1. This appeal came before me as a Third Member to express my opinion on the following question:- "Whether on the facts and in the circumstances of the case, the assessee is entitled to setting off the loss incurred by the SEEPZ Unit entitled for deduction under Section 10A against other business income of the assessee?" 2. I have heard the rival submissions in the light of material placed before me and precedents relied upon. The assessee company is engaged in the business of readymade garments, leather products and carpets. It has also manufacturing unit for electronic goods. The assessee has also got newly established undertaking at Santacruz Electronic Export Processing Zone (hereinafter called SEEPZ), which is a free trade zone and the special provision prescribed under Section 10A of the Income Tax Act, 1961, (hereinafter called the Act) is applicable in respect of the profits of the SEEPZ Unit. The SEEPZ Unit was started during the assessment year 1987-88. The assessee claimed the benefit of Section 10A of the Act, for the assessment years 1987-88, 1988-89 and 1989-90.
This benefit was available for a period of five years. In the assessment year under consideration, the assessee incurred a loss of Rs. 4,79,342/- in respect of this Unit. This loss was adjusted against profits of some other Units. The learned counsel for the assessee submitted at the time of hearing that in the subsequent years also assessee did not avail the benefit of Section 10A of the Act.
3. The AO disallowed the adjustment of loss and held that as profits of SEEPZ Unit are not taxable, therefore, loss cannot be allowed. On appeal, the CIT(A) confirmed the action of the AO, relying on the decision of the Supreme Court in the case of CIT v. Harprasad & Co. P.Ltd. (1975) 99 ITR 118 (SC) and the decision of the Madras High Court in the case of CIT v. S.S. Thiagarajan (1981) 129 ITR 115 (Mad).
4. In the case of Harprasad & Co. P. Ltd. (supra), there was loss under the head "Capital gains", which in that year was not exigible to tax.
The question before the Apex Court was whether in such circumstances the loss can be computed and carried forward. The Hon'ble Supreme Court has held that as capital gains did not form part of the 'total income' of the assessee, which could be brought to charge and were therefore not required to be computed under the Act. If the loss is from a source not liable to tax or congenially exempt from income-tax, neither the assessee is required to show the same in the return, nor is the AO under any obligation to compile or assess it, much less for the purpose of 'carry forward'.
5. In the case of S.S. Thiagarajan (supra), the assessee was maintaining race horses for the purpose of running them at horse races, winning stake money and breeding race horses. He was spending money on feeding the horses and training them in training establishments run commercially. The horses were sent by the assessee to the stud for being reared. He also bet on horses occasionally but the result thereof was a small loss. In respect of the racing activities the assessee incurred losses, and claimed deduction of the loss from his income from other sources. This claim was disallowed by the AO on the ground that the assessee was indulging in the racing activity only as a hobby or sport and not as a business proposition. The Tribunal held that the income referable to this activity would be income from other sources and hence the losses may be set off against the income arising from other sources in each of the years. On a reference, the Hon'ble High Court held that though the receipts arising from betting and racing would be income falling under the head "Other sources", they would be of a casual and non-recurring nature exempt from taxation during the relevant years under Section 10(3), as it stood in the relevant assessment years. Since the income was not taxable, the losses arising from such activity could not also be set off against income from a different source or under a different head.
6. The learned counsel for the assessee submitted before us that as per the prescription of Section 10A of the Act, as it stood at the relevant point of time, the income of the unit set up in the export processing zone was exempt for a period of five years. In case, in any year if such unit has suffered loss, then such loss could not be carried forward as per the interdict of Section 10A(4)(ii) of the Act.
"10A. Special provision in respect of newly established industrial undertakings in free trade zone -- ....................................................................
...
(4) 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, -- (ii) no loss referred to in Sub-section (1) of Section 72 or Sub-section (1) or Sub-section (3) of Section 74 and no deficiency referred to in Sub-section (3) of Section 80J, in so far as such loss or deficiency relates to the business of the industrial undertaking, shall be carried forward or set off where such loss, or, as the case may be, deficiency relates to any of the relevant assessment years;" 8. On the basis of the aforesaid provision it was argued that the said provision does not refer to Sections 70 and 71 of the Act, which permits the set off of the loss from one source against the other source during the year. It was submitted that Section 10A of the Act is a code by itself. The non obstante clause is qua Sections 72 and 74 of the Act. It does not preclude the operation of Sections 70 and 71 of the Act.
9. It was further submitted that Section 10A of the Act, being an incentive provision, should be construed liberally so as to achieve the objective for which deductions are provided in the Act. Reliance was placed on the decision of the Apex Court rendered in the case of Bajaj Tempo Ltd. v. CIT (1992) 196 ITR 188 (SC). In this case the Hon'ble Supreme Court has held that the provision for incentive for growth and development should be interpreted liberally. It should be construed so as to advance objective and not frustrate it. Similar view was taken in the case of CIT v. Gwalior Rayon Silk Manufacturing Co. Ltd. (1992) 196 ITR 149 (SC). In this case it was held that the provision in the taxing statute for deduction, exemption or relief should be construed reasonably. It is trite law that the expressions used in a taxing statute would ordinarily be understood in the sense in which it is harmonious with the object of the statute to effectuate the legislative intention. It is equally settled law that, if the language is plain and unambiguous, one can only look fairly at the language used and interpret it to give effect to the legislative intention. Nevertheless, tax laws have to be interpreted reasonably and in consonance with justice adopting a purposive approach. The contextual meaning has to be ascertained and given effect to.
10. The learned counsel for the assessee further stated that the decisions relied on by the CIT(A) are not applicable to the facts of the present case, as they were rendered on a different set of situation. It was contended that the income of the units in the export processing zone are assessable as per Section 10A of the Act, which is a code by itself. The revenue was therefore not correct in denying the adjustment of loss. Section 10A of the Act nowhere touches the operation of Sections 70 or 71.
11. The point apropos the applicability of Section 14A of the Act was raised at the time of hearing before the Tribunal. It was contended that Section 14A of the Act is applicable only in respect of the 'expenditure incurred' in respect of income, which is not includible in the total income, and it does not deal with the losses from that source etc. and in any case, it cannot be applied retrospectively.
(i) The special scheme of taxation formulated by the Government for taxability of Units set up in the export processing zone, contained in Section 10A, is a code by itself. The computation of profits of such units as well as the carry forward and set off of loss etc. has been specifically laid down in the said section. The other provisions of the Income Tax Act and any other disability or restrictions in respect of the set off of carry forward etc., has been specifically provided in Section 10A(4) of the Act itself.
Therefore, these provisions need to be considered in totality keeping in view the intention of the legislation regarding taxability of such units in the export processing zone.
(ii) Section 10A(4)(ii) specifically prohibits the carry forward and set off of the loss incurred by such units by specifically referring to Sections 72(1) and 72(4)(i) or with effect from 01.04.1988 under Section 74(3). It does not refer to Sections 70 or 71, which clearly means that there is no prohibition prescribed in the section regarding set off of the loss of such units against the income from other units or other business income of other sources.
(iii) In the case of Harprasad & Co. P. Ltd (supra), the AO was dealing with a situation of carry forward and set off of capital loss against the other income, in the case of S.S. Thiagarajan (supra), it was regarding set off of the loss under the head "Income from horses". In both the cases exemption was claimed under Section 10, which cannot be considered to be a code by itself as compared to Section 10A of the Act.
(iv) Hon'ble Supreme Court in the cases of Bajaj Tempo Ltd. and Gwalior Rayon Silk Manufacturing Co. Ltd. (supra), while interpreting the incentive provisions, has held that if there are two interpretations possible, the interpretation, which is harmonious with the object of the statute to effectuate the legislative intention and in consonance with the justice, a purposive approach should be adopted. So also, the provision for deduction, exemption or relief should be construed reasonably and in favour of the assessee.
(v) Section 14A was given retrospective effect with effect from 01.04.1962. The operation of the section was made prospective. This was clarified by the circular No. 11/2001 dated 23.07.2001.
According to the circular, the AO should not re-open the assessments to disallow the expenditure to earn the exempt income by applying the provisions of newly inserted Section 14A of the Act.
(vi) Further, in order to avoid the controversy as to whether the Circular would be binding or not; the Finance Act, 2002, amended the provision with retrospective effect from 11.05.2001, by the insertion of the following proviso:- Provided that nothing contained in this section shall empower the assessing Officer either to reassess under Section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under Section 154, for any assessment year beginning on or before the 1^st day of April, 2001." (vii) Section 14A was not in existence when the impugned order was passed. So also, by the insertion of the provision, the intention of the legislation is clear that it is not to be applied to the past assessments by restricting the officers to re-open the assessments etc. Therefore, if the AO cannot do a particular action like re-opening of assessment already completed, the Tribunal cannot use that provision to disallow something by making use of the same.
Otherwise, it would virtually amount to the enhancement, which is not permissible under the Act.
13. The learned Judicial Member disagreed with the learned Accountant Member only in respect of the applicability of Section 14A of the Act.
There is absolutely no difference among the learned Members on other aspects.
14. According to the learned Judicial Member, in view of the provisions of Section 14A of the Act, the claim of the assessee is not admissible.
Proviso to the above section deals with the situation where assessment has got finality. In the present case, the addition was made by the AO and was upheld by the CIT(A). The appeal was pending before the Tribunal. Therefore, the issue was alive. Proviso to Section 14A of the Act is applicable to a situation where the assessment has got finality and on such assessment, provisions of Sections 147 or 154 cannot be made applicable. In the circumstances, the learned Judicial Member opined that the Tribunal is duty bound to consider the provision, which is on the statute. The provision of Section 14A was brought into statute with retrospective effect from 01.04.1962 and covers the period under consideration. As such, the claim of the assessee was rejected.
15. The learned Judicial Member did not discuss the applicability of Section 14A of the Act, vis-a-vis the facts of the present case. It was presumed that this section applies to the case of the assessee and as because it was made operative retrospectively; as such it was applied.
Therefore, it is necessary to examine firstly whether Section 14A of the Act can be applied in the facts and circumstances of the present case. Subject to its applicability, the question apropos to its retrospective applicability would be pertinent for deciding the issue.
14A. Expenditure incurred in relation to income not includible in total income For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act; Provided............................................................
......" 17. This section puts restriction on the allowability of expenditure.
Can this restriction be extended to loss also? whether loss could be construed to be expenditure?, are some of the questions, which need to be examined.
18. "Spending" in the sense of 'paying out or away' of money is the primary meaning of 'expenditure'. 'Expenditure' is what is paid out or away and is something which is gone irretrievably. Expenditure relates to disbursements; that means something that a trader paid out indicating a sort of volition on his part. He chooses to pay out some disbursement; it is an expense; it is some thing which comes out of his pocket. A "loss" is something different. That is not a thing which he expends or disburses. That is a thing which comes upon him ab extra.
Business expenditure is allowable if it is laid out or expended wholly and exclusively for the assessee's business, while a business loss is allowable if it is of non-capital nature and is not only connected with the trade but is incidental to the trade itself. In assessing the amount of profits and gains of a year, account must necessarily be taken of all losses incurred, besides the expenditure allowable under Sections 30 to 44D of the Act. This view is buttressed by the decision of the Apex Court rendered in the case of CIT v. S.C. Kothari (1971) 82 ITR 794, 801, 802 (SC). Therefore, loss could not be construed to be expenditure. Section 14A of the Act is applicable qua the expenditure and not qua the loss.
19. Without prejudice, contextually the learned counsel for the assessee argued that Section 10A of the Act is a beneficial provision.
It is a code by itself, on which both the Members concurred. If the assessee does not wish to avail benefit for some reason, the benefit cannot be forced upon him. To support this proposition, reliance was placed on the decision of the Apex Court rendered in the case of CIT v.Mahendra Mills (2000) 243 ITR 56 (SC). In this case the Hon'ble Supreme Court has held that a privilege cannot be to a disadvantage and an option cannot become an obligation. If the assessee does not wish to avail a benefit contemplated in the Act for some reason, that benefit cannot be forced upon him.
20. In the present case I find that the benefit of Section 10A of the Act was available to the assessee for five years. The assessee claimed benefit for three years. For rest of the years, the assessee did not claim the benefit of Section 10A of the Act. The assessee opted to get the profits of new industrial undertaking assessed under the normal provisions. I find no provision in the Act by which the assessee can be forced to avail the benefit for five years. If the assessee wants to put the income under the normal computation procedure, there appears to be no bar for doing so. If one purchases ticket to undertake journey from Mumbai to Delhi; later on he decides to disembark from the train at Kota, the Railway authorities cannot force him to go up to Delhi. If the benefit is conferred on the assessee, he cannot be forced to avail the same.
21. Section 10A of the Act, is a code by itself. It contains the scheme of taxation formulated by the Government for taxability of units set up in the export processing zone. As such, it cannot be compared with Section 10 of the Act. Ex consequenti, the decisions rendered in the cases of Harprasad & Co. P. Ltd., and S.S. Thiagarajan, in the context of Section 10 of the Act, cannot be applied over here. Coming to the applicability of Section 10A(4)(ii) of the Act, I find that it put interdict qua Sections 72 and 74. It does not preclude the operation of Sections 70 and 71. Section 14A of the act is applicable in respect of "expenditure". Loss is different from expenditure. As such, the assessee is entitled to setting off the loss incurred by the SEEPZ Unit. In view of this finding, the question whether Section 14A of the Act is prospective or retrospective in operation, has become academic.
I concur with the finding of the learned Accountant Member.
22. The matter will now go before the regular Bench for deciding the appeal in accordance with the opinion of the majority.