Allowability of deduction under section 10B of IT Act prior to setting off of depreciation allowance

RELEVANT PARAGRAPHS:

6. Having heard both the parties and having considered their rival contentions, we find that the only dispute before us is as to whether deduction u/s.10B is to be allowed prior to the set off of the depreciation allowance and whether the unabsorbed depreciation of earlier years would form part of the current year’s depreciation. It is not in dispute that the assessee is eligible for deduction u/s.10B of the Income tax Act. Section 10B is a special provision in respect of newly established 100% export oriented undertaking and reads as follows-

1OB -[1] Subject to the provisions of this section, a deduction of  such profits and gains as are derived by a hundred per cent export-oriented 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 undertaking 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:

Thus, from the plain reading of the section, it can be seen that an undertaking which fulfills the conditions stipulated therein shall be allowed a deduction of profits and gains of business derived from the EOU from the total income of the assessee. Thus, initially the profits and gains of the business of the eligible undertaking has to be computed. Sec.28 of the Income tax Act provides the various incomes which shall be chargeable to income tax under the head ‘profits and gains of business or profession’ and sec. 29 provides that the income referred to in sec.28 shall be computed in accordance with the provisions contained in sections 30 to 32D of the Act. Therefore, for computing the profits and gains of business or profession of a 100% export oriented undertaking, the income has to be computed in accordance with sec.30 to 43D of the Act and thus effect has to be given to sec.32 of the Income tax Act for computation of the profits and gains: of the business or profession. Sub-sec.[2] of sec.32 provides for the carry forward of the unabsorbed depreciation of earlier years and further that subject to the provisions of sub-sec.[2] of sec.72 and sub[sec.[3] of sec.73, the allowance of part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, to be deemed to be allowance for that previous year and so on in the succeeding previous year. Sec.72 of the Income tax Act provides for the carry forward of the set off of business loss. Sub-sec.[1] of sec.72 provides for the set off of the brought forward loss of earlier years and sub-sec.[2j provides for the set off of unabsorbed depreciation under sub[sec.[2] of sec.32 or sub-sec.[4j of sec.35 Sub-sec.[3] of sec.72 provides that no loss, other than the loss referred to in the proviso to sub-sec.[1] of this section shall be carried forwarded under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed. Thus, it can be seen that the brought forward loss or brought forward depreciation/ allowance is allowable only for a period of eight successive assessment years. Consequently, it can be seen that after the computation of income from profits and gains of business or profession, the loss of the earlier years has to be first set off and subsequently the unabsorbed depreciation brought forward from the earlier years has to be set off. Thereafter the current year’s depreciation has to be set off. Current year’s depreciation includes depreciation of the relevant assessment year as well as the deemed depreciation as provided under sub-sec.[2] of sec.32 of the Act, it is only thereafter that the income from profits and gains of business or profession are computed to be included in the total income of the assessee and thereafter deduction u/s.10B of the Act is to be allowed under the computation of income from profits and gains of bus ness or profession after adjusting the unabsorbed depreciation, therefore the action of the AO in computing the deduction u/s.10B is correct. The reference of the CIT[A] to sub-sec.[6] of sec. 10B is misplaced as the said sub section provides for the procedure to be adopted in the year immediately following the year in which the tax holiday comes to an end. This sub section is in no way relevant for adjudication of the issue before us. In view of the same, the order of the CIT[A] is set aside and that of the AO is restored.

NF

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