Loss of a unit not eligible for any tax holiday cannot be set off against profits of the eligible unit for the purpose of computing deduction

The tax payer is carrying on business in two units. The unit engaged in software development was registered with the Software Technology Park of India and was claiming tax holiday under section 1 0A of the Income Tax Act, 1961 (Act) (“eligible unit”) and the other unit was engaged in trading activity (“non eligible unit”). The eligible unit had profits while the non eligible unit had incurred a loss during the relevant year. The tax payer had claimed tax holiday under section 10A of the Act for the eligible unit treating it as an independent unit without reducing the loss of non eligible unit.

The Assessing Officer (“AO”) recomputed the profits of the tax payer by first adjusting the loss of non eligible unit against the profits of eligible unit and thereafter allowing deduction to the extent of balance profit. The tax payer preferred an appeal before the Commissioner of Income tax (Appeals) [“CIT(A)”]. The CIT(A) again allowed the deduction after reducing loss of non eligible unit, however, making some changes in the computation methodology.

The tax payer filed an appeal before the Income Tax Appellate Tribunal (“ITAT”). Simultaneously AO has also preferred an appeal against the order of CIT(A) before the ITAT.

Issues

• Whether losses of non eligible unit can be set off against the profit of eligible unit while determining the tax holiday under section 10A of the Act?
• Whether unabsorbed deduction of eligible unit under section 1 0A can be carried forward?

Contentions of the Tax Payer

• Tax holiday under section 10A of the Act is undertaking specific and not tax payer specific. An undertaking cannot be equated with the tax payer.
• As per the provisions of section 10A, profits and gains that are derived by an eligible unit from the eligible activity would be entitled to the benefit. In case the tax payer has more than one eligible unit, dedcution has to claimed separately for each undertaking.
• The provisions of section 10A form part of Chapter III under the Act which is titled “Income which do not form part of total income”. Therefore, income from the sources specified in Chapter III should not be subject to income tax and is to be excluded from the total income without any restriction.
• The deduction under section 10A is to be granted at source level from the total income and not after computing gross total income.
• Instructions to the return form are clear that the provisions of the section 1 0A would operate to eliminate the relevant income from the computation of profits and gains.
• There is no specific mention under the provisions of section 10A of the Act that the deduction shall be restricted to the total income of the tax payer computed under the provisions of the Act before allowing such deduction.

Contentions of the Revenue

• Section 10A of the Act was originally enacted as an exemption provision where the profits of the unit did not form part of the total income at all. The law was amended by Finance Act 2000 with effect from 1 April 2001, subsequent to which, it was no longer an exemption but a deduction.
• When a deduction is granted of any profits and gains from the total income, such profit and gain only refer to a positive figure arrived at after setting off the losses of the other units.
• Reliance cannot be placed on the return form, as once the intention is clear from the section, the form would not go beyond the provisions of the Act.

Ruling of the ITAT

• Chapter III has different sub-headings and tax holiday/ deduction under section 10A of the Act falls under the sub heading –“Special provisions in respect of newly established undertaking in free trade zone etc”. Therefore, provisions of section 10A would not be governed by first sub heading “Income not included in total income”. The very fact that provisions of section 10A are brought under a separate sub heading and the specific word “deduction” used in the section, would go to show that the intention of the legislature was to give only a deduction and not exclusion from total income.
• Deduction under the provisions of section 1 0A is to be granted while computing the profits and gains of business and profession itself and not from the gross total income.
• Even though the claim under section 10A of the Act is a deduction and not an exemption, the same cannot be subjected to provisions of section which falls under the different Chapter, namely Chapter VI- A so long as the legislature has not specifically mentioned so as to apply.
• In computing deduction, total income as per the provisions of the Act in respect of “that undertaking” has to be ascertained and the amount so determined is to be reduced from the total income. The loss from non eligible unit cannot be set off against the profits of eligible unit while determining deduction.
• There is no provision in the entire Act which can allow the unabsorbed claim of deduction under section 1 0A of the Act to be carried forward.

Conclusion

The ITAT answered the question in favor of the tax payer by holding that loss of non eligible unit cannot be set off against the profit of eligible unit at the time of computing deduction under section 1 0A of the Act for the eligible unit.

Source: Scientific Atlanta India Technology Pvt. Ltd. Vs The Assistant Commissioner of Income Tax ITA No. 229/Mds/2007, ITA No. 352/Mds/2008 and The Income tax Officer (OSD) Vs Scientific Atlanta India Technology Pvt. Ltd. ITA No. 536/Mds/2007 (Chennai Special Bench)

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