THE issue before the Bench is - Whether while computing the exemption u/s 10B, the loss arising from non-eligible unit can be adjusted against the profit arising on eligible unit. NO is the Tribunal's order.
Facts of the case
Assessee, a partnership firm, is engaged in manufacture and export of ready-made garments. Assessee had three units. Unit-I was not entitled to any exemption. Unit II and Unit III were 100% EOU eligible for exemption u/s 10B. Assessee set off losses of eligible units (Unit-II and III) against the profits of Unit-I. AO held that income of eligible units that were entitled to exemption u/s 10-B would not form part of the total income under Chapter-III and therefore they would not
Assessee, a partnership firm, is engaged in manufacture and export of ready-made garments. Assessee had three units. Unit-I was not entitled to any exemption. Unit II and Unit III were 100% EOU eligible for exemption u/s 10B. Assessee set off losses of eligible units (Unit-II and III) against the profits of Unit-I. AO held that income of eligible units that were entitled to exemption u/s 10-B would not form part of the total income under Chapter-III and therefore they would not
enter the computation of total income at all and therefore the set off of income of non-eligible unit against the loss of the eligible unit could not be allowed.
CIT (A) held that in view of the decision of Karnataka High Court in the case of M/s Yokogawa India Ltd. the unit exempted u/s 10A is an insulated entity which has to carry its business performance in isolation from the rest of the assessee’s business. Neither the income nor the loss of such an exempted unit can be now adjusted against the results of another unit.
Assessee contended before ITAT that Hon’ble Karnataka High Court in the case of Yokogawa India Ltd. does not lay down that the provisions of Sec.10B are exemption provisions. The consequences if the provisions of Sec.10-B are treated as exemption provisions or deduction provision need to be set out. It was further contended that after the amendment to the provisions of Sec.10-B(6) by the Finance Act, 2003 w.r.e.f. 1.4.2001, whereby if during the period for which Sec.10-B unit enjoys tax benefits, the Assessee incurs loss, then those loss will be eligible for carry forward and set off against any other income.
Income which does not form part of the total income under Chapter-III of the Act (i.e. exemption provision), do not enter the computation of total income at all. Sec. 4 of the Act creates charge of income-tax and it provides that where any Central Act enacts that income tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of this Act in respect of the total income of the previous year of every person. The charge of tax is thus on total income. Sec. 2 (45) defines total income to mean total amount of income referred to in Sec.5, computed in the manner laid down in this Act. Chapter-II of the Act, from section 4 to 9 deal with Basis of Charge. Chapter-III of the Act, deals with income which do not form part of total income and are contained in Sect. 10 to 13-B of the Act. Chapter IV deals with the computation of total income. Firstly income is categorized under various heads of income. This is laid down in Section 14 of the Act, which lays down that save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income – Salaries, income from house property, profits and gains of business or profession, capital gains, income from other sources. Chapter V then brings income of other persons, which are to be included in the total income of an Assessee and this is contained in section 60 to 65 of the Act. Chapter-VI (containing sec. 66 to 80) then lays down provisions regarding aggregation of income and set off or carry forward of loss.
The provisions of section 66 are not applicable to incomes which are absolutely exempt from tax as per Section 10, Section 11 etc., falling under Chapter III. This position is made clear by s. 66 itself as it speaks only of “incomes on which tax is not payable” and similar words are used in Chapter VII only thus leaving out by implication incomes which do not form part of total income at all as per Chapter III from the scope of s. 66. From the charging provisions of the Act, it is clear that both profit as well as loss which is negative profit must enter into computation, wherever it becomes material. The charge is on total income of the Assessee. Sec. 2 (45) defines total income to mean total amount of income referred to in Sec.5, computed in the manner laid down in this Act. An income in order to come within the purview of that definition must satisfy two conditions. Firstly, it must comprise the "total amount of income, profits and gains.” Secondly, it must be "computed in the manner laid down in the Act". If either of these conditions fails, the income will not be a part of the total income that can be brought to charge. If income includes loss and if income of the eligible unit does not form part of the total income under the Act by virtue of provisions of Sec.10B(1) of the Act contained in Chapter III of the Act, then neither the gain nor loss would be considered for computation of total income.
After hearing both the parties, the ITAT held that,
++ if the provisions are considered as exemption provisions then they will not enter the computation of total income and therefore the loss of the eligible unit cannot be set off against the profits of the non-eligible unit. The expression “shall be allowed from the total income of the Assessee” in the section 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 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. Though the expression used in Sec.10A was “Deduction” but in effect it was only an exemption section;
CIT (A) held that in view of the decision of Karnataka High Court in the case of M/s Yokogawa India Ltd. the unit exempted u/s 10A is an insulated entity which has to carry its business performance in isolation from the rest of the assessee’s business. Neither the income nor the loss of such an exempted unit can be now adjusted against the results of another unit.
Assessee contended before ITAT that Hon’ble Karnataka High Court in the case of Yokogawa India Ltd. does not lay down that the provisions of Sec.10B are exemption provisions. The consequences if the provisions of Sec.10-B are treated as exemption provisions or deduction provision need to be set out. It was further contended that after the amendment to the provisions of Sec.10-B(6) by the Finance Act, 2003 w.r.e.f. 1.4.2001, whereby if during the period for which Sec.10-B unit enjoys tax benefits, the Assessee incurs loss, then those loss will be eligible for carry forward and set off against any other income.
Income which does not form part of the total income under Chapter-III of the Act (i.e. exemption provision), do not enter the computation of total income at all. Sec. 4 of the Act creates charge of income-tax and it provides that where any Central Act enacts that income tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of this Act in respect of the total income of the previous year of every person. The charge of tax is thus on total income. Sec. 2 (45) defines total income to mean total amount of income referred to in Sec.5, computed in the manner laid down in this Act. Chapter-II of the Act, from section 4 to 9 deal with Basis of Charge. Chapter-III of the Act, deals with income which do not form part of total income and are contained in Sect. 10 to 13-B of the Act. Chapter IV deals with the computation of total income. Firstly income is categorized under various heads of income. This is laid down in Section 14 of the Act, which lays down that save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income – Salaries, income from house property, profits and gains of business or profession, capital gains, income from other sources. Chapter V then brings income of other persons, which are to be included in the total income of an Assessee and this is contained in section 60 to 65 of the Act. Chapter-VI (containing sec. 66 to 80) then lays down provisions regarding aggregation of income and set off or carry forward of loss.
The provisions of section 66 are not applicable to incomes which are absolutely exempt from tax as per Section 10, Section 11 etc., falling under Chapter III. This position is made clear by s. 66 itself as it speaks only of “incomes on which tax is not payable” and similar words are used in Chapter VII only thus leaving out by implication incomes which do not form part of total income at all as per Chapter III from the scope of s. 66. From the charging provisions of the Act, it is clear that both profit as well as loss which is negative profit must enter into computation, wherever it becomes material. The charge is on total income of the Assessee. Sec. 2 (45) defines total income to mean total amount of income referred to in Sec.5, computed in the manner laid down in this Act. An income in order to come within the purview of that definition must satisfy two conditions. Firstly, it must comprise the "total amount of income, profits and gains.” Secondly, it must be "computed in the manner laid down in the Act". If either of these conditions fails, the income will not be a part of the total income that can be brought to charge. If income includes loss and if income of the eligible unit does not form part of the total income under the Act by virtue of provisions of Sec.10B(1) of the Act contained in Chapter III of the Act, then neither the gain nor loss would be considered for computation of total income.
After hearing both the parties, the ITAT held that,
++ if the provisions are considered as exemption provisions then they will not enter the computation of total income and therefore the loss of the eligible unit cannot be set off against the profits of the non-eligible unit. The expression “shall be allowed from the total income of the Assessee” in the section 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 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. Though the expression used in Sec.10A was “Deduction” but in effect it was only an exemption section;
++ the plea of the assessee that income of Sec.10B unit has to be excluded before arriving at the gross total income and not after computing the gross total income is not acceptable. The Hon’ble High Court in the case of Yokogawa India Ltd. noticed that the provisions of Sec. 10B(6) as it existed prior to its amendment w.e.f. 1.4.2001 provided that the loss of the eligible unit has to be ignored altogether. 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). The loss suffered by the eligible unit u/s 10B 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. The first benefit is an exemption of the commercial profits during the tax holiday period on a stand-alone basis without the threat of those profits being set off against loss of any other undertaking of the Assessee which may be another eligible undertaking or non-eligible business of the Assessee. The second benefit is that its losses during the tax holiday period can be set off against the income of the non-eligible undertaking. 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. Thus, the claim of assessee was rightly not accepted.
No comments:
Post a Comment