2007 (7) TMI 365 - AT - Income Tax

Deduction claimed u/s 10B to the extent of 90% remaining profit are eligible for set off of losses from earlier years ? - export-oriented undertaking - Remaining profit (i.e.10%) after the deduction u/s 10B should be treated as business profits? - HELD THAT - Since the expression used in clause (ii) of sub-section (6) clearly mentions in so far as such loss relates to the business of the undertaking , therefore, this restriction is applicable only in respect of loss which is directly relatable to the loss of the undertaking which is subject to the provision of section 10B. Therefore, in our view, this restriction is not applicable to the losses in respect of other businesses. The mere fact that section 10B is contained in Chapter III will not make much difference as the hon'ble Supreme Court in the case of Prakash Nath Khanna v. CIT 2004 (2) TMI 3 - SUPREME COURT has clearly observed that marginal notes in an Indian statute, as in an Act of Parliament cannot be referred to for the purpose of construing the statute. In view of this observation merely because section 10B has been placed in Chapter III it does not mean that it relates to exempted income, particularly in view of the fact that only 90 per cent. of the profits from eligible undertaking is allowed to be deducted. Since the business profits have to be assessed and have indeed been assessed in this case as income from business, therefore whatever remains after allowing such 10 per cent. deduction has to be treated only as business income. Once such balance income has been treated as business income, the provisions of section 72 etc. would apply accordingly. As observed by us earlier, the losses were held to belong, to the business and had been allowed by the Tribunal in the earlier years, therefore such losses should have been allowed against the business income of the assessee. In these circumstances, we set aside the order of the learned CIT (A) and direct the Assessing Officer to allow set off of the loss claimed by the assessee. In the result, the appeal of the assessee is allowed.

Summary

Issues:
Set off of losses against income eligible for deduction under section 10B of the Income-tax Act, 1961.

Analysis:
1. The only issue raised in the appeal was regarding the set off of losses against the balance of income eligible for deduction under section 10B. The assessee, engaged in providing software services, claimed a deduction of 90% of profits under section 10B, seeking to set off losses from earlier years against the balance income.

2. The Assessing Officer rejected the claim, citing section 10B(6)(ii) which disallows set off of losses not pertaining to the eligible unit. The Commissioner of Income-tax (Appeals) upheld this decision, emphasizing that losses from domestic units cannot be set off against profits of the eligible unit under section 10B.

3. The appellant argued that a previous Tribunal order allowed carry forward of business loss from the domestic unit, contending that section 10B(6)(ii) does not prohibit such set off. The Departmental representative, however, supported the Commissioner's decision based on the clear provision of clause (ii) of sub-section (6) of section 10B.

4. The Tribunal analyzed the provision of section 10B(6)(ii) and concluded that the restriction on carrying forward or setting off losses applies only to losses directly related to the eligible undertaking. The profits remaining after deduction under section 10B should be treated as business income, not exempt income, as only 90% of profits are allowed as deduction.

5. The Tribunal set aside the Commissioner's order and directed the Assessing Officer to allow the set off of losses claimed by the assessee, emphasizing that losses previously held to belong to the business should be allowed against the business income. Consequently, the appeal of the assessee was allowed.