2013 (1) TMI 294 - AT - Income Tax

Rectification u/s 154 - whether AO was correct to take the recourse of rectification u/s 154 when the assessee claimed the issue to be highly debatable - mistake to allow the carried forward loss of a year prior to assessment year 2001-02 as loss pertained to A.Y. 1997-98 - disallowance was made as per clear provisions of section 10A (6)(ii) - assessee contested that the assessee is very well entitled to relief of brought forward loss and depreciation for the assessment year 1997-98 as accepted in the assessment order - Held that - Section 10A was incorporated with effect from 01.04.1981 providing tax holiday of five consecutive year beginning with the assessment year relevant to the previous year in which the concern undertaking begins manufacturing or production of the article, things or computer software with the amendment incorporated w.e.f. 01.04.2001 where the period of tax holiday of five assessment year stands extended to ten consecutive assessment years with certain conditions that while computing the income after the tax holiday period is over i.e. sub-section 6 comes into play as per which, in computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of relevant assessment year, no loss under section 72 or 74 relating to business of the undertaking is to be allowed to be carried forward or set off if it pertains to any of the relevant assessment year before 01.04.2001. Thus interpreting the above definition and opening lines of sub-section 6, it emerges that sub-section (6) would apply in the previous year relevant to the assessment year immediately succeeding last of the relevant assessment year i.e. the previous year relevant to the first assessment year succeeding tax holiday period. To put in other words, since the assessee s exemption period is continuing as it chose to avail the benefit of tax holiday from assessment year 1999-2000, sub-section 6(ii) does not apply in this case. The aforesaid provisions that they apply during the assessment years after the end of the holiday period & as admittedly the present AY relates to the holiday period and therefore the above provisions are not applicable - AO as well as CIT(A) have erred in subjecting the assessee s claim of brought forward loss and depreciation to sub-section 6(ii) by invoking rectification under section 154 - in favour of assessee.

Summary

Issues Involved:
1. Validity of the rectification order under Section 154 of the Income Tax Act, 1961.
2. Applicability of Section 10A(6)(ii) regarding the carry forward and set-off of unabsorbed business loss and depreciation.
3. Entitlement to claim deduction under Section 10A for specific assessment years.

Detailed Analysis:

Issue 1: Validity of the Rectification Order under Section 154
The Commissioner of Income Tax (Appeals) confirmed the rectification order under Section 154 of the Income Tax Act, 1961, which the assessee contested. The assessee argued that the issue considered by the Assessing Officer for rectification was highly debatable and not a mistake apparent from the record. The Assessing Officer issued a notice stating there was a mistake in accepting the assessee's claim of brought forward business loss and depreciation for the assessment year 1997-98, which violated Section 10A(6)(ii). The CIT(A) upheld the rectification, stating that the mistake was obvious and patent, and within the jurisdiction of the Assessing Officer to rectify under Section 154.

Issue 2: Applicability of Section 10A(6)(ii)
The main contention was whether Section 10A(6)(ii) applied, which would prevent the carry forward or set off of losses relating to any assessment year ending before 01.04.2001. The assessee argued that since it was still availing the tax holiday relief, sub-section 6(ii) did not apply. The Tribunal agreed with the assessee, stating that sub-section 6(ii) applies only after the tax holiday period is over. The Tribunal cited the case of WNS Global Services (P.) Ltd., which held that the provisions of Section 10A(6)(ii) are applicable only after the tax holiday period ends. Hence, the assessee's claim for setting off brought forward loss and depreciation was valid.

Issue 3: Entitlement to Claim Deduction Under Section 10A
The assessee contended that it had chosen to claim the deduction under Section 10A from the assessment year 1999-2000 and not for the assessment year 1997-98. Therefore, the unabsorbed business loss and depreciation for the assessment year 1997-98 should be allowed to be carried forward and set off in subsequent years. The Tribunal found this argument to be valid, as the assessee was entitled to choose the period for claiming the deduction under Section 10A, and sub-section 6(ii) did not apply during the tax holiday period.

Conclusion:
The Tribunal concluded that the rectification under Section 154 was wrongly invoked by the Assessing Officer, as the issue was not a mistake apparent from the record but a debatable issue. The Tribunal held that Section 10A(6)(ii) did not apply to the assessee's case as it was still within the tax holiday period. Consequently, the assessee was entitled to carry forward and set off the unabsorbed business loss and depreciation from the assessment year 1997-98. Both appeals of the assessee were allowed.