2022 (2) TMI 710 - HC - Income Tax

Deduction u/s 10A - excluding the foreign Travel Expenditure and Telecommunication expenses both from the Export turnover and also from the Total turnover while computing deduction - HELD THAT - Issue decided in favour of assessee as relying on HCL TECHNOLOGIES LTD. 2018 (5) TMI 357 - SUPREME COURT if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature. Even in common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well. - Decided against revenue.

Summary

Issues Involved:
1. Exclusion of foreign travel expenditure and telecommunication expenses from both export turnover and total turnover under Section 10A of the Income Tax Act.
2. Applicability of the Supreme Court decision in Himatsingike Seida regarding unabsorbed depreciation loss of Section 10B unit against other income.
3. Deduction under Section 10B without considering depreciation loss while computing gross total income.

Detailed Analysis:

Issue 1: Exclusion of Foreign Travel Expenditure and Telecommunication Expenses
The appellant/Revenue challenged the Income Tax Appellate Tribunal's (ITAT) decision to exclude foreign travel expenditure and telecommunication expenses from both export turnover and total turnover while computing deductions under Section 10A of the Income Tax Act. The Tribunal's decision was based on the Supreme Court judgment in Commissioner of Income Tax v. HCL Technologies Ltd., which clarified that when a term is not defined in a specific section, its meaning should not be imported from other sections unless explicitly stated. The Supreme Court emphasized that Section 10A is a special beneficial provision aimed at encouraging new business undertakings in free trade zones by providing suitable deductions. The Court held that what is excluded from export turnover must also be excluded from total turnover to avoid any illogical results, thereby supporting the ITAT's methodology.

Issue 2: Applicability of Himatsingike Seida Decision
In TCA Nos. 26 and 28 of 2022, the appellant/Revenue argued that the ITAT erred by not applying the Supreme Court's decision in Himatsingike Seida, which held that unabsorbed depreciation loss of a Section 10B unit cannot be set off against other income. However, the ITAT's decision was supported by the Supreme Court's judgment in Commissioner of Income-tax v. Yokogawa India Ltd., which clarified that the provisions of Section 10A and 10B are pari materia (similar in nature) and should be interpreted similarly. The Supreme Court in Yokogawa India Ltd. held that deductions under Section 10A should be made while computing the gross total income of the eligible undertaking under Chapter IV of the Income Tax Act, not at the stage of computing total income under Chapter VI. This interpretation was extended to Section 10B as well.

Issue 3: Deduction Under Section 10B Without Considering Depreciation Loss
The appellant/Revenue contended that the ITAT incorrectly allowed deductions under Section 10B without considering depreciation loss while computing the gross total income. The Supreme Court in Yokogawa India Ltd. had clarified that the stage of deduction under Section 10A (and by extension, Section 10B) is while computing the gross total income of the eligible undertaking under Chapter IV, not at the stage of total income computation under Chapter VI. This means that losses and unabsorbed depreciation should not be set off against the profits of the eligible unit before allowing the deduction under Section 10B.

Conclusion
Following the precedents set by the Supreme Court in Commissioner of Income Tax v. HCL Technologies Ltd. and Commissioner of Income-tax v. Yokogawa India Ltd., the High Court dismissed the appeals filed by the Revenue. The substantial questions of law raised in all the tax case appeals were answered in favor of the assessee, affirming the ITAT's decisions. Consequently, the appeals were dismissed with no order as to costs, and connected miscellaneous petitions were closed.