Brief facts of the case:
M/s. Kei Industries Ltd., (hereinafter the “Assessee”) is a Public Limited company, engaged in the business of manufacturing cables, wires and stainless steel wires selling them to public sector companies and Electricity Board. It filed its return of income on 29.09.2008 declaring Rs. 1,49,18,516/- as income for the year under consideration. It was assessed under the provisions of Section 143(3) of the Act. The Assessing Officer (AO) during the assessment proceedings, noticed that:
(i) The Assessee had a hundred per-cent export oriented undertaking (100% EOU) at RIICO Industrial Area, Chopanki, Distt. Alwar (Rajasthan); was registered as EOU in Noida Special Economic Zone and eligible for deduction under Section 10B of the Act. This was the first year of operation of this Unit.
(ii) However, there was a loss of ` 2,00,29,769/- from this unit which the assessee had set off against the income of the other units. (ineligible units)
The AO disallow the set off of such loss against the other incomes by taking view that since the income since the incomes exempted under section 10B do not form the part of total income ,similarly the losses would not be hence the same not allowable.
Aggrieved by the AO’s order assessee preferred an appeal before the the CIT(A) , who dismissed the assessee’s appeal upholding the AO’s contention. The ITAT, which the assessee approached, allowed the appeal. In doing so, it essentially relied on the ruling of a Division Bench of the Bombay High Court in CIT vs. Galaxy Surfactants Ltd.
Aggrieved by the ITAT’s order, revenue preferred an appeal before the Hon’ble High Court.
Contention of the Assessee:
The learned counsel for the assessee contended that the view taken by the ITAT is sound and should not be upset. He relied on the decision of the Bombay High Court in Galaxy Surfactants and submitted that Section 10B is in the nature of deduction Section 80A (4) of the Act affirms that provisions of Section 10A and 10B are in the nature of deductions and not exemptions. Thus, the incomes deductible under section 10B are not exempted incomes; therefore, the losses in respect of such incomes can be set off under income of taxable units.
Contention of the Revenue:
The learned counsel for the revenue submitted that as Section 10B was in Chapter-III of the Act, under the heading “incomes which do not form part of total income”, legislative intent was clear that such income was exempt. Consequently, the loss of Rs 2,00,29,769/- from the exempted unit was not allowed to be set off from the income of other units because incomes include losses also.
It was further submitted that clause (ii) of sub-section (6) of Section 10B provide for carry forward and set off of losses pertaining to the 100% export oriented units eligible for deduction under the said section. Therefore, if what the learned counsel for the assessee is arguing is to be accepted, then the provisions of section sub-clause (ii) of sub-section (6) shall become redundant. It has to be appreciated that when there is a specific provision for carrying forward and set off of losses sustained by the unit eligible for deduction under Section 10B, there is no occasion for the AO to take a liberal view and allow deduction of loss sustained by such unit against the income from other business not enjoying any tax benefits.
Decision of the Hon’ble High Court:
The High court observed that the sole issue under consideration is that whether the incomes exempt under Sec 10B of the chapter III of the Act can in the case of losses be allowed to set off against other incomes. The court observed that the issue has been dealt by the Hon’ble Supreme court in the case of Tai Technologies wherein the Apex court held that profits from the eligible businesses have to be eliminated at the first stage itself, that is, as soon as they are computed, suggesting that it is an exemption provision. It was held that the eligible profits are not to be subjected to the adjustment under Section 72 of the Act, and the brought forward loss from the unit eligible for the relief under Section 10B cannot be adjusted against the profits from the other units, which in effect reiterates the position that the loss does not enter the field of taxation just as the profits also do not enter the field. This, with respect, lends support more to the view that Section 10A and Section 10B are in the nature of exemption provisions, rather than provisions for deduction.”
Thus, the losses from eligible units cannot be set off against income of the other units.
The appeal of assessee is disallowed.