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TMI Blog2015 (3) TMI 618X X X X Extracts X X X X X X X X Extracts X X X X ..... 6/- as income for the year under consideration. It was assessed under the provisions of Section 143(3) of the Act. The Assessing Officer (AO) during the assessment proceedings, noticed that: (i) The Assessee had a hundred per-cent export oriented undertaking (100% EOU) at Plot No.A-280 to 283, RIICO Industrial Area, Chopanki, Distt. Alwar (Rajasthan); was registered as EOU in Noida Special Economic Zone and eligible for deduction under Section 10B of the Act. This was the first year of operation of this Unit. (ii) However, there was a loss of Rs. 2,00,29,769/- from this unit which the assessee had set off against the income of the other units. 3. The assessee was asked to explain as to why the set-off of this loss should not be disallowed, as the income of this unit was exempt from tax. In response, the Assessee furnished its detailed submissions, which, however, were rejected by the AO who was of the opinion that as Section 10B was in Chapter-III of the Act, under the heading "incomes which do not form part of total income", legislative intent was clear that such income was exempt. The AO also held that such being the case, losses of the unit, too could not be set off against i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of eligible units are to be set off against the profits of such eligible units in the subsequent years." 5. The ITAT, which the assessee approached, allowed the appeal. In doing so, it essentially relied on the ruling of a Division Bench of the Bombay High Court in CIT vs. Galaxy Surfactants Ltd. (343 ITR 102). The impugned order, inter alia, held that: "11. We have heard both the sides in detail. We find that the decision of Hon'ble Bombay High Court in the case of CIT vs. Galaxy Surfactants Ltd. cited supra, is applicable to the facts of the assessee's case. In that case, the facts were as follows :- "The assessee had a hundred per cent Export Oriented Unit (EOU) which was entitled to a deduction under section 10B. The previous year relevant to assessment year 2005-06 was the first year of production in the unit. During the year under consideration, the assessee disclosed a total profit of Rs. 16.82 crores from business. From this profit, a loss of Rs. 5.56 crores sustained by the hundred per cent EOU was reduced. The loss in the EOU was principally on account of current depreciation which was set-off against the profits of the EOU. After reducing the loss sustained b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the section as they apply for the purposes of an undertaking referred to in section 80-IA. A similar provision corresponding to sub-section (5) of section 80-IA is to be found in sub-section (6) of section 80-I. Under sub-section (5) of section 80-IA which begins with overriding non obstante provisions, profits and gains of an eligible business to which sub-section (1) applies are for the purposes of determining the quantum of deduction to be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year. A provision akin to sub-section (5) of section 80-IA or for that mailer akin to sub-section (6) of section 80-I has not been introduced by the Legislature when it enacted section 10B. The fact that unabsorbed depreciation can be carried forward to a subsequent year does not militate against the entitlement of the assessee to set-off a loss which is sustained by an eligible unit against the income arising from other units under the same head of profits and gains of business or profession. The Legislature not having introduced a statutory prohibition, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profits and gains of such undertaking or unit or enterprise or eligible business, as the case may be." Counsel also submitted that another judgment of the Bombay High Court in CIT v. Black and Veatch Consulting Pvt. Ltd. (decided on 09.04.2012; [2012] 348 ITR 72 (Bom)) affirms that in fact Section 10B is in the nature of a deduction and not exemption. Consequently, losses of the tax-liable unit can be set off against the profits or income of the Section 10B unit. It was submitted that the Karnataka High Court decision in Himatasingike Side Ltd (supra) was rendered in the context of a claim for depreciation and not set off. Lastly, it was argued that it would be irrational to say that losses cannot be carried forward or set off against incomes which are not tax exempt, because the facility of carry forward adjustment is available for a limited period. Analysis and Conclusions 8. Section 2(45) of the Income-tax Act defines total income as "the total amount of income referred to in section 5, computed in the manner laid down in this Act". Section 4 provides for charge of income-tax. Section 5 defines the scope of total income. Section 5 (1) states that subject to the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee..." 9. What the assessee argued successfully in this case was that income from a Section 10B unit is in the nature of deduction, rather than exemption. If this contention is accepted, certain inevitable consequences would follow. Under the scheme of the Act, income computed under various heads - in accordance with provisions of Chapter IV of the Act has to be aggregated in terms of Chapter VI of the Act. Consequently, the first step would be that income/loss from various sources i.e. eligible and ineligible units, under the same head are to be aggregated in terms of Section 70 of the Act. In the second step, income from one head is aggregated with the income or loss of the other head under Section 71 of the Act. In the third step, after giving effect to Sections 70 and 71 of the Act, if there is any income (where there is no brought forward loss to be set off in terms of Section 72 of the Act) and the same is eligible for deduction in terms of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e eligible undertaking do not enter the field of taxation for a particular period known as the tax holiday period, it stands to reason that when the profits enter the field of taxation after the period of the tax holiday, those profits should not be reduced or set off by other reliefs provided in the Act such as brought forward losses, brought forward unabsorbed depreciation, etc. The mandate of these sub-sections is that all such allowances and reliefs would be deemed to have been exhausted during the tax holiday period itself and no part thereof would survive for consideration after the tax holiday period. The amendment 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 ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be, then it is not possible to understand sub-section (1) of Section 10A as providing for a "deduction" of the profits of the eligible unit "from the total income of the assessee". The definition of the expression total income given in Section 2(45) cannot be imported into the interpretation of sub-section (1) having regard to the context in which it is used and the scheme of the Act relating to the charge of the tax. It has to be kept in mind that the definition section would not apply if the context requires otherwise; in other words, if the scheme of the Act relating to the charge of income tax clearly makes it impossible for any deduction to be allowed once the total income is determined, then it would be futile to still insist on applying the definition of the expression "total income" under Section 2 (45) to the interpretation of the sub-section. In other words the context in which the expression "total income" is used in the sub-section requires us to abandon the definition of that expression as per Section 2 (45)." Tei Technologies (supra) also noticed that though there was divergence of opinion between the Karnataka and Bombay High Courts as to whether Section 10A or Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art 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" under different heads and the deductions to be made in respect of each of the different heads of income. In the Income-tax Act, the expression "income includible in the total income" has a definite connotation. Similarly, the expression "deduction and allowances" have particular connotation. Therefore, on the one hand we have "agricultural income" which is neither chargeable nor includible in the total income and on the other hand we ..... X X X X Extracts X X X X X X X X Extracts X X X X
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