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2013 (1) TMI 112 - AT - Income TaxExemption u/s.10-B - Income of eligible units entitled to exemption u/s.10-B will not form part of the total income under Chapter-III of the Act - disallowance of set off of income of non-eligible unit against the loss of the eligible unit - Held that - As decided in CIT v. Yokogawa India Ltd 2011 (8) TMI 845 - KARNATAKA HIGH COURT it is clear that the income of the section 10A unit has to be excluded before arriving at the gross total income of the assessee & not after computing the gross total income. Also when there is positive income of the eligible unit then the same should be allowed deduction u/s. 10B without setting of the loss of non-eligible unit but when the eligible unit incurs loss than that will have to be set off against income if any of the non-eligible unit. As deduction under section 10A has to be excluded from the total income of the assessee the question of unabsorbed business loss being set off against such profit and gains of the undertaking would not arise. The expression Deduction and shall be allowed from the total income of the Assessee used in the provisions was considered by the Hon ble High Court and it held that the expression shall be allowed from the total income of the Assessee does not mean total income as defined u/s. 2(45) but that expression means profits and gains of the STP undertaking as understood in its commercial sense or the total income of the STP unit. Thus the view expressed is that income of the STP undertaking gets quarantined and will not be allowed to be set off against loss of either another STP undertaking or a non STP undertaking. Therefore unable to accept the plea of the Assessee that the Hon ble Karnataka High Court has only held that income of the Sec. 10B unit has to be excluded before arriving at the gross total income and not after computing the gross total income. As during the period when the eligible unit enjoys exemption u/s.10B if it suffers a loss then the same will be quarantined and carried forward to the assessment years immediately following the last of the assessment years for which the Assessee is entitled to claim exemption u/s.10B for being set off in accordance with law as if it were any other loss to be dealt with in accordance with Sec.70 to 72 and 32(2). It is also clear that the loss suffered by the eligible unit u/s.10-B during the period it claims exemption without opting out of those provisions will only remain in suspension to be revived immediately after the tax holiday period. Therefore the set off of the eligible unit loss against income of non eligible unit during the tax holiday period when the Assessee has not opted out of the incentive provisions for this year cannot be allowed and has been rightly not allowed by the Revenue authorities. If the claim of the Assessee is accepted then that would mean that the Assessee will have two benefits u/s.10B first being an exemption of the commercial profits during the tax holiday period on a stand-alone basis without the threat of being set off against loss of any other undertaking & second that its losses during the tax holiday period can be set off against the income of the non-eligible undertaking. As the second benefit is not available during the tax holiday period and the provisions of Sec.10B(6) allow them to be kept in suspense to be set off after the tax holiday period the claim of the Assessee in the present case was rightly not accepted by the revenue authorities - against assessee.
Issues Involved:
1. Whether the income of eligible units under Section 10B of the Income Tax Act can be set off against the losses of non-eligible units. 2. Whether the provisions of Section 10B are exemption provisions or deduction provisions. 3. The impact of the amendment to Section 10B(6) by the Finance Act, 2003. 4. The applicability of judicial precedents from different High Courts on the interpretation of Section 10B. 5. The levy of interest under Sections 234B and 234D of the Income Tax Act. Issue-wise Detailed Analysis: 1. Set off of Income of Eligible Units Against Losses of Non-eligible Units: The Assessee, a partnership firm engaged in manufacturing and exporting ready-made garments, filed its return for AY 08-09 declaring a total income of Rs. 12,89,760/-. The Assessee had three units: Unit-I (non-eligible for exemption), and Unit-II and Unit-III (eligible for exemption under Section 10B). The Assessee set off the losses of eligible units against the profits of the non-eligible unit. The AO disallowed this set-off, relying on the ITAT Bangalore decision in Asstt. CIT v. Yokogawa India Ltd., which held that the income of eligible units under Section 10B does not enter the computation of total income and, therefore, cannot be set off against the profits of non-eligible units. 2. Exemption Provisions vs. Deduction Provisions: The CIT(A) upheld the AO's decision, referencing the Karnataka High Court's ruling in Commissioner of Income Tax Vs M/S Yokogawa India Ltd., which clarified that the income of a Section 10A unit (similar to Section 10B) must be excluded at the source before arriving at the gross total income. The court found that the income of the eligible unit is exempt and should not be included in the Assessee's income, thus precluding the set-off of losses from eligible units against profits from non-eligible units. 3. Amendment to Section 10B(6) by Finance Act, 2003: The Assessee argued that the amendment to Section 10B(6) allowed for the carry forward and set-off of losses of eligible units against other income. However, the Tribunal noted that the Karnataka High Court in Yokogawa India Ltd. had interpreted the amendment to mean that losses during the tax holiday period are to be carried forward and set off post the tax holiday period, not during it. 4. Judicial Precedents from Different High Courts: The Assessee cited decisions from the Bombay High Court (Hindustan Unilever Ltd., Galaxy Surfactants Ltd., and Black & Veatch Consulting (P.) Ltd.), which allowed the set-off of losses of eligible units against non-eligible units' income. However, the Tribunal observed a conflict between the Bombay High Court's view (treating Section 10B as a deduction provision) and the Karnataka High Court's view (treating it as an exemption provision). The Delhi High Court also supported the Karnataka High Court's interpretation, agreeing that Section 10B is an exemption provision. 5. Levy of Interest Under Sections 234B and 234D: The Assessee contested the liability to pay interest under Sections 234B and 234D, arguing that it was erroneously levied. However, this issue was not elaborated upon in the Tribunal's decision, as the primary focus was on the interpretation and application of Section 10B. Conclusion: The Tribunal upheld the CIT(A)'s order, affirming that the income of eligible units under Section 10B is exempt and does not enter the computation of total income. Consequently, the losses of eligible units cannot be set off against the profits of non-eligible units during the tax holiday period. The Tribunal dismissed the Assessee's appeal, aligning with the Karnataka High Court's interpretation and distinguishing it from the conflicting views of the Bombay High Court. The Tribunal also implicitly upheld the levy of interest under Sections 234B and 234D.
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