CBDT Circular on setting-off losses of tax holiday units

 

The Central Board of Direct Taxes (‘CBDT’) has issued Circular No 07/2013 dated July 16, 2013 (‘the Circular’) wherein it has been clarified that losses if any, are required to be set-off against the profits of a STP/EOU/SEZ unit (‘eligible unit’), before the deduction under section 10A/10B of the Income Tax Act, 1961 (‘the Act’) is allowed.

Whether the benefit provided under section 10A/10AA/10B/10BA of the Act is in the nature of a deduction or an exemption has been a debated topic. Prior to the amendment made in section 10A/10B of the Act vide the Finance Act, 2000, the sections were worded such that profits and gains derived by eligible units would not be included in the total income of the tax payer, ie the same would be exempt. However, pursuant to the amendment in the year 2000, the sections were amended to read that a deduction of the profits and gains derived by the eligible units would be allowed from the total income of the tax payer. Though there was an amendment in the language of the sections, they were retained under Chapter III of the Act which deals with incomes which do not form part of total income.

As a fall out of this change, there has been litigation between tax payers and the Revenue Authorities (“RA”) on whether the benefit under section 10A/10B of the Act should be allowed before setting‑off of current year losses from non-eligible units of the tax payer and the brought-forward business losses of previous years, or whether the benefit should be allowed after such losses are set-off. Courts, at various levels, have held divergent views. While generally the rulings have held that the benefit under section 10A/10B of the Act should be granted without setting-off the losses, there are contrary rulings as well.

The CBDT has, vide the Circular, clarified its stand that irrespective of their continued placement in Chapter III, section 10A/10B of the Act provide for a deduction of the profits and gains derived by an eligible unit. The CBDT, while highlighting the contrast between the pre and post substitution of Section 10A/10B of the Act, has articulated that the new provisions provide for a “deduction” from the total income of the tax payer and not an “exemption” in respect of profits and gains derived by an eligible unit.

In the Circular, the CBDT has clearly laid out the following manner of computation of the deduction under sections 10A/10AA/10B/10BA of the Act:

· Any income/loss from various sources ie, eligible and non-eligible units, under the same head are to be aggregated / set-off in accordance with the provisions of section 70 of the Act.

· Thereafter, the income from one head is to be aggregated / set-off with the income or loss of the other head in accordance with the provisions of section 71 of the Act.

· Subsequent to the above, any brought-forward business losses or unabsorbed depreciation is required to be set-off against the income as ascertained above, after which the deduction under Chapter VI‑A and section 10A/10AA/10B/10BA of the Act is to be calculated.

· If, however, the result of the aggregation / set-off is a loss, then such loss shall be allowed to be carried forward and set-off with the profits of an eligible unit or a non-eligible unit of the tax payer in accordance with section 72 of the Act.

In summary, the Circular has clarified that the losses, if any, are required to be set-off in respect of the profits of the unit eligible for tax holiday before the deduction under section 10A/10AA/10B/10BA of the Act is allowed.

The table below provides a numerical example showing the effect of the Circular:

Particulars	Tax payers’ Contention Amount (Rs)	CBDT Circular Amount (Rs)
Income from eligible unit for the year (A)	100	100
Current year loss from non-eligible unit (B)	(30)	(30)
Carried-forward business loss from earlier years (C)	(20)	(20)
Net income from eligible unit for the year	100	50
Less: Deduction under section 10A/10AA/10B/10BA of the Act	100	50
Profits and gains from business and profession	Nil	Nil
Current year loss from non-eligible unit eligible to be carried forward and set-off from income in future years	(30)	Nil
Carried-forward business loss from earlier years eligible to be carried forward and set-off from income in future years