DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-12(3), BANGALORE vs. M/S SAMI LABS LTD, BANGALORE

The facts of the case, briefly, are as under :-

Revenue is aggrieved with the order of the CIT (Appeals) – III, Bangalore dt.26.6.2014 for Assessment Year 2006-07 and has preferred this appeal before the Tribunal raising the following grounds :-

The order of the learned CIT (Appeals) is opposed to law and facts of the case.

Grounds at S.Nos.2 and 3 : Deduction u/s.10B of the Act. 5.1 In these grounds, Revenue contends that the learned CIT (Appeals) erred in directing the Assessing Officer to compute deduction under Section 10B of the Act without setting off the business losses and depreciation pertaining to non 10B units against the profits of 10B units by following the decision of Yokogawa India Ltd. (2012) 341 ITR 386 (Kar) which has not become final, since the same has not been accepted by the Department and SLP in this regard is pending before the Hon'ble Apex Court. It is submitted that the deduction under Section 10B has to be allowed from the total income of the assessee from various sources after net off of losses from one source against income from other sources under the same head of income in accordance with the provisions of Section70(1) of the Act. The learned Departmental Representative was heard in support of the grounds. 5.2 Per contra, the learned Authorised Representative for the assessee supported the decision of the learned CIT (Appeals) in the impugned order on this issue. It is submitted that since the issue of deduction under Section 10B of the Act is squarely covered by the decision of the Hon’ble Karnataka High Court in the case of CIT V Yokogawa India Ltd. (supra), Revenue’s appeal on this issue is liable to be dismissed. 5.3.1 We have heard the rival contentions of both parties and perused and carefully considered the material on record; including the judicial pronouncement relied upon by the assessee. We find that the Hon’ble jurisdictional High Court in the case of Yokogawa India Ltd. (supra) had held that deduction u/s 10B is allowable without setting off the brought forward loss and loss of the current year pertaining to the other units. The Hon’ble High Court was considering the following substantial questions of law:- “(i) Whether the appellate authorities failed to take into consideration that the amendment to section 10A by the Finance Act of 2000 with effect from April 1, 2001, the deduction of profits and gains as earned by an undertaking from the export of articles or things or computer software is required to be allowed from the total income of the assessee and consequently the loss from the non-STP unit is required to be set off against the income of the other STP unit before allowing deduction under section 10A of the amended Act? (ii) Whether the Tribunal was correct in holding that the deduction under section 10A or section 10B of the Act during the current assessment year has to be allowed without setting off brought forward unabsorbed losses and the depreciation from earlier assessment year or current assessment year either in the case of non-STP units or in the case of the very same undertaking?” (Emphasis supplied) 5.3.2 The relevant findings of the Hon’ble High Court at paras 19, 20, 31 to 33 reads as follows:- “19. 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 10A unit has to be excluded before arriving at the gross total income of the assessee. The income of 10A unit has to be deducted at source itself and not after computing the gross total income. The 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 u/s 10A would not enter into computation as the same has to be deducted at source level. -------------------------------------------------------------- 31. After making all such computation the assessee would be entitled to the benefit of set off or carry forward of loss as provided u/s 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 u/s 10B of the Act. The expression “deduction of such profits and gains as derived by an undertaking 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.

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.

As the income of 10-A unit has to be excluded at source itself before arriving at the gross total income, the loss of non 10-A unit cannot be set off against the income of 10-A unit u/s 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 10-A 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 years depreciation u/s 32(2) is to be set off. As deduction u/s 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 be assessee. Hence, the main substantial question of law is answered in favour of the assessees and against the revenue” 5.3.3 Respectfully following the decision of the Hon'ble High Court of Karnataka in the case of CIT V Yokogawa India Ltd. Reported in 341 ITR 385 (Kar), we hold that the deduction under Section 10B of the Act for the eligible unit is to be allowed/computed without setting off the losses of other units, other than the eligible unit, against the profit of the eligible unit. As the issue is squarely covered in favour of the assessee by the above decision in the case of Yokogawa India Ltd. (supra), we uphold the decision of CIT (Appeals) in allowing the assessee’s claim for deduction under Section 10B of the Act. Consequently, the Grounds at S.Nos.2 and 3 of Revenue’s appeal are dismissed.

Ground No.4 – Cultivation Expenses 6.1 In this ground, Revenue contends that the learned CIT (Appeals) erred in holding that the expenses of cultivation amounting to Rs.86.85 lakhs is to be set off against the business income of the assessee on the grounds of commercial expediency. It is contended that the learned CIT (Appeals) came to this decision by following the judgement of the Hon'ble High Court of Karnataka in the assessee's own case for Assessment Year 2004-05 in dt.21.2.2012. It is submitted that the learned CIT (Appeals) held so without appreciating the fact that the assessee has undertaken cultivation as a separate activity by way of entering into agreements with farmers was in the nature of contract farming and by following the decision of the Hon'ble High Court of Karnataka in the assessee's own case for Assessment Year 2004-05 in ITA No.207/2011 dt.21.2.2012, which has still not become final. The learned Departmental Representative was heard in support of the grounds raised. 6.2 Per contra, the learned Authorised Representative submitted that the impugned order of the learned CIT (Appeals) on this issue is correct as the Hon'ble High Court of Karnataka in the assessee's own case in ITA No.207/2011 dt.21.2.2012 for Assessment Year 2004-05 has held that identical expenditure incurred in that year to be revenue in nature and incurred for the purpose of the assessee's business. It is contended that, in the light of the above, Revenue’s appeal on this issue is liable to be dismissed.

In the result, Revenue’s appeal for Assessment Year 2006-07 is dismissed. Order pronounced in the open court on 10th July, 2015.