Deduction U/s. 10B available before setting off of brought forward losses & unabsorbed depreciation

 IN THE ITAT CHENNAI BENCH ‘A’

Assistant Commissioner of Income-tax

Versus

Charon Tec (P.) Ltd.

IT Appeal No. 1375 (Mds.) of 2008
[ASSESSMENT YEAR 2005-06]

NOVEMBER  14, 2012

ORDER

Vikas Awasthy, Judicial Member

The appeal has been preferred by the Revenue impugning the order of the Commissioner of Income-tax (Appeals)-VIII, Chennai, dated March 20, 2008.

2. The brief facts of the case are that the assessee is engaged in the business of electronic printing and data processing. The assessee filed its return of income relevant to the assessment year 2005-06 on October 28, 2005 disclosing “nil” taxable income. The case of the assessee was selected for scrutiny. Notice under section 143(2) was issued to the assessee on October 16, 2006. The Assessing Officer, vide assessment order dated October 22, 2007, made certain additions/disallowances in the income returned by the assessee. The Assessing Officer, inter alia, made additions on account of :

3. Aggrieved against the assessment order, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals), vide order dated March 20, 2008 allowed the appeal of the assessee holding that 50 per cent. of internet charges are to be excluded from total turnover as well. In order to support his findings, the Commissioner of Income-tax (Appeals) relied on the order of the Tribunal in I.T.A. No. 3348/Mds/2004 titled Dy. CIT v. SRA Systems Ltd. [2008] 305 ITR (AT) 427 (Chennai) decided on June 15, 2007. The Commissioner of Income-tax (Appeals) further held that the deduction under section 10B is to be computed without setting off any carried forward losses of earlier assessment years. In deciding the issue, the Commissioner of Income-tax (Appeals) relied on the order of the Tribunal in the case of Intimate Fashions (India) (P.) Ltd. in I.T.A. No. 2097/Mds/2006 decided on November 27, 2007. Now, the Revenue has come in the second appeal before the Tribunal impugning the order of the Commissioner of Income-tax (Appeals).

4. Shri Shaji P. Jacob, appearing on behalf of the Revenue submitted that the Commissioner of Income-tax (Appeals) has not taken into consideration the fact that if the items which are specifically directed to be excluded from the export turnover are to be deducted from the total turnover also. The very purpose of exclusion of these items would be defeated and the method of allowing deduction as a proportion of export turnover to total turnover will lose its meaning. The Departmental representative strongly supported the order of the Assessing Officer and submitted that internet charges ought not to have been excluded from total turnover.

5. The Departmental representative assailing the order of the Commissioner of Income-tax (Appeals) on the second issue relating to deduction under section 10B submitted that for the assessment year 2003-04 loss has been set off and thereafter deduction under section 10B has been allowed to the assessee by the Assessing Officer. The assessee has not preferred any appeal against the said order. The Departmental representative in order to support his contentions has relied on the judgment of the hon’ble Supreme Court of India in the case of CIT v. Dalmia Cement (Bharat) Ltd. [1995] 216 ITR 79 , wherein the hon’ble apex court has held that where the assessee having failed to appeal against the intimation of the Income-tax Officer refusing to take cognizance of loss returns filed by the assessee, the assessee cannot claim in the assessment proceedings relating to the subsequent years that the loss in the earlier assessment years be determined, carried forward and set off against the profits of the subsequent year or years, as the case may be.

6. The Departmental representative further submitted that profits and gains of business of the eligible unit is to be computed first and thereafter deduction under section 10B is to be given. The deduction is not to be given from gross total income envisaged under Chapter VI-A. He contended that though section 10B falls under Chapter III, it has been mentioned in the section itself that what is to be given is only a deduction and not exemption. He further submitted that the business loss of the assessee as well as unabsorbed depreciation brought forward by the assessee in respect of eligible undertaking got absorbed by the assessment year 2004-05, thereafter, nothing is left to be adjusted/set off for the assessment year 2005-06. But the assessee did not deduct the unabsorbed depreciation while computing the business profit in the assessment years 2003-04 and 2004-05. Now, the assessee is not entitled to claim the benefit of earlier year depreciation. To buttress his submissions, the Departmental representative relied on the order of the Special Bench of the Tribunal in the case of Scientific Atlanta India Technology (P.) Ltd v. Asstt. CIT [2010] 38 SOT 252 (Chennai). The Departmental representative further relied on the judgment of the hon’ble Kerala High Court in the case of CIT v. Patspin India Ltd. [2011] 203 Taxman 47  wherein it has been held that before granting exemption under section 10B, losses of the earlier assessment years have to be set off.

7. Per contra, Shri Vepa Krishna appearing on behalf of the assessee submitted that the Commissioner of Income-tax (Appeals) has passed a well reasoned and detailed order. The authorised representative strongly supported the order of the Commissioner of Income-tax (Appeals) and submitted that as regards exclusion of 50 per cent. internet charges from the total turnover as well as export turnover, the case of the assessee is squarely covered by the order of the Special Bench of the Tribunal in the case of ITO v. Sak Soft Ltd. [2009] 30 SOT 55 (Chennai).

8. With respect to second issue of method deduction under section 10B, the authorised representative controverting the argument of the Departmental representative made a statement at the Bar that the appeal was filed against the order relevant to the assessment year 2003-04 and the Tribunal had set aside the impugned order passed by the Commissioner of Income-tax (Appeals) and has remitted the file back to the Assessing Officer. The Assessing Officer again set off the loss and the appeal is now pending before the Commissioner of Income-tax (Appeals). On merits the authorised representative submitted that section 10B has been placed in Chapter III of the Act which deals with incomes which do not form part of total income. He contended that the Legislature intended to give a special status to section 10B, if the intention of the Legislature was to treat the deduction under section 10B at par with deduction under Chapter VI-A, then they would have placed sections 10A and 10B in Chapter VI-A. The authorised representative submitted that the profit of 100 per cent. export oriented undertaking has to be calculated as per the formula given in section 10B(4). The profits have to be deducted from the total income of the undertaking and thereafter the residue profits, if any shall be used for deducting carried forward loss and unabsorbed depreciation.

9. In order to support his contentions, the authorised representative relied on the judgment of the hon’ble Karnataka High Court in the case of CIT v. Yokogawa India Ltd. [2012] 341 ITR 385  and the judgment of the hon’ble Bombay High Court in the case of Hindustan Unilever Ltd. v. Dy. CIT [2010] 325 ITR 102  and the order of the Tribunal in the case of Intimate Fashions India (P.) Ltd. (supra).

10. We have heard the submissions made by the rival parties and have also perused the judgments/orders referred to by both parties. The Assessing Officer while making the assessment has excluded 50 per cent. of the internet charges from the “export turnover” only. On appeal, the Commissioner of Income-tax (Appeals) has excluded the said 50 per cent. internet charges from the “total turnover” as well. We are of the opinion that the expenditure incurred in foreign currency which are excluded from the export turnover should also be excluded from the total turnover in order to grant benefit of the provisions of the section. Similar issue has been decided by the Special Bench of the Tribunal in the case of Sak Soft Ltd. (supra). The Special Bench while adjudicating the issue has held that expenses on freight, telecommunication charges, or insurance attributable to the delivery of the articles or things or computer software outside India or expenses incurred in foreign exchange in providing technical services outside India, which are required to be excluded from the export turnover as defined in Explanation 2(iii) of section 10B should also be excluded from the figure of total turnover while applying the formula prescribed by sub-section (4) of section 10B of the Act. The Special Bench relied on the judgment of the hon’ble Supreme Court of India in the case of CIT v. Lakshmi Machine Works [2007] 290 ITR 667  wherein the principle of parity between the export turnover and total turnover for the purpose of section 80HHC was adjudicated. The hon’ble apex court held that any receipt which does not have an element of turnover cannot find a place either in the export turnover or in the total turnover. We are of the considered opinion that the issue is squarely covered by the order of the Special Bench of the Tribunal in the case of Sak Soft Ltd. (supra) and no interference is called for in the order of the Commissioner of Income-tax (Appeals) on this issue. Therefore, this ground of appeal raised by the Revenue is dismissed.

11. The second issue raised in the appeal is with regard to deduction under section 10B. The question for consideration is :

“Whether deduction under section 10B should be computed and allowed in respect of the profits of the eligible undertaking for the year under consideration without setting off brought forward losses and unabsorbed depreciation ?”

12. Divergent views have been taken by the High Courts of different jurisdiction on this issue. The hon’ble Karnataka High Court in the case of Yokogawa India Ltd. (supra) while adjudicating this issue has observed in paragraph 15 as under (page 396) :

“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 undertaking 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.”

13. Similar view has been taken by the hon’ble Bombay High Court in the case of CIT v. Black & Veatch Consulting (P.) Ltd. [2012] 348 ITR 72 . The hon’ble Bombay High Court has held that (headnote) : “section 10A 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”. Since the provisions of section 10A are pari materia with the provisions of section 10B, the same ratio can be applied in the cases covered by section 10B. Therefore, from the aforesaid judgment of the hon’ble Karnataka High Court and the hon’ble Bombay High Court inference can be drawn that deduction under sections 10A and 10B has to be computed and allowed in respect of profits of eligible undertaking for the year under consideration without setting off brought forward, unabsorbed losses and depreciation of the eligible undertaking.

14. On the other hand, the hon’ble Kerala High Court in the case of Patspin India Ltd. (supra) has taken a contrary view. The hon’ble Kerala High Court has held that deduction under section 10B has to be granted with reference to profit of the industrial unit computed under the provisions of the Act which includes set off of unabsorbed depreciation carried forward from earlier years. The Special Bench of the Tribunal in the case of Scientific Atlanta India Technology (P.) Ltd (supra) has concluded that profits and gains of business of the eligible unit is to be computed first and then deduction under section 10A is to be given. It is not to be given from the gross total income as envisaged under Chapter VI-A.

15. It is a well settled law that when two different views of the different jurisdictional High Courts are available, the decision favourable to the assessee is to be followed. The hon’ble Supreme Court of India in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC) has held that (page 195) “if two reasonable constructions of a taxing provisions are possible, that construction which favours the assessee must be adopted. This is a well-accepted rule of constructions recognized by this court in several of its decisions”. Therefore, in view of the above, the Tribunal has been following the judgment of the hon’ble Karnataka High Court in the case of Yokogawa India Ltd. (supra) in various cases holding that exemption under section 10B is to be allowed without setting off brought forward unabsorbed loss and depreciation from earlier assessment year or the current assessment year. A similar view has been taken by the Tribunal in the following cases as well :

16. Respectfully following the decision of the hon’ble Karnataka High Court in Yokogawa India Ltd. (supra) and the view taken by the co-ordinate Bench of the Tribunal, we uphold the findings of the Commissioner of Income-tax (Appeals) on this issue and dismiss the appeal of the Revenue.

17. In the result, the appeal of the Revenue is dismissed.