HIGH COURT OF DELHI
Commissioner of Income-tax
v/s.
TEI Technologies (P.) Ltd.
IT APPEAL NOS. 2067 of 2010 and 347 of 2011
AUGUST 27, 2012
JUDGMENT
R.V. Easwar, J.
These are two appeals filed by the Commissioner of Income Tax under Section 260A of the Income Tax Act, 1961, which is herein after referred to as ‘Act’. The appeals are directed against the orders passed by the Income Tax Appellate Tribunal (hereinafter referred to as ‘Tribunal’). The appeals relate to the assessment years 2002-2003 and 2003-2004. The Tribunal has passed separate orders for each year, though both of them are dated 18th June, 2010.
2. On 26th April, 2012 the following substantial questions of law were framed: –
ITA No.2067/2010 (assessment year 2002-2003)
“Whether the Income Tax Appellate Tribunal is right in holding that for the purpose of Section 10A of the Income Tax Act, 1961 the losses suffered in the Non-EPZ Unit need not be set off from the profit/income of the EPZ Unit?”
ITA No.347/2011 (assessment year 2003-2004)
“Whether the Income Tax Appellate Tribunal is right in holding that for computing deduction under Section 10A of the Income Tax Act, 1961 in respect of EPZ Unit brought forward losses of the Non-EPZ Unit should be first deducted or reduced?”
3. The brief facts relating to the appeal for the assessment year 2002-2003 may be noted. The assessee is a private limited company incorporated on 4th May, 2000. It is engaged in the business of design, manufacture and sale of writing harnesses, cable assembly, remote control, degaussing coils, CRT sockets, power cords and other electrical and electronic components related thereto. It is a joint venture between a Korean company and a company based in Mauritius. In respect of the assessment year 2002-2003 it filed a return of income declaring income of Rs. 15,71,607 on 31st October, 2002. In the return, the assessee claimed exemption of Rs. 16,41,505/- under Section 10A of the Act in respect of the profits derived from the unit located in the export promotion zone (EPZ), Noida where the manufacture and export of eligible goods commenced in the previous year relating to the assessment year 2002-2003. The assessee also had another unit which was located in Non EPZ area the profits from which were not entitled to any exemption. In respect of the non-eligible unit, the assessee incurred a loss of Rs. 19,20,480/-. In making the assessment under Section 143(3) of the Act by order dated 31st March, 2005, the Assessing Officer set off the loss from the non-eligible unit against the profit of the eligible unit. It would appear that he had computed profit of the eligible unit at Rs. 19,90,278/-. After setting off the loss from the non-eligible unit, the balance profit of Rs. 69,799/- was arrived at. To this figure, the Assessing Officer added an amount of Rs. 1,22,34,928/- being the aggregate amount of the disallowance of the technical support fees, provision for write back and donation. After making the add back, the gross total income was computed at Rs. 1,23,04,727/- against which the loss for the assessment year 2001-2002 were brought forward and adjusted in terms of Section 72. Thus the total income was assessed at Rs. Nil. Towards the end of the assessment order the Assessing Officer made the following remarks:-
“Assessed at Nil income since the net income of the assessee is assessed at Nil deduction u/s 10A of the Act claimed by the assessee is not considered.”
4. The assessee filed an appeal against the assessment order before the CIT (Appeals) on various grounds and in the course of the appeal proceedings raised an additional ground as follows:-
“Additional Ground (Ground No.6)
(a) “That the Ld. Assessing Officer has erred in not allowing deduction under Section 10A of the Income Tax Act, 1961 (Act) in respect of profits derived by the undertaking registered under Noida Export Processing Zone (EPZ) from exports.
(b) That the Ld. Assessing Officer has grievously erred in not allowing deduction under Section 10A claimed in the return of income on the purported ground that as the net income of the assessee after setting off of brought forward loss/unabsorbed depreciation was nil, the deduction under section 10A of the Act was not considered.
(c) That deduction under section 10A is allowable in respect of profits of eligible undertaking, derived from exports irrespective of profit/loss of other undertakings or total income after set off of brought forward business losses/ unabsorbed depreciation. That admittedly in this case export profit of eligible undertaking is Rs. 1,644,405/-, which is eligible for deduction under section 10A of the Act.”
5. In support of the above additional ground the assessee filed written submissions before the CIT (Appeals). The CIT (Appeals) admitted the additional ground on the basis of the judgments of the Supreme Court in Jute Corporation of India Ltd. v. CIT, [1991] 187 ITR 688 and National Thermal Power Co. Ltd. v. CIT, [1998] 229 ITR 383. As regards the merits of the additional grounds, the CIT (Appeals) dismissed the same, following an order of the Bangalore Bench of the Tribunal in the case of Mindtree Consulting (P) Ltd. v. ACIT (102 TTJ 691). The CIT (Appeals) held, following the aforesaid order of the Tribunal, as follows:-
“In view of this decision which is also followed by Hon’ble ITAT, Delhi in other cases, the appellant is eligible to set off the loss of such unit. In the facts and circumstances of the case and the decision quoted above, I am of the view that the income of unit eligible for deduction u/s 10A is merely a deduction and not exemption. In view of the same, if the company concern becomes eligible to set off the loss and ultimately the gross total income becomes NIL, the claim of deduction u/s 10A cannot be entertained if the company does not have any positive income. According to the view taken by the Hon’ble ITAT, Delhi and Hon’ble ITAT, Bangalore, it becomes clear that the benefit allowed u/s 10A of the I.T Act is by way of deduction and not exemption. If the appellant as in this case does not have any positive income, deduction u/s 10A cannot be allowed. The view taken by the AO that the assessee has only NIL income u/s 10A cannot be allowed is, therefore, right and I confirm his view. In this particular year, the appellant has no positive income to avail the benefits of deduction u/s 10A and, therefore, the claim of the appellant to the tune of Rs. 16,41,405/- is not allowed. The decision of the AO on this issue is sustained.”
6. Aggrieved by the order of the CIT (Appeals) the assessee preferred further appeal before the Tribunal and raised grounds to the effect that the deduction under Section 10A in respect of the Noida unit has to be allowed notwithstanding any current or brought forward loss of the non-eligible unit and that the income tax authorities overlooked that Section 10A continues to be placed under Chapter-III of the Act which deals with “incomes which do not form part of total income “. In effect, what was contended was that the losses from the non-eligible units cannot be adjusted against the eligible unit for the purposes of Section 10A. Several orders of the various Benches of the Tribunal including the order of the Tribunal in the case of ACIT v. Yokogava India Limited [2007] 111 TTJ 548, were relied upon by the assessee. The Tribunal, on a consideration of the assessee’s submissions based on those authorities, held that the facts of the assessee’s case and the claim made by it were similar to the controversy decided by the Bangalore Bench of the Tribunal in the case of ACIT v. Yokogava India Limited (supra) and following the said order and other orders of the coordinate Benches held that the business loss of the undertakings or units whose income is not exempt under Section 10A cannot be set off against the profits of an undertaking which was eligible for the exemption under section 10A thereby reducing the exemption. The point was thus decided in favour of the assessee.
7. In respect of the assessment year 2003-2004, the facts are these. The assessee filed its return of income declaring “Nil” income after setting off the brought forward losses of Rs. 81,91,655/-. The Assessing Officer computed the income at Rs. 1,98,96,654/-in the following manner:-
