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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI ABRAHAM P. GEORGE
Per N.V. Vasudevan, Judicial Member
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:-
Rs.4,24,07,123 Less: B/f losses for earlier years set off A.Y. 2007-08 Business loss 38,03,998 A.Y. 2008-09 Depreciation loss 13,61,856 A.Y. 2008-09 Depreciation loss 45,23,505 Rs. 96,89,359 5. On appeal by the assessee, the CIT(Appeals) following the decision of the Hon’ble High Court of Karnataka in the case of Yokogawa India Ltd., (supra) held that deduction u/s. 10A has to be allowed without setting off of brought forward losses.
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
IT(TP)A No.1374/Bang/2014 & CO 39/Bang/2015 Page 4 of 8 High Court in the case of Yokogawa (supra) had to deal with two substantial question of law. The first substantial question of law was on the right of set off of loss of non-eligible unit against the profit of the eligible unit on which deduction u/s.10B was to be allowed. The Hon’ble Court in para 10 to 20 of its judgment dealt with the issue. The Hon’ble Court noticed that Sec.10-A(1) of the Act (which is in pari materia with Sec.10-B of the Act) read as follows:
“10B. Special provisions in respect of newly established undertaking in free trade zone etc.,-(1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by 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 articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee :” (emphasis supplied)
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
IT(TP)A No.1374/Bang/2014 & CO 39/Bang/2015 Page 5 of 8 in its commercial sense or the total income of the STP unit. Thus the view expressed is that income of the STP undertaking gets quarantined and will not be allowed to be set off against loss of either another STP undertaking or a non STP undertaking. The Hon’ble Court thereafter held that though the expression used in Sec.10A was “Deduction” but in effect it was only an exemption section. These conclusions clearly emanate from para 17 of the Hon’ble Court’s judgment.
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%
IT(TP)A No.1374/Bang/2014 & CO 39/Bang/2015 Page 6 of 8 EOU in AY 1988-89. For want of profits it did not claim benefits u/s 10B in AYs 1988-89 to 1990-91. From AY 1992-93 it claimed the said benefits for a connective period of 5 years. In AY 1994-95, the assessee computed the profits of the EOU without adjusting the brought forward unabsorbed depreciation of AY 1988-89. It claimed that as s. 10B conferred “exemption” for the profits of the EOU, the said brought forward depreciation could not be set-off from the profits of the EOU but was available to be set-off against income from other sources. It was also claimed that the profits had to be computed on a “commercial” basis. The AO accepted the claim though the CIT revised his order u/s 263 and directed that the exemption be computed after set-off. On appeal by the assessee, the Tribunal reversed the order of the CIT. On appeal by the department, the High Court in CIT Vs. Himatasingike Seide Ltd. 286 ITR 255 (Kar) reversed the order of the Tribunal and held that the brought forward depreciation had to be adjusted against the profits of the EOU before computing the exemption allowable u/s 10B. In Civil Appeal No.1501 of 2008 dated 19.9.2013 against the aforesaid decision of the Hon’ble Karnataka High Court, the Hon’ble Supreme Court observed as follows while dismissing the appeal:-
“Having perused the records and in view of the facts and circumstances of the case, we are of opinion that the civil appeal being devoid of any merit deserves to be dismissed and is dismissed accordingly.”
IT(TP)A No.1374/Bang/2014 & CO 39/Bang/2015 Page 7 of 8
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.
IT(TP)A No.1374/Bang/2014 & CO 39/Bang/2015 Page 8 of 8 12. In view of the aforesaid decision of the Hon’ble Karnataka High Court in the case of Yokogawa India Ltd. (supra), we are of the view that there is no merit in this appeal by the Revenue.
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.
Pronounced in the open court on this 7th day of August, 2015.