ITAT MUMBAI BENCH ‘F’
Valueprocess Technologies (I) (P.) Ltd.
Income-tax Officer, Ward-10(3)(1), Mumbai
IT Appeal No. 5343 (Mum.) of 2010
[ASSESSMENT YEAR 2007-08]
JANUARY 24, 2013
Amit Shukla, Judicial Member
The present appeal preferred by the assessee, is directed against the impugned order dated 29th April 2010, passed by the learned Commissioner (Appeals)-XXII, Mumbai, for the quantum of assessment passed under section 143(3) of the Income Tax Act, 1961 (for short “the Act”) for assessment year 2007-08, on the following grounds:-
“1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming that the brought forward losses and unabsorbed depreciation of earlier years have to be set off first against the business income of the current year before allowing the deduction under section 10A and further erred in not grant deduction under section 10A though claimed during the assessment proceedings.
2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in not appreciating that the Assessing Officer has failed to issue statutory notice within the specified time as required by proviso to section 143(2) and as such the entire assessment made by the Assessing Officer has been rendered barred by limitation.”
2. The facts in brief, apropos ground no.1, is that the assessee is a Private Limited company engaged in the business of providing high quality and time bound medical transcription services to non-resident entities. The assessee’s unit is registered under the Software Technology Part Scheme of India as 100% export oriented unit. Accordingly, in the return of income, the assessee, after claming deduction under section 10B, for sums amounting to Rs. 32,59,506, declared income at Rs. nil.
3. The Assessing Officer noted that the assessee is not eligible for claiming deduction under section 10B, but is eligible to claim deduction under section 10A. In response to the show cause notice, as to why deduction under section 10B, should not be allowed as Director, STPI, is not the authority prescribed under the Income Tax Act, 1961, for granting approval for 100% EOU to be eligible for deduction under section 10B, the assessee filed detail reply and submitted that the approval letter dated 10th April 2003, granted by the Director, STPI, is a prescribed authority under the notification issued by the Ministry of Commerce. The detail submission of the assessee has been reproduced in Para-4.1 of the assessment order. However, before the Assessing Officer, the assessee, alternatively argued that its eligibility for deduction should be given under section 10A. The Assessing Officer, though rejected the assessee’s claim for deduction under section 10B, however, entertained the assessee’s alternative plea for deduction under section 10A, which also provides 100% exemption of income.
4. On perusal of the computation of income filed by the assessee, the Assessing Officer observed that the assessee company has computed the business income at Rs. 36,21,673, and has claimed the deduction of Rs.32,59,506, resulting into balance income at Rs. 3,62,167, which has been set-off against brought forward business losses and unabsorbed depreciation for the assessment year 2003-04. In nut-shell, the assessee’s claim for deduction was made from the total income before setting off brought forward loss which, as per the Assessing Officer, was incorrect. The assessee made a detail reply before the Assessing Officer, vide letter dated 23rd December 2009, which has been reproduced in Para-5.1 of the assessment order, inter-alia, contending that the deduction under section 10A, is independent and has to be allowed on the total income before the set-off of brought forward losses. In support of this, he has referred to the prescribed form ITR-6 and various schedules given therein and also various decisions.
5. The Assessing Officer rejected the assessee’s claim after referring to various provisions of the Act specifically section 4, which is the charging section, definition of total income as defined in section 2(45) r/w section 5, sections 66 to 80, containing provisions relating to aggregation of income under various heads of income and set-off of intra/inter head losses and carried forward of unabsorbed losses and disallowance and also referred to section 80B(5), which defines gross total income. After referring to these section, he observed that in order to arrive at gross total income, adjustment and brought forward losses are necessary. He further held that even though section 10A and 10B are part of Chapter III, then also, deduction of profit and computation of total income can only be computed only after allowing intra head set-off under section 70 and inter head under section 71. In short, the Assessing Officer had compared the deductions allowable under Chapter VI-A, and held that it is similar to Chapter III and, therefore, the decision laid down by the Hon’ble Supreme Court in CIT v. Shirke Construction Equipment Ltd.  291 ITR 380, though rendered in respect of section 80HHC, will also be applicable to sections 10A & 10B. Thereafter, he analysed the provisions of section 80B(5) and section 70 and held that the assessee has to set-off the losses of the business first, while determining the total income before claiming any deduction under section 10.
6. Before the Commissioner (Appeals), after explaining the various provisions of law relating to deduction under section 10A, the assessee relied upon the decision of ITAT, Special Bench, Chennai, in Scientific Atlanta Technology (P.) Ltd. v. Asstt. CIT  38 SOT 252 and the Hon’ble Supreme Court’s judgment in CIT v. V. Venkatachalam  201 ITR 737 and submitted that deduction of Rs. 32,59,506, claimed under section 10A, has to be allowed before setting off the losses. The Commissioner (Appeals) held that the decision of the Special Bench of the Tribunal in Scientific Atlanta Technology (P.) Ltd. (supra), will not be applicable as in the said case, there were two units of the same assessee are eligible for deduction under section 10A, while other one was not and therefore, the issue was whether the business loss or unabsorbed depreciation of non-eligible unit, can be set-off against eligible profit of unit under section 10A or not. Whereas in the present case, there is only one unit and the assessee has claimed deduction in respect of same unit before the setting-off of carry forward losses and depreciation. Thus, this issue was not before the Special Bench. Ultimately, he relied upon the decision of the Tribunal, Chennai Bench, in Sword Global (I.) (P.) Ltd. v. ITO  122 ITD 103 and rejected the assessee’s contention. He further referred to the decision of the Tribunal, Mumbai Bench, in Asstt. CIT v. Jewellery Solutions International (P.) Ltd.  28 SOT 405. Accordingly, he confirmed the action of the Assessing Officer.
7. Before us, the learned Counsel for the assessee submitted that the point in issue is now squarely covered by the decision of the Bombay High Court in CIT v. Black & Veatch Consulting (P.) Ltd.  348 ITR 72 and Karnataka High Court decision in CIT v. Yokogawa India Ltd.  204 Taxman 305. He further submitted that in principle, the High Court upheld that deduction under section 10A has to be given effect at the stage of computing the profits and gains of business before applying the provisions of section 72.
8. On the other hand, the learned Departmental Representative relied upon the reasoning given by the Commissioner (Appeals) and submitted that in both the decisions of High Courts cited by the learned Counsel, the matter pertained to various units and the issue was carried forward of losses and depreciation of a non-eligible unit to be set-off against eligible unit for claiming deduction under section 10A. Therefore, these judgments will not apply. He further relied upon the decisions as have been referred to by the Commissioner (Appeals). He, thus, submitted that none of the decisions relied upon by the assessee either before the Commissioner (Appeals) or before the Tribunal is applicable to the facts of the present case.
9. We have carefully considered the rival contentions of the parties, perused the orders of the authorities below and the judgment relied upon. The main issue before us is while computing the deduction under section 10A, whether carry forward losses and unabsorbed depreciation of the earlier assessment years or the current year has to be set-off first against the current business income and then deduction should be allowed or the same should be allowed at the stage of computing the profit itself without setting-off of any loss/depreciation. The Assessing Officer has drawn a parallel between Chapter VI-A and sections 10A/10B and held that these provisions are similar and, therefore, while computing the income, set-off of business losses and unabsorbed depreciation has to be taken into account first and then only the deduction has to be allowed on the resultant profit. He has referred to the judgment of Hon’ble Supreme Court in Shirke Construction Equipment Ltd. (supra) which was rendered in the context of section 80HHC and Liberty India v. CIT  317 ITR 218. Such an analogy, in our opinion, is not correct. Section 10A has been placed under the Act in Chapter-III, which deals with “Incomes which do not form part of the total Income”. The main purpose and object of section 10A, is to allow deduction of such profits and gains by an undertaking from export carried from STPI unit. The entire income of eligible unit under section 10A, has to be excluded before arriving at the gross total income. Thus, the income has to be exempted at the source itself and not after computing the gross total income. Chapter-VIA, deals with the deductions to be made from the total income of the assessee, is arrived at. There is a clear cut demarcation between the two provisions. The deduction provided in Chapter VI-A, is given at the stage of computing the total income once gross total income is arrived, whereas under Chapter-III, the income of a unit has to be excluded before arriving or computing the gross total income of the assessee and deduction has to be given at source itself and not after computing the total income. The purpose and object behind deduction/exemption under Chapter-III, and deduction under Chapter VI-A, are entirely different. One is exemption of total income and other is deduction from the income. From a plain reading of section 10A, it is evident that the said provision requires that deduction of profits and gains has to be allowed from the total income of the assessee itself. The Karnataka High Court in Yokogawa India Ltd. (supra) while interpreting the said provisions of section 10A and Chapter VI-A, held that “there can be deduction from the total income, however, there cannot be deduction from the total income which is the final result of 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 of 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”. The computation of the total income begins with only in Chapter IV and the phrase “Total Income” used in section 10A, which falls in Chapter III, cannot be understood in the same sense. The relevant observation of Their Lordships, while interpreting the definition of total income as used in the Act, are as under:-
“13. Sec. 2(45) defines “total income” to mean the total amount of income referred to in s. 5 and computed in the manner laid down in the IT Act. Sec. 5 defines the scope of total income and it is subject to the provisions of IT Act. Sec. 14 provides that “save as otherwise provided by the IT Act, all income shall for the purpose of charge of income-tax and the computation of total income, 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 s. 10A is covered in Chapter III, the phrase “total income” used in s. 10A cannot be understood in the same sense as in s. 2(45).
14. The phrase “total income” has been used in the IT Act in several places with different connotations and shades. The phrase total income used in s. 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 s. 10A(4) is also with reference to the undertaking. A business might have several undertakings and s. 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 s. 10A(1) is, therefore, to be understood as the total income of the STP unit. This is clear from the first proviso to s. 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 s. 2 will apply only when the context does not otherwise require. The placement, language and setting of s. 10A cannot mean the total income computed in accordance with the provisions of the Act. Instead, such a phrase, in the context of s. 10A, means profits and gains of the STP undertaking as understood in its commercial sense.
15. Chapter IV deals with the computation of total income under various heads of income. Sec. 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 s. 14 are that income is subject to charge of income-tax and is includible in the total income. As the relief under s. 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-s. 14 are not existing in the case of income of STP undertaking and accordingly such income is not liable to be computed under Chapter IV. Therefore the correct view would be that the relief under s. 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.”
10. While drawing a distinction between Chapter-III and VIA, Their Lordships observed and held as under:-
“16. The substituted s. 10A continues to remain in Chapter III. It is titled as “Incomes which do not form part of the total income”. It may be noted that when s. 10A was recast by the Finance Act, 2001 (sic-2000), the 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 the Parliament intended that the relief under s. 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. The Parliament was aware of the various restricting and limiting provisions like s. 80A and s. 80AB which were 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 the intention of Parliament that it is to be regarded as an exemption and not a deduction. The Act of the 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. The Parliament despite being conversant with the implications of this chapter, has consciously chosen to retain s. 10A in Chapter III.
17. If s. 10A is to be given effect to as a deduction from the total income as defined in s. 2(45), it would mean that s. 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 s. 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 s. 10A. In other words, the gross total income would be arrived at after considering s. 10A deduction also. Therefore, it would be inappropriate to conclude that s. 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 is 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 total income used in the provisions of s. 10A in this context means the global income of the assessee and not the total income as defined in s. 2(45). Hence, the income eligible for exemption under s. 10A would not enter into computation as the same has to be deducted at source level.”
11. This principle has been reiterated by the Jurisdictional High Court in Black & Veatch Consultant (P.) Ltd. (supra), wherein it has been observed and held as under:-
“Section 10A of the Income-tax Act, 1961, is a provision which is in the nature of a deduction and not an exemption. The deduction under section 10A 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. Therefore, 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. The Tribunal was right in holding 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-section 10A unit.”
12. From the ratio laid down by the aforesaid decisions of the High Court, it is absolutely clear that exemption under section 10A, is to be allowed without setting off carry forward unabsorbed losses and the depreciation from the earlier assessment year or current assessment year either in the case of non-STPI unit or in the case of very same undertaking. The distinction drawn by the learned Commissioner (Appeals) and reiterated by the learned Departmental Representative that the principle and ratio laid down by the High Court and Chennai Special Bench decision of the Tribunal in Scientific Atlanta Technology (P.) Ltd. (supra), will not be applicable in case of same unit, cannot be upheld as there cannot be two yardsticks for allowing the deduction under section 10A of the same unit vis-a-vis two units, one eligible under section 10A and the other non- eligible unit. The principle and ratio laid down by the High Court and the Special Bench decision of the Tribunal is that the deduction under section 10A, has to be given effect at the stage of computing the profit itself and it is anterior to the application of provision dealing with the set-off of losses under section 72, and unabsorbed depreciation. Thus, the decisions relied upon by the learned Commissioner (Appeals) cannot be held to be applicable in view of the subsequent decisions and the principle laid down by the Karnataka High Court in Yokogawa India Ltd. (supra) and Delhi High Court in Black & Veatch Consulting (P.) Ltd. (supra). We, thus, set aside the impugned order passed by the learned Commissioner (Appeals) and hold that the assessee is eligible for claiming deduction under section 10A, before set-off of carry forward losses and unabsorbed depreciation of the earlier years. Thus, ground no.1 is allowed.
13. Ground no.2, relates to non issuance of statutory notice within the limitation period provided under the proviso to section 143(2).
14. Since we have already allowed the assessee’s appeal on merit, the legal issue raised in ground no.2, is treated as academic in nature and the same is liable to be dismissed. We order accordingly.
15. In the result, assessee’s appeal is partly allowed.