2016 (5) TMI 573 - AT - Income Tax

Setting off of losses against income from STPI unit while computing deduction under section 10A - Held that - Assessee was claiming deduction under section 10A of the Act in respect of export of software in eight units at different places, out of which five units had declared positive profits and balance three units had declared losses for the captioned assessment years. The assessee had claimed deduction under section 10A of the Act unit-wise, whereas the Assessing Officer was of the view that the said deduction under section 10A of the Act is to be allowed to the assessee after setting off of losses of three units against the profits of five units and on the balance, the assessee was entitled to claim the said deduction. Assessee is entitled to claim the deduction under section 10A of the Act in respect of its STPI unit and the losses from non - STPI units are to be carried forward to the succeeding years. See M/s. KPIT Cummins Infosystems Ltd. Vs. DCIT 2015 (12) TMI 398 - ITAT PUNE - Decided in favour of assessee.

Summary

Issues Involved:

1. Setting off income from STPI unit against loss of non-STPI unit.
2. Application of provisions of sections 32(2), 70, 71, 72 prior to section 10A.
3. Reliance on the decision of Himatsingike Seide Ltd. by CIT(A).
4. Applicability of Himatsingike Seide Ltd. case to the appellant's facts.
5. Importing provisions of section 2(45) for determining profits under section 10A.
6. Consideration of judicial precedents identical to the appellant's case.
7. Applicability of Circular No. 7/DV/2013 dated 16/07/2013.

Issue-wise Detailed Analysis:

1. Setting off income from STPI unit against loss of non-STPI unit:

The primary issue in this appeal was whether the income from the STPI unit should be set off against the loss of the non-STPI unit while computing the deduction under section 10A of the Income-tax Act. The assessee had claimed deduction under section 10A for its STPI unit without adjusting the loss from the manufacturing activity, which was carried forward. The Assessing Officer (AO) objected to this computation, adjusting the loss from the manufacturing activity against the income from the STPI unit and re-computed the deduction under section 10A, significantly reducing the allowable deduction. The CIT(A) upheld the AO's view, leading to the present appeal.

2. Application of provisions of sections 32(2), 70, 71, 72 prior to section 10A:

The CIT(A) confirmed the AO's view that the provisions of sections 32(2), 70, 71, and 72 should be applied before section 10A. This meant that the intra-head adjustments of losses from other units had to be made before computing the deduction under section 10A. The Tribunal, however, found that the deduction under section 10A is unit-specific and should be computed independently for each eligible unit before any intra-head adjustments are made.

3. Reliance on the decision of Himatsingike Seide Ltd. by CIT(A):

The CIT(A) relied on the decision of the Hon'ble Karnataka High Court in the case of Himatsingike Seide Ltd., which dealt with the erstwhile exemption section. The appellant argued that this decision was not applicable as it pertained to the set-off of brought forward unabsorbed depreciation against the profit of eligible business, which was different from the current scenario.

4. Applicability of Himatsingike Seide Ltd. case to the appellant's facts:

The appellant contended that the facts of the Himatsingike Seide Ltd. case were different and not applicable to their case. The Tribunal noted that the decision in Himatsingike Seide Ltd. was based on the erstwhile exemption provisions, whereas the current provisions of section 10A, post-amendment, allowed for a deduction, not an exemption, thus making the appellant's argument valid.

5. Importing provisions of section 2(45) for determining profits under section 10A:

The CIT(A) did not appreciate that the provisions of section 2(45) could not be imported for determining the profits to be deducted under section 10A. The Tribunal agreed with the appellant that the computation of deduction under section 10A should be unit-specific and not based on the total income of the assessee.

6. Consideration of judicial precedents identical to the appellant's case:

The appellant argued that the CIT(A) failed to consider various judicial precedents where facts identical to their case were dealt with favorably. The Tribunal referred to the decision in M/s. KPIT Cummins Infosystems Ltd. Vs. DCIT, where it was held that the deduction under section 10A is unit-specific and should be computed independently for each eligible unit. The Tribunal found this precedent applicable and supportive of the appellant's case.

7. Applicability of Circular No. 7/DV/2013 dated 16/07/2013:

The appellant argued that the CIT(A) erred in importing the provisions of Circular No. 7/DV/2013, which was not available at the time of filing the return for AY 2007-08. The Tribunal did not specifically address this issue but focused on the broader principle that the deduction under section 10A should be computed independently for each unit.

Conclusion:

The Tribunal concluded that the deduction under section 10A is unit-specific and should be computed independently for each eligible unit. The losses from non-STPI units should be carried forward to succeeding years and not adjusted against the income from the STPI unit. The order of the CIT(A) was reversed, and the appeal of the assessee was allowed.