INCOME TAX OFFICER, WARD-11(1), BANGALORE vs. M/S CARREMEN SILVERCAST CLOTHING(I)P LTD, BANGALORE

The appeal is by the Revenue and Cross Objection by the assessee against the order dated 1.7.2014 of the CIT(Appeals)-I, Bangalore relating to assessment year 2009-10.

The grievance projected by the Revenue in its appeal is that the CIT(Appeals) erred in following the decision of the Hon’ble High Court of Karnataka in the case of Yokogawa India Ltd., 341 ITR 385 (Karn) and allowing the claim of assessee for deduction u/s. 10B of the Income-tax Act, 1961 [“the Act”], without setting off the brought forward losses, on the ground that the Department has filed a SLP against the said decision. It is the further plea of the Revenue that the decision rendered by the CIT(Appeals) is not in tune with the Circular No.749 dated 9.8.2000 and Circular No.7/2003 dated 5.9.2003.

The Cross Objection by the assessee is purely supportive of the order of CIT(Appeals).

The facts under which the appeal arises for consideration are as follows. During the course of assessment proceedings, the AO noted that the assessee has claimed Rs.4,11,23,355 on the profits of exports of the EOU unit eligible for deduction u/s. 10B of the Act, before setting off of the brought forward losses which was not in accordance with law. According to IT(TP)A No.1374/Bang/2014 & CO 39/Bang/2015 Page 3 of 8 the Assessing Officer, consequent to amendment to section 10B w.e.f. 1.4.2001, a deduction equal to the profits & gains derived from the undertaking shall be allowed from the total income of the assessee. Section 2(45) defines total income as the total amount of income referred to in section 5 computed in the manner laid down in the Act. Thus, total income of the assessee computed under the Act is income after setting off the brought forward losses as provided u/s. 72, from which deduction u/s. 10B would be allowed. He therefore held that deduction u/s.10B is to be allowed only after setting off the brought forward losses of Rs.96,89,359 as follows:-

Aggrieved by the order of CIT(Appeals), the Revenue is in appeal before the Tribunal.

This issue has already been settled by the Hon’ble Karnataka High Court in the case of Yokogawa India Ltd. (supra). The Hon’ble Karnataka

The expression “Deduction” and “shall be allowed from the total income of the Assessee” used in the aforesaid provisions was considered by the Hon’ble High Court and it held in para 13 to 15 of its judgment that the expression “ shall be allowed from the total income of the Assessee” does not mean total income as defined u/s.2(45) of the Act but that expression means “profits and gains of the STP undertaking as understood

The situation with which we are concerned in the present case is a situation where there is positive income of the eligible unit then the same should be allowed deduction u/s.10B of the Act without setting of the loss of non-eligible unit. The Hon’ble Karnataka High Court in the case of Yokogawa (supra) was concerned with similar situation as set out above. In view of the aforesaid decision of the Hon’ble Karnataka High Court, we are of the view that the claim as made by the Assessee for carry forward of loss of the non-eligible unit had to be allowed without set off of profits of the 10A/10B unit. We hold accordingly and dismiss the relevant grounds of appeal of the Revenue.

We may also observe that the Hon’ble Karnataka High Court’s decision in the case of Himatasingike Seide (supra) has held that unabsorbed depreciation (and business loss) of same (s. 10A/10B) unit brought forward from earlier years have to be set off against the profits before computing exempt profits. The assessee in that case set up a 100%

Thus the ratio has to be confined to the facts and circumstances of the case. The aforesaid observations have to be confined to the facts of that case and as applicable to a case where brought forward losses and depreciation of the very same STP undertaking are not adjusted while arriving at the profits of the 10B unit for allowing deduction u/s.10A/10B of the Act and not in respect of brought forward losses and depreciation of other undertakings/non-10A/10B units. S. 10A/10B(6) as amended by the FA 2003 w.r.e.f. 1.4.2001 provides that depreciation and business loss of the eligible unit relating to the AY 2001-02 & onwards is eligible for set-off & carry forward for set-off against income post tax holiday which means that they need not be so set off as mandated in the decision of the Hon’ble Karnataka High Court in the case of Himatasingike Seide Ltd. (supra). As we have already seen, in Yokogawa India Ltd. 341 ITR 385 (Kar), it was held that even after s. 10A/10B were converted into a “deduction” provision w.e.f 1.4.2001, the benefit of relief u/s 10A/10B is in the nature of “exemption” with reference to “commercial profits” and that as the income of the s. 10A unit has to be excluded at source itself before arriving at the gross total income, the question of setting off the loss of the current year’s or the brought forward business loss (and unabsorbed depreciation) against the s. 10A profits does not arise. Therefore the decision of the Hon’ble Karnataka High Court in the case of Himatasingike Seide (supra) will not apply to the facts of the present case.

Since the Cross Objection by the assessee is only supportive of the order of the CIT(Appeals), the same is dismissed as not maintainable.

In the result, the appeal of the Revenue and the Cross Objection by the assessee is dismissed.