2004 (3) TMI 318 - AT - Income Tax

Deduction u/s 10(A) - Free Trade Zone - Set-off of loss incurred by SEEPZ Unit against other business income - difference of opinion between the Accountant Member and the Judicial Member - Third member Order - in respect of the applicability of section 14A of the Act - Subject to its applicability, the question apropos to its retrospective applicability would be pertinent for deciding the issue. Learned Accountant Member - HELD THAT - We have also perused the provisions of section 10A, section 70 and section 71 of the I.T. Act and also the decisions relied upon by the learned CIT(Appeals). The special scheme of taxation formulated by the Govt. for taxability of Units set up in the Export Processing Zone, contained in section 10A, is a code by itself. The computation of such Units as well as the carry forward and set off etc., has been specifically laid down in the said section. The other provisions of the I.T. Act and any other disability or restrictions in respect of the set off of carry forward etc., has been specifically provided in section 10A(4) of the Act itself. Therefore, these provisions need to be considered in totality keeping in view the intention of the legislation regarding taxability of such units in the Export Processing Zone. Section 10A(4)(ii) specifically prohibits the carry forward and set off of the loss incurred by such units by specifically referring to sections 72(1) and 72(4)(i) or with effect from 1 -4-1988 under section 74(3). It does not refer to sections 70 or 71 which clearly means that there is no prohibition prescribed in the section regarding set off of the loss of such units against the income from other units or other business income of other sources. We find that section 14A was not in existence when the impugned order was passed. So also, by the insertion of provision, the intention of the legislation is clear that it is not to be applied to the past assessments by restricting the officers to reopen the assessments etc. Therefore, if the Assessing Officer cannot do a particular action like reopening of assessment already completed, the Tribunal cannot use that provision to disallow something by making use of the same. Otherwise, it would virtually amount to the enhancement which is not permissible under the Act. We, therefore, agree with the submissions made by the learned Counsel for the assessee and hold that the loss incurred by SEEPZ Unit of Rs.4,79,342 has to be allowed to be set off against the other business income of the assessee. The Assessing Officer is directed accordingly. This ground accordingly succeeds. In the result, appeal filed by the assessee is allowed in part. learned Judicial Member, in view of the provisions of section 14A of the Act, the claim of the assessee is not admissible. Proviso to the above section deals with the situation where assessment has got finality. In the present case, the addition was made by the Assessing Officer and was upheld by the CIT(A). The appeal was pending before the Tribunal. Therefore, the issue was alive. Proviso to section 14A of the Act is applicable to a situation where the assessment has got finality and on such assessment, provisions of section 147 or 154 cannot be made applicable. Thus, the learned Judicial Member opined that the Tribunal is duty bound to consider the provision, which is on the statute. The provision of section 14A was brought into statute with retrospective effect from 1-4-1962 and covers the period under consideration. As such, the claim of the assessee was rejected. learned Judicial Member did not discuss the applicability of section 14A of the Act, vis-a- vis the facts of the present case. It was presumed that this section applies to the case of the assessee and as because it was made operative retrospectively; as such it was applied. Third Member Order - In the present case I find that the benefit of section 10A of the Act was available to the assessee for five years. The assessee claimed benefit for three years. For rest of the years, the assessee did not claim the benefit of section 10A of the Act. The assessee opted to get the profits of new industrial undertaking assessed under the normal provisions. I find no provision in the Act by which the assessee can be forced to avail the benefit for five years. If the assessee wants to put the income under the normal computation procedure, there appears to be no bar for doing so. If one purchases ticket to undertake journey from Mumbai to Delhi; later on he decides to disembark from the train at Kota, the Railway authorities cannot force him to go up to Delhi. If the benefit is conferred on the assessee, he cannot be forced to avail the same. Section 10A of the Act, is a code by itself. It contains the scheme of taxation formulated by the Government for taxability of units set up in the export processing zone. As such, it cannot be compared with section 10 of the Act. Ex consequenti, the decisions rendered in the cases of Harprasad Co. (P.) Ltd. 1975 (2) TMI 2 - SUPREME COURT and S.S. Thiagarajan 1978 (3) TMI 8 - MADRAS HIGH COURT , in the context of section 10 of the Act, cannot be applied over here. Coming to the applicability of section 10A(4)(ii) of the Act, I find that it put interdict qua sections 72 and 74. It does not preclude the operation of sections 70 and 71. Section 14A of the Act is applicable in respect of 'expenditure'. Loss is different from expenditure. As such, the assessed is entitled to setting off the loss incurred by the SEEPZ unit. In view of this finding, the question whether section 14A-of the Act is prospective or retrospective in operation, has become academic. I concur with the finding of the learned Accountant Member. The matter will now go before the regular Bench for deciding the appeal in accordance with the opinion of the majority.

Summary

Issues Involved:
1. Disallowance of foreign traveling expenses.
2. Treatment of expenses on lodging and boarding of foreign designers and buyers as entertainment expenses u/s 37(2A).
3. Disallowance of rent paid relating to an earlier year.
4. Set-off of loss incurred by SEEPZ Unit against other business income.
5. Addition on account of sale of wastage.
6. Treatment of interest earned on fixed deposits as income from other sources.
7. Set-off of interest paid against interest received.
8. Treatment of compensation received for letting out business premises as income from other sources.
9. Correct deduction under sections 32AB and 80HHC.
10. General ground.

Summary:

1. Disallowance of Foreign Traveling Expenses:
The assessee's appeal against the disallowance of Rs. 12,245 out of foreign traveling expenses was rejected. The Tribunal followed its earlier decision in the assessee's own case for the assessment year 1989-90, confirming the addition.

2. Treatment of Lodging and Boarding Expenses:
The CIT(A) upheld the disallowance of Rs. 92,717 as entertainment expenses u/s 37(2A). The Tribunal, however, found the total disallowance of Rs. 1,47,862 to be excessive and restricted it to Rs. 30,000, granting relief of Rs. 30,000 to the assessee.

3. Disallowance of Rent Paid:
The Tribunal allowed the assessee's claim for Rs. 40,000 rent paid during the year, which related to an earlier year, as the liability crystallized during the current year. The addition was deleted.

4. Set-off of SEEPZ Unit Loss:
The assessee claimed set-off of Rs. 4,79,342 loss incurred by SEEPZ Unit against other business income. The Tribunal, considering section 10A as a code by itself, allowed the set-off, rejecting the applicability of section 14A to the loss. The Judicial Member dissented, but the Third Member concurred with the Accountant Member, allowing the set-off.

5. Addition on Account of Sale of Wastage:
The Tribunal reduced the addition on account of wastage from Rs. 83,000 to Rs. 35,000, granting relief of Rs. 48,000, following its earlier decision in the assessee's case.

6. Treatment of Interest on Fixed Deposits:
The Tribunal directed the Assessing Officer to rework the deduction u/s 32AB, treating the interest of Rs. 1,47,649 as part of the book profit. For section 80HHC, the AO was directed to verify the nexus between earning and payment of interest and rework the profits accordingly.

7. Set-off of Interest Paid:
The Tribunal agreed to the alternate submission to set off interest paid against interest received, directing the AO to verify the direct nexus and rework the profits for deduction u/s 80HHC.

8. Treatment of Compensation Received:
The Tribunal directed the AO to consider the rental compensation of Rs. 55,560 as part of the book profit for section 32AB and verify the nexus for section 80HHC, granting set-off if applicable.

9. Correct Deduction u/s 32AB and 80HHC:
The Tribunal directed the AO to consider the reworked income after various disallowances for granting deductions u/s 32AB and 80HHC.

10. General Ground:
No specific comments were required for this ground.

Conclusion:
The appeal was allowed in part, with specific directions to the Assessing Officer for reworking deductions and set-offs based on the Tribunal's findings.