2006 (8) TMI 448 - AT - Income Tax

Free trade zone - exemption u/s 10A - losses from the non-10A unit - profits and gains derived by an undertaking - export of articles or things or computer software - HELD THAT - As per section 72(2), unabsorbed business loss is to be first set off and thereafter unabsorbed depreciation treated as current years depreciation u/s 32(2) is to be set off. For computing deduction u/s 10A, we are concerned only with the profit derived from export of computer software. As already observed unabsorbed business losses of other units cannot be set off and therefore unabsorbed depreciation which is to be set off after the unabsorbed business loss as per section 72(2) also cannot be set off for ascertaining the deduction u/s 10A. In the instant case, there is no unabsorbed depreciation or unabsorbed business loss in respect of software services division and therefore profits and gains of the software services division will be exempt u/s 10A without setting off the loss of other division or the setting off of carry forward losses of other division. In view of above discussion we hold that learned CIT(A) was justified in directing the Assessing Officer to allow exemption u/s 10A without setting off loss of non-10A unit and consequentially allowed carry forward of such losses and depreciation of non-10A unit. In the result, the appeal is dismissed.

Issues Involved:
1. Whether the CIT(A) erred in directing the Assessing Officer to allow exemption under section 10A without setting off the losses of the non-10A unit.
2. Interpretation of the terms "total income" and "gross total income" in relation to section 10A.
3. Treatment of unabsorbed business losses and depreciation in the context of section 10A.

Detailed Analysis:

Issue 1: Exemption under Section 10A without Setting Off Losses of Non-10A Unit

The revenue contended that the CIT(A) erred in directing the Assessing Officer to allow exemption under section 10A without setting off the losses of the non-10A unit. The revenue argued that the total income should be computed first, which involves setting off losses from non-10A units against the income from the 10A unit. The CIT(A), however, concluded that the income of the 10A unit should be excluded before arriving at the gross total income, as section 10A is placed in Chapter III, which deals with items that do not form part of the total income. The CIT(A) directed that the income of the 10A unit should be deducted at the source level, and thus, the losses of non-10A units cannot be set off against the income of the 10A unit.

Issue 2: Interpretation of "Total Income" and "Gross Total Income"

The revenue argued that section 10A refers to a deduction and not an exemption, implying that the income derived from the 10A unit should be included in the total income, which is defined under section 2(45) of the Income-tax Act. The CIT(A) and the learned AR contended that section 10A is part of Chapter III, which deals with income that does not form part of the total income, and thus, the income of the 10A unit should be excluded before computing the gross total income. The Tribunal noted that section 10A specifically states that a deduction is to be given and does not mention that such profits and gains will not be included in the total income. Therefore, the Tribunal concluded that the substituted section 10A should not be interpreted to mean that profits under section 10A should not be included in the total income.

Issue 3: Treatment of Unabsorbed Business Losses and Depreciation

The learned AR argued that the unabsorbed business losses and depreciation of non-10A units should not be set off against the income of the 10A unit. The Tribunal observed that section 10A is undertaking specific and does not fall under the sections mentioned in section 29 of the Income-tax Act, which governs the computation of profits and gains of business or profession. Therefore, the business losses of non-10A units cannot be set off against the profits of the 10A unit for determining the allowable deduction under section 10A. Additionally, unabsorbed business losses and depreciation, which are to be set off under sections 72 and 32(2) respectively, cannot be set off against the profits of the 10A unit for the purpose of ascertaining the deduction under section 10A.

Conclusion:

The Tribunal upheld the CIT(A)'s direction to allow exemption under section 10A without setting off the losses of the non-10A unit and consequently allowed the carry forward of losses and depreciation of the non-10A unit. The appeal filed by the revenue was dismissed.

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