2008 (6) TMI 592 - AT - Income Tax

Eligibility of deduction u/s 10A - profits of the business - clubbing of loss from Non-STPI Unit with the profit of the STPI Unit - business of software and information system - Expenditure reduced from the export turnover - Set off against the profit of the STPI Unit. Eligibility of deduction u/s 10A - profits of the business - clubbing of loss from Non-STPI Unit with the profit of the STPI Unit - business of software and information system - Non-STPI Unit with its head office in Bangalore consisting of four foreign branches - HELD THAT - Tribunal decision in the case of Tata Elxsi Ltd. vs. ACIT 2007 (10) TMI 630 - ITAT BANGLORE and I-Gate Global Solutions Ltd. vs. ACIT 2007 (11) TMI 444 - ITAT BANGALORE relied upon by the learned counsel were on similar facts and situation wherein it has been held that when there is no unabsorbed depreciation or unabsorbed loss in respect of STPI Unit and the profits and gains of the same would be exempt u/s 10A were to be without setting off of the loss of the other divisions or the setting off of carry forward losses of other divisions. The Tribunal held that the exemption u/s 10A to STPI unit and consequently to allow carry forward of such losses and depreciation of non-STPI Unit were separate - AO had taken recourse to consider this clubbing on the basis of finding relating to the separate units interlinked by way of receipts, coupling and deriving costs. The learned CIT(A) thereafter did not take cognizance of the said finding but considered the assessee's agitation by relying on the intention of the legislation for granting deduction u/s 10A only to export income and not other income. These facts have not been controverted. We are inclined to hold that the law is very clear regarding incomes not taxable under Chapter III in the Income Tax Act which only relates to incomes forming part of total income for consideration in the spirit of the legislation has to be considered when the assessee has been able to establish the income of the STPI Unit as was available to the AO remains undisputed. This ground by the assessee, therefore, stands allowed as covered by the decision of the ITAT, Bangalore Bench in Tata Elxsi Ltd. vs. ACIT 2007 (10) TMI 630 - ITAT BANGLORE on similar facts and circumstances. Expenditure reduced from the export turnover - HELD THAT - The learned counsel did not argue the amount of expenditure on account of foreign travel and lease line charges as not pertaining to export of software as considered and definite in sub-clause (iv) to Expln. 2 to sub-section 8 of Section 10A. Therefore, this ground stands partly allowed to the extent that the expenditure that has been reduced from the export turnover has to be reduced from the total turnover as well for the purpose of quantifying the profits of the STPI Unit available under section 10A. In other words ground No. 2 stands dismissed and ground No. 3 stands allowed as covered by the decision of the ITAT, Bangalore Bench in cases mentioned above. Set off against the profit of the STPI Unit - HELD THAT - As section 10A falls under Chapter III being income exempt from tax to be excluded in determining the total income and procedural computation of taxable income as provided in the I.T. Return Format requires income or loss from eligible business u/s 10A be excluded while computing the income from business. This method of computation should be followed consistently in accordance with the provisions of the I.T. Act and profits of the non-STPI Unit cannot be clubbed to the STPI Unit profit going by the same principle, the loss for the non-STPI Unit cannot be set off against the profit of the STPI Unit. Therefore, we direct the AO to consider the carry forward business loss and unabsorbed depreciation of the Non-STPI unit in accordance with the provisions of the Income Tax Act, 1961 after computing deduction 10A deduction based on the income of the STPI Unit which is the eligible profit under the said section. In the result the appeal of assessee stands partly allowed.

Summary

Issues involved:
1. Clubbing of loss from Non-STPI Unit with the profit of the STPI Unit for computing deduction under section 10A.
2. Computation of export turnover by reducing certain expenses and their impact on deduction under section 10A.
3. Treatment of unrealized export profits and computation of profit for deduction under section 10A.
4. Consideration of brought forward business losses and unabsorbed depreciation for the Non-STPI Unit.

Issue 1: Clubbing of loss from Non-STPI Unit with the profit of the STPI Unit for computing deduction under section 10A:
The assessee contested the action of setting off the loss of the Non-STPI Unit with the profit of the STPI Unit for calculating the eligible profits under section 10A. The argument was based on the interpretation that the Finance Act 2000 did not intend to convert the exclusion of income under section 10A into a provision for deduction. The assessee relied on precedents to support the contention that profits of the Non-STPI unit should not be clubbed with the STPI profit. The Tribunal agreed with the assessee, emphasizing the need for consistency in computation methods for section 10A deductions. It was held that the profits of the Non-STPI unit cannot be set off against the profit of the STPI Unit, aligning with previous decisions on similar matters.

Issue 2: Computation of export turnover and impact of reducing certain expenses on deduction under section 10A:
The dispute centered around expenses incurred in foreign currency for foreign travel and lease line charges, and their treatment in calculating export turnover and total turnover for section 10A deduction. The Tribunal referred to previous judgments to rule that certain expenses should be reduced from both export turnover and total turnover to determine the profits eligible under section 10A. The Tribunal partially allowed this ground, emphasizing the need for consistency in including expenses in both turnovers for accurate deduction calculation.

Issue 3: Treatment of unrealized export profits and computation of profit for deduction under section 10A:
The assessee chose not to press the issue of unrealized export proceeds, acknowledging the availability of a remedy under section 155. The Tribunal dismissed this ground as not pressed, indicating that the issue was not further pursued due to alternative remedies.

Issue 4: Consideration of brought forward business losses and unabsorbed depreciation for the Non-STPI Unit:
The Tribunal clarified that as section 10A falls under Chapter III, which excludes certain incomes from total income, the computation of taxable income should exclude profits or losses from eligible businesses under section 10A. It was emphasized that profits of the Non-STPI unit cannot be combined with the STPI Unit profit. The Tribunal directed the Assessing Officer to consider carry forward business losses and unabsorbed depreciation of the Non-STPI unit after computing the section 10A deduction based on the STPI Unit's eligible profit.

In conclusion, the appellate tribunal partially allowed the appeal, addressing the issues related to clubbing of profits, computation of turnover, treatment of unrealized proceeds, and consideration of business losses and unabsorbed depreciation. The judgment provided clarity on the correct methodology for calculating deductions under section 10A and emphasized consistency in applying relevant provisions of the Income Tax Act.