C.J.JEWELLERIES PRIVATE LIMTED ,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME 5(1)(2), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “C”, BENCH MUMBAI BEFORE SHRI G. MANJUNATHA, ACCOUNTANT MEMBER & SHRI RAM LAL NEGI, JUDICIAL MEMBER ITA No.5975/Mum/2017 (Assessment Year :2012-13) C.J.Jewelleries Pvt.Ltd. Vs. DCIT-5(1)(2) Room NO.568, 5th Floor 401, Block, SEEPZ, MIDC Andheri (East) Aaykar Bhawan Mumbai-400 096 M.K.Road Mumbai-400 020 PAN/GIR No.AACCC3607N Appellant) .. Respondent)

Assessee by Ms. Aarti Vissanji Revenue by Abi Rama Kartikeyan

Date of Hearing 23/07/2019 Date of Pronouncement 28/08/2019 आदेश आदेश / O R D E R आदेश आदेश PER G.MANJUNATHA (A.M):

This appeal filed by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)–10, Mumbai, dated 24/07/2017 and it pertains to the Assessment Year 2012-13. 2. The assessee has raised the following grounds of appeal:- 1. The order passed by Learned Assessing officer and the learned CIT(A) is against equity and justice. 2. The learned CIT(A) erred in holding as under: “Keeping in view of the decision of the Hon’ble Apex Court in the case of Commissioner of Income Tax vs. Yokogawa India Ltd., the AO was justified in adjusting brought forward unabsorbed depreciation while computing income of the eligible unit for the purpose of deduction under section 10A.” 3. The Assessing Officer ought to have computed deduction u/s10A, first on current income of the year and thereafter set off brought

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forward losses and unabsorbed depreciation to compute taxable income. 4. The appellant craves leave to add, amend or alter the grounds of appeal at or before the time of hearing.

engaged in the business of manufacturing diamond studded, gold

jewellery at SEEPZ, Mumbai. The assessee has filed its return of

income for AY 2012-13 on 28/09/2012, declaring total income of Rs.

‘Nil’, under normal provision of the I.T.Act, 1961 and book profit of

Rs. 1,76,08,544/- u/s 115JB of the I.T.Act, 1961. The case was

selected for scrutiny and the assessment has been completed u/s

143(3) of the I.T.Act, 1961 on 23/12/2014, determining the total

income at Rs. ‘Nil’, after rejecting deduction claimed u/s 10A of the

I.T.Act, 1961, in respect of eligible profit, after setting off of, the

brought forward business loss of Rs. 45,24,709/- and unabsorbed

depreciation of Rs. 1,42,96,964/-. The relevant findings of the AO

are as under:-

4.1. . Deduction u/s 10A of the Act.: On going through the computation of income, it is noticed that the assesses has claimed set off of business losses and unabsorbed losses of earlier years against the total income of the year after claiming deduction, u/s 10A of the Act amounting to Rs. 94,09745/-, However, the deduction u/s 10A of the Act can be allowed only after setting off the brought forward business losses/unabsorbed depreciation of earlier years. Hence the assesses vide this office dated 28.11.2014 was requested to explain as to whether the conditions as specified in section 10A/10B of Act are satisfied for claiming deduction under that section. In response to the same, the assessee vide letter dated 15.12.2014 submitted that the conditions specified under that section have "been fulfilled. The assesses has also stated that "the main purpose and object of section 10A is to allow deduction of

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such profits and gains by an undertaking from export The entire income of eligible Unit u/s 10A, has to be excluded before arriving at the gross total income. Thus, the income has to be exempted at the source itself and not after computing the gross total income. 4.2 The explanation of the assessee has been considered and found to be not tenable. It is to state that the deduction under section 10A is to be claimed alter setting off of brought forwarded business losses/unabsorbed depreciation of the earlier years. In this regard, reliance is placed on the decision of the Hon’ble Supreme Court in the case of CIT Vs Shrike Construction Equipment Ltd. (SC) 291 ITR 380 wherein it has been held that brought forward losses/unabsorbed depreciation of earlier years needs to be deducted from profits ,of the year before calculating deduction under chapter VIA of the Act.” 4.3 In view of the same, the brought forward business losses and unabsorbed depreciation of earlier years is first set off against the income of the current year. It is thus seen that after setting off of the brought forward of the business loss of Rs. 45,24,709/- and unabsorbed depreciation tot eh extent of Rs. 1,42,94,964/- there is no profit available for allowing deduction u/s 10A of the Act. 4. Aggrieved by the assessment order, the assesee preferred an

appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assesee

contended that eligible profit of an undertaking shall be determined

without restoring to adjustment of brought forward business loss

and unabsorbed depreciation, for the purpose of deduction claimed

u/s 10A of the I.T.Act, 1961. In this regard, relied upon the decision

of Hon’ble Supreme Court in the case of CIT vs Yokogawa India

Ltd. & others (2017) 291 CTR 001 (SC). The Ld. CIT(A), after

considering relevant submissions of the assessee and also relied

upon, the decision of Hon’ble supreme Court, in the case of CIT vs

Yokogawa India Ltd & others (supra) observed that the stage of

deduction of the profits and gains of the business of an eligible

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undertaking has to be made independently and therefore,

immediately after, the stage of determination of its profit and gains

and the stage of deduction would be, while computing, the gross

total income of the eligible undertaking under Chapter-IV of the Act,

however, he further went on to discuss the issue, in light of provision

of section 32(2) of the I.T.Act, 1961 and held that for the purpose of

set off of depreciation of earlier years, it takes, the character of

current year depreciation and hence, when it comes to determination

of profit of an eligible undertaking, the brought forward depreciation

of earlier years needs to be clubbed with current depreciation to

determine eligible profits and accordingly, reworked profit of the

undertaking eligible for deduction u/s 10A. The relevant findings of

the Ld.CIT(A) are as under:

7.4 The decision of the Hon’ble Apex Court in the case of Commissioner of Income Tax & ANR. Vs. Yokogawa India Ltd. & ORS (2017) 291 CTR 0001 (SC): (2017) 145 DTR 0001 (SC) is directly on the issue, whereas the decision of the Hon’ble Apex Court in the case of Commissioner of Income Tax vs Shrike Construction. Equipment Ltd. (2007) 291 TT6. 038O is with reference to determination of business profit under s. 80HHC. Therefore, in my humble view, the decision of the Hon’ble Apex Court in the case of Commissioner of Income Tax & ANR. vs. Yokogawa India Ltd. & ORS (2017) 291 CTR 0001 (SC): (2017) 145 DTR 0001 (SC, being directly on the issue, will be applicable in the present case. It has been held in this case that Section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of the total income under Chapter VI and that at that Stage the aggregate of the incomes under other heads and the: provisions for set off and carry forward contained in Sections 70, 72 and 74 of the Act would be premature for application.

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7.5 The AO has denied the assessee the claim of deduction u/s 10A by setting off of the brought forward business loss of Rs. 45,24,709/- and unabsorbed depreciation of earlier years to the extent of Rs. 1,42,94,964/- against the profit available for deduction u/s 10A of the Act. The Hon’ble Apex Court in the case of Commissioner of Income Tax & ANR. Vs. Yokogawa India Ltd. &ORS (supra) has held that the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made independently and therefore, immediately after the stage of determination of its profits and gains and the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore, immediately after the stage of determination of its profits and gains and the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV of the Act. The profit and gains of business or profession are computed in accordance with the provisions contained in Sec.30 to 43 under Chapter IV of the Act. Depreciation is allowed as per the provisions of Sec. 32(1) of the Act. Section 32(2) under Chapter IV of the Act contains provisions relating to unabsorbed depreciation which is as under: “ Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub section (2) of section 7 and sub-section (3) of section 7, the allowance or the part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for”

7.6 It is clear from the provisions of Sec. 32(2), that if the current year’s depreciation cannot be set off owing to the profits or gains chargeable being less than the allowance, the allowance or the part of the allowance to which effect has not been given shall be added to the amount of allowance for depreciation for the following previous year and deemed to be part of the allowance which means that brought forward depreciation merges with the current years depreciation because fo the legal fiction created by provisions of sec. 32(2) of the Act. As the brought forward unabsorbed depreciation is treated as current years’ depreciation because of the legal fiction, the treatment given to the current year’s depreciation is equally applicable to brought forward depreciation after the application fo Finance Act, 2001. Therefore, keeping in view the decision of the Hon’ble Apex Court the Hon’ble Apex Court in the case of Commissioner of Income Tax & ANR vs. Yokogawa India Ltd. & ORS (supra), the AO was justified in adjusting brought forward unabsorbed depreciation while computing income fo the eligible unit for the purpose of deduction under section 10A.

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7.7 However, the Hon’ble Apex Court also held that the provisions for set off an carry forward contained in sections 70,72 and 74 of the Act would be premature for application as the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of the total income under Chapter VI. Therefore, the AO is not justified in setting off of the brought forward business loss of Rs. 45,24,709/- while computing income of the eligible unit for the purpose of deduction under section 10A. 7.8 As the assessee has been allowed relief on account of setting off of the brought forward business loss f Rs. 42,24,709/- against the income of the eligible unit for the purpose of deduction under section 10, the balance unabsorbed depreciation of Rs. 20,43,889/- A.Y. 2010-11 becomes available for adjustment against the income of the eligible unit for the purpose of deduction under section 10A. Accordingly, the income of eligible unit for the purpose of deduction under section 10A is determined at Rs. 24,80,631/-, ad the assesee is eligible for deduction of Rs. 12,40,316/- under section 10A of the Act. 5. Aggrieved by the Ld.CIT(A) order, the assessee is in appeal

before us.

that this issue is squarely covered in favour of the assesee by the

decision of Hon’ble Supreme Court, in the case of CIT vs Yokogawa

India Ltd. & others (2017) 391 ITR 274 (SC), where the procedure of

determination of an eligible profits for claiming deduction u/s 10A

has been explained by the Hon’ble Supreme Court. The Ld. AR,

further submitted that as per, the decision of Hon’ble Supreme Court

eligible profit of an undertaking shall be determined without setting

off of brought forward business loss and unabsorbed depreciation of

eligible and non-eligible units.

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Ld. CIT(A).

on record and gone through orders of the authorities below. The only

controversy that needs to be resolved in the given facts and

circumstances of this case is whether, profit of an eligible

undertaking, for the purpose of claiming deduction u/s 10A shall be

determined without setting off of brought forward business loss and

unabsorbed depreciation of earlier years of eligible/non-eligible

units. We find that the Hon’ble Supreme Court, in the case of CIT vs

Yokogawa India Ltd. & others (Supra) had considered an identical

issue in light of provision of section 10A and section 70,72 and 74 of

the I.T.Act, 1961 and held that though section 10A has amended as

a provision for deduction, the stage of deduction would be while,

computing the gross total income of the eligible undertaking under

Chapter IV of the Act and not at the stage of computation of total

income under Chapter -V of the I.T.Act, 1961. The relevant findings

of the Hon’ble Supreme Court are as under:-

“ Section 10A of the Income-tax Act, 1961 as originally introduced, provided that any profits and gains derived by an assessee from an industrial under-taking to which the section applied shall not be included in the total income of the assesee. The amendment of the section by the Finance Act, 2000 with effect from April 1, 2001, specifically uses the

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words “deduction of profits and gains derived by an eligible unit.. from the total income of the assessee.” The retention of section 10A in Chapter III of the Act after the amendment made by the Finance Act, 2000 would be merely suggestive and not determinative of what is provided by the section as amended, in contrast to what was provided by the un amended section. The true and correct purport and effect of the amended section will have to be construed from the language used and not merely from the fact that it has been retained in Chapter III. The introduction of the word “deduction” in section 10A by the amendment, in te absence of any contrary material, and in view of the scope of the deductions contemplated by section 10A has to be understood as embodying a clear enunciation of the legislative decision to alter the nature of the section from one providing for exemption to one providing for deduction.

Though the difference between the two expressions “exemption” and “deduction”, broadly may appear to be the same, ie. immunity from taxation, the practical effect of it in the light of the specific provisions contained in the different parts of the Act would be wholly different. The above implications would be obvious where loss making eligible units or non-eligible assessee seek the benefit of adjustment of loses against profits made by eligible units. Sub-section (4) of section 10AA which provides for pro rata exemption necessarily involving deduction of the profits arising out of domestic sales, is one instance of deduction provided by the amendment. Profits of an eligible unit pertaining to domestic sales would have to enter into the computation under the head “Profit and gains from business” in Chapter IV and be denied the benefit of deduction. The provision of sub section (6) of section 10A, as amended by the Finance Act, 2003 granting the benefit of adjustment of losses and unabsorbed depreciation, etc, commencing from the year 2001-02 on completion of the period of tax holiday also virtually work as a deduction which has to be worked out at a future point of time, namely, after the expiry of the period of tax holiday. The absence of any reference in Chapter VI of the Act to deduction under section 10A can be understood by acknowledging that any such reference or mention would have been a repetition of what has already been provided in section 10A. The provisions of sections 80HHC and 80HHC of the Act providing for somewhat similar deductions would be wholly irrelevant ad redundant if deductions under section 10A were to be made at the stage of operation of Chapter VI of the Act. The retention of the provisions of the Act, i.e,., sections 80HHC, despite the amendment 10A indicates that some additional benefit to eligible section 10A units, not contemplated by sections 80HHC and 80HHE, was intended by the Legislature. Such a benefit can only be understood by a legislative mandate to understand that the stages for working out the deductions under sections 10A and 80HHCand 80HHE are substantially different.

From a reading of the relevant provisions of section 10A, it is more than clear that the deduction contemplated therein is qua the eligible undertaking of an assessee standing on its own and without reference to the other eligible or non-eligible units or undertakings of the assessee.

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The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee. Circular N. 794, dated August 9,2000 states in paragraph 15.6 that the export turnover and the total turnover for the purposes of sections 10A and 10B shall be of the undertaking located in specified zones or 100 percent export oriented undertakings, as the case may be, and this shall not have any material relationship with the other business of the assessee outside these zones or units of the purposes of this provision. If the specific provisions of the Act (the first proviso to sub-section (1) of section10A and sub-sections (1A) and (4) of section 10A) provide that the unit that is contemplated for grant of benefit of deduction is the eligible undertaking and that is also how the contemporaneous circular of the Department understood the situation, it is logical ad natural that the deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore, immediately after the stage of determination of its profits and gains. At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in sections 70, 72 and 74 of the Act would be premature for application. The deduction under section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression” total income of the assessee” in section 10A as “total income of the undertaking. Therefore, though section 10A, as amended, is a provision for deduction the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter-IV of the Act and not at the stage of computation of the total income under Chapter VI.

decision of Hon’ble Supreme Court, in the case of CIT vs Yokogawa

India Ltd. & others (supra), we are of the considered view that the

AO as well as, the Ld.CIT(A) were erred in determination of profit of

an eligible undertaking for deduction u/s 10A, after setting off of

brought forward business loss and unabsorbed depreciation of

earlier years of an eligible and non-eligible units. Hence, we direct

the AO to determine net profit of an eligible undertaking without

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setting off of brought forward business loss and unabsorbed

depreciation of earlier years.

Order pronounced in the open court on this 28/08/2019

Sd/- Sd/- (RAM LAL NEGI) (G. MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated 28/08/2019 Thirumalesh Sr.PS

Copy of the Order forwarded to : The Appellant 1. The Respondent. 2. The CIT(A), Mumbai. 3. CIT 4. DR, ITAT, Mumbai 5. BY ORDER, 6. Guard file. स�यािपत �ित //True Copy// (Asstt. Registrar) ITAT, Mumbai