PHONIX LAMPS LTD vs. ADDL CIT RANGE,

PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER This appeal has been preferred by the assessee against the

order dated 5th of March 2007 passed by the Commissioner of

Income Tax (Appeals), Ghaziabad for assessment year 2003 – 04.

incorporated on 26/03/1991 and 1 of the units (Unit 1) is in the

Noida Export Processing Zone, Noida. The assessee company

manufactures CFL lamps for which it has 2 units. The unit in the

Noida Export Processing Zone began production w.e.f.

01/02/1993 (relevant to assessment year 1993 – 94). The second

unit is admittedly outside the Noida Export Processing Zone. The

I.T.A. 2845/Del/2007 Assessment year 2003-04 present assessment year under consideration is the 11th year of

operation. The assessee claimed deduction under section 10A of

the Income Tax Act, 1961 (hereinafter called “the Act”) till

assessment year 2002 – 03. For the year under consideration, i.e.

AY 2003-04, the return of income was initially filed showing

income of Rs. 11,19,69,789/- but later on the assessee realized

that it had not claimed setoff of depreciation loss brought forward

from assessment years 1993–94, 1994–95 and 1995–96

aggregating to Rs. 10,33,07,980/-. Therefore, after adjusting the

set off of depreciation allowance already allowed amounting to

Rs. 5,38,447/-, the assessee filed revised return of income

claiming setoff of brought forward depreciation amounting to Rs.

10,27,69,533/-.

2.1 The assessee was entitled to special deduction under

section 10A (3) of the Act and as per the existing provisions

applicable to the assessee in the relevant assessment years, the

assessee was entitled to claim deduction of its profits and gains

in respect of any five consecutive assessment years falling within

a period of eight years beginning with the assessment year

relevant to the previous year in which the industrial undertaking

began to manufacture or produce articles or things. The

I.T.A. 2845/Del/2007 Assessment year 2003-04 assessee, while filing the return for assessment year 1993–94

opted to claim the benefit of tax holiday under section 10A of the

act in the last five consecutive years, that is, from assessment

year 1996–97 to 2000–01. However, the assessee did not claim

the carried forward depreciation relating to assessment years

1993–94, 1994–95 and 1995–96 and the Department allowed the

unabsorbed depreciation to be carried forward for subsequent

years for setoff against any taxable income in future years.

2.2 Subsequently, there was an amendment to section 10A of

the Act w.e.f. 01/04/2001 wherein it was provided that the

benefit of deduction under section 10A would be allowed from the

total income of the assessee for a period of ten consecutive years

beginning with the assessment year relevant to the previous year

in which the undertaking began to manufacture or produce such

articles or things or computer software, as the case may be.

Thus, the assessee could claim the benefit of section 10A up to

assessment year 2002–03. It was the claim of the assessee that

the unabsorbed carried forward depreciation could be set off by

the assessee in the assessment year under consideration. It was

contended that assessment years 1993–94 to 1995–96 were prior

to the start of relevant assessment year for the purpose of section

I.T.A. 2845/Del/2007 Assessment year 2003-04 10A of the Act and, therefore, the unabsorbed carried forward

depreciation could be set off in the year under consideration.

2.3 However, the assessing officer after considering the

provisions of section 10A (6) of the Act opined that section 10A

(6), as amended from 01/04/2001, assumed that full allowance

under depreciation had been given effect to. The AO was of the

opinion that section 10A(6) overrode all other provisions of the

Act and it provided certain special provisions for computing the

total income of the assessee. The AO held that since the year

under consideration immediately succeeded the last of the

relevant assessment year, the brought forward depreciation could

not be allowed to be set off against the income of the relevant

Unit 1 or any other unit. Consequently, the respective

unabsorbed depreciation amounts were not allowed to be carried

forward or set off against the profits of any subsequent year as

they were pending before the 1st April 2001.

2.4 The assessee’s appeal before the Ld. CIT (Appeals) also

failed and on the assessee approaching the ITAT, the ITAT also,

vide order dated 30/01/2009, decided in favour of the

Department by holding that the unabsorbed depreciation for the

assessment years 1993 – 94 to 1995-96 pertained to the period 4

I.T.A. 2845/Del/2007 Assessment year 2003-04 before 01/04/2001 and, therefore, the same could not be set off

against the income of the assessment year under consideration.

2.5 Aggrieved, the assessee approached the Hon’ble High Court

of Allahabad wherein vide judgment dated 13/02/2017 in ITA

No. 446/2009, the Hon’ble High Court restored the issue to the

file of the ITAT with the following observations –

“After hearing Ld. counsels on both sides we are of the opinion that this matter requires reconsideration because one thing is clear on fact that the assessee had not claimed any benefit or any deduction in respect of the years 1993 – 94, 1994 – 95, 1995 – 96. It is also clear that no exemption was granted to the assessee. Although, Ld. counsel for the respondent has sought to argue that a specific bar was created by the 2001 amendment by which the right of the assessee to see anything beyond 1st April, 2001 was not there and his rights stood extinguished or exhausted by way of deemed in fiction, we are unable to agree with that because the amendment, which came thereafter, allowed ten years relief. The intent of the Legislature while making these amendments was certainly not to curtail relief to an assessee, who had not availed double benefit. In the light of the aforesaid observations and decisions placed before us the matter requires reconsideration by the Tribunal. It may clarify the facts of the case fully and give to both parties an opportunity of hearing and pass fresh orders in accordance with law.….” 2.6 Now, the assessee has again approached the ITAT and we

proceed to hear the appeal in terms of the directions of the

Hon’ble High Court of Allahabad.

I.T.A. 2845/Del/2007 Assessment year 2003-04 3. The Authorised Representative reiterated the facts of the

case and submitted that the amended section 10A(1) provided for

deduction 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. It

was submitted that the 1st proviso to section 10A(1) 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 the section, as it stood

immediately before its substitution by the Finance Act, 2000, the

undertaking shall be entitled to deduction referred to in this

subsection only for the unexpired period of the aforesaid ten

consecutive assessment years. It was submitted that,

accordingly, in terms of 1st proviso, the assessee could not have

claimed exemption for the expired period which was covered by

assessment years 1993-94, 1994 – 95 and 1995 – 1996 and,

therefore, the assessee could have claimed exemption for the

unexpired period which is assessment year 2001-02 and 2002 –

03.

I.T.A. 2845/Del/2007 Assessment year 2003-04 3.1 The Ld. Authorised Representative further submitted that it

was the Revenue’s contention that as per the amended definition,

the phrase “relevant assessment year” meant “all” assessment

years falling within a period of ten consecutive years whereas the

definition of the term “relevant assessment year” very

categorically used the word “any” and not “all”. He referred to

explanation 2 to section 10A of the Act which defined “relevant

assessment year” as meaning any assessment year falling within

a period of ten consecutive assessment years referred to in this

section. The Ld. AR also referred to the earlier definition wherein

“relevant assessment year” meant the five consecutive

assessment years specified by the assessee at his option under

subsection (3). The Ld. Authorised Representative underlined the

fact that the earlier definition did not use the word “any”. It was

submitted that by the use of word “any”, the unexpired period of

the ten consecutive assessment years would be covered.

3.2 It was further submitted by the Ld. AR that the object and

purpose behind section 10A and subsection 10A(6) of the Act was

clearly discernible from the historical background of the

provisions in the context of meaning and definition of “relevant

assessment years” which could never be to deprive the assessee

I.T.A. 2845/Del/2007 Assessment year 2003-04 the benefit of other provisions of the Act in respect of those years

for which the assessee could not avail exemption under section

10A.

3.3 It was further submitted that section 10A was an exemption

section and the Department cannot interpret and use a deeming

provision against the assessee when, by law, the assessee is

precluded from taking the benefit on account of an express

exclusion given under the provision itself. It was further

submitted that since section 10A was a beneficial provision

providing for incentive for growth and development, the same

should be interpreted liberally and should be construed in such a

way so as to advance the objective and not frustrate it.

3.4 The Ld. Authorised Representative relied on numerous case

laws to submit that provisions of taxing statutes for deduction,

exemption or relief should be construed reasonably. It was

submitted that the beneficial provisions for exemption or relief

should be interpreted liberally and in favour of the assessee and

in so being interpreted, it should advance the objective and not

frustrate it.

I.T.A. 2845/Del/2007 Assessment year 2003-04 3.5 The Ld. Authorised Representative also placed reliance on

judgment of the Hon’ble Delhi High Court in the case of CIT

versus Tei Technologies Private Limited reported in 361 ITR 36

(Delhi) for the proposition that section 10A was an exemption

provision and not a deduction provision and, therefore, it is not

the gross income or receipt which would be eligible but only the

net income that is to say the gross receipts of profits minus

expenditure incurred that will be eligible for exemption. It was

submitted that in light of the legal provisions as well as judicial

precedents, the appeal of the assessee be allowed.

relied on the order of the Ld. CIT (Appeals) as well as supported

the observations of the AO in the assessment order and

submitted that the Ld. Commissioner of Income Tax (Appeals)

had given his adjudication after due consideration of the facts

and the legal issues involved and, therefore, the same should not

be disturbed.

material on record. As far as the facts of the case are concerned,

the same are undisputed. The only question for consideration

before us is whether the unabsorbed depreciation relating to non- 9

I.T.A. 2845/Del/2007 Assessment year 2003-04 exemption years that is assessment year 1993–94, 94–95 and

1995–96 could be denied to be carried forward and set off in the

assessment year under consideration, that is, assessment year

2003–04.

5.1 We proceed to analyse the legal position first. The Finance

Act, 2003 made significant changes both with prospective and

retrospective effect from assessment year 2001–02. The

significant retrospective amendment was the one which was

made in subsection (6) of section 10A of the Act which contained

provisions for ensuring that an assessee who enjoys the tax

holiday under section 10A does not enjoy any other tax

concession. The effect was that from 01/04/2001, once the tax

holiday ended, the bar or prohibition on enjoying other tax

benefits such as carry forward and set off of loss and unabsorbed

depreciation etc. came into force. The mandate of this subsection

was that all such allowances and reliefs would be deemed to have

been exhausted during the tax holiday period itself and no part

thereof would survive for consideration after the tax holiday

period.

5.2 However, it has to be first seen whether a particular benefit

to the assessee is in the nature of a deduction or an exemption. 10

I.T.A. 2845/Del/2007 Assessment year 2003-04 The essential difference between exemption and deduction is that

exempt income does not enter the computation of total income at

all whereas in the case of a deduction, in the very nature of

things, the income is first included in the total income and then

given a deduction subject to fulfillment of certain conditions. The

fact that the deduction may be given in respect of entire income

does not necessarily mean that it is exempt income. At the same

time, the fact that a particular class of income partially exempt

from taxation does not necessarily mean that it is only a

deduction. The implication of an exemption provision is that the

particular income which is exempt from tax does not enter the

field of taxation and is not subject to any computation. The

computation provisions of the Act do not get attracted at all to

the exempt income.

5.3 The Hon’ble Delhi High Court in the case of CIT versus Tei

Technologies Private Limited (supra) discussed the difference

between exemption and deduction vis-à-vis section 10A at length

and the relevant paragraphs are being reproduced herein under

for a ready reference –

“The question whether section 10A provides for total exemption from tax or provides for only a deduction from the income of the assessee was debated at the bar at 11

I.T.A. 2845/Del/2007 Assessment year 2003-04 considerable length. The section is placed in Chapter III of the Act which is titled “Incomes which do not form part of total income”. Subsection (1) of this section, as it stood amended by the Finance Act, 2000 w.e.f. 01/04/2001, however provides for “a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software……from the total income of the assessee”. The language used has given rise to the argument that the section only provides for a deduction which means that the profits of the eligible undertaking will have to enter the field of taxation and be subjected to all the provisions of the Act and only the balance of profits, if any, will be deducted from the total income. This is in contrast to subsection (1), as it stood prior to the aforesaid amendment, which provided that “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.” This phraseology which we have noted earlier to conform to the title of Chapter III of the Act has given rise to the further argument from the Department that w.e.f. 01/04/2001, there is a significant change and profits which were earlier exempt from income tax and were not includable in the assessees total income are now so included, subject to deduction, and once the profits are included, all the provisions of the Act will have to be applied while arriving at the amount of deduction. In order to test this argument it is necessary to look at several aspects. Firstly, section 10A even after being amended substantially by the Finance Act, 2000, has been retained in Chapter III of the Act, notwithstanding the change in the language of subsection (1). If the Department is right in its contention that after 01/04/2001, the section only provides for deduction and not in exemption, it was open to the legislature to transpose the section from Chapter III to Chapter VI-A of the Act which is titled “deductions to be made in computing total income”. This aspect of the matter has been adverted to and discussed by the Karnataka High Court in CIT v. Yokogawa India Ltd. (2012) 341 ITR 385 (Karn). It has been observed by the Karnataka High Court as follows (page 396): (Para 17) “The substituted section 10A continues to remain in Chapter III. It is titled as “Incomes which do not form

I.T.A. 2845/Del/2007 Assessment year 2003-04 part of total income.’ It may be noted that when section 10A was recast by Finance Act, 2001, Parliament was aware of the character of relief given in Chapter III. Chapter III deals with incomes which do not form part of total income. If Parliament intended that the relief under section 10A should be by way of deduction in the normal course of computation of total income, it could have placed the same in Chapter VI-A, which houses the sections like 80HHC, 80-IA, etc. Parliament was aware of the various restricting and limiting provisions like section 80A and section 80AB which was in Chapter VI-A which do not appear in Chapter III. The fact that even after its recast, the relief has been retained in Chapter III indicates that the intention of the Parliament it is o be regarded as an exemption and not a deduction. The Act of Parliament in consciously retaining this section in Chapter III indicates its intention that the nature of relief continues to be an exemption. Chapter VII deals with the incomes forming part of the total income on which no income-tax is payable. These are the incomes which are exempted from charge, but are included in the total income of the assessee. Parliament, despite being conversant with the implications of this Chapter, has consciously chosen to retain section 10A in Chapter III.” Secondly, we find that though subsection (1) provides for a deduction of the eligible profits, there is good reason to think that it is not to be considered as a deduction because the subsection further says that the deduction “shall be allowed from the total income of the assessee”. Under the Income Tax Act, 1961, the income of an assessee under the various heads of the income enumerated in section 14 have to be computed in accordance with the provisions of the Act. The aggregate of such incomes constitutes the “gross total income” of the assessee within the meaning of section 80B(5) which defines “gross total income” as the total income computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A. The expression “total income” is defined in 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. Section 4 which is the

I.T.A. 2845/Del/2007 Assessment year 2003-04 charging section provides for the charge of income-tax in respect of the total income of the previous year of every person. The position that emerges from a harmonious reading of these provisions is that the assessee is required to pay income-tax on his total income of the previous year. The determination of the total income is the last point before the tax is charged and once the total income is determined or quantified, there is absolutely no scope for making any further deduction, having regard to the provisions referred to above. If this is the true legal position, as we think it to be, then it is not possible to understand subsection (1) of section 10A as providing for a “deduction” of the profits of the eligible unit “from the total income of the assessee”. The definition of the expression “total income” given in section 2 (45) cannot be imported into the interpretation of subsection (1) having regard to the context in which it is used in the scheme of the Act relating to the charge of the Act. It has to be kept in mind that the definition section would not apply if the context requires otherwise; in other words, if the scheme of the Act relating to the charge of income-tax clearly makes it impossible for any deduction to be allowed once the total income is determined, then it would be futile to still insist on applying the definition of the expression “total income” under section 2 (45) to the interpretation of the subsection. In other words, the context in which the expression “total income” is used in the subsection requires us to abandon the definition of that expression as per section 2 (45)……. (Para 18) There is further indication that section 10A provides for an exemption and not merely a deduction and this is in the form of return of income prescribed by the Income Tax Rules, 1962. The return of income in form number ITR-6 shows that the first step which an assessee is required while computing the income from business or profession is to commence the computation from the profit as per the profit and loss account. The second step is to adjust the profit figure by excluding receipts which are not subject to tax or which are subject to tax under other heads of income. The third step is to exclude exempt income credited to the profit and loss account. Fourth step is to add back claims which are disallowable under the various provisions of the Act. The fifth step is to claim any

I.T.A. 2845/Del/2007 Assessment year 2003-04 other allowance or deduction. This exercise gives the figure of profit and loss before deduction under section 10A. Thereafter, the assessee has to deduct the profits eligible under section 10A. The form further prescribes the steps involved in the computation of total income. This shows that after aggregating the income from salary, house property, profits and gains from business, capital gains and income from other sources, the total is arrived at and it is from this total that the losses of the current year and the brought forward losses from the past years are to be set off. The resultant figure gives the gross total income of the assessee from which deductions under Chapter VI-A are to be made in order to arrive at the total income. The steps given in the income tax return form also are an indication that it is before the adjustment of the losses of the current year and the brought forward losses from the past year that the profits eligible for the relief under section 10A have be be given the relief. The form of return is also an indication that the relief under section 10A has to be given before adjustment of the current as well as the past losses.…… (Para 19) It is interesting to note that though there is a divergence of opinion between the Karnataka High Court in Yokogawa’s case (supra) and the Bombay High Court in Hindustan Unilever (supra) as to the nature of section 10A – whether it provides for exemption or deduction of the profits of the eligible unit, the ultimate decision in Black and Veatch Consulting (supra) which purports to follow Hindustan Unilever (supra) was that such profits have to be eliminated at the first stage itself, that is, as soon as they are computed, suggesting that it is an exemption provision. It was held that the eligible profits are not to be subjected to the adjustment under section 72 of the Act, and the brought forward losses from the unit eligible for the relief under section 10B cannot be adjusted against the profits from the other three eligible units, which in effect reiterates the position that the loss does not entered the field of taxation just as the profits also do not enter the field. This, with respect, lends support more to the view that section 10A and section 10B are in the nature of exemption provisions, rather than provisions for deduction. In the ultimate analysis it may perhaps be wise to fall back on

I.T.A. 2845/Del/2007 Assessment year 2003-04 the observations of Justice Narasimham J. (as then he was) speaking for a Division Bench of the Orissa High Court in Ramachandra Mardaraj Deo versus Collector of Commercial Taxes (1957) 31 ITR 651 (Orissa) where he described the difference between “exemption” and “deduction” as “a fine distinction” and observed as under (page 658): (Para 22) “Whether a particular sum is claimed as an exemption or as a deduction, the net result is its immunity from taxation if the claim is allowed.” Thus, incomes which are enumerated in Chapter III of the Act have traditionally been considered as incomes which are exempt from tax rather than as deductions in the computation of total income. The essential difference between an exemption and deduction seems to be that an exempt income does not enter the computation of total income at all, whereas a deduction, in the very nature of things, is first included in the total income and given a deduction subject to fulfilment of several conditions. The fact that the deduction may be given in respect of the entire income does not necessarily mean that it is an exempt income. At the same time, the fact that a particular class of income is only partially exempt from taxation does not necessarily mean that it is only a deduction…. (Para 24) With this caution or disclaimer in mind we are inclined to hold that section 10A is a provision exempting a particular kind of income even in its present form, that is to say, even after being amended by the Finance Act, 2000, w.e.f. 01/04/2001.We are inclined, with respect to agree with the view taken by the Karnataka High Court in the case of CIT v. Yokogawa (supra). As noticed, the Bombay High Court reached the same conclusion which the Karnataka High Court reached in the case of CIT v. Yokogawa (supra), in its judgment in Hindustan Unilever Ltd (supra) and CIT vs. Black and Veatch Consulting Ltd (supra), despite taking the view that section provides for a deduction and not an exemption. (Para 30) ….We have already seen that section 10A, as it presently stands, though worded as deduction provision, is essentially

I.T.A. 2845/Del/2007 Assessment year 2003-04 and in substance an exemption provision we have also held that the implication of an exemption provision is that the particular income which is exempt from taxes does not enter the field of taxation and is not subject to any computation. The computation provisions of the Act do not get attracted at all to the exempted income.”…. (Para 35) 5.4 Coming to the present appeal before us, as we have already

stated, the facts are not in dispute and the only question for our

consideration is whether the unabsorbed depreciation relating to

non-exemption years, that is, assessment years 1993–94, 94–95

and 1995–96 could be denied to be carried forward and set off in

the assessment year under consideration. The Hon’ble Allhabad

High Court has also indicated while restoring the assessee’s

appeal to the ITAT that the intent of the Legislature while making

these amendments was certainly not to curtail relief to an

assessee, who had not availed double benefit. It is not the

Department’s case that any double benefit has been availed by

the assessee. Also, the question as to whether section 10A is an

exemption provision or a deduction provision is also no longer res

integra in view of the judgment of the Hon’ble Delhi High Court in

the case of CIT v. Tei Technologies Pvt. Ltd (supra) as well as CIT

v. Yokogawa (supra), which the Hon’ble Delhi High Court has

discussed in the case of CIT v. Tei Technologies Pvt. Ltd (supra).

I.T.A. 2845/Del/2007 Assessment year 2003-04 The Hon’ble Delhi High Court has held that it was in agreement

with the judgment of the Karnataka High Court in the case of CIT

v. Yokogawa (supra).Therefore, respectfully following the ratio of

the said judgment of the Hon’ble Delhi High Court, we are of the

considered opinion that the assessee will be eligible for set off of

unabsorbed depreciation for the assessment years 1993 – 94 to

1995-96 against the income of the assessee for the assessment

year under consideration. Therefore, we set aside the order of the

Ld. CTT (Appeals) on this issue and direct the AO to allow set off

of unabsorbed depreciation to the assessee as discussed

hereinabove.

Order pronounced in the Open Court on 31st October, 2017.

Sd/- Sd/- (PRASHANT MAHARISHI) (SUDHANSHU SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER

DT. 31/10/ 2017 ‘GS’

I.T.A. 2845/Del/2007 Assessment year 2003-04