• Oct
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  • 2012

Carry forward business losses & depreciation cannot be set off against profits of an undertaking while working out claim u/s. 10B

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IN THE ITAT MUMBAI BENCH ‘A’

ASB International (P.) Ltd.

versus

Deputy Commissioner of Income tax, Circle-1

IT Appeal Nos. 245, 7040 to 7042 (Mum.) of 2011

[Assessment years 2005-06 to 2007-08]

JUNE 29, 2012

ORDER

1. These are assessee’s appeal for assessment years 2005-06, 2006-07 and 2007-08. ITA No.245/Mum/2011 is against the order of the CIT under section 263 dated 29.3.2010 for AY 2005-06. Since AO has passed consequential order and assessee’s appeal in ITA Nos.7040 to 7042 have been contested on merits, assessee during the course of the arguments withdrew the appeal as infructuous. Accordingly ITA No.245/Mum/2011 was dismissed as withdrawn.

2. In the three appeals, there are common issues with reference to exemption under section 10B and computation of book profits under section 115JB. For assessment years 2005-06, AO originally computed the assessment under section 143(3) which was subsequently revised under section 263 and in the consequential orders AO adjusted the brought forward business losses and unabsorbed depreciation before allowing the deduction under section 10B, thereby affecting the claim of section 10B and carry forward losses. While calculating the computation of book profit under section 115JB, AO similarly made adjustment under section 10B as well. In assessment year 2007-08 the assessment was completed under section 143(3) on similar lines, whereas on assessment year 2006-07 the order was modified under section 154 by AO. Assessee is contesting the issues both on merits as well as on legal principles. For the sake of record, the grounds in assessment year 2005-06 are extracted below:

“Exemption under section 10B:

  1.  The learned CIT (A) erred in confirming the action of AO in holding that the deduction under section 10B is to be allowed after set off of brought forward business losses and unabsorbed depreciation. On that basis, the learned CIT (A) erred in upholding the action of AO in disallowing the deduction under section 10B of Rs. 11,15,23,091/-.

  2.  The CIT (A) erred in holding that this is now settled position of law that all brought forward losses and depreciation are first to be set off against the business profits of the current year before deduction are computed.

  3.  The CIT (A) erred in observing that from the assessment year 2001-02, the provisions of section 10A and 10B have been brought at par with other sections dealing with deductions under Chapter VI-A.

Computation of Book Profit under section 115JB:

  4.  The learned CIT (A) erred in upholding the action of AO of computing book profits under section 115JB at Rs. 313,07,040 without adding/deducting the amount credited/debited as income/expenses relatable to unit eligible for tax holiday under section 10B as per the books of account of the appellant.

  5.  The learned CIT (A) erred in confirming the view of AO that the income/expenses of units whose profit is exempt under section 10B can be considered for computation of book profit under section 115JB only when there is some income available to be claimed exemption of.

  6.  The learned CIT (A) erred in confirming the action of AO of computing book profit under section 115JB by reducing the amount of loss brought forward or unabsorbed depreciation as per books of account at Rs. 11,85,60,095/- instead of Rs. 15,06,70,261/-.

Others:

  7.  The learned CIT (A) erred in confirming the interest charged under section 234B of Rs. 16,47,651/-.

  8.  The learned CIT (A) erred in confirming the interest charged under section 234D of Rs. 20,126/-.

  9.  The learned CIT (A) erred in dismissing the ground in relating to initiation of penalty by AO under section 271(1)(c).

10.  Each one of the above grounds of appeal is without prejudice to the other”.

3. We have heard the learned Counsel and the learned CIT (DR) in detail.

4. Ground No.1 is with reference to the claim of exemption under section 10B. It was 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.

5. 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 (P.) Ltd. [2012] 208 Taxman 144/20 taxmann.com 727 (Bom.) (Mag.) as well as the judgment of the Hon’ble Karnataka High Court in the group of cases Asstt. CIT v. Yokogawa India Ltd. [2012] 341 ITR 385/21 taxmann.com 154 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.”

7. 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 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 v. 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.

3. 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. v. 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 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”.

8. On similar question, the Hon’ble Karnataka High Court in the batch of cases of Yokogawa India Ltd. (supra) 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.

11. 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 trade 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 sub-section (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 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 ;

(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 ;”

12. 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.

13. 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).

14. 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.

15. 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.

16. 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 VI-A 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.

17. 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.

18. 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.

19. From the aforesaid discussion it is clear that the income of the section10A 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

20. 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 sub-section (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 sub-section (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.

21. 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 sub- section 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.”

22. 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.

23. 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 for-ward 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-

(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.”

25. 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.

26. The Madras High Court in the case Madras Machine Tools 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.”

27. 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.

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”.

9. 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.

10. Ground No.2 is with reference to exclusion of the amount under section 115JB which credited or debited as income or expenses relatable to units eligible for exemption under section 10B. AO proceeded to re-compute the income by giving affect to the working of income under the normal provisions to the computation under section 115JB. It was assessee’s contention that the working under section 115JB has to be considered on the basis of the book results without taking recourse to the normal computation of income.

11. It was fairly admitted that this issue is also decided by the Coordinate Bench in the case of Moser Baer India Ltd v. Dy. CIT [2007] 17 SOT 510 (Delhi) Delhi Tribunal and Dy. CIT v. Roxy Investments (P.) Ltd. [2008] 24 SOT 227 Delhi Tribunal and this matter was ultimately decided by the Hon’ble Supreme Court in the case of CIT v. Bhari Information Tech. Systems (P.) Ltd. [2012] 204 Taxman 85/17 taxmann.com 62 (SC) (Mag.).

12. In the case of Moser Baer India Ltd. (supra), the issue was decided as under:

“Mode of Computation of book profit under section 115JB

For the purpose of computing book profit under section 115JB, profit is to be first arrived at as computed under Parts II and III of Schedule VI of the Companies Act, 1956. In so computing, the accounting policies and the accounting standards adopted for preparing such accounts and the method and rates adopted for calculating the depreciation shall be the same as have been adopted for the purpose of preparing such accounts and rate by the company at its annual general meeting. Thus, under the scheme of provisions of section 115JB minimum alternate tax is levied with reference to the book profit disclosed in the profit and loss account prepared in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act, as opposed to ‘profits or gains of business or profession’ as computed as per the provisions of the Act. The book profit gets substituted for the total income as computed under the Act. The book profit has, therefore, to be wholly quarantined from the said total income. For the determination of book profits thus any mode and manner of computation of total income under the Act has not to be applied unless specifically provided, as held by the Apex Court in Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273/122 Taxman 562 and as clarified in the memorandum explaining provisions of the Finance Bill, 2000 [242 ITR (St.) 117, 138]. In other words, for the purpose of levy of MAT, reference is to be made only to the annual accounts as prepared for the purpose of the Companies Act. Further, the Explanation to section 115JB(2) provides the manner of computation of book profit. The starting point is the book profit as disclosed in the profit and loss account prepared in accordance with Parts II and III of Schedule VI of the Companies Act, 1956. Such profit is subject to adjustments specified in the Explanation to said section. In terms of clause (ii) of Explanation to section 115JB(2), the amount of income to which provisions, inter alia, section 10A/10B apply if such amount is credited to profit and loss account, is to be reduced from the profit as per profit and loss account.

Similarly, clause (f ) of Explanation to section 115JB(2) provides that profit as shown in the profit and loss account be increased by the amount of expenditure relatable to any income to which, inter alia, section 10A or 10B apply. The amount of income to which, inter alia, section 10A/10B applies, if such amount is credited to the profit and loss account it would only refer to such amount as appearing in the books of account. Similarly, the amount of expenditure, including depreciation relatable to any income to which section 10A/10B applies, would certainly refer to the expenses and depreciation debited to the profit and loss account and not computed in the manner provided under sections 28 to 44 of the Act. The assessee, accordingly, while computing book profit under section 115JB, on which tax was paid, deeming the same to be the total income chargeable to tax in its hands, adjusted the profit as shown in the profit and loss account to the following extent : (i) expenditure and book depreciation in relation to two units were added back to the profit; (ii) income of the aforesaid two units minus other income, interest dividend, etc., were reduced from the profit. The Assessing Officer, on the other hand, reduced the book profit by deduction admissible under section 10A/10B in respect of the aforesaid units, calculated in accordance with the provisions of the Act. The major difference in the basis adopted by the assessee and the Assessing Officer was on account of adjustment of depreciation. In the books of account, depreciation had been calculated on straight line method and the book profit had been computed taking into account the aforesaid basis of book depreciation in terms of clear and unambiguous mandate contained in clause (iii) of the proviso to sub-section (2) of section 115JB providing that methods and rates adopted for calculating depreciation would be same as have been adopted for preparing the accounts that are laid before annual general meeting convened as per the provisions of section 210 of the Companies Act. The Assessing Officer, on the other hand, had sought to exclude depreciation calculated on the basis of written down value as provided in section 32 while adding back book depreciation. As a consequence of the aforesaid, exclusion of income net of expenses relatable to units eligible for deduction under section 10A/10B had been taken by the Assessing Officer at Rs. 9,825.14 lakhs as against Rs. 13,343.61 lakhs excluded by the assessee. The action of the Assessing Officer was contrary to the scheme of section 115JB, the unambiguous provisions of clause (f) and clause (ii) of Explanation to section 115JB(2) and the settled judicial precedent in this regard. While computing book profit under section 115JB amount to be reduced is income which is eligible for exemption under section 10A/10B as computed on basis of book profits as per Parts II and III of Schedule VI of the Companies Act and not on basis of provisions of Act. Further, the CBDT vide Circular No. 559, dated 4-5-1990 and also Circular No. 680, dated 21-2-1994 clarified that for the purpose of section 115J (which is pari materia to section 115JB) deduction under section 80HHC that needs to be excluded (from book profits) in terms of clause (iii ) of Explanation is to be calculated with reference to book profits. The Special Bench of the Tribunal in the case of Dy. CIT v. Syncome Formulations (I) Ltd. [2007] 106 ITD 193 (Mum.) considering provisions of sections 115JA and 115JB held that the Assessing Officer is not permitted to deviate from the book profit while computing the deduction under section 80HHC of the Act that is to be excluded in terms thereof. Therefore, while computing book profit under section 115JB the adjustment, in terms of clause (ii) of Explanation to section 115JB(2) has to be for the amounts credited/debited to the profit and loss account, as the case may be. Therefore, while computing book profit the amount of Rs. 13,343.61 lakhs as claimed by the assessee was required to be reduced from the book profit and not the sum of Rs. 9,825.14 lakhs as computed by the Assessing Officer in accordance with the provisions of Act. Hence, the appeal was to be allowed. [Para 5]“.

13. Similarly in the case of Roxy Investments (P.) Ltd. (supra) Delhi Tribunal, the issue was decided as under:

“Under the scheme of provisions of section 115JB Minimum Alternate Tax (MAT) is levied with reference to the book profit disclosed in the profit and loss account prepared in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act, 1956, as opposed to ‘profits or gains of business or profession’ as computed as per the provisions of the Act. The book profit gets substituted for the total income as computed under the Act. The book profit has, therefore, to be wholly quarantined from the said total income. For the determination of book profit, thus, any mode and manner of computation of total income under the Act has not to be applied unless specifically provided for. The Explanation to section 115JB provides the manner of computation of book profit. The starting point is the book profit as disclosed in the profit and loss account prepared in accordance with Parts II and III of Schedule VI to the Companies Act, 1956. Such profit is subject to adjustments specified in the Explanation to said section. In terms of clause (ii) of the Explanation to section 115JB (2) the amount of income to which provisions, inter alia, of section 10A/10B apply, if such amount is credited in profit & loss account, it is to be reduced from the profit as per profit & loss account. The amount of income to which, inter alia, section 10A/10B applies, if such amount is credited in the profit & loss account it would only refer to such amount as is appearing in the books of account. [Para 12].

A careful perusal of clause (ii) of the Explanation to section 115JB(2) reveals that, though the said clause speaks about the amount of ‘income’, yet it also speaks of ‘if, any such amount is credited in profit & loss account’. Thus, while reading the said clause as a whole, it becomes clear that the amount of income which can be reduced by the Assessing Officer for computing the book profit under clause (ii) of the Explanation to section 115JB(2), it would be the amount which is credited to the profit & loss account and not the amount of income which is claimed by the assessee or determined by the Assessing Officer while assessing the income under the regular provisions of the Income-tax Act. [Para 13]

Therefore, the impugned order of the Commissioner (Appeals) was correct and deserved to be upheld”.

14. The Hon’ble Supreme Court in the case of Bhari Information Tech. Sys. (P) Ltd (supra) considered the issue under the provisions of section 115JA and held as under:

“The assessee filed its return of income for assessment year 2000-01. The assessee claimed deduction under section 80HHE to the extent of Rs.1,56,33,719 against net profit as per the profit and loss account amounting to Rs. 3,07,84,105 to arrive at the book profit of Rs. 1,51,50,386 under section 115JA of the Income-tax Act, 1961 [See : Vol.R/1 of I.A. paper book A- page 6]. This claim for deduction made by the assessee was rejected by the Assessing Officer saying that since in normal computation there is no profit after carry forward loss, deduction under section 80HHE to the extent of Rs. 1,56,33,719 for computing book profit under section 115JA was not admissible.

According to the Assessing Officer, since in the present case in normal computation no net profit was left after the brought forward losses of the earlier years got adjusted against the current year’s profit, the assessee was not entitled to deduction under section 80HHE to the extent of Rs. 1,56,33,719. In appeal, the Commissioner of Income-tax (Appeals) upheld the order of the Assessing Officer.

The assessee went in appeal, against the order of the Commissioner of Income-tax (Appeals), before the Tribunal which, following the judgment of the Special Bench of the Tribunal in the case of Deputy CIT v. Syncome Formulations (I) Ltd. [2007] 106 ITD 193*, took the view that the MAT scheme which includes section 115JA did not take away the benefits given under section 80HHE. The said judgment of the Special Bench was with regard to computation of deduction under section 80HHC which, like section 80HHE, falls under Chapter VI-A of the Income-tax Act, 1961.

In the said judgment of Special Bench, which squarely applies to the facts of the present case, the Tribunal held that the deduction under section 80HHC (section 80HHE also falls in Chapter VI-A) is to be worked out not on the basis of regular income-tax profits but it has to be worked out on the basis of the adjusted book profits in a case where section 115JA is applicable. In the said judgment, the dichotomy between regular income-tax profits and adjusted book profits under section 115JA is clearly brought out.

The Tribunal in the said judgment rightly held that in section 115JA relief has to be computed under section 80HHC(3)/(3A). According to the Tribunal, once the law itself declares that the adjusted book profit is amenable for further deductions on specified grounds, in a case where section 80HHC (80HHE in the present case) is operational, it becomes clear that computation for the deduction under those sections needs to be worked out on the basis of the adjusted book profit [See: Para 61 of the judgment of the Tribunal in Syncome Formulations*.]

In the present case, we are concerned with section 80HHE which is referred to in the Explanation to section 115JA, clause (ix). In our view, the judgment of the Special Bench of the Tribunal in Syncome Formulations* squarely applies to the present case. Following the view taken by the Special Bench in Syncome Formulations*, the Tribunal in the present case came to the conclusion that deduction claimed by the assessee under section 80HHE has to be worked out on the basis of adjusted book profit under section 115JA and not on the basis of the profits computed under regular provisions of law applicable to computation of profits and gains of business.

The judgment of the Tribunal has been upheld by the High Court. We see no reason to interfere with the impugned judgment. We agree with the view taken by the Special Bench of the Tribunal in the case of Syncome Formulations1 vide Para 61 of the judgment. Accordingly, the special leave petition filed by the Department stands dismissed with no order as to costs”.

15. Since the principles laid down by the Hon’ble Supreme Court in the case of Bhari Information Tech. Sys. (P.) Ltd (supra) while working out deduction under section 80HHC are equally applicable to the provisions of section 10B while working out deduction under section 115JB, respectfully following the same and decisions of Coordinate Benches above, we uphold assessee’s contentions. Accordingly, AO is directed to rework out the computation under section 115JB keeping in view the above principles. Assessee’s ground is allowed.

16. The other ground relating to levy of interest are consequential in nature. The ground on initiation of penalty proceedings is also premature as the proceedings have only been initiated and not concluded. These grounds are therefore academic in nature.

17. Since the issues in assessment year 2005-06 and 2007-08 on the above issue are decided in favour of assessee, the appeals to that extent are allowed. In AY 2006-07, the issue on merits is same and accordingly assessee’s grounds on merits are also allowed. In addition to the issue on merits, assessee is also contending that AO cannot rectify the issue under section 154 as the mistake should be obvious and patent and not something which can be established by long drawn process of reasoning on points on which there may conceivably of two opinions. Assessee’s objections are valid as the issues cannot be rectified under section 154. However, since assessee’s grounds on merits were considered in its favour, the decision on this is only academic in nature. Therefore, the appeal in assessment year 2006-07 is also decided in favour of assessee without adjudicating the Ground No.1 on the jurisdiction under section 154. AO is directed to modify the order accordingly in the light of the decision given above on sections 10B and 115JB claims and to restore the original 143(3) order.

18. One more ground raised in assessment year 2007-08 is with reference to the action of AO of not allowing the deduction on provisions of fringe benefit tax of Rs. 21,01,800/- and provision of wealth tax of Rs. 90,000/- while computing book profits under section 115JB. The issue arises in the order in a way that AO worked out the net profit from business at Nil after setting off the brought forward losses and depreciation against the current year income. While doing so AO added back the provisions of Fringe Benefit Tax, provision of wealth tax in the computation. It was the contention that these two amounts are to be allowed. While arguing it was informed that as far as wealth tax is concerned, the same is not covered by provisions of section 115JB and submitted that AO has added an amount of Rs. 90 lakhs as against Rs. 90,000/- offered by assessee. The learned Counsel submitted that the above mistake can be rectified. With reference to provisions of FBT, it was submitted that the decision of ITAT in the case of Asstt. CIT v. Balarampur Chini Mills Ltd. [2007] 109 ITD 146/14 SOT 372 (Kol.) and ITO v. Vintage Distillers Ltd. [2010] 130 TTJ 79 (Delhi) are applicable and CBDT Circular No.8 dated 29th August, 2005 is also applicable. However, the CIT (A) did not agree to the above arguments.

19. We have considered the issue. As far as the wealth tax is concerned, the same cannot be considered as part of Income Tax and assessee itself offered the income at Rs. 90,000/- for disallowance in the working of income under section 115JB. As seen from the order of the assessment, AO mentioned an amount of Rs. 90.00 lakhs against the provision of wealth tax which seems to be a typographic error as the amounts added was at Rs. 90,000/- only. The total amount added back was at Rs. 1,18,31,598/- which include provisions of warrantees Rs. 40,29,798/-, dividend distribution tax Rs. 56,10,100/-, provisions of FBT Rs. 21,01,800/- and provisions of Wealth Tax at Rs. 90,000/- which makes total to Rs. 1,80,31,598/-. Therefore, even though the Counsel submitted for rectification of the amount, since it is only a typographical error, there is no need to modify the order of AO. However, AO is directed to keep in mind Rs. 90,000/- only which can be disallowed as per the provisions of wealth tax while giving effect to this order.

20. With reference to the FBT, the Board Circular is very clear which is as under:

“Whether FBT would be allowable deduction while computing ‘book profit’ under section 115JB?.

103. FBT is a liability qua employer. It is an expenditure laid out or expended wholly and exclusively for the purposes of the business or profession of the employer. However, sub-clause (ic) of clause (a) of section 40 of the Income-tax Act expressly prohibits the deduction of the amount of FBT paid, for the purposes of computing the income under the head “profits and gains of business or profession”. This prohibition does not apply to the computation of ‘book profit’ for the purposes of section 115JB. Accordingly, the FBT is an allowable deduction in the computation of ‘book profit’ under section 115JB of the Income Tax Act”.

21. The Board circular treats it as part of Income tax. AO is bound by the Board circular. Therefore, he is directed to exclude the amount of FBT in the computation of book profits under section 115JB. Accordingly, the ground for assessment year 2007-08 is partly allowed.

22. In the result appeal in ITA Nos.7040 & 7041/Mum/2011 are allowed, ITA No.7042/Mum/2011 is partly allowed and ITA No.245/Mum/2011 is dismissed as withdrawn.


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