciation carried forward from earlier years as provided under Section 32(2) of the Act. It is against this common order of the Tribunal the Revenue has filed these appeals. We have heard Senior counsel Sri.P.K.R. Menon appearing for the Revenue and Adv.
Sri.Parthasarathi appearing for the respondent-assessee.
Before proceeding with the matter Senior counsel for the Court, in SLP No.21101/2006. When the Supreme Court grants leave against the judgment relied on, we have to consider the issue on merit in our own way.
Since the issue pertains to method of computation of deduction eligible under Section 10B(4), we extract hereunder the relevant provisions of Section 10B of the Act: "S.10B. Special provisions in respect of newly established hundred per cent export-oriented undertakings:- (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred per cent export-oriented 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 articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee: ............... (4) For the purposes of sub-section(1), 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 undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. ............... (6) Notwithstanding anything contained in any other provision of this Act, in computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of the relevant assessment years, or of any previous year, relevant to any subsequent assessment year,-- (i) section 32, section 32A, section 33, section 35 and clause (ix) of sub-section (1) of section 36 shall apply as if every allowance or deduction referred to therein and relating to or allowable for any of the relevant assessment years ending before the 1st day of April, 2001, in relation to any building, machinery, plant or furniture used for the purposes of the business of the undertaking in the previous year relevant to such assessment year or any expenditure incurred for the purposes of such business in such previous year had been given full effect to for that assessment year itself and accordingly sub-section (2) of section 32, clause (ii) of sub-section (3) of section 32A, clause (ii) of sub- section (2) of section 33, sub-section (4) of section 35 or the second proviso to clause (ix) of sub-section (1) of section 36, as the case may be, shall not apply in relation to any such allowances or deduction; ................ There is no controversy that deduction on export profit under Section 10B(4) has to be determined with reference to the profit of eligible industrial unit i.e. 100% EOU. Assessee has two industrial units engaged in export qualifying both units for deduction under Section 10B(4). The only question, therefore, to be considered is the method of computation of relief eligible under Section 10B(4) of the Act. It is clearly stated in the said provision that exemption is on the entire profits on exports which has to be computed on proportionate basis with reference to total profits of the eligible industry. So much so, there can be no controversy that the profit to be reckoned for the purpose of determining profit on exports is the business profit. This leaves us with the only question which is the meaning and content of “profits on business” of the undertaking. Respondent-assessee has no case that the business profit has to be computed in any way other than by applying Sections 30 to 43D as stated under Section 29 of the Act. This is exactly what the Commissioner of Income Tax has directed in the order issued under Section 263 of the Act for the first four years and by CIT (Appeals) for 2005-2006. However, respondent-assessee raised the contention that since Section 10B is an exemption clause, exclusion has to be first allowed before computation of business income including set off of carried forward depreciation. It is this claim of the respondent-assessee that was accepted by the Tribunal against which Revenue has filed the appeals.
Senior counsel appearing for the Revenue contended that the two orders of the other Benches of the Tribunal relied on by the Cochin Bench are wrongly decided. He has placed reliance on the Karnataka High Court's decision referred above in which it is clearly stated that business profit has to be first computed in accordance with Section 28 to 43D of the Act and in the course of the same, unabsorbed depreciation carried forward should also be set off. However, in the two Tribunal decisions relied upon by the Cochin Bench the finding of the Tribunals is that in the course of computation of business profit, Section 10B(4) deduction has to be first made and thereafter only unabsorbed depreciation should be set off. We are unable to uphold the order of the Tribunal following two other Bench decisions of the Tribunal because business profit has to be first determined based on Section 30 to 43D as provided under Section 29 of the Act and it is with reference to profit so determined deduction eligible under Section 10B(4) has to be determined with reference to export turnover and the total turnover. The whole purpose of the exercise of computation by applying Section 30 to 43D is to determine the total business profits with reference to which the export profit of the unit has to be determined for granting deduction under sub-clause (4) of Section 10B. In fact, since respondent's two industrial units are eligible for deduction under Section 10B(4), eligibility has to be determined with reference to export turnover of each of the units and that has to be done after computing the business profit from the industrial units which necessarily has to be done after setting off unabsorbed depreciation carried forward from previous years. We are also constrained to notice that the principle of computation of deduction under Section 10B(4) is similar to determination of eligible export profit for deduction under Section 80HHC(3) of the Act.
Even though the Tribunal has not relied on sub-section (6) of Section 10B to uphold the claim of respondent-assessee, they have referred to the said provision and said that sub-section (6) of Section 10B also supports the case of the respondent-assessee. We are unable to accept this observation of the Tribunal also because Section 10B(6) does not deal with computation of business profit during the period the assessee enjoys exemption under Section 10B(4) of the Act. On the other hand this sub-section is only an embargo against the assessee claiming any carried forward benefit under the sections referred to therein in the assessment for the assessment year following the end of the tax holiday enjoyed by the assessee under Section 10B (4) of the Act. So much so, in our view, contrary to the finding of the Tribunal sub-section (6) only supports Revenue's case that carried forward depreciation should be set off in the computation of business profit even during the period assessee enjoys exemption under Section 10B(4) of the Act. We agree with the view taken by the Karnataka High Court in the decision above referred. In view of the above findings, we allow the appeals by reversing the orders of the Tribunal and by restoring the orders issued by the Commissioner of Income Tax under Section 263 for the first four years and by upholding the order of the C.I.T.(Appeals) for the assessment year 2005-2006. C.N.RAMACHANDRAN NAIR Judge BHABANI PRASAD RAY JudgeP.S. to Judge pms
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