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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 7TH DAY OF SEPTEMBER 2020
PRESENT
THE HON’BLE MR. JUSTICE ALOK ARADHE
AND
THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD
I.T.A. NO.377 OF 2012 BETWEEN:
M/S. KARLE INTERNATIONAL PRIVATE LTD, (FORMERLY KNOWN AS KARLE INTERNATIONAL) REP. BY ITS DIRECTOR, MAHENDRA KARLE No.203/73, TUMKUR ROAD NAGASANDRA VILLAGE BANGALORE NORTH, BANGALORE-560022. ... APPELLANT (BY SRI. A. SHANKAR, SR. COUNSEL A/W SRI. M. LAVA, ADV.,)
AND:
THE ASSISTANT COMMISSIONER OF INCOME-TAX CIRCLE-6(1), NRUPATHUNGA ROAD R.P. BHAVAN, OPP. RESERVE BANK OF INDIA BANGALORE-560001. ... RESPONDENT (BY SRI. K.V. ARAVIND, ADV.) - - -
THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 12.10.2012 PASSED IN ITA NO.381/BANG/2012 FOR THE ASSESSMENT YEAR 2008-09, PRAYING THAT THIS HON’BLE COURT MAY BE PLEASED TO: (I) FORMULATE THE SUBSTANTIAL QUESTION OF LAW STATED THEREIN. (I) ALLOW THE APPEAL AND SET ASIDE THE FINDINGS TO THE EXTENT AGAINST THE APPELLANT IN THE ORDER PASSED BY
THE TRIBUNAL IN ITA NO.381/BANG/2012 DATED 12/10/2012 VIDE ANNEXURE-A, IN THE INTEREST OF JUSTICE AND EQUITY.
THIS ITA COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING:
JUDGMENT
This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the assessee. The subject matter of the appeal pertains to the Assessment year 2008-09. The appeal was admitted by a bench of this Court vide order dated 23.12.2004 on the following substantial question of law:
(i) Whether the Tribunal was justified in law in not setting off the losses from Export Oriented Unit (Section 10B unit) against the income earned in the Domestic Tariff Area Unit in accordance with section 70 of the Act on the facts and circumstances of the case?
(ii) Whether the Tribunal was justified in law in holding that the appellant is not
entitled to set off the loss of the Export Oriented Unit against the income in Domestic Tariff Area Unit contrary to the ratio of the Hon’ble High Court decision in the case of CIT Vs. Yokogawa India Limited and Ors. on the facts and circumstances of the case?
(iii) Whether the Tribunal was justified in law in not adjudicating the ground No.3 related to the issue of the appellant not claiming deduction under Section 10B of the Act and consequently entitled for set off losses on the facts and circumstances of the case?
(iv) Whether the Tribunal was justified in law in not adjudicating the grounds raised in respect of levy of interest under section 234B and 234D of the Act on the facts and circumstances of the case?
Facts leading to filing of this appeal briefly stated are that the assessee is a private limited company engaged in the business of manufacture and
export of readymade garments. The assessee for the Assessment year 2008-09 filed the return of income declaring total income of Rs.12,89,760/-. The assessee has three units and showed profit and loss from Units I to III. The assessee had set off losses of the units against the profits of the unit making profits and offered the balance as income tax payable under the head ‘income from business’ at Rs.12,89,762/- which was declared in the return of income. The Assessing Officer by order dated 31.12.2010 inter alia held that losses of export oriented units cannot be allowed to set off against the profits of Unit No.I and added back the losses of export oriented unit i.e., Rs.6,65,23,391/- against the income of profit making unit and determined the total income of the assessee at Rs.6,78,13,151/- and created a demand of Rs.2,99,27,080/-.
The assessee challenged the order passed by the Assessing Officer in an appeal before the Commissioner of Income Tax (Appeals), which was
dismissed by an order dated 02.02.2012. Being aggrieved, the assessee filed an appeal before Income Tax Appellate Tribunal (hereinafter referred to as ‘the Tribunal’, for short). The Tribunal by an order dated 12.10.2012 dismissed the appeal preferred by the assessee and upheld the order of the Commissioner of Income Tax (Appeals). In the aforesaid factual background, the assessee has filed this appeal.
Learned Senior counsel for the assessee while inviting the attention of this court to the return of income for the Assessment year 2008-09 submitted that the assessee has neither claimed any deduction under Section 10B of the Act in respect of any of the three units of the assessee nor has filed any audit report in Form 56G in accordance with Section 10B(5) of the Act read with Rule 16E for the Assessment year 2008-09, which is a mandatory requirement for claiming deduction under Section 10B of the Act. It is also argued that since, the assessee had not claimed deduction
under Section 10B of the Act, the assessee is eligible to set off losses incurred in the eligible (EOU) against the profits earned by ineligible (DTA) units in accordance with Section 70 of the Act, even assuming that the assessee had claimed deduction under Section 10B of the Act. It is also urged that claim for deduction under Section 10B of the Act cannot be thrust upon the assessee. It is also submitted that the claim of the assessee for set off of the loss from one unit against profit of other units is also supported by circular issued by Central Board of Direct Taxes (CBDT) dated 16.07.2013. In this connection, our attention has been invited to paragraph 5.2 of the Circular and it is argued that the Circulars are binding on the authorities. It is also pointed out that similar issue has been decided by a bench of this court against the revenue by Income Tax Appellate Tribunal in ‘MINDTREE CONSULTING P LTD., VS. ASSISTANT COMMISSIONER OF INCOME TAX and the aforesaid decision has been upheld by this
court in ‘COMMISSIONER OF INCOME TAX VS. YOKOGAWA INDIA LTD.,’, (2012) 341 ITR 385. In support of aforesaid submissions, reference has also been made to decisions in ‘CIT VS. YOKOGAWA INDIA LTD.,’, 391 ITR 274 (SC), ‘CIT VS. YOKOGAWA INDIA LTD’, 341 ITR 385 (KARNATAKA), ‘CIT VS. GALAXY SURFACANTS LTD’, 343 ITR 108 (BOMBAY), ‘MINDTREE CONSULTING (P) LTD VS. ACIT’, 102 TTJ 691 (BANGALORE), ‘HINDUSTAN UNILEVER LTD. VS. DCIT’, 325 ITR 102 (BOMBAY), ‘CIT VS. BALCK AND VEATCH CONSULTING (P) LTD’, 348 ITR 72 (BOMBAY), ‘CIT VS. SHANTIVIJAY JEWELS LTD’, 374 ITR 520 (BOMBAY), ‘CIT VS. CHESLIND TEXTILES LTD’, 354 ITR 29 (KARNATAKA), ‘CIT VS. MINDTREE CONSULTING LTD. IN ITA NO.797/2006 DATED 09.08.2011 and BOARD CIRCULAR 7/DV/2013 DATED 16.07.2013.
On the other hand, learned counsel for the revenue submitted that due date of filing the return under Section 139(1) of the Act was 30.09.2008. However, the return, which was referred to by learned Senior counsel for the assessee is dated 07.11.2012 and was not even filed. Therefore, the Assessing Officer was not under an obligation to take note of the return which was filed beyond the prescribed time limit, which otherwise had not legal sanctity. Alternatively, it is submitted that even if return filed by the assessee on 30.09.2008 is examined, it is evident that same does not contain any declaration that the assessee is not making a claim under Section 10B of the Act. It is further submitted that declaration has to be made in writing before the return and mere mentioning of the word ‘not applicable’ in the return does not amount to compliance with requirements of Section 10B(8) of the Act. It is further submitted that since, the assessee had not filed declaration before filing of the return, Section
70 of the Act does not apply to the fact situation of the case. It is also submitted that while construing taxing statute, literal construction has to be adhered to unless the context renders it plain that such a construction cannot be put up on the words. In support of his submissions, learned counsel for the revenue has referred to decision of the Supreme Court in YOKOGAWA INDIA LTD. supra as well as ‘COMMISSIONER OF INCOME TAX-III VS. CALCUTTA KNITWEARS’, (2014) 43 TAXMANN.COM 446 (SC) and ‘K.NAGESH VS. ASSISTANT COMMISSIONER OF INCOME-TAX, BANGALORE’, (2015) 57 TAXMANN.COM 439 (KARNATAKA).
We have considered the submissions made by the learned counsel for the parties and have perused the record. Before proceeding further, it is apposite to take note of the relevant statutory provisions namely Section 10B(i), 10B(5), 10B(6)(ii), and Section 70 as well as the
para 5.2 of the Circular issued by the Central Board of Direct Taxes. Section 10B(1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee.
Section 10B(5) The deduction under sub-Section (1) shall not be admissible for any assessment year beginning on or after the 1st day of April 2001, unless the assessee furnishes in the prescribed form, along with the return of income, the report of an accountant, as defined in the Explanation below sub-Section (2) of Section 288, certifying that the
deduction has been correctly claimed in accordance with the provisions of this section.
Section 10B(6)(ii) 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 year, or of any previous year, relevant to any subsequent assessment year- (i)xxxxx (ii) no loss referred to in sub-section (1) of Section 72 or sub-Section (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.
Section 70(1) Save as otherwise provided in this act, where the net result for any assessment year in respect of any source falling under any
head of income, other than “Capital gains”, is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head.
(2) Where the result of the computation made for any assessment year under Sections 48 to 55 in respect of any short-term capital asset is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset.
(3) Where the result of the computation made for any assessment year under Sections 48 to 55 in respect of any capital asset (other than a short-term capital Asset) is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset not being a short-term capital asset.
Para 5.2 of Circular dated 10.7.2013 The income computed under various heads of income in accordance with the provisions of Chapter IV of the IT Act shall be aggregated in accordance with the provisions of Chapter VI of the IT Act, 1961. This means that first the income / loss from various sources i.e., eligible and ineligible units, under the same head are aggregated in accordance with the provisions of Section 70 of the Act. Thereafter, the income from one ahead is aggregated with the income or loss of the other head in accordance with the provisions of Section 71 of the Act. If after giving effect to the provisions of Sections 70 and 71 of the Act there is any income (where there is no brought forward loss to be set off in accordance with the provisions of Section 72 of the Act) and the same is eligible in accordance with the provisions of Chapter VI- A or Sections 10A, 10B etc. of the Act, the same shall be allowed in computing the total income of the assessee.
Section 10B of the Act was substituted by Finance Act, 2000 w.e.f. 01.04.2001. Section 10B as it stands is not a provision in the nature of an exemption but provides for a deduction of such profit and gains as are derived by 100% export oriented undertaking from the export of articles or things or computer software for 10 consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce. Section 10B does not contain any prohibition to prevent an assessee from setting off losses from one source against income from another source under the same head of income as prescribed under Section 70 of the Act. Section 10B(6)(ii) of the Act restricts carry forward and set off of loss under Sections 72 and 74 of the Act but does not provide anything regarding intra-head set off under Section 70 and inter-head set off under Section 71 of the Act. The business income can be computed only after set off of business loss against the
business income in the year as per provisions of Section 70 of the Act. Section 10A of the Act is a code by itself and it is pertinent to note that Section 10A(6)(ii) does not preclude the operation of Sections 70 and 71 of the Act. Para 5.2 of the Circular issued by the Central Board of Direct Taxes dated 16.07.2013 clearly provides that income / loss from various sources i.e. eligible and ineligible units under the same head are aggregated in accordance with provisions of Section 70.
It is equally well settled legal proposition that where the assessee does not want the benefit of deduction from the taxable income, the same cannot be thirst upon it. There is no provision which makes compulsory on the part of income tax officer to make deduction in all cases. (See: ‘COMMISSIONER OF INCOME-TAX Vs. MAHINDRA MILLS’ (2000) 243 ITR 56 (SC). From the return of income for the assessment year 2008-09 in Schedule BP, Sl.No.35(iii),
the assessee has shown the deduction under Section 10B of the Act as zero. Similarly, at Sl.No.57 the assessee has filed the deduction under Section 10B as not applicable. Thus, from perusal of return of assessment year 2008-09 it is evident that the assessee has not claimed any deduction under Section 10B of the Act in respect of any of the three units of the assessee. It is pertinent to mention here that Section 10B(5) read with Rule 16E mandates that the assessee has to file audit report in Form-56G for claiming deduction under Section 10B of the Act. Admittedly, in the instant case, the assessee has not filed any audit report in Form-56G which is a mandatory requirement for claiming deduction under Section 10B of the Act. Therefore, the deduction under Section 10B of the Act cannot be thirst upon the assessee.
Admittedly, in the instant case, two units of the assessee namely unit No.II and unit No.III were export
oriented units and were eligible for exemption. The assessee had sustained loss in respect of unit No.I and therefore, the assessee had claimed set off, as permissible under Section 70 of the Act and had offered the balance as income taxable under the head income from business of Rs.12,89,762/- which has been declared in the return. The provisions of Section 70 of the Act have to be given effect to. It is pertinent to mention here that Income Tax Appellate Tribunal had taken a similar view in MINDTREE CONSULTING (P) LTD., supra, which was upheld by a Division Bench of this Court in COMMISSIONER OF INCOME-TAX Vs. YOKOGAWA INDIA LTD., supra. Similar view has been taken by Bombay High Court in GALAXY SURFACTANTS LTD., supra. We respectfully agree with the view taken by the Division Bench of this Court as well as Bombay High Court.
It is pertinent to mention here that decision of the Supreme Court in YOKOGAWA, supra is not an authority for the proposition that an assessee cannot claim set off under Section 70 of the Act and therefore, the aforesaid decision has no application to the facts of the case. Since we have dealt with the issues involved in this appeal with reference to the return filed for the assessment year 2008-09 on 30.08.2009, therefore, it is not necessary for us to deal with the contention raised by the learned counsel for the revenue that the return had filed beyond prescribed period and therefore, has no legal sanctity.
In view of preceding analysis, the substantial question of law framed by this Court are answered in favour of the assessee and against the revenue. In the result, the order of the income tax appellate tribunal date 12.10.2012 in so far as it contains the finding against the Assessee is hereby quashed.
In the result, the appeal is allowed.
Sd/- JUDGE
Sd/- JUDGE ss