Whether when assessee has multiple units eligible for Sec 10A benefits, losses of some units can be set off against profits of others before final deduction is computed - NO: ITAT

THE issues before the Bench are - Whether for the purpose of computation of deduction u/s.10A, each industrial unit should be treated as an independent assessee; Whether for the purpose of computing deduction u/s 10A, loss of an Industrial unit can be set off with that of another profit making unit; Whether for the purpose of section 10A the profit
derived did not cover the profit from any sources beyond the profits derived from the eligible business; Whether in case the immediate source of the transaction is not the export of articles or things or computer software but the bank deposits etc, the profits arising out of the same can be considered as profits from eligible business and Whether deduction u/s.10A is allowable in respect of other income. And the verdict partly goes in favour of the assessee.

Facts of the case

Assessee company had seven units eligible for deduction u/s.10A. It had filed its ROI declaring income of Rs. 2,03,71,350/-, on the basis of which the assessment was finalised u/s 143(3) with the total income of Rs. 3,09,59,600/-. Assessee had computed the profit / loss in respect of each unit separately in the ROI filed and had ignored the loss making units for the purpose of computing deduction u/s 10A. It was accepted by the AO in his original assessment order. Later on, AO discovered that the loss of loss making units was not set off with that of profits of the profit making units and also deduction in respect of interest had been wrongly allowed for the purpose of calculating deduction u/s 10A. Hence AO reopenend the assessment. It was pointed out that section 10A referred to only profit derived from the business undertaking and not the losses and there were no provisions for set off of losses against profits of other undertakings.

Assessee objected to the notice issued by the AO and submitted that the original assessment had already been completed u/s.143(3) and, therefore, under the provisions of section 147, assessment could be reopened after the expiry of four years from the end of assessment year only if there was failure on the part of the assessee to disclose truly and fully all material facts necessary for assessment. In this case, the assessee had disclosed all the material facts and, therefore, the assessment could not be reopened u/s.147. It was also submitted that the deduction u/s.10A was allowable in respect of each unit set up in the free trade zone treating the same as an undertaking. Therefore, treating all the units as one unit for the purpose of deduction u/s.10A was not correct. It was also pointed out that the section 10A referred to only profit derived from the business undertaking and not the losses and there were no provisions of set off of losses against profits of other undertakings. Therefore, losses could not be set off against the profit of other units. As regards the interest income, it was submitted that the interest income had been received during the normal course of business and assessee had considered net interest income in the P & L A/c. The assessee, therefore, requested that the proceedings initiated u/s.147 should be withdrawn. It was further contended that assessee had opted for deduction u/s.10A only for four units as per declaration given u/s.10A.

On appeal, the CIT(A) observed that the deduction u/s.10A(4) has to be computed in the ratio of export turnover to the total turnover of the business carried on by the assessee and, therefore, the business of all the units has to be taken as part of the same business and accordingly he confirmed the approach adopted by the A.O. to consider the profit / losses of all the units together while computing the deduction u/s.10A in the ratio of export turnover to total turnover. Revenue had relied upon the judgment of Pandian Chemicals Ltd. Vs CIT (2003-TIOL-51-SC-IT), and in the case of CIT Vs Sterling Foods (2002-TIOL-222-SC-IT). Accordingly he has upheld the order of the A.O. It was also observed that there was no disclosure of the income on the part of the assessee and merely because the AO committed a mistake in applying the provisions of law in the original assessment, it would not be correct to say that he will not be empowered to reopen the assessment. The CIT(A) accordingly upheld the legal validity of reopening of assessment aggrieved by which the assessee had filed an appeal before ITAT.

AR referred the decision in the case of M/s. Scientific Atlanta India Technology Pvt. Ltd. (2010-TIOL-69-ITAT-MAD-SB) in which it has been held that loss of non eligible unit cannot be set off against the profits of undertaking eligible for deduction u/s.10A. The view taken by the Special Bench has been upheld by the High Court in the case of CIT vs. Black & Veatch Consulting Pvt. Ltd. (2012-TIOL-318-HC-MUM-IT), in which it has been held that the brought forward losses and unabsorbed depreciation of non eligible units cannot be set off against the eligible units. It was thus argued that the losses from eligible units cannot be set off against the profit of other units. As regards the allowability of deduction u/s.10A in respect of interest and other income is concerned, it was submitted that in respect of interest from ICD and bank deposits there was some basis for disallowing the claim u/s.10A but the assessee had also received interest from advance given in connection with the business or employee loans which has to be considered as integral part of the profit of the business and deduction u/s.10A has to be allowed.

Having heard the rival contentions, the Tribunal held that,

++ as regards the set off of losses from some units against the profit of other units while computing the deduction u/s.10A is concerned, we find that the assessee has maintained separate accounts in respect of each unit and profit and loss has been computed separately. The assessee has also filed the copies of separate P & L A/c. of each unit in the paper book and has also filed an auditors certificate giving separate computation in respect of each unit. In our view, profit from each unit is eligible for deduction u/s.10A independently provided the profit could be computed separately. In this case there is no dispute that the assessee has maintained separate accounts in respect of each unit and profit has been computed separately. The same issue we find has also been considered by the Special Bench of the Tribunal in the case of M/s. Scientific Atlanta India Technology Pvt. Ltd. in which the Special Bench held that the deduction u/s.10A was not an exemption and, therefore, the provisions of section 80A of Chapter VIIA would not be applicable to such deduction u/s.10A. It was accordingly held that the losses from non eligible units cannot be set off against the profit of the undertaking eligible for deduction u/s.10A for the purpose of computation of deduction u/s.10A. The view taken by the Special Bench has been upheld by the High Court in the order of Black & Veatch Consulting Pvt. Ltd. Following these judgments, we hold that the deduction u/s.10A in respect of each unit has to be computed separately and losses from some units cannot be adjusted against the profit from other units. We accordingly set aside the order of the CIT(A) on this point and allow the claim of the assessee;

++ section 10A(1) allows deduction only in respect of profits and gains derived by an undertaking from the export of articles or things or computer software. The profit derived from the export of articles or things or computer software has been defied u/s.10A(4) to mean the profit of business of undertaking in the proportion of export turnover of such articles or things to the total turnover of the business of undertaking. While computing the profit under the head “profit and loss from business or profession”, any item of income which is of the nature of the business income such as any incidental business income or profit attributable to the business has to be considered as part of profit of business, but such is not the case u/s.10A where profit of the business has not been defined. In our view, the phrase “profit of business” in the context of profit derived from the business of undertaking in respect of which deduction is allowable u/s.10A, has to be considered as profit of the eligible business of the undertaking which is export of articles or things or computer software. This view gets support from the judgment of Supreme Court in the case of Liberty India Pvt. Ltd. In that case, the Supreme Court was concerned with the deduction u/s.80IB in which case also the deduction was allowable in respect of profit derived from the business of the undertaking. It was held that the profit derived did not cover the profit from any sources beyond the first degree and that only profit derived from the eligible business has to be considered and not any incidental profit or profit attributable to the business. It was accordingly held that the duty draw back or DEPB would not form the part of the profit of the eligible business of the undertaking;

++ therefore, in our view, the profit directly arising from the export of articles or things or computer software will have to be considered as profit of business and not any other income which is incidental or attributable to such income while computing the profit derived u/s.10A(4). In the present case, the deduction has been claimed in respect of other income which includes dividend income, income from investment, profit from sale of assets, interest from ICD, bank deposits, interest on advance for business or to employees and other receipts. The dividend income, income from investments and profit on sale of assets is obviously out of purview of the income derived from export of articles or things or computer software. Similarly, the source of interest income from the ICD’s, bank deposits, advance to employee etc. is not the export of article or things. Such receipts are from source beyond the degree. The immediate source is not the export of articles or things or computer software but the bank deposits etc. Therefore, the interest income will not be eligible for deduction u/s.10A. The A.O. will obtain the details and decide the allowbility after necessary examination in the light of above observation and after hearing the assessee