2007-VIL-324-ITAT-MUM

Equivalent Citation: [2008] 21 SOT 29 (MUM.)

Income Tax Appellate Tribunal MUMBAI

IT APPEAL NO. 6794 (MUM.) OF 2004

Date: 28.12.2007

ENERCON WIND FARMS (KRISHNA) LTD.

Vs

ASSISTANT COMMISSIONER OF INCOME-TAX, RANGE-8(1), MUMBAI

BENCH

J. SUDHAKAR REDDY AND RAJPAL YADAV, JJ.

JUDGMENT

J. Sudhakar Reddy, Accountant Member. - This is an appeal filed by the assessee and directed against the order of the CIT(A)-VIII, Mumbai dated 12-7-2004 for the assessment year 2001-02.

2. The appeal is barred by limitation by one day. The assessee has filed an application for condonation of delay. After perusing the reasons for the delay, we condone the same as we hold that the assessee was prevented by reasonable cause from filing the appeal in time.

3. The effective ground taken in the appeal is that the CIT(A) has erred in confirming the action of the Assessing Officer in not setting off the business loss brought forward from assessment year 1999-2000 while computing income for the year under consideration. The assessee is a domestic company engaged in the business of exporting components of Wind turbine Generators manufactured by it. In the computation of income the assessee had shown business income of Rs. 70,38,585 and after set off of unabsorbed depreciation of Rs. 2,61,656 the profits were determined at Rs. 67,76,929. The assessee claimed exemption of Rs. 62,10,828 under section 10B. Thus, the taxable income was worked out at Rs. 5,66,101. Out of this the assessee claimed set off of loss of Rs. 5,66,101 out of loss of Rs. 7,55,789 incurred in the assessment year 1999-2000 and thus the taxable income was declared at Nil. The Assessing Officer denied the claim of set off on the ground that set off was not permissible in view of the provisions of section 10B(6)(ii) of the Act.

4. It was the contention of the assessee before the CIT(A) that provision of section 10B(6) would come into play only on completion of the relevant assessment years i.e., only after the expiry of tax holiday period. The CIT(A), though in principle was in agreement with the assessee that provisions of section 10B(6) would not be applicable in assessee’s case however, was of the opinion that the case of the assessee was hit by provisions of section 10B(1) read with section 72 of the Act. The assessee contended that section 10B(1) provides for deduction in respect of profits of 100 per cent EOU. The loss arising to the EOU cannot be ignored and is required to be carried forward for set off against the profit, if any, in the subsequent years within the tax holiday period. As the tax holiday period in assessee’s case extends up to assessment year 2008-09, the brought forward loss of assessment year 1999-2000 could be set off against the profit of the impugned assessment year.

5. The learned CIT(A) did not agree with the above contention of the assessee. He observed that section 72 provides for both carry forward and subsequent set off of the loss against the profits. Further section 72 provides that the said profit is to be computed under the head ‘Profits and gains of business and profession’ within the meaning of section 28. According to ld. CIT(A), the assessee’s profits are determined in terms of section 10B(1) and not in terms of section 28 and hence the said profit being loss is required to be ignored for the purposes of its carry forward and set off. Further he held that the claim of the assessee that since section 10B(1) provides for a deduction in computation of total income, it takes within the ambit ‘profits’ and not ‘loss’ is rather misconceived. Thus, relying on the decision of the Apex Court in IPCA Laboratory Ltd. v. Dy. CIT [2004] 266 ITR 521 and CIT v. J.H. Goetla [1985] 156 ITR 323 (SC) the CIT(A) held that the words ‘Income’ or ‘profits and gains’ should be understood as including losses. It was finally concluded by the CIT(A) that in the scheme computation where the profit is required to be excluded in the computation of taxable profits, the loss is also to be ignored and cannot be allowed to be carried forwards separately or in conjunction with any other loss, since the said loss is not a loss determined under the head ‘Profits and gains from business or profession’. Aggrieved the assessee is in appeal before us.

6. The learned counsel for the assessee, Shri Jaidev submitted that it would be clear from a plain reading of section 10B(6)(i) that the section provides for certain restrictions in computing the total income of the assessee in assessment year immediately succeeding the last of the relevant assessment years and in any subsequent years. In other words, restrictions referred to in section 10B(6) would apply to post tax holiday period. The restrictions do not apply to previous years within the tax holiday period. In the instant case tax holiday period extends up to 2008-09. Hence, there is no bar in claiming the brought forward loss of assessment year 1999-2000 against the profit of assessment year 2001-02. The deduction under section 10B(1) has been worked out in accordance with the provisions of section 10B(4). He contended that the new section 10B as substituted by Finance Act, 2000 with effect from 1-4-2001 provides for deduction and not exemption as was there in old section 10B. Moreover, the deduction is with respect to export profit and not total profit of eligible undertaking. It also provides for method of computation of export profit on pro rata basis. Therefore in many cases, there will be possibility that the eligible undertaking will also have taxable income. It is thus submitted that in such circumstances, it cannot be said that the assessee’s profits have been determined under section 10B(1) and not under section 28 of the Act. Thus it was the contention of the learned counsel that the CIT(A) is not correct and justified in holding that the assessee’s profits have not been determined under the head ‘Profits and gains of business or profession’ or within the terms of section 28 and hence benefit of carry forward and set off of loss under section 72 is not available to the assessee. He emphasised that the finding of the CIT(A) is not in accordance with law. The learned counsel then put lot of stress to contend that the profits of the assessee were determined under section 28 and consequently the claim of set off of loss under section 72 was very much in accordance with law. The only difference was that the exemption was claimed under section 10B(1).

7. The learned counsel then took us to the amended provisions of clauses (i) and (iii ) of section 10B(6) with effect from assessment year 2001-02 vide Finance Act, 2003 whereby the bar against carry forward and set off has been restricted to unabsorbed depreciation, losses, etc. relating to any of the assessment years up to 2000-01. In other words, restrictions placed earlier have been lifted in respect of unabsorbed depreciation, losses, etc., of eligible undertaking pertaining to assessment year 2001-02 and onwards. These losses would be available for carry forward and set off in the post tax holiday period in accordance with the general provisions of the Act. Thus the restrictions do not apply to previous years within the tax holiday period.

8. The learned counsel then tried to distinguish the case laws relied on by the learned CIT(A). He contended that the reliance placed on IPCA Laboratories Ltd.’s case (supra) is misplaced. This case was decided in a different context and on different facts. There the issue pertained to special deduction under section 80HHC and there being profit in export of goods manufactured by the assessee and loss in export of trading goods and there being overall net loss in export of goods, it was held that the assessee was not entitled to deduction under section 80HHC. In the case of J.H. Goetla ( supra) the learned counsel states that the facts in this case were also different. The assessee in that case had transferred part of machinery of his business to his wife and minor children. Then wife entered into partnership with third person and minor children admitted to the benefits of partnership. The assessee leased out his business premises and remaining machinery to the firm. Share of profits of wife and minor children were included in the total income of the assessee. It was held by the Hon’ble Apex Court that losses incurred by the assessee in his business in earlier years which are brought forward could be set off against such income. It is submitted that the aforecited case being distinguishable, does not assist the department’s case. Moreover, the brought forward loss in that case was allowed to be set off against the current year’s income of that assessee which included the share profits of assessee’s wife and minor children from the firm and hence this decision in fact helps the assessee’s case rather than helping the case of the department as the assessee also sought the set off of brought forward loss against current year’s profits.

9. The learned counsel for the assessee instead sought to rely on the following decision :

9.1 Navin Bharat Industries Ltd. v. Dy. CIT [2004] 90 ITD 1 (Mum.) (TM) wherein it was held that the assessee in that case being a SEZ unit was entitled to deduction under section 10A. Further, such units are entitled to set off losses against the profit of other units or other business income.

9.2 Mindtree Consulting (P.) Ltd. v. Asstt. CIT [2006] 102 TTJ (Bang.) 691 wherein it was held that income of unit eligible for deduction under section 10B is merely a deduction from income and not exemption and accordingly, the assessee is eligible to set off of loss of such unit under sections 70 and 71 of the Act. On the strength of this decision of the co-ordinate Bench the learned counsel contended that it is not a case of inter-head set off under section 70 and inter-head set off under section 71 but it is a case of carry forward and set off of business losses under section 72 but still the broad principle decided by the Hon’ble Tribunal helps the case of the assessee.

9.3 Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188 (SC) for the proposition that incentive provision for growth and development should be interpreted liberally. It should be construed to advance the objective and not frustrate it.

10. On the strength of above legal position, the learned counsel for the assessee contended that the claim of the assessee for set off of losses brought forward from assessment year 1999-2000 against income of the impugned assessment year.

11. The learned departmental representative, on the other hand, strongly relied on the orders of the authorities below. He further contended that the express provision in the form of section 10B(6)(ii) in the Act puts a bar on the assessee from carrying forward any loss. However, the learned CIT(A) denied the claim of the assessee on the strength of provisions of section 10B(1) read with section 72 of the Act. According to the learned departmental representative, when the income of a particular unit is exempt, the question of carrying forward any loss to a subsequent assessment year does not arise. He contended that the proposition laid down by the Hon’ble Apex Court in IPCA Laboratories Ltd.’s case (supra) is squarely applicable to the case before hand.

12. Heard rival contentions and perused the material available on record. To resolve the issue before, it would be necessary to have a close and clear understanding of the relevant provisions applicable to the issue. It was the case of the Assessing Officer, that in view of provisions of section 10B(6)(ii), the brought forward losses were not eligible to be set off against the income available in the impugned assessment year, which according to the learned CIT(A) was not applicable to the case of the assessee. According to the CIT(A), in fact provisions of section 10B(1) read with section 72 of the Act is applicable to the case. The main objection of the CIT(A) in denying the claim was that the profits of the assessee was not determined under the head ‘Profits and gains of business or profession’ or within the terms of section 28. But according to the assessee, the profits of the assessee was, in fact, computed under section 28 and were taxable under the head ‘Profits and gains of business or profession’ and only a deduction under section 10B(1) was claimed. It is in these circumstances, we deem it relevant to extract the relevant provisions, i.e., section 10B(1), section 10B(6), section 10B(9A), Explanation 2(v) to section 10B, section 72, section 28 and section 2(45) of the Act :

Section 10B(1)

"Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred per cent export-oriented undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years 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." [Emphasis supplied]

Section 10B(6)

"Notwithstanding anything contained in any other provision of this Act, in computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of the relevant assessment years, or of any previous year, relevant to any subsequent assessment year,-

(i )section 32, section 32A, section 33, section 35 and clause (ix) of sub-section (1) of section 36 shall apply as if every allowance or deduction referred to therein and relating to or allowable for any of the relevant assessment years, in relation to any building, machinery, plant or furniture used for the purposes of the business of the undertaking in the previous year relevant to such assessment year or any expenditure incurred for the purposes of such business in such previous year had been given full effect to for that assessment year itself and accordingly sub-section (2) of section 32, clause (ii) of sub-section (3) of section 32A, clause (ii) of sub-section (2) of section 33, sub-section (4) of section 35 or the second proviso to clause (ix) of sub-section (1) of section 36, as the case may be, shall not apply in relation to any such allowance or deduction.

(ii )no loss referred to in sub-section (1) of section 72 or sub-section (1) or sub-section (3) of section 74, insofar as such loss relates to the business of the undertaking, shall be carried forward or set off where such loss relates to any of the relevant assessment years.

(iii)no deduction shall be allowed under section 80HH or section 80HHA or section 80-I or section 80-IA or section 80-IB in relation to the profits and gains of the undertaking; and

(iv)in computing the depreciation allowance under section 32, the written down value of any asset used for the purposes of the business of the undertaking shall be computed as if the assessee had claimed and been actually allowed the deduction in respect of depreciation for each of the relevant assessment year." [Emphasis supplied]

Explanation 2 (v) to section 10B

"(v )‘relevant assessment years’ means any assessment years falling within a period of ten consecutive assessment years, referred to in this section."

Section 72

"[(1) Where for any assessment year, the net result of the computation under the head ‘Profits and gains of business or profession’ is a loss to the assessee, not being a loss sustained in a speculation business, and such loss cannot be or is not wholly set off against income under any head of income in accordance with the provisions of section 71, so much of the loss as has not been so set off or, where he has no income under any other head, the whole loss shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and—

(i )it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year;

(ii )if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on:]

[Provided that where the whole or any part of such loss is sustained in any such business as is referred to in section 33B which is discontinued in the circumstances specified in that section, and, thereafter, at any time before the expiry of the period of three years referred to in that section, such business is re-established, reconstructed or revived by the assessee, so much of the loss as is attributable to such business shall be carried forward to the assessment year relevant to the previous year in which the business is so re-established, reconstructed or revived, and—

(a )it shall be set off against the profits and gains, if any, of that business or any other business carried on by him and assessable for that assessment year; and

(b )if the loss cannot be wholly so set off, the amount of loss not so set off shall, in case the business so re-established, reconstructed or revived continues to be carried on by the assessee, be carried forward to the following assessment year and so on for seven assessment years immediately succeeding.]

(2) Where any allowance or part thereof is, under sub-section (2) of section 32 or sub-section (4) of section 35, to be carried forward, effect shall first be given to the provisions of this section.

(3) No loss [(other than the loss referred to in the proviso to sub-section (1) of this section)] shall be carried forward under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed."

Section 28

"The following income shall be chargeable to income-tax under the head ‘Profits and gains of business or profession’,—

(i )the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year.

(ii)to (va)******"

Section 2(45)

"(45) ‘total income’ means the total amount of income referred to in section 5, computed in the manner laid down in this Act;"

13. A close reading of section 10B(1) makes it clear that this section provides for deduction of such profits and gains as are derived by a 100 per cent export-oriented undertaking from the total income of the assessee for a period of ten consecutive assessment years, starting from the previous year in which such undertaking begins manufacture of production for export of articles or things or a computer software. Though this section falls in Chapter III of the Income-tax Act, 1961, which consists of incomes which do not form part of total income, in its wisdom, the Legislature provided that as far as section 10B is concerned, the assessee shall get only a deduction from the total income.

14. A perusal of the definition of ‘total income’ given in section 2(45) makes it clear that it means income referred to in section 5 and computed in the manner laid down in this Act. A perusal of section 5 gives the scope of total income and it includes all incomes from whatever source derived, which is received or deemed to be received, accrues or arises or deemed to accrue or arise to, a person both inside India and outside India. From the above it is clear that the findings of the first appellate authority that the term ‘total income’ appearing in section 10B(1) cannot be said to be profits and gains of business or profession computed in terms of section 28, is an error. In our humble opinion, the term ‘total income’ appearing in section 10B(1), is total income as computed under the Act.

15. Now we come to section 10B(6)(ii) invoked by the Assessing Officer for the purpose of denying carry forward losses to the assessee. The first appellate authority negatived this finding of the Assessing Officer. The Revenue has not filed a cross objection nor a cross appeal and thus accepted this finding of the CIT(A) that the Assessing Officer wrongly invoked provisions of section 10B(6)(ii) of the Act. Be it as it may, we examine the section as a lot of debate has taken place in the court on this issue. The starting words of section 10B(6) refers to term ‘relevant assessment years’. This term is defined in sub-clause (v) of Explanation 2 to mean ‘any assessment years falling within the period of 10 consecutive assessment years referred to in section 10B’. Section 10B(6) refers to computation of total income of the assessee for the previous years and assessment years which immediately succeed the relevant assessment years as also the subsequent previous years and assessment years. A plain reading of sub-clause (v) of Explanation 2 with section 10B(6) clearly shows that this section is not relevant while computing deduction under section 10B. The entire section 10B(6) refers to computation of total income after the tax holiday period of 10 years. The Legislature in section 10B(6)(i) provided that deductions of depreciation under section 32, investment allowance under section 32A, development rebate under section 33, expenditure on scientific research under section 35, bona fide expenditure incurred for the purpose of family planning amongst his employees under section 36(1)(ix), shall not be claimed after the expiry of the tax holiday period, when they pertained to the assessment years and previous years within the tax holiday period. Thus, this sub-section (1) provides that these deductions should be taken as given full effect to. Similarly, sub-section (iii) of section 10B(6) provides that the assessee shall not claim once again deduction for the same profits of the tax holiday period either under section 80HH or under section 80HHA or under section 80-I, etc. In sub-section (iv) of section 10B(6) it is clearly provided that the assessee has no option but to claim depreciation even during the tax holiday period, so that after the relevant assessment years, the assessee’s written down value for assets would be taken as if depreciation has actually been allowed as a deduction in each of the relevant assessment years during the tax holiday period of 10 years. Thus, the entire scheme of the section provides for a situation where the assessee is not allowed to postpone some of his claims of deduction under various sections during the tax holiday period, so that the profits in the tax holiday period are inflated and the profits of business after the tax holiday period are reduced by claiming these deductions at that particular point of time. Thus, in our humble opinion, the Assessing Officer was wrong in invoking the provisions of section 10B(6) during the current assessment year.

16. Be it as it may, we also find that the first appellate authority was wrong in his conclusions that total income does not refer to income computed under sections 28 to 44DB of the Act but has to be separately computed under section 10B(1). There is no such scheme envisaged in the Act. Profits and gains from business has to be necessarily computed by applying sections 28 to 44DB of the Act as well as other relevant sections of the Act. In any event, we are concerned with the term ‘total income’ used in section 10B(1). A conjoined reading of section 2(45) and section 5 brings us to a conclusion that the total income of any previous year shall be computed as per the provisions of this Act. In our considered opinion, total income has to be computed under the provisions of the Act and thereafter a deduction has to be quantified under section 10B as provided in section 10B(4). In section 10B(4) it is provided that for the purpose of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect to such articles or thing or computer software bears to the total turnover of the business carried on by the undertaking. The formula is as follows :

The terms ‘profits’ and ‘turnover’ in sub-section (4) refers only to the current year’s profits and current year’s turnover. No other view can be taken. Thus, the Assessing Officer should have, in our considered view, taken the profits of the business of the undertaking of the current year and then multiplied it with export turnover and then divided the resultant figure with the total turnover to arrive at the deduction under section 10B. This figure should be deducted from the total income as computed under the rest of the provisions of the Act. This is exactly what the assessee has done.

17. If there is certain income still left with the assessee, after granting deduction, then the same shall be total income of the assessee and all other provisions of the Act will apply. Under this scenario, section 72 comes into play and the carry forward losses can definitely be set off against the total income computed after providing for deduction under section 10B of the Act.

18. It is very important to note that the deduction under section 10B is not controlled by section 80AB as deduction under section 10B is not a deduction under Chapter VI-A. When the export turnover and total turnover pertained to a particular year, the profits and gains from the business of an undertaking should obviously be for that particular year and which are not adjusted against the previous losses or allowances. Any other interpretation would not yield logical conclusions while applying the formula. The amount of deduction under section 10B arrived in this particular manner would become an income which would form part of the total income of the assessee, under the Act.

19. Thus, for all these reasons we fully agree with the arguments of the learned counsel for the assessee and allow its claim.

20. In the result, the appeal filed by the assessee is allowed.

 

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