THE issues before the Bench are - Whether Section 10A provides for total exemption from tax or only a deduction from the income; Whether difference between exemption and deduction is that an exempt income does not enter the computation of total income wherease in case of deduction, it first gets included in the total income, and then gets deducted subject to several conditions; Whether sub-section (4) of Sec 10A aims at ensuring that there is no double benefit arising to the assessee in respect of the same income and Whether for the purpose of Section 10A, the losses suffered in the non-EPZ
Unit can be set off from the profit/income of the EPZ Unit - Whether for computing deduction u/s 10A in respect of EPZ Unit, brought forward losses of the Non-EPZ Unit are to be first deducted / reduced. And the verdict goes in favour of the assessee.
Unit can be set off from the profit/income of the EPZ Unit - Whether for computing deduction u/s 10A in respect of EPZ Unit, brought forward losses of the Non-EPZ Unit are to be first deducted / reduced. And the verdict goes in favour of the assessee.
Facts of the case
Assessee is a private limited company, 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 AY 2002-2003 it filed a return of income claiming exemption of Rs. 16,41,505/- u/s 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 AY 2002-2003. The assessee also had another unit which was located in Non EPZ area the profits from which were not entitled to any exemption. In respect of the non-eligible unit, the assessee incurred a loss of Rs. 19,20,480/-. In making the assessment u/s 143(3) of the Act, the AO set off the loss from the non-eligible unit against the profit of the eligible unit. He had computed profit of the eligible unit at Rs. 19,90,278/-. After setting off the loss from the non-eligible unit, the balance profit of Rs. 69,799/- was arrived at. To this figure, the AO added an amount of Rs. 1,22,34,928/- being the aggregate amount of the disallowance of the technical support fees, provision for write back and donation. After making the add back, the gross total income was computed at Rs. 1,23,04,727/- against which the loss for the AY 2001-2002 were brought forward and adjusted in terms of Section 72. Thus the total income was assessed at Rs. Nil.
The assessee filed an appeal against the assessment order before the CIT (Appeals) on various grounds and in the course of the appeal proceedings raised an additional ground that the AO has erred in not allowing deduction u/s 10A of the Act in respect of profits derived by the undertaking registered under Noida Export Processing Zone (EPZ) from exports; that the AO has grievously erred in not allowing deduction u/s 10A claimed in the return of income on the purported ground that as the net income of the assessee after setting off of brought forward loss/ unabsorbed depreciation was nil, the deduction u/s 10A of the Act was not considered and that deduction u/s 10A is allowable in respect of profits of eligible undertaking, derived from exports irrespective of profit/ loss of other undertakings or total income after set off of brought forward business losses/ unabsorbed depreciation. That admittedly in this case export profit of eligible undertaking is Rs 1,644,405/-, which is eligible for deduction u/s 10A of the Act. However, the CIT(A) upheld the action of the AO.
The assessee preferred further appeal before the Tribunal and raised grounds to the effect that the deduction u/s 10A in respect of the Noida unit has to be allowed notwithstanding any current or brought forward loss of the non-eligible unit and that the income tax authorities overlooked that Section 10A continues to be placed under Chapter-III of the Act which deals with “incomes which do not form part of total income”. In effect, what was contended was that the losses from the non-eligible units cannot be adjusted against the eligible unit for the purposes of Section 10A. The Tribunal held that the business loss of the undertakings or units whose income is not exempt u/s 10A cannot be set off against the profits of an undertaking which was eligible for the exemption u/s 10A thereby reducing the exemption. The point was thus decided in favour of the assessee.
In respect of the AY 2003-2004, the assessee filed its return of income declaring “Nil” income after setting off the brought forward losses of Rs. 81,91,655/-. The AO computed the income at Rs. 1,98,96,654/. 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. 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, the claim for deduction u/s 10A cannot be entertained. In this view of the matter the point was decided against the assessee. The assessee preferred a further appeal before the Tribunal. The Tribunal, relying on its decision in the assessee's own case for the AY 2002-2003, accepted the assessee's plea and directed the AO to allow the deduction u/s 10A without setting off the brought forward losses. Thus the point was decided in favour of the assessee.
A point of difference between the AY 2002-2003 and the AY 2003-2004 is that in respect of the former, the assessee's claim is that the losses suffered by the non-eligible unit cannot be set off against the profits of the eligible, whereas in the latter the assessee's claim is that the brought forward losses of the non-eligible units should not be set off against the profits of the unit eligible u/s 10A.
On further appeal by the Revenue, the High Court held that,
++ the Finance Act, 2003 made significant changes both with prospective and retrospective effect from the AY 2001-2002 in section 10A. The significant retrospective amendment was the one which was made in sub-section (6) of Section 10A. This sub-section contained provisions for ensuring that an assessee who enjoys the tax holiday u/s 10A does not enjoy any other tax concession. This aspect was earlier taken care of by sub-section (4), but when the entire Section was substituted and recast by the Finance Act, 2000 with effect from 1st April, 2001, sub-section (4) became sub-section (6) but the essence and substance of the provisions of these sub-sections remained the same. The effect was that from 1st April, 2001 (AY 2001-2002) once the tax holiday ended, the bar or prohibition on enjoying other tax benefits such as carry forward and set off of laws and unabsorbed depreciation etc. came into force;
++ the rationale behind both sub-section (4) and sub-section (6) is not far to seek. The legislature obviously wanted to ensure that if the profits from the eligible undertaking are allowed to enjoy the benefits of Section 10A, they should not enjoy any further reliefs or benefits which are available under the provisions of the Act. Circular No.308 dated 29.06.1981 explained sub-section (4) of Section 10A when the section was introduced by the Finance Act, 1981. The same rationale holds good for sub-section (6) also. If the profits of the 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 AY 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 and was lifted and from the AY 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 AY 2001-02, which the section initially did not want to confer;
++ in the computation of the income for the AY 2002-03, the profits and gains of business computed at Rs. 69,799/- is the result of setting off the loss of Rs. 19,20,480/- from the non-eligible units against the profits of Rs. 19,90,278/- from the eligible unit at Noida. If the assessee's claim is accepted then the profits from the eligible Noida unit will not enter the field of taxation with the result that the loss from the non-eligible unit would be eligible to be carried forward to the subsequent years subject to fulfillment of other conditions as applicable. This right has been lost to the assessee because of the adjustment made by the AO. Not only that, the AO has further brought the excess of Rs. 69,799/- (which in reality represents the profits of eligible unit) to tax which is also stated to be contrary to Section 10A(1).
++ in respect of the AY 2003-04 the exemption claimed by the assessee in respect of the profits of the eligible unit at Rs. 32,13,829/- was reduced by Rs. 6,07,911/- by allocating certain common expenses such as salary, wages and allowances, interest and miscellaneous expenses, etc. against the profits from the eligible unit. If the profits do not enter the field of taxation at all as claimed by the assessee, it would not have been possible for the AO to allocate a part of the common expenses against such profits and reduce the exemption which has resulted in a part of the profits from the eligible unit suffering taxation;
++ 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 assessee”. The language used has given rise to the argument that the section only provides for a deduction which means that the profits of the eligible undertaking will have to enter the field of taxation and be subjected to all the provisions of the Act and only the balance of profits, if any, will be deducted from the total income. This is in contrast to sub-section (1) as it stood prior to the aforesaid amendment, which provided that “any profits and gains derived by an assessee from an industrial undertaking to which this Section applies shall not be included in the total income of the assessee”. This phraseology to conform to the title of Chapter III of the Act has given rise to the further argument from the department that w.e.f. 01.04.2001 there is a significant change and profits which were earlier exempt from income tax and were not includible in the assessee's total income are now so included, subject to deduction, and once the profits are included, all the provisions of the Act will have to be applied while arriving at the amount of deduction. In order to test this argument it is necessary to look at several aspects. Firstly, Section 10A even after being amended substantially by the Finance Act, 2000 has been retained in Chapter III of the Act, notwithstanding the change in the language of sub-section (1). If the department is right in its contention that after 01.04.2001 the section only provides for a deduction and not an exemption, it was open to the legislature to transpose the section from Chapter III to Chapter VIA of the Act which is titled “deductions to be made in computing total income”. This aspect of the matter has been adverted to and discussed by the Karnataka High Court in CIT v. Yokogawa India Ltd. (2011-TIOL-711-HC-KAR-IT);
++ secondly, 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”. Under the Income Tax Act, 1961 the income of an assessee under the various heads of income enumerated in Section 14 have to be computed in accordance with the provisions of the Act. The aggregate of such incomes constitutes the “gross total income” of the assessee within the meaning of Section 80B (5) which defines “gross total income” as the total income computed in accordance with the provisions of the Act before making any deduction under Chapter VIA. The expression “total income” is defined in Section 2 (45) of the Act to mean the total amount of income referred to in Section 5, computed in the manner laid down in the Act. Section 4 which is charging section provides for the charge of income tax in respect of the total income of the previous year of every person;
++ the position that emerges from a harmonious reading of these provisions is that the assessee is required to pay income tax on his total income of the previous year. The determination of the total income is the last point before the tax is charged and once the total income is determined or quantified, there is absolutely no scope for making any further deduction, having regard to the provisions referred to above. If this is the true legal position, 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” u/s 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);
++ there is further indication that Section 10A provides for an exemption and not merely a deduction and this is in the form of return of income prescribed by the Income Tax Rules, 1962. The return of income in Form No.ITR-6 shows that the first step which an assessee 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 u/s 10A. Thereafter the assessee has to deduct the profits eligible u/s 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 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 from the past year that the profits eligible for the relief u/s 10A have to be given the relief. The form of return is also an indication that the relief u/s 10A has to be given before adjustment of the current as well as the past losses;
++ incomes which are enumerated in Chapter III of the Act have traditionally been considered as incomes which are exempt from tax rather than as deductions in the computation of the total income. The essential difference between an exemption and deduction seems to be that an exempt income does not enter the computation of total income at all, whereas a deduction, in the very nature of things, is first included in the total income and given a deduction subject to fulfillment of several conditions. The fact that the deduction may be given in respect of the entire income does not necessarily mean that it is an exempt income. At the same time, the fact that a particular class of income is only partially exempt from taxation does not necessarily mean that it is only a deduction.;
++ it cannot be denied that there is uncertainty and lack of clarity or precision in the language employed in sub-section (1). It is, therefore, not impermissible to rely on the heading or title of Chapter III and interpret the section as providing for an exemption rather than a deduction;
++ the key to the problem seems to lie in appreciating the difference between a provision which exempts an income and a provision which provides for a deduction of the income or a part thereof in computing the total income of the assessee;
++ Section 10A is a provision exempting a particular kind of income even in its present form, that is to say, even after being amended by the Finance Act, 2000 w. e. f. 01.04.2001;
++ sub-section (4) of Section 80A 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 AY 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 u/s 10A or Section 10B or under any of the provisions of Chapter VI-A and again under any other provision of the Act. This sub-section does not militate against the view that Section 10A or Section 10B is an exemption provision. The sub-section is not inconsistent with such an interpretation because even if those sections are construed as exemption provisions, it is still possible to invoke the sub-section and ensure that the assessee does not obtain a deduction in respect of the exempted income under any other provision of the Act. The only object of the sub-section is to ensure that there is no double benefit arising to the assessee in respect of the same income;
++ Sub-section (4) of Section 80A was inserted by the Finance (No.2) Act, 2009 with retrospective effect from 01.04.2003. Circular No.5/2010 issued by the CBDT on 3rd June, 2010 explained the sub-section. The contents of the circular accord with our view of the sub-section. Merely because there is a reference to Section 10A and Section 10B in the sub-section, it cannot control the interpretation of those Sections.
Assessee is a private limited company, 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 AY 2002-2003 it filed a return of income claiming exemption of Rs. 16,41,505/- u/s 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 AY 2002-2003. The assessee also had another unit which was located in Non EPZ area the profits from which were not entitled to any exemption. In respect of the non-eligible unit, the assessee incurred a loss of Rs. 19,20,480/-. In making the assessment u/s 143(3) of the Act, the AO set off the loss from the non-eligible unit against the profit of the eligible unit. He had computed profit of the eligible unit at Rs. 19,90,278/-. After setting off the loss from the non-eligible unit, the balance profit of Rs. 69,799/- was arrived at. To this figure, the AO added an amount of Rs. 1,22,34,928/- being the aggregate amount of the disallowance of the technical support fees, provision for write back and donation. After making the add back, the gross total income was computed at Rs. 1,23,04,727/- against which the loss for the AY 2001-2002 were brought forward and adjusted in terms of Section 72. Thus the total income was assessed at Rs. Nil.
The assessee filed an appeal against the assessment order before the CIT (Appeals) on various grounds and in the course of the appeal proceedings raised an additional ground that the AO has erred in not allowing deduction u/s 10A of the Act in respect of profits derived by the undertaking registered under Noida Export Processing Zone (EPZ) from exports; that the AO has grievously erred in not allowing deduction u/s 10A claimed in the return of income on the purported ground that as the net income of the assessee after setting off of brought forward loss/ unabsorbed depreciation was nil, the deduction u/s 10A of the Act was not considered and that deduction u/s 10A is allowable in respect of profits of eligible undertaking, derived from exports irrespective of profit/ loss of other undertakings or total income after set off of brought forward business losses/ unabsorbed depreciation. That admittedly in this case export profit of eligible undertaking is Rs 1,644,405/-, which is eligible for deduction u/s 10A of the Act. However, the CIT(A) upheld the action of the AO.
The assessee preferred further appeal before the Tribunal and raised grounds to the effect that the deduction u/s 10A in respect of the Noida unit has to be allowed notwithstanding any current or brought forward loss of the non-eligible unit and that the income tax authorities overlooked that Section 10A continues to be placed under Chapter-III of the Act which deals with “incomes which do not form part of total income”. In effect, what was contended was that the losses from the non-eligible units cannot be adjusted against the eligible unit for the purposes of Section 10A. The Tribunal held that the business loss of the undertakings or units whose income is not exempt u/s 10A cannot be set off against the profits of an undertaking which was eligible for the exemption u/s 10A thereby reducing the exemption. The point was thus decided in favour of the assessee.
In respect of the AY 2003-2004, the assessee filed its return of income declaring “Nil” income after setting off the brought forward losses of Rs. 81,91,655/-. The AO computed the income at Rs. 1,98,96,654/. 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. 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, the claim for deduction u/s 10A cannot be entertained. In this view of the matter the point was decided against the assessee. The assessee preferred a further appeal before the Tribunal. The Tribunal, relying on its decision in the assessee's own case for the AY 2002-2003, accepted the assessee's plea and directed the AO to allow the deduction u/s 10A without setting off the brought forward losses. Thus the point was decided in favour of the assessee.
A point of difference between the AY 2002-2003 and the AY 2003-2004 is that in respect of the former, the assessee's claim is that the losses suffered by the non-eligible unit cannot be set off against the profits of the eligible, whereas in the latter the assessee's claim is that the brought forward losses of the non-eligible units should not be set off against the profits of the unit eligible u/s 10A.
On further appeal by the Revenue, the High Court held that,
++ the Finance Act, 2003 made significant changes both with prospective and retrospective effect from the AY 2001-2002 in section 10A. The significant retrospective amendment was the one which was made in sub-section (6) of Section 10A. This sub-section contained provisions for ensuring that an assessee who enjoys the tax holiday u/s 10A does not enjoy any other tax concession. This aspect was earlier taken care of by sub-section (4), but when the entire Section was substituted and recast by the Finance Act, 2000 with effect from 1st April, 2001, sub-section (4) became sub-section (6) but the essence and substance of the provisions of these sub-sections remained the same. The effect was that from 1st April, 2001 (AY 2001-2002) once the tax holiday ended, the bar or prohibition on enjoying other tax benefits such as carry forward and set off of laws and unabsorbed depreciation etc. came into force;
++ the rationale behind both sub-section (4) and sub-section (6) is not far to seek. The legislature obviously wanted to ensure that if the profits from the eligible undertaking are allowed to enjoy the benefits of Section 10A, they should not enjoy any further reliefs or benefits which are available under the provisions of the Act. Circular No.308 dated 29.06.1981 explained sub-section (4) of Section 10A when the section was introduced by the Finance Act, 1981. The same rationale holds good for sub-section (6) also. If the profits of the 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 AY 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 and was lifted and from the AY 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 AY 2001-02, which the section initially did not want to confer;
++ in the computation of the income for the AY 2002-03, the profits and gains of business computed at Rs. 69,799/- is the result of setting off the loss of Rs. 19,20,480/- from the non-eligible units against the profits of Rs. 19,90,278/- from the eligible unit at Noida. If the assessee's claim is accepted then the profits from the eligible Noida unit will not enter the field of taxation with the result that the loss from the non-eligible unit would be eligible to be carried forward to the subsequent years subject to fulfillment of other conditions as applicable. This right has been lost to the assessee because of the adjustment made by the AO. Not only that, the AO has further brought the excess of Rs. 69,799/- (which in reality represents the profits of eligible unit) to tax which is also stated to be contrary to Section 10A(1).
++ in respect of the AY 2003-04 the exemption claimed by the assessee in respect of the profits of the eligible unit at Rs. 32,13,829/- was reduced by Rs. 6,07,911/- by allocating certain common expenses such as salary, wages and allowances, interest and miscellaneous expenses, etc. against the profits from the eligible unit. If the profits do not enter the field of taxation at all as claimed by the assessee, it would not have been possible for the AO to allocate a part of the common expenses against such profits and reduce the exemption which has resulted in a part of the profits from the eligible unit suffering taxation;
++ 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 assessee”. The language used has given rise to the argument that the section only provides for a deduction which means that the profits of the eligible undertaking will have to enter the field of taxation and be subjected to all the provisions of the Act and only the balance of profits, if any, will be deducted from the total income. This is in contrast to sub-section (1) as it stood prior to the aforesaid amendment, which provided that “any profits and gains derived by an assessee from an industrial undertaking to which this Section applies shall not be included in the total income of the assessee”. This phraseology to conform to the title of Chapter III of the Act has given rise to the further argument from the department that w.e.f. 01.04.2001 there is a significant change and profits which were earlier exempt from income tax and were not includible in the assessee's total income are now so included, subject to deduction, and once the profits are included, all the provisions of the Act will have to be applied while arriving at the amount of deduction. In order to test this argument it is necessary to look at several aspects. Firstly, Section 10A even after being amended substantially by the Finance Act, 2000 has been retained in Chapter III of the Act, notwithstanding the change in the language of sub-section (1). If the department is right in its contention that after 01.04.2001 the section only provides for a deduction and not an exemption, it was open to the legislature to transpose the section from Chapter III to Chapter VIA of the Act which is titled “deductions to be made in computing total income”. This aspect of the matter has been adverted to and discussed by the Karnataka High Court in CIT v. Yokogawa India Ltd. (2011-TIOL-711-HC-KAR-IT);
++ secondly, 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”. Under the Income Tax Act, 1961 the income of an assessee under the various heads of income enumerated in Section 14 have to be computed in accordance with the provisions of the Act. The aggregate of such incomes constitutes the “gross total income” of the assessee within the meaning of Section 80B (5) which defines “gross total income” as the total income computed in accordance with the provisions of the Act before making any deduction under Chapter VIA. The expression “total income” is defined in Section 2 (45) of the Act to mean the total amount of income referred to in Section 5, computed in the manner laid down in the Act. Section 4 which is charging section provides for the charge of income tax in respect of the total income of the previous year of every person;
++ the position that emerges from a harmonious reading of these provisions is that the assessee is required to pay income tax on his total income of the previous year. The determination of the total income is the last point before the tax is charged and once the total income is determined or quantified, there is absolutely no scope for making any further deduction, having regard to the provisions referred to above. If this is the true legal position, 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” u/s 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);
++ there is further indication that Section 10A provides for an exemption and not merely a deduction and this is in the form of return of income prescribed by the Income Tax Rules, 1962. The return of income in Form No.ITR-6 shows that the first step which an assessee 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 u/s 10A. Thereafter the assessee has to deduct the profits eligible u/s 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 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 from the past year that the profits eligible for the relief u/s 10A have to be given the relief. The form of return is also an indication that the relief u/s 10A has to be given before adjustment of the current as well as the past losses;
++ incomes which are enumerated in Chapter III of the Act have traditionally been considered as incomes which are exempt from tax rather than as deductions in the computation of the total income. The essential difference between an exemption and deduction seems to be that an exempt income does not enter the computation of total income at all, whereas a deduction, in the very nature of things, is first included in the total income and given a deduction subject to fulfillment of several conditions. The fact that the deduction may be given in respect of the entire income does not necessarily mean that it is an exempt income. At the same time, the fact that a particular class of income is only partially exempt from taxation does not necessarily mean that it is only a deduction.;
++ it cannot be denied that there is uncertainty and lack of clarity or precision in the language employed in sub-section (1). It is, therefore, not impermissible to rely on the heading or title of Chapter III and interpret the section as providing for an exemption rather than a deduction;
++ the key to the problem seems to lie in appreciating the difference between a provision which exempts an income and a provision which provides for a deduction of the income or a part thereof in computing the total income of the assessee;
++ Section 10A is a provision exempting a particular kind of income even in its present form, that is to say, even after being amended by the Finance Act, 2000 w. e. f. 01.04.2001;
++ sub-section (4) of Section 80A 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 AY 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 u/s 10A or Section 10B or under any of the provisions of Chapter VI-A and again under any other provision of the Act. This sub-section does not militate against the view that Section 10A or Section 10B is an exemption provision. The sub-section is not inconsistent with such an interpretation because even if those sections are construed as exemption provisions, it is still possible to invoke the sub-section and ensure that the assessee does not obtain a deduction in respect of the exempted income under any other provision of the Act. The only object of the sub-section is to ensure that there is no double benefit arising to the assessee in respect of the same income;
++ Sub-section (4) of Section 80A was inserted by the Finance (No.2) Act, 2009 with retrospective effect from 01.04.2003. Circular No.5/2010 issued by the CBDT on 3rd June, 2010 explained the sub-section. The contents of the circular accord with our view of the sub-section. Merely because there is a reference to Section 10A and Section 10B in the sub-section, it cannot control the interpretation of those Sections.
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