2013 (1) TMI 449 - AT - Income Tax

Setting off of loss of Sec.10B unit from the income under other heads - The assessee is an Export Oriented Unit (EOU) u/s 10B - The Revenue stand is that the same cannot be set off as it is section 10B unit, which is all together a separate entity - Held that - Following the decision in case of Patni Computers system Ltd that there is no provision in Section 10B by which a prohibition has been introduced by the Legislature in setting off of a loss which is sustained from one source falling under the head of profits and gains of business against income from any other source under the same head. On the other hand, there is intrinsic material in Section 10B to indicate that such a prohibition was not within the contemplation of the Legislature. Remand back in favour of assessee

Summary

Issues Involved:
1. Whether the CIT(A) erred in confirming the decision of the Assessing Officer in not allowing the assessee's set off of business losses from a unit under section 10B of the Income Tax Act against income from other sources or other heads of income.

Issue-wise Detailed Analysis:

1. Confirmation of Disallowance of Set Off by CIT(A):

The primary issue revolves around the assessee's claim to set off the business losses of an eligible unit under section 10B of the Income Tax Act, 1961, against the incomes from other sources. The assessee, engaged in IT Enabled Services, filed a return declaring a loss of Rs. 2,55,38,201/- for the Assessment Year 2007-08. The receipts included IT Enabled Services, interest income, exchange differences, rent received, amenities received, closing WIP, and miscellaneous income. The expenses listed were administrative and other expenses, financial charges, and depreciation.

The Assessing Officer disallowed the assessee's plea for setting off the loss from the 10B unit against other heads of income, which was upheld by the CIT(A). The CIT(A) reasoned that the provisions of Sections 70 and 71 of the Act, which deal with the set off of losses from one source against income from another source under the same head or different heads, do not apply when the income is exempt from tax. The CIT(A) cited the cases of Commissioner of Income Tax V. S.S. Thiagarajan [129 ITR 115(Mad)] and Commissioner of Income Tax V. Harprasad & Co (P) Ltd. [99 ITR 118(SC)] to support the decision, concluding that the loss from a 10B eligible unit cannot be set off against other incomes.

2. Assessee's Argument and Legal Provisions:

The assessee argued that under section 10B(8) of the Act, it could opt out of the deduction scheme for the relevant assessment year, thereby allowing the set off of losses under normal provisions of the Act. The assessee cited the case of CIT vs. M/s. Galaxy Surfactants Ltd. (Bombay High Court) to support the contention that the loss from a 10B unit can be set off against other incomes under Sections 70 and 71.

3. Tribunal's Analysis and Decision:

The Tribunal considered the submissions, relevant findings, and case laws. It noted that section 10B(8) provides the option for an assessee to opt out of the deduction scheme, which would then bring the normal provisions of the Act into operation. The Tribunal found that the assessee's 10B unit had indeed suffered a loss and that the receipts under various heads were declared as incomes. It concluded that Sections 70 and 71, particularly Section 71 providing intra-head setting off, were applicable.

The Tribunal referred to the Bombay High Court's decision in M/s. Galaxy Surfactants Ltd., which clarified that Section 10B, as it stands, is a provision for deduction and not exemption. The High Court held that the loss from a 10B unit could be set off against other incomes under the same head of profits and gains of business or profession, as there was no statutory prohibition against such a set off.

4. Remand to Assessing Officer:

In light of the legal position and facts, the Tribunal found that the Assessing Officer had not considered the correct legal position while finalizing the assessment order. Therefore, it remitted the issue back to the Assessing Officer to pass a fresh order considering the assessee's plea for set off in accordance with the Tribunal's observations and after providing adequate opportunity of hearing to the assessee.

Conclusion:

The appeal of the assessee was allowed for statistical purposes, with the issue being remitted back to the Assessing Officer for fresh consideration in line with the Tribunal's findings and the legal precedents cited.