Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI MAHAVIR SINGH & SHRI RAMIT KOCHAR
आयकर अपील"य अ"धकरण “A” "यायपीठ मुंबई म"। IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, MUMBAI BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER आयकर अपील सं./I.T.A. No.7034/Mum/2013 and 7035/Mum/2013 ("नधा"रण वष" / Assessment Years : 2004-05 and 2006-07) Asstt. Commissioner of M/s ASB International बनाम/ Income Tax – Circle 1, Pvt. Ltd., v. Kalyan, E-9, Addl Ambernath Indl. 1st Floor,, Area, Mohan Plaza, MIDC Anand Nagar, Wayale Nagar, Ambernath. Khadakpada, Kalyan. "थायी लेखा सं./PAN :AAACA8424F .. (अपीलाथ" /Appellant) (""यथ" / Respondent)
Revenue by : Shri Vijay Kumar Bora (D.R.) Assessee by : Shri Girish Dave & Ms. Kadamberi Dave
सुनवाई क" तार"ख /Date of Hearing : 30-09-2016 घोषणा क" तार"ख /Date of Pronouncement : 19-12-2016 आदेश / O R D E R PER RAMIT KOCHAR, Accountant Member
These two appeals, filed by the Revenue, being ITA No. 7034/Mum/2013 and 7035/Mum/2013, are directed against two separate appellate orders dated 17th September, 2013 and 19th September, 2013 respectively passed by learned Commissioner of Income Tax (Appeals)- II, Thane (hereinafter called “the CIT(A)”), for the assessment years 2004-05 and 2006-07 respectively, the appellate proceedings before the learned CIT(A) arising from two separate assessment orders dated 30th September, 2011 and ITA 7034/Mum/2013 and 2 ITA 7035/Mum/2013
29th December, 2009 respectively passed by the learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) r.w.s. 147 of the Income Tax Act,1961 (Hereinafter called “the Act”) for the assessment year 2004-05 , and u/s 143(3) of the Act for the assessment year 2006-07 respectively.
First, we shall take up assessee’s appeal for the assessment year 2004- 05 being ITA No. 7034/Mum/2013. Since both the appeals involve common issues’, our decision in ITA no. 7034/Mum/2013 for assessment year 2004- 05 shall apply mutatis mutandis to the appeal in ITA no. 7035/Mum/2013 for assessment year 2006-07. The grounds of appeal raised by the Revenue in ITA no. 7034/Mum/2013 for the assessment year 2004-05 read as under:-
“1. On the facts and in the circumstances of the case and in law, the Ld CIT (A)-II Thane has erred in holding that the exemption u/s 10B has to be allowed from the total income before set off of brought forward losses and depreciation. 2. The appellant prays the order of the Ld. CIT(A)-II, Thane, may be vacated and that of the Assessing Officer be restored.”
The Revenue is aggrieved by the appellate order of the ld. CIT(A) wherein the ld. CIT(A) has held that deduction u/s 10B of the Act has to be allowed on the total income before setting off of the brought forward business losses of the eligible unit, wherein the learned CIT(A) reversed the assessment orders of the AO wherein the AO had held that brought forward business losses of the eligible unit are to be set off from the current year profits of the eligible unit before allowing deduction u/s 10B of the Act. The learned CIT(A) upheld/sustain the assessment order of the AO that unabsorbed depreciation of the eligible unit has to be set off against current year profits of the eligible unit as per the provisions of Section 32(2) of the Act as the same becomes current year’s depreciation while computing the profits from business or profession of the eligible unit for the purpose of working out
ITA 7034/Mum/2013 and 3 ITA 7035/Mum/2013
deduction u/s 10B of the Act. The ld. CIT(A) has held as under, vide appellate order dated 17-09-2013 passed for the assessment year 2004-05:-
“Thus, from the decision of Hon'ble Bombay High Court, it is also very clear that the deduction u/s. 10B (u/s.10A in that case), has to be given effect to at the stage of computing profits & gains of business which is anterior to the application of provisions of section 72 which deals with carry forward and set off of business losses. Hence, Hon'ble Bombay High Court has only held that the deduction u/s. 10B has to be computed before adjusting brought forward business losses as per section 72. No finding has been recorded in respect of set off of unabsorbed depreciation which is governed by the provisions of section 32(2) of the Act. It is also an established legal position that the provisions of section 72 do not bar application of provisions of section 32(2) of the Act. Since provisions of section 72 are not required to be considered while computing the profit of eligible business as per the provisions of sections 30 to 43D of the Act, the provisions of section 32(2) have to be read as if there is no reference to section 72 therein and hence, brought forward depreciation has to be given set off as per provisions of section 32(2) as the same becomes current year's depreciation while computing the profits from business or profession for the purpose of working out of deduction u/s. 10B. Accordingly, the decision of Hon'ble Bombay High Court which is a Superior Court and also a jurisdictional High Court, is binding on me and accordingly, I am inclined to take a view that the deduction u/s.10B is to be computed after determination of the profits and gains of business or profession u/s. 30 to 43D of the Act including provisions of section 32(2) of the Act. However, brought forward business losses which are governed by the provisions of section 72 are to be allowed set off subsequent to the claim of deduction u/s. 10B. The A.O. is directed accordingly and appellant partly succeeds in respect of Ground Nos. 3 to 9.”
Aggrieved by the appellate order dated 17-09-2013 passed by the ld. CIT(A) for assessment year 2004-05, the Revenue has preferred an appeals before the tribunal. The ld. CIT(A) has held that deduction u/s 10B of the Act shall be allowed of the current year profits of the eligible unit before set off of the brought forward business losses of the eligible unit in view of the provisions of section 72 of the Act. The assessee has not come forward by filing appeal
ITA 7034/Mum/2013 and 4 ITA 7035/Mum/2013
with the tribunal with respect to the findings of the ld. CIT(A) with respect to the adjustments of the unabsorbed depreciation of the eligible unit while computing profits u/s 10B of the Act , as the learned CIT(A) has held that unabsorbed depreciation of the eligible unit has to be given set off as per provisions of Section 32(2) of the Act as the same becomes current years depreciation while computing current year profits of the eligible unit for the purposes of working out deductions u/s. 10B of the Act. It is un undisputed and admitted position between the parties that the assessee is entitled for deduction u/s 10B of the Act and the assessment year under consideration i.e. assessment year 2004-05 is after the amendments being brought into section 10B of the Act by Finance Act 2000 w.e.f. 01-04-2001. The A.O. has held that while computing deduction u/s 10B of the Act brought forward losses and unabsorbed depreciation of eligible unit are first required to be set off against the current year business profits of the eligible unit, before computing deduction u/s 10B of the Act. The assessee is engaged in the business of manufacture of Injection Blow Moulding Machines.
It is the say of the ld. D.R. that while computing deduction u/s 10B of the Act as per the amended provisions, set off of brought forward business losses and un-absorbed depreciation has to be first adjusted from the current year profits of the eligible unit u/s 10B of the Act and thereafter deduction shall be allowed u/s 10B of the Act. The ld. D.R. relied on the decision of Hon’be Supreme Court in the case of Himatsingka Seide Ltd. v. CIT [2014] 48 taxmann.com 357 (SC) whereby the Hon’ble Supreme Court has dismissed the civil appeal filed by the assessee against the Hon’ble Karnataka High Court decision in the case of [2006] 156 Taxman 151 (Kar).
The ld. Counsel for the assessee, on the other hand, submitted that the same issue arose in assessment years 2005-06 to 2007-08 in assessee’s own case before the tribunal , whereby the tribunal in ITA No. 7040 to ITA 7034/Mum/2013 and 5 ITA 7035/Mum/2013
7042/Mum/2011 and ITA No. 245/Mum/2011 dated 29th June, 2012 has allowed the appeal of the assessee , whereby the tribunal has held as under:-
“4. Ground No.1 is with reference to the claim of exemption under section 10B. It as the contention that it was an exemption provision and brought forward business losses and unabsorbed depreciation were to be given set off after allowing claim u/s 10B.
This issue is to be decided in favour of assessee and against the Revenue, in view of the judgment of the jurisdictional High Court in the case of CIT v. Black & Veach Consulting Pvt. Ltd (ITA No.1237 of 2011) as well as the judgment of the Hon'ble Karnataka High Court in the group of cases ACIT vs. M/s Yokogawa India Ltd and others vide order dated 9th August, 2011. 6. The Hon'ble High Court of Bombay in ITA No.1237 of 2011 dated 9th April, 2012 considered the following question:
“(A) Whether on the facts and circumstance of the case and law, the ITAT was correct in holding that the brought forward unabsorbed depreciation and losses of the unit, the income which is not eligible for deduction under section 10A of the Act cannot be set off against the current profit of the eligible unit for computing the deduction under section 10A of the I.T. Act.”
The Hon'ble High Court held as under:
“2. The Assessing Officer, during the course of the order of assessment under Section 143(3) observed as follows:
“Under the scheme of the Act, the profits of the unit eligible for deduction under Section 10A of the Act, would form part of the income computed under the head `Profits and gains of business and profession’. However, in order the same does not suffer tax, deduction will have to be made in respect thereof while computing the income under the head `Profits and gains of business and profession’. In other words, the deduction in respect of the profits eligible under Section 10A of the Act is required to be made at the stage of computing the income under the head `Profits and gains of business or profession’.”
Nonetheless, while computing the total income of the assessee the Assessing Officer took the net profit as per the profit and loss account and after, inter alia, making certain disallowances and ITA 7034/Mum/2013 and 6 ITA 7035/Mum/2013
allowances, arrived at the total business income at Rs.86.07 lakhs. A set off was effected of the brought forward business loss of AY 2003-04 and AY 2004-05 upon which the Assessing Officer came to the conclusion that there was nil income which would qualify for deduction under Section 10A. The CIT (A) held that the Assessing Officer was justified in adjusting the brought forward losses of earlier years before arriving at the gross total income, for allowing a deduction under Section 10B. In appeal, the Tribunal has relied upon a decision of its Special Bench in the case of Scientific Atlanta Vs. ACIT 129 TTJ 273 in which it has been emphasized that the provision contained in Section 10A is not an exemption but a deduction under Chapter III. Following that decision, the Tribunal held that the deduction under Section 10A in respect of the allowable unit under Section 10A has to be allowed before setting off brought forwarded losses of a non 10A unit.
Section 10A is a provision which is in the nature of a deduction and not an exemption. This was emphasized in a judgment of a Division Bench of this Court while construing the provisions of Section 10B in Hindustan Unilever Ltd Vs. Deputy Commissioner of Income Tax 2. (2010) 325 ITR 102 at Para 24. The submission of the Revenue placed its reliance on the literal reading of Section 10A under which a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive Assessment Years is to be allowed from the total income of the assessee. The deduction under section 10A, in our view, has to be given effect to at the stage of computing the profits and gains of business. This is anterior to the application of the provisions of Section 72 which deals with the carry forward and set off of business losses. A distinction has been made by the Legislature while incorporating the provisions of Chapter VI-A. Section 80A(1) stipulates that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of the Chapter, the deductions specified in Sections 80C to 80U. Section 80B(5) defines for the purposes of Chapter VI-A “gross total income” to mean the total income computed in accordance with the provisions of the Act, before making any deduction under the Chapter. What the Revenue in essence seeks to attain is to telescope the provisions of Chapter VI-A in the context of the deduction which is allowable under Section 10A, which would not be permissible unless a specific statutory provision to that effect were to be made. In the absence thereof, such an approach cannot be accepted. In the circumstances, the decision of the Tribunal would have to be affirmed since it is plain and evident that the deduction under Section 10A has to be given at the stage when the profits and gains
ITA 7034/Mum/2013 and 7 ITA 7035/Mum/2013
of business are computed in the first instance. So construed, the appeal by the Revenue would not give rise to any substantial question of law and shall accordingly stand dismissed. There shall be no order as to costs”.
On similar question, the Hon'ble Karnataka High Court in the batch of cases of ACIT vs. M/s Yokogawa India Ltd and others vide order dated 9th August, 2011 examined this issue elaborately and decided as under:
“1st Substantial question of law 9. The benefit of tax holiday was originally enacted as an absolute exemption under Chapter III of the Income-tax Act, 1961. It remained as exemption for almost two decades. The heading of Chapter III under which the relevant provisions were placed is titled as "Incomes which do not form part of the total income". The second heading read as "Special conditions in respect of newly established industrial undertakings in free trade zones". Section 10 begins as "In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not he included", whereas section 10A as originally enacted provided that the profits and gains of the eligible undertaking shall not be included in the total income of the assessee. The Finance Act, 2000, recast section 10A. It came into effect from April 1, 2001. The second heading continues with a marginal change by way of addition of the word "etc." to read as "Special provisions in respect of newly established undertakings in a free trade zone, etc". The new section provides for deduction of profits and gains of eligible undertaking from the total income of the assessee.
Section 10B which is also substituted by the Finance Act,2000, and which came into effect from April 1, 2001, deals with the special provisions in respect of newly established 100 per cent export oriented undertakings.
Section 10A reads as under: "10A. Special provision in respect of newly established undertakings in free trade zone, etc.-(1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an 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 under-taking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee :
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 this section, as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to deduction referred to in this sub-section only for the unexpired period of the aforesaid ten consecutive assessment years :
ITA 7034/Mum/2013 and 8 ITA 7035/Mum/2013
Provided further that where an undertaking initially located in any free trade zone or export processing zone is subsequently located in a special economic zone by reason of conversion 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 produce such articles or things or computer software in such free rade 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 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 year (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 subsection (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 A-section (1) of section 36, as the case may be, shall not apply in relation to any such allowance or deduction ;
(ii) no loss referred to in sub-section (1) of section 72 or subsection (1) or sub-section (3) of section 74, in so far as such loss relates to the business of the undertaking, shall be carried forward or set off where such loss relates to any of the relevant assessment years ending before the 1st day of April, 2001 ;
ITA 7034/Mum/2013 and 9 ITA 7035/Mum/2013
(iii) no deduction shall be allowed under section 80HH or section 80HHA or section 80-I or section 80-IA or section 80-IB in relation to the profits and gains of the undertaking ; and (iv) in computing the depreciation allowance under section 32, the written down value of any asset used for the purposes of the business of the undertaking shall be computed as if the assessee had claimed and been actually allowed the deduction in respect of depreciation for each of the relevant assessment year . . .
Explanation 2.-. . .
(ii) 'convertible foreign exchange' means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign 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 Commerce and Industry ;"
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 computed, the next step is determination of tax by applying the applicable rates on the total income.
Section 2(45) defines "total income" to mean the total amount of income referred to in section 5 and computed in the manner laid down in the Income-tax Act. Section 5 defines the scope of total income and it is subject to the provisions of the Income-tax Act. Section 14 provides that "save as otherwise provided by the Income-tax Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income". Therefore, the total income in its strict sense requires computation for the purpose of levy of tax. The computation of total income begins only with Chapter IV and as section 10A is covered in Chapter III, the phrase "total income" used in section 10A cannot be understood in the same sense as in section 2(45).
The phrase "total income" has been used in the Income-tax Act in several places with different connotations and shades. The phrase "total
ITA 7034/Mum/2013 and 10 ITA 7035/Mum/2013
income" used in section 10A is one such variant. The phrase need not necessarily mean the total income as computed in accordance with the provisions of the Act. The relief under this section is with reference to the STP undertakings and not to the assessee. In other words, the relief travels with the undertaking irrespective of who owns the same. The computation of relief as provided in section 10A(4) is also with reference to the under- taking. A business might have several undertakings and section 28 does not envisage computation of income of each such undertaking. In other words, the profits of the business of the undertaking cannot be computed in isolation. The profits are computed under the head "Profits and gains of business or profession", as under the above head, the income from business as a whole has to be computed. The phrase "total income" used in section 10A(1) is, therefore, to be understood as the total income of the STP unit. This is clear from the first proviso to section 10A(1) which makes a reference to the total income of the undertaking and not to the total income of the assessee. The definition of any term given in section 2 will apply only when the context does not otherwise require. The placement, language and setting of section 10A cannot mean the total income computed in accordance with the provisions of the Act. Instead, such a phrase in the context of section 10A, means profits and gains of the STP under-taking as understood in its commercial sense.
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 provisions 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 "profits and gains of business or profession" begins thereafter. This proposition is in line with the form of return. Allowing deduction at the earliest stage of business income computation almost blurs the difference between the commercial profits and tax profits.
The substituted section 10A continues to remain in Chapter III. It is titled as "Incomes which do not form part of total income". It may be noted that when section 10A was recast by the 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
ITA 7034/Mum/2013 and 11 ITA 7035/Mum/2013
like section 80A and section 80AB which was in Chapter VIA 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 Parliament it is to 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 con- versant with the implications of this Chapter, has consciously chosen to retain section 10A in Chapter III.
If section 10A is to be given effect to as a deduction from the total income as defined in section 2(45), it would mean that section 10A is to be considered after Chapter VI-A deductions have been exhausted. The deductions under Chapter VI-A are to be given from out of the gross total income. The term "gross total income" is defined in section 80B(5) to mean the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter. As per the definition of gross total income, the other provisions of the Act will have to be first given effect to. There is no reason why reference to the provisions of the Act should not 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.
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.
From the aforesaid discussion it is clear that the income of the section 10A 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 global income of the assessee and not the total income as defined in section 2(45). Hence, the income eligible for exemption under section 10A would not enter into computation as the same has to be deducted at source level.
2nd substantial question of law
Prior to the introduction of sub-section (6) of sections 10A and 10B of the Finance Act, 2000, which came into effect from April 1, 2001, 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. Sub-section (2) of section 32, clause (ii) of sub-section (3)
ITA 7034/Mum/2013 and 12 ITA 7035/Mum/2013
of section 32A. Clause (ii) of subsection (2) of section 33 and sub-section (4) of section 35 of the Act or the second proviso to clause (ix) of sub- section (1) of section 36 shall not be applicable in relation to any such allowance or deduction. Similarly, no loss as referred to in sub-section (1) or in section 72 or sub-section (1) or subsection (3) of section 74 in so far as such loss relates to the business of the undertaking was permitted to be carried forward or set off where such loss relates to any of the relevant assessment years.
It is in this background the Finance Act, 2003, was introduced by inserting the words "the year ending up to the first day of April, 2001, for that in clauses (i) and (ii) of sub A-section (6) restricting the disallowance only up to the first day of April, 2001, and granting the benefit, of those provisions even in respect of units to which sections 10A and 10B is applicable. The Finance Act, 2003, amended this subsection with retrospective effect from April 1, 2001, by lifting the embargo in the aforesaid clauses in respect of depreciation and business loss relating to the assessment year 2001-02 onwards. The amendment indicates the legislative intention of providing the benefit of carry forward of depreciation and business loss relating to any year of the tax holiday period to be set off against income of any year post-tax holiday. This is supported by Circular No. 7 of 2003 wherein the Board has stated that the purpose of amendment is to entitle an assessee to the benefit of carry forward of depreciation and loss suffered during the tax holiday period. The circular dated September 5, 2003, reads as under ([2003] 263 ITR (St.) 62, 77) :
"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 sub A-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."
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 providing relaxation wherever it deems fit and in the present
ITA 7034/Mum/2013 and 13 ITA 7035/Mum/2013
case, such relaxation has been made in section 10A but not in section 10C.
It is to be noted that the aforesaid amendment read with the Board circular does not militate against the proposition that the benefit of relief under this section is in the nature of exemption with reference to the commercial profits. However, in order to give effect to the legislative intention of allowing the carry forward of depreciation and loss suffered in respect of any year during the tax holiday for being set off against income post-tax holiday, it is necessary that the notional computation of business income and the depreciation as per the provisions of the Act should be made for each year of the tax holiday period. While so computing, attention will have to be given to the provisions of sections 70, 71, 72 and section 32(2). The amount of depreciation and business loss remaining unabsorbed at the end of the tax holiday period should be determined so that the same may be set off against the income post-tax holiday period.
24.Chapter VI deals with the aggregation of income and set off or carry forward of loss. Section 72(1) deals with the carry forward and set off of business loss which reads as under :
"72.(1) Where for any assessment year, the net result of the computation under the head 'Profits and gains of business or profession' is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or, where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward, to the following assessment year, and-
(i) it shall be set off against the profits and gains, if any, of business or profession carried on by him and assessable for that assessment year ;
(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on :
Provided that where the whole or any part of such loss is sustained in any such business as is referred to in section 33B which is discontinued in the circumstances specified in that 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, reconstructed 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-
ITA 7034/Mum/2013 and 14 ITA 7035/Mum/2013
(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."
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 :
" . . . section 10B as it stands is not a provision in the nature of an exemption but provides for a deduction. Section 10B was substituted by the Finance Act of 2000 with effect from April 1, 2001. Prior to the substitution of the provision, the earlier provision stipulated that any profits and gains derived by an assessee from a 100 per cent. export oriented undertaking, to which the section applies 'shall not be included in the total income of the assessee'. The provision, therefore, as it earlier stood was in the nature of an exemption. After the substitution of section 10B by the Finance Act of 2000, the provision as it now stands provides for a deduction of such profits and gains as are derived by a 100 per cent export oriented undertaking from the export of articles or things or computer software for ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce. Consequently, it is evident that the basis on which the assessment has sought to be reopened is belied by a plain reading of the provision. The Assessing Officer was plainly in error in proceeding on the basis that because the income is exempted, the loss was not allowable. All the four units of the assessee were eligible under section 10B. Three units had returned a profit during the course of the assessment year, while the crab stick unit had returned a loss. The assessee was entitled to a deduction in respect of the profits of the three eligible units while the loss sustained by the fourth unit could be set off against the normal business income. In these circumstances, the basis on which the assessment is sought to be reopened is contrary to the plain language of section 10B."
The aforesaid principle equally applies to a case falling under section 10A of the Act.
The Madras High Court in the case Madras Machine Tool Manufacturers Ltd. v. CIT reported in [1975] 98 ITR 119 (Mad) has explained the difference between a company and an undertaking which is owned or run by such company. It was held as under (page 127) :
ITA 7034/Mum/2013 and 15 ITA 7035/Mum/2013
"A company may own or run many undertakings, some of which may be entitled to the benefit of section 84 and others may not be so entitled. It is not, therefore, possible to equate the undertaking with the company. When a company owns more than one undertaking the application of section 84 has to be with respect to the particular undertaking and not to the company 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."
Form No. 1 read with rule 12 of the Income-tax Rules, 1962, provides for return of income and return of fringe benefits.
28.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 deduction under section 10A, 10AA, 10B or 10BA in respect of some specific business". Item 7 of Schedule 1 is to eliminate such income from computation of profits and loss and no separate declaration under section 10A(8) or 10B(8) if any is required to be made.
29.After making all such computations the assessee would be entitled to the benefit of set off or carry forward of loss as provided under section 72 of the Act. That is the benefit which is given to the assessee under the Act irrespective of the nature of business which he is carrying on. The said benefit is available even to undertakings under section 10B of the Act. The expression "deduction of such profits and gains as derived by an under- taking shall be allowed from the total income of the assessee", has to be understood in the context with which the said provision is inserted in Chapter III of the Act. Sub-section (4) of section 10A clarifies this position. It provides that the profits derived from export of articles or things from 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. Therefore, it is clear that though the assessee may be having more than one undertaking for the purpose of section 10A it is the profit derived from export of articles or things or computer software from the business of the undertaking alone that has to be taken into consideration and such profit is not to be included in the total income of the assessee. It is only after the deduction of the said profits and gains, the income of the assessee has to be computed.
ITA 7034/Mum/2013 and 16 ITA 7035/Mum/2013
30.The provisions of this sub-section will apply even in the case where an assessee has opted out of section 10A by exercising his option under sub- section (8). As discussed, it is permissible for an assessee to opt in and opt out of section 10A. In the year when the assessee has opted out, the normal provisions of the Act would apply. The profits derived by him from the STP undertaking would suffer tax in the normal course subject to various provisions of the Act including those of Chapter VI-A. If in such a year, the assessee has suffered losses, such losses would be subject to inter source and inter head set off. The balance, 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. 31.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 section 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 assessee the question of unabsorbed business loss being set off against such profit and gains of the undertaking would not arise. In that view of the matter, the approach of the assessing authority was quite contrary to the aforesaid statutory provisions and the Appellate Commissioner as well as the Tribunal were fully justified in setting aside the said assessment order and granting the benefit of section 10A to the assessee Hence, the main substantial question of law is answered in favour of the assessees and against the Revenue”.
Since the provisions of section 10A and 10B are similar in nature and as the jurisdictional High Court decided the issue while considering the provisions of section 10B also respectfully following the above, we uphold the contention of assessee that carry forward business losses and depreciation cannot be set off to the profits of the undertaking while working the claim u/s 10B. Therefore, AO is directed to do the needful in light of the above principles laid down. Ground No.1 is accordingly allowed.”
The ld. Counsel for the assessee submitted that the tribunal has followed the decision of Hon’ble Bombay High Court in the case of CIT v. Black & Veach Consulting Pvt. Ltd. (ITA No. 1237 of 2011) (2012) 20 taxmann.com
ITA 7034/Mum/2013 and 17 ITA 7035/Mum/2013
727(Bom.) as well as the decision of Hon’ble Karnataka High Court in the case of ACIT v. M/s Yokogawa India Ltd.((2012) 21 taxmann.com 154(Kar.) wherein relief to the assessee was allowed. It is the say of the ld. Counsel for the assessee that Hon’ble Bombay High Court in the case of CIT v. Techno Tarp Polymers Private Limited in ITA No.2134 of 2013 (2015) 97 CCH 0048 (Bom. HC) has duly considered the decision of Hon’ble Karnataka High Court in the case of CIT v. Himatasingike Seide Ltd. (2006) 156 Taxman 1512 (Kar.) which was upheld by Hon’ble Apex court vide orders dated 19-09-2013, the Hon’ble Apex Court has left the decision of the Hon’ble Karnataka High Court undisturbed in civil appeal no 1501 of 2008, by holding as under:
“We have heard learned counsel for the parties to the lis. 2. Having perused the records and in view of the facts and circumstances of the case, we are of the opinion that the civil appeal being devoid of any merit deserves to be dismissed and is dismissed accordingly. Ordered accordingly”
The learned counsel for the assessee referred to decision of Hon’ble Bombay High Court in the case of CIT v. Techno Tarp Polymers Private Limited in ITA No.2134 of 2013 (2015) 97 CCH 0048 (Bom. HC) wherein Hon’ble Bombay High Court has held as under:
“5. We find that the decision of the Karnataka High Court in Himatasingike Seide Ltd. (supra) which was undisturbed by the Apex Court was in respect of Assessment Year 1994-95. Thus it dealt with the provisions of Section 10B of the Act as existing prior to 1 April 2001 which was admittedly different from Section 10B as in force during Assessment Year 200910 involved in this appeal. Section 10B of the Act as existing prior to 1 April 2001 provided for an exemption in respect of profits and gains derived from export by 100% Export Oriented Undertakings and now it provides for deduction of profits and gains derived from a 100% Exported Oriented Units..
ITA 7034/Mum/2013 and 18 ITA 7035/Mum/2013
In any view of the matter, the decision of the Karnataka High Court in Himatasingike Seide Ltd. (supra) which was undisturbed by the Apex Court dealt with the provision of law different from that which was dealt with in the impugned Order. A decision has to be considered in the context of the law as arising for consideration and a change in law would render the decision under the old law inapplicable while considering the amended law.
The issue as raised stands concluded by the decision of this Court in Black & Veatch Consulting(P) Ltd.(supra) and “Ganesh Polychem Ltd. Vs. ITO” against the Revenue. Therefore, the question of law as proposed for our consideration does not give rise to any substantial question of law.
Accordingly, the appeal is dismissed. No order as to costs.”
We have heard the rival submissions and perused the material including case laws cited by both the parties. The assessee is engaged in the business of manufacture of Injection Blow Molding Machines. It is an undisputed and admitted position that the assessee is entitled to deduction u/s 10B of the Act. We have observed that the assessee has claimed deduction u/s 10B of the Act under the amended provisions of the Act which were amended by Finance Act,2000 w.e.f. 01-04-2001 wherein the assessee has not set off brought forward business losses and unabsorbed depreciation of the eligible unit from current years’ profit of the eligible unit before computing deduction u/s 10B of the Act. The A.O. has decided the issue against the assessee by holding that brought forward business losses and unabsorbed depreciation of the eligible unit is to be set off from current year profits of the eligible unit before computing deduction u/s 10B of the Act , while the ld. CIT(A) has held against the assessee by holding that unabsorbed depreciation of the eligible unit has to be set off as per the provisions of section 32(2) of the Act as the same becomes current year’s depreciation while computing profits from business or profession for the purpose of working out
ITA 7034/Mum/2013 and 19 ITA 7035/Mum/2013
deduction u/s 10B of the Act. We find that the assessee has not come in appeal with respect to the ld. CIT(A) holding against the assessee wherein the assessment order of the AO was confirmed with respect to adjustments of the brought forward depreciation of the eligible unit against current year profits of the eligible unit while computing deduction u/s 10B of the Act , as the learned CIT(A) has held that brought forward depreciation of the eligible unit has to be set off as per provisions of Section 32(2) of the Act as the same becomes current years depreciation while computing the profits from business of profession for the purposes of working out deductions u/s. 10B of the Act. We have observed that the same issues’ arose in assessment years 2005-06 to 2007-08 whereby the Tribunal in ITA No. 7040 to 7042/Mum/2011 and ITA No. 245/Mum/2011 dated 29th June, 2012 in assessee’s own case has allowed the appeal of the assessee , whereby the tribunal has held as under:-
“4. Ground No.1 is with reference to the claim of exemption under section 10B. It as the contention that it was an exemption provision and brought forward business losses and unabsorbed depreciation were to be given set off after allowing claim u/s 10B.
This issue is to be decided in favour of assessee and against the Revenue, in view of the judgment of the jurisdictional High Court in the case of CIT v. Black & Veach Consulting Pvt. Ltd (ITA No.1237 of 2011) as well as the judgment of the Hon'ble Karnataka High Court in the group of cases ACIT vs. M/s Yokogawa India Ltd and others vide order dated 9th August, 2011. 6. The Hon'ble High Court of Bombay in ITA No.1237 of 2011 dated 9th April, 2012 considered the following question:
“(A) Whether on the facts and circumstance of the case and law, the ITAT was correct in holding that the brought forward unabsorbed depreciation and losses of the unit, the income which is not eligible for deduction under section 10A of the Act cannot be set off against the current profit of the eligible unit for computing the deduction under section 10A of the I.T. Act.”
The Hon'ble High Court held as under:
ITA 7034/Mum/2013 and 20 ITA 7035/Mum/2013
“2. The Assessing Officer, during the course of the order of assessment under Section 143(3) observed as follows:
“Under the scheme of the Act, the profits of the unit eligible for deduction under Section 10A of the Act, would form part of the income computed under the head `Profits and gains of business and profession’. However, in order the same does not suffer tax, deduction will have to be made in respect thereof while computing the income under the head `Profits and gains of business and profession’. In other words, the deduction in respect of the profits eligible under Section 10A of the Act is required to be made at the stage of computing the income under the head `Profits and gains of business or profession’.”
Nonetheless, while computing the total income of the assessee the Assessing Officer took the net profit as per the profit and loss account and after, inter alia, making certain disallowances and allowances, arrived at the total business income at Rs.86.07 lakhs. A set off was effected of the brought forward business loss of AY 2003-04 and AY 2004-05 upon which the Assessing Officer came to the conclusion that there was nil income which would qualify for deduction under Section 10A. The CIT (A) held that the Assessing Officer was justified in adjusting the brought forward losses of earlier years before arriving at the gross total income, for allowing a deduction under Section 10B. In appeal, the Tribunal has relied upon a decision of its Special Bench in the case of Scientific Atlanta Vs. ACIT 129 TTJ 273 in which it has been emphasized that the provision contained in Section 10A is not an exemption but a deduction under Chapter III. Following that decision, the Tribunal held that the deduction under Section 10A in respect of the allowable unit under Section 10A has to be allowed before setting off brought forwarded losses of a non 10A unit.
Section 10A is a provision which is in the nature of a deduction and not an exemption. This was emphasized in a judgment of a Division Bench of this Court while construing the provisions of Section 10B in Hindustan Unilever Ltd Vs. Deputy Commissioner of Income Tax 2. (2010) 325 ITR 102 at Para 24. The submission of the Revenue placed its reliance on the literal reading of Section 10A under which a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive Assessment Years is to be allowed from the total income of the assessee. The deduction under section 10A, in our view, has to be given effect to at the stage of computing the profits and gains of business. This is anterior to the ITA 7034/Mum/2013 and 21 ITA 7035/Mum/2013
application of the provisions of Section 72 which deals with the carry forward and set off of business losses. A distinction has been made by the Legislature while incorporating the provisions of Chapter VI-A. Section 80A(1) stipulates that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of the Chapter, the deductions specified in Sections 80C to 80U. Section 80B(5) defines for the purposes of Chapter VI-A “gross total income” to mean the total income computed in accordance with the provisions of the Act, before making any deduction under the Chapter. What the Revenue in essence seeks to attain is to telescope the provisions of Chapter VI-A in the context of the deduction which is allowable under Section 10A, which would not be permissible unless a specific statutory provision to that effect were to be made. In the absence thereof, such an approach cannot be accepted. In the circumstances, the decision of the Tribunal would have to be affirmed since it is plain and evident that the deduction under Section 10A has to be given at the stage when the profits and gains of business are computed in the first instance. So construed, the appeal by the Revenue would not give rise to any substantial question of law and shall accordingly stand dismissed. There shall be no order as to costs”.
On similar question, the Hon'ble Karnataka High Court in the batch of cases of ACIT vs. M/s Yokogawa India Ltd and others vide order dated 9th August, 2011 examined this issue elaborately and decided as under:
“1st Substantial question of law 9. The benefit of tax holiday was originally enacted as an absolute exemption under Chapter III of the Income-tax Act, 1961. It remained as exemption for almost two decades. The heading of Chapter III under which the relevant provisions were placed is titled as "Incomes which do not form part of the total income". The second heading read as "Special conditions in respect of newly established industrial undertakings in free trade zones". Section 10 begins as "In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not he included", whereas section 10A as originally enacted provided that the profits and gains of the eligible undertaking shall not be included in the total income of the assessee. The Finance Act, 2000, recast section 10A. It came into effect from April 1, 2001. The second heading continues with a marginal change by way of addition of the word "etc." to read as "Special provisions in respect of newly established undertakings in a free trade zone, etc". The new section provides for deduction of profits and gains of eligible undertaking from the total income of the assessee. 10. Section 10B which is also substituted by the Finance Act,2000, and which came into effect from April 1, 2001, deals with the special provisions in respect of newly established 100 per cent export oriented undertakings.
ITA 7034/Mum/2013 and 22 ITA 7035/Mum/2013
Section 10A reads as under:
"10A. Special provision in respect of newly established undertakings in free trade zone, etc.-(1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an 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 under-taking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee :
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 this section, as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to deduction referred to in this sub-section only for the unexpired period of the aforesaid ten consecutive assessment years :
Provided further that where an undertaking initially located in any free trade zone or export processing zone is subsequently located in a special economic zone by reason of conversion 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 produce such articles or things or computer software in such free rade 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 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,-
ITA 7034/Mum/2013 and 23 ITA 7035/Mum/2013
(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 year (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 subsection (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 A-section (1) of section 36, as the case may be, shall not apply in relation to any such allowance or deduction ;
(ii) no loss referred to in sub-section (1) of section 72 or subsection (1) or sub-section (3) of section 74, in so far as such loss relates to the business of the undertaking, shall be carried forward or set off where such loss relates to any of the relevant assessment years ending before the 1st day of April, 2001 ;
(iii) no deduction shall be allowed under section 80HH or section 80HHA or section 80-I or section 80-IA or section 80-IB in relation to the profits and gains of the undertaking ; and (iv) in computing the depreciation allowance under section 32, the written down value of any asset used for the purposes of the business of the undertaking shall be computed as if the assessee had claimed and been actually allowed the deduction in respect of depreciation for each of the relevant assessment year . . .
Explanation 2.-. . .
(ii) 'convertible foreign exchange' means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign 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 Commerce and Industry ;"
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 ITA 7034/Mum/2013 and 24 ITA 7035/Mum/2013
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 computed, the next step is determination of tax by applying the applicable rates on the total income.
Section 2(45) defines "total income" to mean the total amount of income referred to in section 5 and computed in the manner laid down in the Income-tax Act. Section 5 defines the scope of total income and it is subject to the provisions of the Income-tax Act. Section 14 provides that "save as otherwise provided by the Income-tax Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income". Therefore, the total income in its strict sense requires computation for the purpose of levy of tax. The computation of total income begins only with Chapter IV and as section 10A is covered in Chapter III, the phrase "total income" used in section 10A cannot be understood in the same sense as in section 2(45).
The phrase "total income" has been used in the Income-tax Act in several places with different connotations and shades. The phrase "total income" used in section 10A is one such variant. The phrase need not necessarily mean the total income as computed in accordance with the provisions of the Act. The relief under this section is with reference to the STP undertakings and not to the assessee. In other words, the relief travels with the undertaking irrespective of who owns the same. The computation of relief as provided in section 10A(4) is also with reference to the under- taking. A business might have several undertakings and section 28 does not envisage computation of income of each such undertaking. In other words, the profits of the business of the undertaking cannot be computed in isolation. The profits are computed under the head "Profits and gains of business or profession", as under the above head, the income from business as a whole has to be computed. The phrase "total income" used in section 10A(1) is, therefore, to be understood as the total income of the STP unit. This is clear from the first proviso to section 10A(1) which makes a reference to the total income of the undertaking and not to the total income of the assessee. The definition of any term given in section 2 will apply only when the context does not otherwise require. The placement, language and setting of section 10A cannot mean the total income computed in accordance with the provisions of the Act. Instead, such a phrase in the context of section 10A, means profits and gains of the STP under-taking as understood in its commercial sense.
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 ITA 7034/Mum/2013 and 25 ITA 7035/Mum/2013
income-tax nor includible in the total income. Therefore, the twin provisions 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 "profits and gains of business or profession" begins thereafter. This proposition is in line with the form of return. Allowing deduction at the earliest stage of business income computation almost blurs the difference between the commercial profits and tax profits.
The substituted section 10A continues to remain in Chapter III. It is titled as "Incomes which do not form part of total income". It may be noted that when section 10A was recast by the 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 VIA 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 Parliament it is to 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 con- versant with the implications of this Chapter, has consciously chosen to retain section 10A in Chapter III.
If section 10A is to be given effect to as a deduction from the total income as defined in section 2(45), it would mean that section 10A is to be considered after Chapter VI-A deductions have been exhausted. The deductions under Chapter VI-A are to be given from out of the gross total income. The term "gross total income" is defined in section 80B(5) to mean the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter. As per the definition of gross total income, the other provisions of the Act will have to be first given effect to. There is no reason why reference to the provisions of the Act should not 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.
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
ITA 7034/Mum/2013 and 26 ITA 7035/Mum/2013
be any further deduction from the total income as the total income is itself arrived at after all deductions.
From the aforesaid discussion it is clear that the income of the section 10A 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 global income of the assessee and not the total income as defined in section 2(45). Hence, the income eligible for exemption under section 10A would not enter into computation as the same has to be deducted at source level.
2nd substantial question of law
Prior to the introduction of sub-section (6) of sections 10A and 10B of the Finance Act, 2000, which came into effect from April 1, 2001, 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. Sub-section (2) of section 32, clause (ii) of sub-section (3) of section 32A. Clause (ii) of subsection (2) of section 33 and sub-section (4) of section 35 of the Act or the second proviso to clause (ix) of sub- section (1) of section 36 shall not be applicable in relation to any such allowance or deduction. Similarly, no loss as referred to in sub-section (1) or in section 72 or sub-section (1) or subsection (3) of section 74 in so far as such loss relates to the business of the undertaking was permitted to be carried forward or set off where such loss relates to any of the relevant assessment years.
It is in this background the Finance Act, 2003, was introduced by inserting the words "the year ending up to the first day of April, 2001, for that in clauses (i) and (ii) of sub A-section (6) restricting the disallowance only up to the first day of April, 2001, and granting the benefit, of those provisions even in respect of units to which sections 10A and 10B is applicable. The Finance Act, 2003, amended this subsection with retrospective effect from April 1, 2001, by lifting the embargo in the aforesaid clauses in respect of depreciation and business loss relating to the assessment year 2001-02 onwards. The amendment indicates the legislative intention of providing the benefit of carry forward of depreciation and business loss relating to any year of the tax holiday period to be set off against income of any year post-tax holiday. This is supported by Circular No. 7 of 2003 wherein the Board has stated that the purpose of amendment is to entitle an assessee to the benefit of carry forward of depreciation and loss suffered during the tax holiday period. The circular dated September 5, 2003, reads as under ([2003] 263 ITR (St.) 62, 77) :
"20. Providing for carry forward of business losses and unabsorbed depreciation to units in special economic zones and 100 per cent export oriented units:
ITA 7034/Mum/2013 and 27 ITA 7035/Mum/2013
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 sub A-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."
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 providing relaxation wherever it deems fit and in the present case, such relaxation has been made in section 10A but not in section 10C.
It is to be noted that the aforesaid amendment read with the Board circular does not militate against the proposition that the benefit of relief under this section is in the nature of exemption with reference to the commercial profits. However, in order to give effect to the legislative intention of allowing the carry forward of depreciation and loss suffered in respect of any year during the tax holiday for being set off against income post-tax holiday, it is necessary that the notional computation of business income and the depreciation as per the provisions of the Act should be made for each year of the tax holiday period. While so computing, attention will have to be given to the provisions of sections 70, 71, 72 and section 32(2). The amount of depreciation and business loss remaining unabsorbed at the end of the tax holiday period should be determined so that the same may be set off against the income post-tax holiday period.
24.Chapter VI deals with the aggregation of income and set off or carry forward of loss. Section 72(1) deals with the carry forward and set off of business loss which reads as under :
"72.(1) Where for any assessment year, the net result of the computation under the head 'Profits and gains of business or profession' is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or, where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward, to the following assessment year, and-
ITA 7034/Mum/2013 and 28 ITA 7035/Mum/2013
(i) it shall be set off against the profits and gains, if any, of business or profession carried on by him and assessable for that assessment year ;
(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on :
Provided that where the whole or any part of such loss is sustained in any such business as is referred to in section 33B which is discontinued in the circumstances specified in that 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, reconstructed 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."
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 :
" . . . section 10B as it stands is not a provision in the nature of an exemption but provides for a deduction. Section 10B was substituted by the Finance Act of 2000 with effect from April 1, 2001. Prior to the substitution of the provision, the earlier provision stipulated that any profits and gains derived by an assessee from a 100 per cent. export oriented undertaking, to which the section applies 'shall not be included in the total income of the assessee'. The provision, therefore, as it earlier stood was in the nature of an exemption. After the substitution of section 10B by the Finance Act of 2000, the provision as it now stands provides for a deduction of such profits and gains as are derived by a 100 per cent export oriented undertaking from the export of articles or things or computer software for ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce. Consequently, it is evident that the basis on which the assessment has sought to be reopened is belied by a plain reading of the provision. The Assessing Officer was plainly in error in proceeding on the basis that because the income is exempted, the loss was not allowable. All the four
ITA 7034/Mum/2013 and 29 ITA 7035/Mum/2013
units of the assessee were eligible under section 10B. Three units had returned a profit during the course of the assessment year, while the crab stick unit had returned a loss. The assessee was entitled to a deduction in respect of the profits of the three eligible units while the loss sustained by the fourth unit could be set off against the normal business income. In these circumstances, the basis on which the assessment is sought to be reopened is contrary to the plain language of section 10B."
The aforesaid principle equally applies to a case falling under section 10A of the Act.
The Madras High Court in the case Madras Machine Tool Manufacturers Ltd. v. CIT reported in [1975] 98 ITR 119 (Mad) has explained the difference between a company and an undertaking which is owned or run by such company. It was held as under (page 127) :
"A company may own or run many undertakings, some of which may be entitled to the benefit of section 84 and others may not be so entitled. It is not, therefore, possible to equate the undertaking with the company. When a company owns more than one undertaking the application of section 84 has to be with respect to the particular undertaking and not to the company 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."
Form No. 1 read with rule 12 of the Income-tax Rules, 1962, provides for return of income and return of fringe benefits.
28.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 deduction under section 10A, 10AA, 10B or 10BA in respect of some specific business". Item 7 of Schedule 1 is to eliminate such income from computation of profits and loss and no separate declaration under section 10A(8) or 10B(8) if any is required to be made.
29.After making all such computations the assessee would be entitled to the benefit of set off or carry forward of loss as provided under section 72 of the Act. That is the benefit which is given to the assessee under the Act irrespective of the nature of business which he is carrying on. The said
ITA 7034/Mum/2013 and 30 ITA 7035/Mum/2013
benefit is available even to undertakings under section 10B of the Act. The expression "deduction of such profits and gains as derived by an under- taking shall be allowed from the total income of the assessee", has to be understood in the context with which the said provision is inserted in Chapter III of the Act. Sub-section (4) of section 10A clarifies this position. It provides that the profits derived from export of articles or things from 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. Therefore, it is clear that though the assessee may be having more than one undertaking for the purpose of section 10A it is the profit derived from export of articles or things or computer software from the business of the undertaking alone that has to be taken into consideration and such profit is not to be included in the total income of the assessee. It is only after the deduction of the said profits and gains, the income of the assessee has to be computed.
30.The provisions of this sub-section will apply even in the case where an assessee has opted out of section 10A by exercising his option under sub- section (8). As discussed, it is permissible for an assessee to opt in and opt out of section 10A. In the year when the assessee has opted out, the normal provisions of the Act would apply. The profits derived by him from the STP undertaking would suffer tax in the normal course subject to various provisions of the Act including those of Chapter VI-A. If in such a year, the assessee has suffered losses, such losses would be subject to inter source and inter head set off. The balance, 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.
31.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 section 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 assessee the question of unabsorbed business loss being set off against such profit and gains of the undertaking would not arise. In that view of the matter, the approach of the assessing authority was quite contrary to the aforesaid statutory provisions and the Appellate Commissioner as well as the Tribunal were fully justified in setting aside the said assessment order and granting the benefit of section 10A to the ITA 7034/Mum/2013 and 31 ITA 7035/Mum/2013
assessee Hence, the main substantial question of law is answered in favour of the assessees and against the Revenue”.
Since the provisions of section 10A and 10B are similar in nature and as the jurisdictional High Court decided the issue while considering the provisions of section 10B also respectfully following the above, we uphold the contention of assessee that carry forward business losses and depreciation cannot be set off to the profits of the undertaking while working the claim u/s 10B. Therefore, AO is directed to do the needful in light of the above principles laid down. Ground No.1 is accordingly allowed.”
The tribunal has followed the decision of Hon’ble Bombay High Court in the case of CIT v. Black & Veach Consulting Pvt. Ltd. (ITA No. 1237 of 2011) (2012) 20 taxmann.com 727(Bom.) as well as the decision of Hon’ble Karnataka High Court in the case of ACIT v. M/s Yokogawa India Ltd.((2012) 21 taxmann.com 154(Kar.) and allowed relief to the assessee. The Hon’ble Bombay High Court in the case of CIT v. Techno Tarp Polymers Private Limited in ITA No.2134 of 2013 ( (2015) 97 CCH 0048 (Bom. HC) ) has duly considered the decision of Hon’ble Karnataka High Court in the case of CIT vs. Himatasingike Seide Ltd. (2006) 156 Taxman 1512 (Kar.) which was upheld by Hon’ble Apex court wherein vide orders dated 19-09-2013 the Hon’ble Apex Court has left the decision of the Hon’ble Karnataka High Court undisturbed in civil appeal no 1501 of 2008, by holding as under:
“We have heard learned counsel for the parties to the lis. 2. Having perused the records and in view of the facts and circumstances of the case, we are of the opinion that the civil appeal being devoid of any merit deserves to be dismissed and is dismissed accordingly. Ordered accordingly”
Hon’ble Bombay High Court in the case of CIT v. Techno Tarp Polymers Private Limited in ITA No.2134 of 2013 (2015) 97 CCH 0048 (Bom. HC) has allowed the relief to the assessee wherein question of law was answered in ITA 7034/Mum/2013 and 32 ITA 7035/Mum/2013
favour of the assessee. The question of law formulated in the said appeal in CIT v. Techno Tarp Polymers Private Limited(supra) was as under:
“(1) Whether on the facts and in circumstances of the case and in law, the Tribunal was justified in holding that the brought forward unabsorbed loss/depreciation of the assessee’s 10B unit was not liable for set off against the current year’s profit of the same 10B unit?”
The Hon’ble Bombay High Court answered above question of law vide judgment dated 05-12-2015 in ITA no. 2134 of 2013, by holding as under:
“5. We find that the decision of the Karnataka High Court in Himatasingike Seide Ltd. (supra) which was undisturbed by the Apex Court was in resepct of Assessment Year 1994-95. Thus it dealt with the provisions of Section 10B of the Act as existing prior to 1 April 2001 which was admittedly different from Section 10B as in force during Assessment Year 200910 involved in this appeal. Section 10B of the Act as existing prior to 1 April 2001 provided for an exemption in respect of profits and gains derived from export by 100% Export Oriented Undertakings and now it provides for deduction of profits and gains derived from a 100% Exported Oriented Units..
In any view of the matter, the decision of the Karnataka High Court in Himatasingike Seide Ltd. (supra) which was undisturbed by the Apex Court dealt with the provision of law different from that which was dealt with in the impugned Order. A decision has to be considered in the context of the law as arising for consideration and a change in law would render the decision under the old law inapplicable while considering the amended law.
The issue as raised stands concluded by the decision of this Court in Black & Veatch Consulting(P) Ltd.(supra) and “Ganesh Polychem Ltd. Vs. ITO” against the Revenue. Therefore, the question of law as proposed for our consideration does not give rise to any substantial question of law.
Accordingly, the appeal is dismissed. No order as to costs.”
ITA 7034/Mum/2013 and 33 ITA 7035/Mum/2013
Respectfully following the decision of Hon’ble Bombay High Court in the case of Black & Veatch Consulting (P) Ltd. (supra) , in the case of Ganesh Polychem Ltd. v. ITO decided in ITA no. 8515/Mum/2010 on 10-08-2010 ((2013) 35 taxmann.com 446(Bom.) and the latest decision of Hon’ble Bombay High Court in the case of CIT v. Techno Tarp and Polymers Pvt. Ltd. In Income Tax Appeal No. 2134 of 2013 dated 5th December, 2015 ( (2015) 97 CCH 0048( Bom. HC) , the appeal of the Revenue is not sustainable in law and hence we dismiss appeal filed by the Revenue , by upholding/sustaining the appellate order of the ld. CIT(A)’s wherein partial relief was granted to the assessee by holding that the assessee is entitled to deduction u/s 10B of the Act from current year’s profits without setting off of carry forward of business losses of the eligible unit and hence the appeal filed by the Revenue is dismissed. We would also like to clarify that Hon’ble Bombay High court in the afore-stated judgment dated 05-12-2015 in the case of CIT v. Techno Tarp and Polymers Pvt. Ltd has laid down proposition of law that even unabsorbed depreciation of eligible unit shall not be set-off against the current year profits of eligible unit while computing deduction u/s 10B of the Act.We order accordingly.
ITA No. 7035/Mum/2013 for A.Y. 2006-07
Our above decision in ITA No. 7034/Mum/2013 for the assessment year 2004-05 shall apply mutatis mutandis to the Revenue’s appeal in ITA No. 7035/Mum/2013 for the assessment year 2006-07. Thus, the appeal filed by Revenue in ITA no. 7035/Mum/2013 for assessment year 2006-07 is dismissed . We order accordingly.
ITA 7034/Mum/2013 and 34 ITA 7035/Mum/2013
In the result, appeals filed by the Revenue in ITA No. 7034/Mum/2013 for the assessment year 2004-05 and Revenue’s appeal in ITA No. 7035/Mum/2013 for the assessment year. 2006-07 are dismissed.
Order pronounced in the open court on 19th December, 2016. आदेश क" घोषणा खुले "यायालय म" "दनांकः 19-12-2016 को क" गई । sd/- (MAHAVIR SINGH) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER मुंबई Mumbai; "दनांक Dated 19-12-2016 [ व."न.स./ R.K. R.K. R.K., Ex. Sr. PS R.K.
आदेश क" ""त"ल"प अ"े"षत/Copy of the Order forwarded to : 1. अपीलाथ" / The Appellant 2. ""यथ" / The Respondent. 3. आयकर आयु"त(अपील) / The CIT(A)- concerned, Mumbai 4. आयकर आयु"त / CIT- Concerned, Mumbai "वभागीय ""त"न"ध, आयकर अपील"य अ"धकरण, मुंबई / DR, ITAT, Mumbai “A” Bench 5. 6. गाड" फाईल / Guard file. आदेशानुसार/ BY ORDER, स"या"पत ""त //// उप/सहायक पंजीकार (Dy./Asstt.