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Before: Shri Chandra Poojari & Shri Duvvuru RL Reddy
O R D E R
PER DUVVURU RL REDDY, JUDICIAL MEMBER:
The cross appeals filed by the assessee as well as the Revenue are directed against the order of the ld. Commissioner of Income Tax (Appeals) [Central] I, Chennai dated 28.11.2013 relevant to the assessment year 2008-
9. The assessee has also filed an appeal against the order of the ld. CIT(A) I, Chennai dated 27.08.2014 for the assessment year 2007-08. First we shall take cross appeals filed by the assessment year 2008-09, wherein the ground raised by the assessee is that the ld. CIT(A) has erred in confirming the disallowance made by the Assessing Officer treating interest income as income from other sources instead of business and denying deduction claimed under section 10A/10B of the Income Tax Act, 1961[“Act” in short], whereas, the Revenue has challenged that the ld. CIT(A) has erred in holding that unabsorbed depreciation must not be set off against income of the undertaking before giving deduction under section 10A/10B of the Act.
Brief facts of the case are that the assessee is engaged in the manufacture and export of groundnut kernels, blanched groundnut kernels, yellow maize, cashew kernels and vegetable oil. The assessee filed its return of income for the assessment year 2008-09 declaring NIL income. The Assessing Officer has completed the assessment under section 143(3) of the Act determining total income of the assessee at ₹.1,09,75,887/- disallowing and reducing the assessee’s claim of deduction under section 10A and 10B of the act including interest income under income from other sources by rejecting the netting of interest received against interest paid and disallowing ₹.6,39,234/- under section 14A of the Act.
The assessee carried the matter in appeal before the ld. CIT(A). After considering the submissions of the assessee and by following various decisions, the ld. CIT(A) partly allowed the appeal filed by the assessee.
With regard to the claim of deduction under section 10A/10B of the Act, the assessee has claimed an amount of ₹.76,90,154/- as deduction under section 10A of the Act on the SEZ unit and ₹.55,75,781 as deduction under section 10B of the Act on EOU division. Such deduction has been computed on the assessee’s profit before set off of unabsorbed depreciation and brought forward business losses. By following the decision in the case of CIT v. Himatasingike Seid Ltd. 286 ITR 255 (Kar.), wherein, it was held that the set off of losses and unabsorbed depreciation should be done before the allowance of deduction under section 10B of the Act and also the decision of the Tribunal in the case of Sword Global India Pvt. Ltd. v. ITO 306 ITR (AT) 286, the Assessing Officer has allowed the deduction under section 10B of the Act from the total income after set off of brought forward business losses and unabsorbed depreciation. On appeal, by following the decision in the case of ACIT v. Charon Tech Pvt. Ltd. vide order dated 14.11.2012, wherein, the decision in the case of CIT v. Yokogawa India Ltd. 341 ITR 385 (Kar.) has been followed, in which it has been held that exemption under section 10B of the Act was to be allowed without setting off of brought forward unabsorbed loss and unabsorbed depreciation from the earlier assessment year or the current assessment year, the ld. CIT(A) directed the Assessing Officer to allow deduction under section 10A/10B of the Act without setting off brought forward business losses and unabsorbed depreciation.
The point at issue before the Tribunal is whether the assessee is required to set off the brought forward depreciation and business loss of earlier years against current year’s profit of 10A/10B units. On similar facts in an identical issue in the case of DCIT v. Data Software Research Company Private Limited for the assessment year 2006-07 in vide order dated 17.07.2015, the Coordinate Bench of the Tribunal has decided the issue in favour of the assessee by observing as under: “9. We have considered the rival submissions on either side and also perused the material available on record. The Special Bench of this Tribunal in Scientific Atlanda Tec. P. Ltd. (supra) found that the brought forward losses and depreciation need not be set off for computing deduction u/s 10B of the Act. We have also gone through the order of this Tribunal in Sword Global (I) P. Ltd. (supra). This decision was delivered by a Division Bench of this Tribunal. Therefore, this Tribunal has to prefer a Larger Bench decision in the case of Scientific Atlanda Tec. P. Ltd. (supra). Since the CIT(A) has followed the decision of Larger Bench, this Tribunal do not find any infirmity in the order of the CIT(A). Accordingly, the same is confirmed.” 5.1 Further, in a recent judgement in the case of CIT v. Yokogawa India Ltd. in Civil Appeal No. 8498 of 2013 & Ors dated 16.12.2016 of the Hon’ble Supreme Court which has been rendered in the context of provisions contained in section 10A, which is analogous to the provisions contained in section 10B of the Act, it is clear that 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 relevant findings of the Apex Court are reproduced as under: “12. We have considered the submissions advanced and the provisions of Section 10A as it stood prior to the amendment made by Finance Act, 2000 with effect from 1.4.2001; the amended Section 10A thereafter and also the amendment made by Finance Act, 2003 with retrospective effect from 1.4.2001.
The retention of Section 10A in Chapter III of the Act after the amendment made by the Finance Act, 2000 would be 18 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 the absence of any contrary material, and in view of the scope of the deductions contemplated by Section 10A as already discussed, it has to be understood that the Section embodies a clear enunciation of the legislative decision to alter its nature from one providing for exemption to one providing for deductions.
The difference between the two expressions ‘exemption’ and ‘deduction’, though broadly may appear to be the same i.e. immunity from taxation, the practical effect of it in the light of the specific provisions contained in different parts of the Act would be wholly different. The above implications cannot be more obvious than from the case of Civil Appeal 19 Nos. 8563/2013, 8564/2013 and civil appeal arising out of SLP(C) No. 18157/2015, which have been filed by loss making eligible units and/or by non-eligible assessees seeking the benefit of adjustment of losses against profits made by eligible units.
Sub-section 4 of Section 10A 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 “profits and gains from business” in Chapter IV and denied the benefit of deduction. The provisions of Sub-section 6 of Section 10A, as amended by the Finance Act of 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 works as a deduction which has to be worked out at a future point of time, namely, after the expiry of period of tax holiday. The absence of any reference to deduction under Section 10A in Chapter VI of the Act can be understand 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 80HHE of the Act providing for somewhat similar deductions would be wholly irrelevant and 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 said provisions of the Act i.e. Section 80HHC and 80HHE, despite the amendment of Section 10A, in our view, indicates that some additional benefits 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 Section 10A and 80HHC and 80HHE are substantially different. This is the next aspect of the case which we would now like to turn to.
16. From a reading of the relevant provisions of Section 10A it is more than clear to us that the deductions 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. The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee. This is also more than clear from the contemporaneous Circular No. 794 dated 9.8.2000 which 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% 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 for the purposes of this provision.”
If the specific provisions of the Act provide [first proviso to Sections 10A(1); 10A (1A) and 10A (4)] 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 (No.794 dated 09.08.2000) 22 understood the situation, it is only logical and natural 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. 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 deductions 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 has already been dealt with earlier and in the overall scenario unfolded by the provisions of Section 10A the aforesaid discord can be reconciled by understanding the expression “total income of the assessee” in Section 10A as ‘total income of the undertaking’.
For the aforesaid reasons we answer the appeals and the questions arising therein, as formulated at the outset of this order, by holding that 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. All the appeals shall stand disposed of accordingly.” 5.2 In view of the overwhelming judicial pronouncement of various Benches of the Tribunal as well as the judgement of the Hon’ble Supreme Court, we are of the considered opinion that the brought forward losses and unabsorbed depreciation need not be set off for computing deduction under section 10A/10B of the Act. Thus, the ld. CIT(A) has rightly directed the Assessing Officer to allow the deduction under section 10A/10B of the Act as claimed by the assessee and we find no infirmity in the order passed on this account. Thus, the ground raised by the Revenue in its appeal in is dismissed.
While computing the deduction under section 10A/10B of the Act, by following the decision in the case of K. Somasundraram & Bros. v. CIT 238 ITR 939 (Mad) and in the case of V. Chinnapandi v. CIT in 282 ITR 389 (Mad), the gross interest income received by the assessee of ₹.13,43,426/- from SEZ unit and ₹.20,33,769/- from the EOU are taken to the head “income from other sources” and the Assessing Officer has denied deduction under section 10B of the Act on such receipts.
6.1 The assessee carried the matter in appeal before the ld. CIT(A). By following the decisions of the Hon’ble Jurisdictional High Court as was followed by the Assessing Officer, the ld. CIT(A) confirmed the order of the Assessing Officer on this issue.
6.2 On being aggrieved the assessee is in appeal before the Tribunal. By reiterating the submissions as made before the ld. CIT(A), the ld. Counsel for the assessee has submitted that the interest income was earned on deposits made with the banks in the course of business activities and pleaded that there is direct nexus between the interest income and the business of exports and the 100% EOU. Therefore, he prayed that the orders of authorities should be reversed. On the other hand, the ld. DR strongly supported the orders of authorities below.
6.3 We have heard rival contentions and perused the materials available on record. Before us, the assessee has not furnished any cogent evidences to show that the deposits with the banks were made as a pre-condition for sanction of credit limits and therefore, we are of the considered opinion that the interest income has been justifiably assessed by the Assessing Officer under the head “income from other sources” and rightly confirmed by the ld. CIT(A). Moreover, in any case, the issue stands covered by the decision of the jurisdictional High Court in the case of Dollar Apparels v. ITO [294 ITR 484], wherein, the Hon’ble High Court has held that the income from interest is to be assessed under the head “income from other sources” and not as business income irrespective of the purpose for which the deposits were made. Thus, we find no infirmity in the order passed by the ld. CIT(A) on this issue and accordingly, the first ground raised by the assessee in its appeal in is dismissed.
The next ground raised in the appeal of the assessee for the assessment year 2008-09 is that the ld. CIT(A) has erred in confirming the disallowance made under section 14A of the Act. In the assessment order, the Assessing Officer has observed that the assessee has made investment to the extent of ₹.1,50,00,000/- in shares, which are and capable of earning exempt income. However, the assessee has not earned any exempt income or admitted any expenditure for the above investment. By following the decision in the case of Godrej Boyce Mfg. Co. Ltd. v. CIT reported in 328 ITR 81, the Assessing Officer determined the disallowance under section 14A r.w. Rule 8D of ₹.6,39,234/- and brought to tax. On appeal, the ld. CIT(A) directed the Assessing Officer to identify the expenditure relatable to earning of exempt income and 2% of the said expenditure can be taken towards disallowance under section 14A of the Act and to restrict the disallowance to the extent already disallowed by the Assessing Officer if the disallowance is not exceeded, which was already made by the Assessing Officer.
7.1 Before us, the ld. Counsel for the assessee has strongly contended that the assessee has neither earned any exempt income nor incurred any expenditure and therefore, prayed that there should not be any disallowance of expenditure. By filing copy of the recent judgement in the case of Redington (India) Ltd. v. Addl. CIT in T.C.A. No. 520 of 2016 dated 23.12.2016, wherein, the Hon’ble Jurisdictional High Court has observed that when there is no exempt income there cannot be a disallowance of expenditure, the ld. Counsel for the assessee has prayed that the disallowance made under section 14A of the Act should be deleted.
7.2 We have heard both sides, perused the materials available on record and find that the issue is squarely covered in favour of the assessee by the decision in the case of Redington (India) Ltd. v. Addl. CIT (supra), wherein the Hon’ble Jurisdictional High Court has held as under: “15. The exemption extended to dividend income would relate only to the previous year when the income was earned and none other and consequently the expenditure incurred in connection therewith should also be dealt with in the same previous year. Thus, by application of the matching concept, in a year where there is no exempt income, there cannot be a disallowance of expenditure in relation to such assumed income. (Madras Industrial Investment Corporation Ltd. v. CIT (225 ITR 802). The language of s. 14A(1) should be read in that context and such that it advances the scheme of the Act rather than distort it.
In conclusion, we are of the view that the provisions of s. 14A read with Rule 8D of the Rules cannot be made applicable in a vacuum i.e., in the absence of exempt income. The questions of law are answered in favour of the assessee and against the department and the appeal allowed. No costs.” 7.3 Admittedly, against the investments made in the shares, the assessee has not earned any exempt income. When there was no exempt income earned by the assessee, the provision of section 14A r.w. Rule 8D cannot be made applicable in a vacuum to determine the expenditure. Under the above facts and circumstances and respectfully following the decision in the case of Redington (India) Ltd. v. Addl. CIT (supra), we delete the addition made under section 14A of the Act and accordingly, the ground raised by the assessee is allowed.
I.T.A. No. 2911/Mds/2014 [A.Y. 2007-08]
In respect of the appeal filed by the assessee for the assessment year 2007-08, the assessee has raised the only effective ground that the ld. CIT(A) has erred in confirming the order of the Assessing Officer holding that brought forward losses and unabsorbed depreciation allowance are to be set off before allowing eligible deduction under section 10B of the Act. Since the issue raised in this appeal on similar facts and circumstances to that of the appeal filed by the Revenue for the assessment year 2008-09, wherein, by following various decisions including the decision in the case of CIT v.
Yokogawa India Ltd. (supra), we have held hereinabove at para 5.2 that brought forward losses and unabsorbed depreciation need not be set off for computing deduction under section 10A/10B of the Act. In view of the above findings, we set aside the order passed by the ld. CIT(A) on this issue and the ground raised by the assessee for the assessment year 2007-08 is allowed.
In the result, the appeal filed by the Revenue is dismissed and the appeals filed by the assessee for both the assessment years are allowed.
Order pronounced on the 11th July, 2017 at Chennai.