2012 (3) TMI 193 - AT - Income Tax

Exemption u/s 10B - Set off of loss of EOU Unit brought forward against profit of the eligible business unit - held that - Had the Legislature intended that the provisions of sections 70 & 71 should not be applied in respect of loss incurred in eligible business, it could have specifically provided so. According to us, the assessee is therefore entitled to set off the loss incurred in an eligible Industrial Unit against the other incomes earned by him (Sovika Info Tech Ltd.). In short, section 10B(6)(ii) restricts carry forward and set off of loss u/s. 72 and u/s. 74, but does not provide or restrict anything regarding intra-head set off u/s. 70 or inter-head set off u/s. 71. Admittedly, there was a loss in the Unit eligible for deduction u/s. 10B and there was a business income in an another Unit. Therefore, while computing the total income; the business income can be computed only after set off of business loss as per section 70 and if after such set off, still there is a business loss, such loss can be set off against other sources as per section 71 of the I.T. Act, though this is not the present case. Double benefit of adjustment - held that - for the A.Y. 2008-09 it ought not to be a double disallowance because for A.Y. 2007-08, we have already directed to allow the set off of loss. Once the loss shall be adjusted in A.Y.2007-08, consequence our above decided appeal there should be a direct effect on the computation of income for A.Y. 2008-09. We therefore revert this matter back to the stage of the AO for re-computation of the eligible profit of the said Unit.

Summary

Issues Involved:
1. Disallowance of set-off of losses from an Export Oriented Unit (EOU) against profits of taxable units for A.Y. 2007-08.
2. Addition on account of set-off of loss of EOU brought forward against profit of the eligible business unit for A.Y. 2008-09.

Issue-wise Detailed Analysis:

1. Disallowance of Set-off of Losses from EOU against Profits of Taxable Units for A.Y. 2007-08:
The issue revolves around whether the loss from an EOU can be set off against the profits of non-EOU units. The Assessee claimed a set-off of losses amounting to Rs. 25,91,332/- from the EOU against the profits of its taxable units. The AO disallowed this set-off, arguing that since the EOU was exempt under section 10B, its income did not form part of the total income, and thus, the loss could not be set off against the taxable profits of other units. The CIT(A) upheld the AO's decision, emphasizing that the loss from an EOU, which enjoys tax benefits, cannot be adjusted against other taxable income.

However, the Tribunal observed that after the amendment in section 10B effective from 1/4/2001, the provision allows for a deduction rather than an exemption. The Tribunal referred to the decision in Hindustan Unilever Ltd. v. Dy. CIT, which clarified that section 10B provides for a deduction from the total income, not an exemption. Therefore, the loss from the EOU can be set off against the profits of other units. The Tribunal allowed the Assessee's appeal, directing that the loss from the EOU should be adjusted against the taxable profits of other units.

2. Addition on Account of Set-off of Loss of EOU Brought Forward against Profit of the Eligible Business Unit for A.Y. 2008-09:
For A.Y. 2008-09, the AO adjusted the loss of Rs. 25,91,332/- from the EOU (brought forward from A.Y. 2007-08) against the eligible business profit, reducing the deduction under section 10B. The CIT(A) ruled this as a double disallowance since the Assessee's appeal for A.Y. 2007-08 was dismissed, and directed the AO to delete the addition.

The Tribunal, considering its decision on the Assessee's appeal for A.Y. 2007-08, where the set-off of the loss was allowed, reverted the matter back to the AO for re-computation of the eligible profit for A.Y. 2008-09. The Tribunal emphasized that once the loss is adjusted in A.Y. 2007-08, it should reflect in the computation for A.Y. 2008-09.

Conclusion:
The Tribunal allowed the Assessee's appeal for A.Y. 2007-08, permitting the set-off of EOU losses against the profits of other units. Consequently, the Tribunal also allowed the Revenue's appeal for A.Y. 2008-09 for statistical purposes, directing the AO to re-compute the eligible profit considering the Tribunal's decision for A.Y. 2007-08.