1. This appeal by the assessee is directed against the order of learned CIT(A)-XV, New Delhi dt. 21st Dec, 2006. The assessee has raised the following ground of appeal: That the CIT(A) erred on facts and in law in confirming the action of the AO in denying the set-off of loss of Rs. 2,46,93,358 pertaining to the unit of the appellant eligible for exemption under Section 10A of the IT Act, 1961 ('the Act'), against profits of the other units of the appellant for the relevant year.
2. During the relevant assessment year, the applicant incurred a loss of Rs. 2,46,93,358 in the amorphous division, which was otherwise eligible for deduction under Section 10A of the Act. The applicant claimed set-off of the aforesaid loss against the profits of the other units. The AO disallowed the aforesaid claim of the assessee, on the ground that the declaration as required under Section 10A(8) of the Act for not claiming the benefit of Section 10A of the Act had not been filed by the assessee. The action of the AO in denying set-off of loss of the undertaking eligible for deduction under Section 10A of the Act has been sustained by the CIT(A) holding that (i) income of an undertaking eligible for deduction under Section 10A of the Act will not form part of the total income of the applicant even under the amended provisions applicable w.e.f. the asst. yr. 2001-02; (ii) in absence of any provision under the scheme of Section 10A of the Act, set-off of losses of the eligible undertaking against the profits of other units was not permissible and (iii) under the provisions of Section 10A(6) of the Act the eligible undertaking is entitled to carry forward its business loss and unabsorbed depreciation relating to asst.
yr. 2001-02 to asst. yr. 2009-10 and adjust the same against profits and gains relating to asst. yr. 2010-11 and subsequent years.
3. The learned Counsel for the assessee Shri Ajay Vohra submitted that the CIT(A) erred in not appreciating that the provision of Section 10A of the Act as they stood for the relevant year entitled the appellant to claim a set-off of the aforesaid loss against the profits of the other units of the appellant for the year. The CIT(A) erred in holding that income of an undertaking eligible for deduction under Section 10A of the Act will not form part of the total income of the appellant even under the amended provisions applicable with effect from the asst. yr.
2001-02. The CIT(A) erred in holding that in absence of any provision under the scheme of Section 10A of the Act set-off of losses of the eligible undertaking against the profits of other units was not permissible. The CIT(A) erred in holding that in absence of any reference to Sections 70 and 71 within Section 10A(6) of the Act, the legislative intent was only to provide for carry forward of losses of the eligible undertaking without the losses being set-off against the profits of the non-eligible units. The CIT(A) erred in not appreciating that application of Sections 70 and 71 of the Act providing for set-off of losses was not prohibited to the losses incurred by the undertaking eligible for deduction under Section 10A of the Act. He relied upon the Third Member decision of Tribunal, Mumbai Bench in the case of Naveen Bharat Industries Ltd. v. Dy CIT (2005) 92 TTJ (Mumbai)(TM)U66 : (2004) 90 ITD 1 (Mumbai)(TM) and the decision of Tribunal, Bangalore Bench in the case of Mindtree Consultants (P) Ltd. v. Asstt. CIT (2006) 102 TTJ (Bang) 691.
4. The learned Departmental Representative on the other hand, strongly relied upon the appellate order.
5. We have considered the relevant facts, arguments advanced and the case law cited. The lower authorities have incorrectly appreciated the scheme of deduction under Section 10A of the Act, as amended and have completely erred in denying set-off of loss of the eligible undertaking against that incomes, for the reasons hereunder: 6. The charge of income-tax, as per the provisions of Section 4 of the Act, is with reference to the total income of the previous year of the assessee. 'Total income' is defined in Section 2(45) to mean the total amount of income referred to in Section 5, computed in the manner laid down in the Act. Section 5 of the Act defines the scope of total income. Section 14 of the Act provides that all income shall, for the purposes of the charge of income-tax and computation of total income, be classified under the various heads of income, as specified in that section. Sections 66 to 80 of the Act contain provisions relating to aggregation of income computed under the various heads of income and set-off of intra/inter-head losses and carry forward of unabsorbed losses/allowances. Section 80B(5) of the Act defines 'gross total income' to mean the total income computed in accordance with the provisions of the Act, before making any deduction under Chapter VI-A of the Act. The scheme of the Act as to the manner of computation of total income, as gathered from the perusal of the aforesaid provisions is as follows: (a) First, compute the income under the various heads of income, as per the provisions pertaining to the same. The aggregate of the same, after adjustment of intra/inter-head and brought forward losses would be the 'gross total income'.
(b) From the gross total income so arrived at, deduct the reliefs admissible under Sections 80C to 80U (i.e., Chapter VI-A deductions), which cannot exceed the gross total income. The resultant figure is the 'total income', with reference to which the tax is payable under the provisions of the Act.
Section 10A of the Act, as substituted by the Finance Act, 2000, w.e.f.
1st April, 2001, provides for deduction in respect of profits and gains derived by the eligible industrial undertaking from export of articles or things or computer software for a period of 10 consecutive assessment years beginning with the assessment year in which the undertaking begins to manufacture or produce such articles or things or computer software.
The provisions of Section 10A of the Act as substituted w.e.f. 1st April, 2001 provide for a deduction from income and not an exemption.
The Explanatory Notes on provisions relating to the Finance Act, 2000, issued vide Circular No. 794 dt. 9th Aug., 2000 by the CBDT, [(2000) 162 CTR (St) 9] explained the provisions relating to tax holiday, inter alia, under the newly substituted Section 10A as under: 15.2 With a view to rationalise the concessions and to phase these out by the end of the asst. yr. 2009-10, the provisions of Section 10A and Section 10B have been substituted by new provisions. The main features of the new sections are explained in the following paras: 15.3 The new provisions provide for deduction in respect of profits and gains derived by an undertaking from export of articles or things or computer software. This deduction is available for a period of ten consecutive assessment years in a graded manner. The deduction would be granted with reference to the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software. Thus an undertaking set up on or before 31st March, 2000 shall be entitled to the deduction for a period of ten years, that set up in 2000-01 for a period of nine years, that set up in 2001-02 for a period of eight years and so on. The existing units will get the deduction for the expired period of ten years only. In case an export promotion zone (EPZ), is converted into a special economic zone, the period of consecutive years shall include the period during which such unit was located in the export promotion zone.
Under the scheme of the Act, the profits of the unit eligible for deduction under Section 10A of the Act, would form part of the income computed under the head 'Profits and gains of business and profession'.
However, in order the same does not suffer tax, deduction will have to be made in respect thereof while computing the income under the head 'Profits ad gains of business and profession'. In other words, the deduction in respect of the profits eligible under Section 10A of the Act is required to be made at the stage of computing the income under the head 'Profits and gains of business or profession'.
The aforesaid also finds support from the IT return form for companies, i.e., Form No. 1 of IT Rules, 1962, substituted by the IT (Nineteenth Amendment) Rules, 2001, w.e.f. 17th Aug., 2001. As per the manner of computation of income from business or profession, as provided in the aforesaid form, the net profit and loss as per the consolidated P&L a/c is the starting point and therefrom deduction is to be made, inter alia, in respect of amount claimed deductible under Section 10A/10B of the Act.
The aforesaid reasoning is reinforced by the definition of the term 'gross total income' in Section 80B(5) of the Act, as per which the same refers to total income computed in accordance with all provisions of the Act (including Section 10B) except Chapter VI-A, implying thereby that the allowance of deductions under the said chapter is the final step in the computation of total income and that the deduction before reaching the stage of gross total income.
In other words, the profits and gains of the eligible undertaking in proportion of export turnover to total turnover are allowed as deduction while computing the taxable income of the assessee.
Consequently, there would not be any deduction worked out in case of a loss in the eligible undertaking and such loss is to be set-off with the profit of the other unit/business, if any, as per Section 70 of the Act.
Prior to amendment by Finance Act, 2003 with retrospective effect from 1st April, 2001, provision of Sub-section (6) of Section 10A of the Act provided for restriction on carry forward of business losses and unabsorbed depreciation of the eligible undertaking. With a view to rationalise the existing tax incentive in respect of such undertaking, Sub-section (6) of Section 10A of the Act has been amended to do away with restriction on carry forward of business loss and unabsorbed depreciation arising in asst. yr. 2001-02 and subsequent year.
The Explanatory Notes on Finance Act, 2003 vide CBDT Circular No. 7 of 2003 dt. 5th Sept., 2003 [(2003) 184 CTR (St) 33] provide, in this regard, as under: 20. Providing for carry forward of business losses and unabsorbed depreciation to units in special economic zones and 100 per cent export oriented units.
20.1 Under the existing provision of Sections 10A and 10B, the undertaking operating in a special economic zone (under Section 10A) and 100 per cent export oriented units (EOU's) forward their business losses and unabsorbed depreciation.
20.2 With a view to rationalise the existing tax incentives in respect of such units Sub-section (6) in Sections 10A and 10B has been amended to do away with the restrictions on the carry forward of business losses and unabsorbed depreciation.
20.3 The amendments have been brought into effect retrospectively from 1st June, 2001 and have been made applicable to business losses or unabsorbed depreciation arising in the asst. yr. 2001-02 and subsequent years.
The aforesaid amendment by the Finance Act is consistent with the new scheme of tax holiday under Section 10A of the Act, which is a deduction provision as opposed to earlier provisions of Section 10A, which provided for exemption of profit and gains of the eligible undertaking. In terms of the new provisions of Section 10A of the Act, provided for deduction in respect of profits derived from export of computer software, being the profits of the business, which bear the same turnover, remaining profit/loss of the undertaking is to be set-off as per the provisions of Sections 70, 71 and 72(1) of the Act.
It is emphasized that there was never any restriction in the scheme of deduction under Section 10A of the Act as substituted by the Finance Act, 2003 w.e.f. 1st April, 2001 on application of provisions of Section 70 of the Act providing for set-off of loss from one source against income from other source under the same head of income in any assessment year.
Pursuant to the aforesaid amendment, the anomaly that existed in the new scheme of deduction under Section 10A of the Act with respect to carry forward of loss and unabsorbed depreciation under Sections 72(1) and 32(1) of the Act, has been corrected.
The aforesaid supports the contention that the application of provisions of Section 70 of the Act is not precluded in the scheme of deduction under Section 10A of the Act.Naveen Bharat Industries Ltd. v. Dy CIT (supra) even in the case of the erstwhile provisions of Section 10A of the Act, which provided for restriction on application of Sections 72(1) and ?72(4) for carry forward of loss held that, the provisions of the said section did not preclude operation of Sections 70 and 71 of the Act.Mindtree Consultants (P) Ltd. v. Asstt. CIT (supra), applying the Third Member decision in the case of Naveen Bharat Industries Ltd (supra), held that the income of unit eligible for deduction under Section 10B was merely a deduction from income and not exemption and the assessee was eligible to set-off the loss of such unit under Sections 70 and 71 of the Act. In the said case, to which one of us (AM) is a signatory, held thus: Section 10B(1) provides that subject to the provision of this section a deduction of such profits and gains as are derived by 100 per cent export-oriented undertaking from the export of articles or things or computer software shall be allowed from the total income of the assessee. Thus, though Section 10B falls in Chapter HI which is titled as 'Incomes which do not form part of total income' yet what is granted to the assessee is deduction as per the amended provisions of Section 10B w.e.f. 1st April, 2000. Section 10B(6)(ii) restricts carry forward and set-off of loss under Sections 72 and 74 but does not provide anything regarding intra-head set-off under Section 70 and inter-head set-off under Section 71. Admittedly, in this case, there was loss in the unit eligible for deduction under Section 10B. The business income of such unit is computed at Rs. 13,40,575 whereas the loss itself is Rs. 4,26,73,854. Thus, the business income can be computed only after set-off of business loss against the business income in the same year as per provisions of Section 70. Similarly, after setting-off of the business loss against the business income, there is still a loss and such loss has to be set-off against income from other sources in the same year, as per the provisions of Section 71. Income of unit eligible for deduction under Section 10B is merely a deduction from income and not exemption. Accordingly, the assessee is eligible to set-off the loss of such unit under Sections 70 and 71.
7. The learned CIT(A) while interpreting the provisions of Section 10A has laid much consideration on the fact that Section 10A is included in Chapter III of the IT Act which is titled as "Incomes which do not form part of total income". He is, therefore, of the opinion that since under Section 10A income is not to form part of total income, even the losses in such unit eligible for deduction under Section 10A are to be ignored and not to be set-off as per Section 70 and Section 71 of the Act. In our opinion, the learned CIT(A) has misread the provision of Section 10A and has misinterpreted the same. By Finance Act, 2000 w.e.f. 1st April, 2001 the provision of Section 10A has been substantially amended. As per Section 10A(1) deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software shall be allowed from the total income of the assessee. Thus though Section 10A is part of Chapter III, still as per Section 10A(1) only deduction of profits derived by an undertaking is to be allowed to the assessee from the total income of the assessee. Thus the prerequisite is that the total income of the assessee is to be computed. The total income can be computed only after allowing intra-head set-off under Section 70 and inter-head set-off under Section 71 of the Act. It is settled principle governing interpretation of statutes that marginal notes to the sections, or headings cannot control the construction of the statute. The title given to a chapter cannot legitimately be used to restrict the plain terms of an enactment or to construe a section thereunder. These are internal aids to construction. However, such internal or external aids to construction can be roped in provided the section under the statute is either not clear or ambiguous. The interpretation has to be based on the section itself and even the intention of legislature can be best found as recorded in the section itself and only in case the language of section is not clear or ambiguous such internal or external aids to interpretation of statutes can be brought into. The Privy Council as back as in 1904 in the case of Balraj Kunwar v. Jagat Pal Singh 26 All 398 at p. 405 observed that marginal notes in an Indian statute as in an Act of Parliament cannot be referred to for the purpose of construing the statutes. Similar view has been adopted by Hon'ble Supreme Court in the case of CIT v. Ahmedbhai Umaibhai & Co. (1950) 18 ITR 472 (SC) at p. 487. This principle has been reiterated in the case of Chandroji Rao v. CIT . The Hon'ble Supreme Court in the case of K.P. Varghese v. ITO at p. 609 observed that the marginal notes to a section cannot be referred to for the purpose of construing the section but it can be relied upon as indicating the drift of the section and to show what the section is dealing with. It cannot control the interpretation of the words of a section particularly when the language of section is clear and unambiguous, In the present case since provision of Section 10A(1) is clear which provides that deduction of profits and gains as are derived by an undertaking shall be allowed from the total income of the assessee, merely because it falls under Chapter III which is titled "Incomes which do not form part of total income", the same cannot be considered to be an exemption provision so as to deny the assessee benefit of Sections 70 and 71 of the Act.
Further, the provisions of Section 10A/10B of the Act are intended to confer a benefit to the assessee. The provisions cannot be used as a lever/tool to the disadvantage of the assessee by reading the restriction in the provisions of Section 10A that the loss of the eligible unit is not to be set-off as per Sections 70 and 71 of the Act.
The set-off of a loss of the amorphous unit against the profit of the other unit as per Section 70 of the Act, therefore, has wrongly been denied in the assessment completed under Section 143(3) of the Act.
In view of the aforesaid, it is held that the set-off of losses of Rs. 2,46,93,358 of the amorphous division of the assessee against the profit of the other units has wrongly been declined.
9. Since the appeal of the assessee has been disposed of, the stay petition has become infructuous and is accordingly to be dismissed.