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TMI Blog2012 (9) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... r that the income of the section 10A unit has to be excluded before arriving at the gross total income of the assessee - the income eligible for exemption under section 10A would not enter into computation as the same has to be deducted at source level. Though sub-section (1) provides for a deduction of the eligible profits, there is good reason to think that it is not to be considered as a deduction because the sub-section further says that the deduction “shall be allowed from the total income of the assessee” - The return of income in Form No.ITR-6 shows shows that after aggregating the income from salary, house property, profits and gains from business, capital gains and income from other sources, the total is arrived at and it is from this total that the losses of the current year and the brought forward losses from the past years are to be set off. The resultant figure gives the gross total income of the assessee from which deductions under Chapter VIA are to be made in order to arrive at the total income. The steps given in the income tax return form also are an indication that it is before the adjustment of the losses of the current year and the brought forward losses fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding that for computing deduction under Section 10A of the Income Tax Act, 1961 in respect of EPZ Unit brought forward losses of the Non-EPZ Unit should be first deducted or reduced? 3. The brief facts relating to the appeal for the assessment year 2002-2003 may be noted. The assessee is a private limited company incorporated on 4th May, 2000. It is engaged in the business of design, manufacture and sale of writing harnesses, cable assembly, remote control, degaussing coils, CRT sockets, power cords and other electrical and electronic components related thereto. It is a joint venture between a Korean company and a company based in Mauritius. In respect of the assessment year 2002-2003 it filed a return of income declaring income of Rs.15,71,607 on 31st October, 2002. In the return, the assessee claimed exemption of Rs.16,41,505/- under Section 10A of the Act in respect of the profits derived from the unit located in the export promotion zone (EPZ), Noida where the manufacture and export of eligible goods commenced in the previous year relating to the assessment year 2002-2003. The assessee also had another unit which was located in Non EPZ area the profits from which were no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of the above additional ground the assessee filed written submissions before the CIT (Appeals). The CIT (Appeals) admitted the additional ground on the basis of the judgments of the Supreme Court in Jute Corporation of India Ltd. v. CIT, (1991) 187 ITR 688 and National Thermal Power Co. Ltd. v. CIT, (1998) 229 ITR 383. As regards the merits of the additional grounds, the CIT (Appeals) dismissed the same, following an order of the Bangalore Bench of the Tribunal in the case of Mindtree Consulting (P) Ltd. vs. ACIT (102 TTJ 691). The CIT (Appeals) held, following the aforesaid order of the Tribunal, as follows:- In view of this decision which is also followed by Hon‟ble ITAT, Delhi in other cases, the appellant is eligible to set off the loss of such unit. In the facts and circumstances of the case and the decision quoted above, I am of the view that the income of unit eligible for deduction u/s 10A is merely a deduction and not exemption. In view of the same, if the company concern becomes eligible to set off the loss and ultimately the gross total income becomes NIL, the claim of deduction u/s 10A cannot be entertained if the company does not have any positive income. Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer computed the income at Rs.1,98,96,654/- in the following manner:- Profit and Gains of Business As per computation of income filed with return : Rs.1,02,22,214/- Add: Technical Support Fees : Rs.1,32,05,273/- Gross Total Income : Rs.2,34,26,941/- Less: Exemption u/s 10 [3213829-607911 as discussed above + 924369 (technical fee as computed by assessee though it was not computed correctly as per agreement] : Rs.35,30,287/- Income Assessed Rs.1,98,96,654/- The assessee filed an appeal against the assessment order before the CIT(Appeals) and took up the point of re-computation of the claim under Section 10A of the Act. The CIT(Appeals) held that the loss from the non-eligible unit can be set off against the profit from the unit eligible for Section 10A relief and in so holding, followed an order of the Bangalore Bench of the Tribunal in the case of Mindtree Consulting (P) Ltd. vs. ACIT (supra). The CIT (Appeals) also expressed the view that the provisions of Section 10A provide merely for a deduction and not exemption. He also held that if the assessee becomes eligible to set off the brought forward losses thereby reducing the gross total income of the year to Nil, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion in respect of newly established industrial undertakings in Free Trade Zones. Paragraph 6.4. of the circular describes the new Section as providing for a complete tax exemption in respect of the profits derived from an industrial undertaking set up in any Free Trade Zone for a period of 5 initial assessment years. Originally the expression Free Trade Zone meant the Kandla Free Trade Zone and Santa Cruz Electronics Export Processing Zone and included any other such zone notified by the Central Government in the official gazette for the purposes of the Section. It is relevant to note that sub-section (4) of Section 10A made certain provisions to ensure that the assessee who availed of the benefit of the exemption will not be eligible for any other tax concessions in relation to the industrial undertaking in the Free Trade Zone either during the course of the five year tax holiday period or at any time after the end of the said period. It may be useful to reproduce paragraph 6.6. of the circular referred to above in which the provisions of sub-section (4) have been explained: - 6.6 The scheme of the new section is that the assessee who avails of the benefit of this tax conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the head Capital gains under section 74(1) and no tax holiday deficiency under section 80J(3) in respect of any of the assessment years comprised in the tax holiday period will, in so far as such loss or deficiency relates to the business of industrial undertaking, be carried forward or set off in computing the income of the assessment year immediately succeeding the last of the assessment years comprised in the tax holiday period or in any subsequent assessment year; (iii) the assessee will not be eligible for deduction under section 80HH (relating to deduction in respect of profits and gains from newly established industrial undertakings in backward areas) or under section 80HHA (relating to deduction in respect of profits and gains from newly established small-scale industrial undertakings in rural areas) or in respect of tax holiday under section 80J or under section 80-I in relation to the profits and gains of the industrial undertaking for any previous year relevant to the assessment year immediately succeeding the last assessment year comprised in the tax holiday period or any subsequent assessment year; and (iv) In computing the depreciation allowance under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee: It may be noted that there is a significant difference in the language between sub-section(1) as it existed prior to being amended by the Finance Act, 2000 with effect from 1st April, 2001 and after being amended by the said Act. Whereas before the amendment the language conformed to the heading of Chapter-III, namely, incomes which do not form part of total income by providing that the profits of the original undertaking shall not be included in the total income of the assessee, after the amendment the language underwent a change and it was provided that a deduction of such profits will be allowed from the total income of the assessee . 12. By the Finance Act, 2002, for one assessment year only, namely, the assessment year 2003-2004, the deduction under sub-section (1) was restricted to 90% of the profits derived by the industrial undertaking, [as against 100% deduction given earlier] and this move was explained in para 19.4 of the circular No.8 of 2002 dated 27th August, 2002 [(2002) 258 ITR St. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dment made by the Finance Act, 2003 to sub-section (6) with retrospective effect from 01.04.2001 made a significant departure from the legislative thinking outlined above. It provided that from the assessment year 2001-02, the right to carry forward the losses will be recognized. The result of this retrospective amendment is that even the bar on claiming the benefits of carried forward losses and allowances after the period of tax holiday is over was lifted and from the assessment year 2001-02, irrespective of the fact that the profits from the eligible unit do not enter the field of taxation, the assessee would be still entitled to claim those allowances and reliefs against the profits of the eligible undertaking. This has resulted in the position that a double benefit has been conferred on the eligible profits from the assessment year 2001-02, which the section initially did not want to confer. 15. With the aforesaid background, we shall first proceed to examine the computation of the income for the assessment year 2002-03 as per the assessment order. The same is as follows: - Rs. Profits and Gains of Business 69,799 As per computation of income filed with return Add: Techni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termined and then the deduction with reference to that eligible income as allowable is to be deducted there from and the balance amount can only be added to the taxable income. Therefore, profit of the eligible undertaking would form part of total income of the assessee, only after reducing the amount of exemptible profit therefrom. This is a process which falls much before reaching the gross total income. It is submitted that for this very distinction, nature of exemption allowed under Chapter-III is not dependent on the Gross Total Income . Hon‟ble Bangalore Tribunal in VXL Instruments Ltd. v. Jt. CIT, 6 SOT 371 (Bang.) held that profits of an eligible undertaking under section 10A do not form part of gross total income. It may be further observed that the heading of section 10A is Special provision in respect of newly established undertaking . . Undoubtedly, these are the special provisions made for encouraging the establishment of export oriented industries in specified free trade or export processing zones. Having regard to the cardinal principal of interpretation emerged from the maxim generalia specialibus non derogant , the special provision which is overriding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te computation of such exemption with reference to the aggregate profits of all the undertakings of the assessee. In this regard provision of sub-section (4) of section 10A may be referred to, which reads as under: - S.10A (4) for the purposes of sub-sections (1) and (1A), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking. The same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. 17. The question whether Section 10A provides for total exemption from tax or provides for only a deduction from the income of the assessee was debated at the Bar at considerable length. The section is placed in Chapter III of the Act which is titled Incomes which do not form part of total income . Sub-section (1) of this section as it stood amended by the Finance Act, 2000 w. e. f. 01.04.2001, however, provides for a deduction of such profits and gains as are derived by an undertaking from the export of articles or thins or computer software from the total income of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I-A which houses the sections like 80HHC, 80-IA, etc. Parliament was aware of the various restricting and limiting provisions like section 80A and section 80AB which was in Chapter VI-A which do not appear in Chapter III. The fact that even after its recast, the relief has been retained in Chapter III indicates that the intention of Parliament it is to be regarded as an exemption and not a deduction. The Act of Parliament in consciously retaining this section in Chapter III indicates its intention that the nature of relief continues to be an exemption. Chapter VII deals with the incomes forming part of the total income on which no income-tax is payable. These are the incomes which are exempted from charge, but are included in the total income of the assessee. Parliament, despite being conversant with the implications of this Chapter, has consciously chosen to retain section 10A in Chapter III. 18. Secondly, we find that though sub-section (1) provides for a deduction of the eligible profits, there is good reason to think that it is not to be considered as a deduction because the sub-section further says that the deduction shall be allowed from the total income of the assessee . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing words: - A literal reading of the above provision requires deduction from the total income. There can be a deduction in computing the total income. However, there cannot be deduction from the total income which is the final result of the computation process. The language adopted in section 10A is different from the one adopted in section 80A. Section 10A provides for deduction from the total income. In the scheme of the Act, while various deductions are allowed in computing the total income, once the total income is computed, no further adjustment to the total income is envisaged. The scheme of the Act provides for deduction in computing the total income but no mechanism for any deduction from the total income already computed is provided under the Act. Once the total income is computed, the next step is determination of tax by applying the applicable rates on the total income. Section 2(45) defines "total income" to mean the total amount of income referred to in section 5 and computed in the manner laid down in the Income-tax Act. Section 5 defines the scope of total income and it is subject to the provisions of the Income-tax Act. Section 14 provides that "save as othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee is required while computing the income from business or profession is to commence the computation from the profit as per the profit and loss account. The second step is to adjust the profit figure by excluding receipts which are not subject to tax or which are subject to tax under other heads of income. The third step is to exclude exempt income credited to the profit and loss account. Fourth step is to add back claims which are disallowable under the various provisions of the Act. The fifth step is to claim any other allowance or deduction. This exercise gives the figure of profit or loss before deduction under Section 10A. Thereafter the assessee has to deduct the profits eligible under Section 10A. The form further prescribes the steps involved in the computation of total income. This shows that after aggregating the income from salary, house property, profits and gains from business, capital gains and income from other sources, the total is arrived at and it is from this total that the losses of the current year and the brought forward losses from the past years are to be set off. The resultant figure gives the gross total income of the assessee from which deductions und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Section 10B in the amount of Rs.11.11 crores in the assessment. The Assessing Officer observed that there was a loss in the crab stick unit amounting to Rs.1.33 crores and since this unit was exempt from taxation under Section 10B, the losses therein were wrongly set off against the normal business income of the assessee and thus there was escapement of income to the extent of Rs.1.33 crores. The reopening was challenged before the Bombay High Court which held as follows: - There is merit in the submission which has been urged on behalf of the assessee that the Assessing Officer has while reopening the assessment ex facie proceeded on the erroneous premise that section 10B is a provision in the nature of an exemption. Plainly, section 10B as it stands is not a provision in the nature of an exemption but provides for a deduction. Section 10B was substituted by the Finance Act of 2000 with effect from April 1, 2001. Prior to the substitution of the provision, the earlier provision stipulated that any profits and gains derived by an assessee from a 100 per cent. export oriented undertaking, to which the section applies "shall not be included in the total income of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unabsorbed depreciation and losses of the unit, the income from which was not eligible for deduction under Section 10A cannot be set off against the current profit of the eligible unit for computing the deduction under Section 10A. Referring to its earlier judgment in the case of Hindustan Unilever Ltd. (supra) it was held as under: - 2. Section 10A is a provision which is in the nature of a deduction and not an exemption. This was emphasised in a judgment of a Division Bench of this Court while construing the provisions of Section 10B in Hindustan Unilever Ltd Vs. Deputy Commissioner of Income Tax (2010) 325 ITR 102 at para 24. The submission of the Revenue placed its reliance on the literal reading of Section 10A under which a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive Assessment Years is to be allowed from the total income of the assessee. The deduction under Section 10A, in our view, has to be given effect to at the stage of computing the profits and gains of business. This is anterior to the application of the provisions of Section 72 which deals with the car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 10B are in the nature of exemption provisions, rather than provisions for deduction. In the ultimate analysis it may perhaps be wise to fall back on the observations of Justice Narasimham, J. (as he then was) speaking for a Division Bench of the Orissa High Court in Ramachandra Mardaraj Deo v. Collector of Commercial Taxes, (1957) 31 ITR 651 where he described the difference between exemption and deduction as a fine distinction and observed as under: - Whether a particular sum is claimed as an exemption or as a deduction, the net result is its immunity from taxation if the claim is allowed . 23. This Court considered a somewhat similar question, though not identical, in Commissioner of Income-Tax v. Dalmia Cement (Bharat) Ltd., (1980) 126 ITR 736. The question arose under the Companies (Profits) Surtax Act, 1964. Ranganathan, J. (as he then was) referred to the judgment of E. S. Venkataramiah, J. (as he then was) of the Karnataka High Court in Stumpp, Schuele and Somappa P. Ltd. v. ITO (Second), (1976) 102 ITR 320 where the position was summed up as under: - (a) Any amount in respect of which deduction is claimed under any of the provisions in sections 80C to 80V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income. These incomes are wholly or partly tax-free incomes on account of special deductions under Chapter VI-A. We are essentially concerned with these tax-free incomes. 25. Again at paragraph 40 at page 34 of the report it was observed as under: - As stated above, there is a vital difference between income not chargeable to tax and not includible in the total income (for example, agricultural income) and income which forms part of total income but which is made tax-free. Deductions under Chapter VI-A fall in the category of tax-free incomes. In fact, history shows that some of the incomes in Chapter VI-A have been transferred from Chapter VII to Chapter VI-A. Chapter VII has been deleted. However, at the relevant time Chapter VII referred to incomes forming part of total income on which no tax was payable. That is why we have stated that there is a difference between exempted incomes and tax-free incomes . This distinction is of some importance. As stated above, section 5 provides what the total income shall include. Chapter III refers to incomes which do not form part of total income . Chapter IV deals with computation of total income . It classifies the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ving the doubts. 28. In making the aforesaid observations the Court noted that there is a drift from the old values in recent times, suggesting that the Courts are increasingly accepting the Chapter headings as an aid to construction or interpretation in case of ambiguity . The caveat, however, is that where the statute is clear and unambiguous that should prevail. In interpreting sub-section (1) of Section 10A after the amendment made by the Finance Act, 2000 w. e. f. 01.04.2001, one cannot deny that there is ambiguity or doubt, because of the language used, as to whether the sub-section provides for an exemption or a deduction. We have earlier referred to the difficulty caused by the language which says that the deduction shall be made from the total income, when the Act contains no provision to allow any deductions from the total income. The section has been interpreted by the Karnataka High Court (supra) as an exemption provision whereas the Bombay High Court has understood the same as a deduction section, though the ultimate result did not make any difference to the assessee‟s claim in Black Veatch Consulting (supra). Therefore, it cannot be denied that there is un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of, and to the extent of, such profits and gains shall not be allowed under any other provisions of this Act for such assessment year and shall in no case exceed the profits and gains of such undertaking or unit or enterprise or eligible business, as the case may be. This Section seems to indicate, as contended by the Revenue, that Section 10A or Section 10B are only deduction provisions. No doubt, the assumption underlying the sub-section is that Section 10A and Section 10B are deduction provisions and once a deduction is allowed to the assessee under those sections, the same profits shall not be allowed as a deduction under any other provision of this Act for the same assessment year and that in any case the deduction shall not exceed the profits and gains of the eligible undertaking or unit or enterprise or business, as the case may be. Even if Section 10A/ Section 10B are construed as exemption provisions, sub-section (4) of Section 80A cannot defeat such construction. The sole object of the sub-section is to ensure that double benefit does not result to an assessee in respect of the same income, once under Section 10A or Section 10B or under any of the provisions of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-section, it cannot control the interpretation of those Sections. 34. Our attention was invited by the Revenue to three judgments of the Supreme Court which are; (i) Cambay Electric supply Industrial Co. Ltd. v. CIT, (1978) 113 ITR 84, (ii) IPCA Laboratory Ltd. v. Deputy CIT, (2004) 266 ITR 521 (iii) Synco Industries Ltd. v. AO (IT) Others, (2008) 299 ITR 444. 35. In Cambay (supra) the Supreme Court was concerned with the question as to whether Section 72 of the Act can be considered as part of the computation provisions of the Act. It was held that it was so and that before allowing the deduction under Section 80E of the Act from the gross total income of the assessee, the brought forward losses relating to the business have to be set off against the profits of the eligible unit because Section 72 which permits the set off is part of the computation provisions of the Act. In the case of IPCA (supra) the Supreme Court was concerned with Section 80HHC of the Act and the question was whether the loss in the trading activity has to be set off against the profits of the manufacturing activity while computing the deduction under the Section in respect of the export profits. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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