Judgment:
1. In this appeal assessee has raised various grounds but at the time of hearing learned counsel of the assessee submitted that the only issue involved was regarding set off of losses against the balance of income against which deduction under Section 10B of the Income-tax Act, 1961 is allowed.
2. After hearing both the parties, we find that assessee is engaged in the business of providing software services and had clamed deduction under Section 10B to the extent of 90% of the profits from the undertaking which was eligible for deduction under Section 10B. Against the balance profits assessee had claimed set off of losses from earlier years amounting to Rs. 34,16,275/-. In response to the query, why losses pertaining to assessment years 1997-98 and 1999-2000 should be allowed to be set off against the balance income, it was submitted before the AO as under: In the A.Y. 2003-04, we were eligible to claim 10B deduction for 90% of the eligible income and the balance 10% became taxable as business income. In such a scenario, carry forward losses from a domestic training income (not part of the 10B unit's income) can be adjusted against this taxable income from 10B unit. Therefore, we submit that we are eligible for set off of earlier year carry forward losses from our domestic training business against the 10% taxable income from our 10B unit.
3. The AO did not accept this explanation as according to him as per Section 10B(6)(ii) such loss could not be allowed to be set off and therefore assessee's claim for set off of carry forward loss was rejected. Learned CIT(A) adjudicated the issue vide para 5 of his order which is as under: 5. I have examined the facts and various submissions of the appellant The only issue involved in this appeal is whether the losses pertaining to the domestic unit can be set off against the profits of the 10A/10B eligible unit. The losses brought forward from assessment years 1997-98 and 1999-2000 amounting to Rs. 34,16,275/- set off by the appellant against 10% of taxable profits of the current year are pertaining to the domestic unit. What assessee had done is it has firstly computed deduction under Section 10A/10B to the extent of 90% of business profits. The balance 10% of profits and income from other sources have been wiped out by setting off unabsorbed loss of domestic unit pertaining to earlier assessment years. I am of the considered view that both the actions of the appellant are not in accordance with the specific provisions of Section 10A/1 OB of the Act. Provisions of Section 10A/10B in my view cannot be mixed up with the general provisions of the Act.
Section 10A/10B(6) has been specifically amended from 01.04.2001, by which specific provisions have been made for carry forward and set off of losses of 10A/10B eligible profits. It has been specifically provided under Clause (ii) of Section 10A/10B(6) that no loss referred under Section 72 or 74 as far as it pertains to the business of the undertaking shall be carried forward and set off if such loss relates to any of the relevant assessment years ending before 01.04.2001. In other words, any loss pertaining to 10A/1 OB eligible unit can be carried forward and set off only if it pertains to A.Y. 2001-02 onwards. I am of the view that when the losses of eligible unit itself have been separately categorized for the purpose of carry forward and set off at the end of relevant assessment years, there is no scope of importing the losses suffered by the other domestic unit of the appellant for setting off against the profits of 10A/10B eligible undertaking. In view of these facts and circumstances, the contentions of the appellant have been found to be without any merit and legal basis, and the same are therefore rejected. I am further of the view that only for A. Y. 2003-04, a specific amendment had been brought in the Act that deduction under Section 10A/10B shall be available to the extent of90% of the eligible profits. The intention of the legislature for bringing the said amendment cannot be negated by interpreting the provisions of Section 10A/10B as contemplated in the contentions of the appellant on this issue. It is further noticed that the decision of the Chennai Tribunal relied upon by the appellant was on different facts and circumstances and therefore, the ratio of the said decision is not applicable on the facts of the appellant company. In the result all the contentions of the appellant are rejected and the adjustment made by the AO is confirmed.
4. Before us learned counsel submitted that the Tribunal in the case of the assessee (order is in the name of M/s. Vetri Software India Ltd., which was the former name of the assessee) in ITA No. 1921/Mds/03 dt.
16-06-2004 has allowed the carry forward of business loss from domestic business at Rs. 39,13,763/-. He submitted that once such loss was held to be belonging to the domestic business of the assessee, the same should have been allowed now. According to him, Section 10B(6)(ii) does not prohibit such set off because that clause refers to the loss belonging to the undertaking eligible for Section 10B and not to the other business. He also submitted that Section 10B has been amended by Finance Act, 2002 w.e.f. 01-04-2003 and assessee is now entitled only to 90% of deduction and therefore the deduction available under Section 10B cannot be termed as 'exemption'.
5. On the other hand, learned D.R. referred to Clause (ii) of Sub-section (6) of Section 10B and submitted that losses of undertaking cannot be allowed to be carried forward or set off if such undertaking was eligible for deduction under Section 10B. He therefore submitted that In view of the clear provision of this clause, CIT(A) has correctly rejected the claim of the assessee.
6. We have considered the rival submissions carefully. We find that loss amounting to Rs. 39,13,763/- was allowed to be carried forward by the Tribunal in the assessee's case in ITA No. 1921/Mds/03 vide order dated16-06-2004. Clause (ii) of Sub-section (6) of Section 10B reads as under: (ii) no loss referred to in Sub-section (1) of Section 72 or Sub-section (1) or Sub-section (3) of Section 74, in so far 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 ending before the 1^st day of April, 2001; When the above clause is carefully perused, it would show that Legislature have used the expression with reference to the loss as "insofar as such loss relates to the business of the undertaking". This expression clearly shows that prohibition regarding carry forward or set off of losses relates to only the loss incurred in the undertaking.
The undertaking has to be understood separate from the business of the assessee. Undertaking in the context of Section 10B would only mean the export-oriented undertaking which is eligible for benefits under Section 10B. There may be cases where assessee had various businesses and one of the businesses could be export-oriented undertaking which is eligible for the benefits of Section 10B. Now if there are profits in such other businesses, they will not be eligible for the benefits of Section 10B. Similarly, if there are losses, they cannot also be allowed to be set off against the profits determined in respect of such eligible undertakings. However, the profits and losses of the business, which is not subject to the benefits of Section 10B, have to be treated separately. Since the expression used in Clause (ii) of Sub-section (6) clearly mentions "insofar as such loss relates to the business of the undertaking", therefore, this restriction is applicable only in respect of loss which is directly relatable to the loss of the undertaking which is subject to the provision of Section 10B. Therefore, in our view, this restriction is not applicable to the losses in respect of other businesses.
7. There is one more angle from which this issue has to be examined and that is, whether profits remaining after the deduction under Section 10B should be treated as business profits? The answer to this question would depend upon whether the benefits given under Section 10B is an exemption or a deduction. Section 10B reads as under: 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: Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this Section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to the deduction referred to in this sub-Section only for the unexpired period of aforesaid ten consecutive assessment years.
Provided further that for the assessment year beginning on the 1st day of April, 2003, the deduction under this sub-Section shall be ninety per cent of the profits and gains derived by an undertaking from the export of such articles or things or computer software: The Section has clearly employed the expression "deduction" though Section 10B is contained in Chapter III which deals with the incomes which do not form part of total income, but still at least after 01.04.2003 this provision would amount to deduction only. Firstly only 90% of the profits is allowed as deduction which means whole of income is not exempt and therefore the same cannot be treated as exempt. The mere fact that Section 10B is contained in Chapter III will not make much difference as Hon'ble Supreme Court in the case of Prakash Nath Khanna and Anr. v. CIT 266 ITR 1 (SC) has clearly observed that marginal notes in an Indian statute, as in an Act of Parliament cannot be referred to for the purpose of construing the statute. In view of this observation merely because Section 10B has been placed in Chapter III it does not mean that it relates to exempted income, particularly in view of the fact that only 90% of the profits from eligible undertaking is allowed to be deducted. Since the business profits have to be assessed and have indeed been assessed in this case as income from business, therefore whatever remains after allowing such 10% deduction has to be treated only as business income. Once such balance income has been treated as business income, provisions of Section 72 etc. would apply accordingly. As observed by us earlier, the losses were held to be belonging to the business and had been allowed by the Tribunal in the earlier years, therefore such losses should have been allowed against the business income of the assessee. In these circumstances, we set aside the order of the learned CIT(A) and direct the AO to allow set off of the loss claimed by the assessee.