1. The appeal of the Assessee is directed against the order of the C.I.T.(Appeals)-III, Chennai dated 12.10.2006. The assessment year involved in these appeal is 2003-04.
2. The facts of the case are that the Assessee company is 100% subsidiary of Global Software Services Ltd. (Global UK), Summer Haze Bath, Woolley Bath, BAI 8 AS, U.K. The Assessee company has filed a return of income for the assessment year 2003-04 on 20.11.2003 admitting a loss of Rs. 28,54,452/- and the same was processed under Section 143(1) of the Act on 27.2.2004 accepting the loss returned. The Assessee has claimed an exemption under Section 10B of the Act of Rs. 2,66,83,098/- in the original return and the case was selected for scrutiny to verify the exemption claimed. Notice under Section 143(2) of the Act was issued to the Assessee. In response to the same, authorized representative of the Assessee appeared before the Assessing Officer from time to time and filed the details called for. While examining the details filed by the Assessee, the Assessing Officer found that for the assessment year 2002-03, there was a loss of Rs. 58,19,240/-. The Assessee has first claimed deduction under Section 10B of the Act and against the balance taxable income has claimed set off of carry forward loss for the assessment year 2002-03. The Assessing Officer was of the opinion that the act of the Assessee company is neither logical nor as per the provisions of the law and this was also against the intention of the legislature. He held that set off of carry forward loss for the assessment year 2002-03 has to be set off firstly against the total income of the Assessee company and out of the balance income only deduction under Section 10B of the Act can be granted and he completed the assessment accordingly vide his order dated 24.2.2006.
Aggrieved by the assessment order dated 24.2.2006 passed by the Assessing Officer, the Assessee preferred an appeal before the C.I.T.(Appeals) who vide order dated 12.10.2006 dismissed the appeal of the Assessee upholding the order of the Assessing Officer. Now, the Assessee has filed the present appeal against the order of the C.I.T.(Appeals) dated 12.10.2006.
1. The Commissioner of Income-tax (Appeals) III erred in confirming the setting off of the carried forward business loss against the profits and gains derived by the undertaking before allowing the exemption under Section 10B, thereby, allowing the said 10B exemption on the adjusted profits.
2. He should have found that as per the proviso to Section 10B of the Act for the AY 2003-04, the deduction under Section 10B shall be ninety percent of the profits and gains derived by the undertaking and the brought forward loss should be set off against the 10% portion of the profits of the undertaking.
4. The Assessee has filed two grounds of appeal. However, there is only one issue involved in this case which is pertaining to the setting off of carried forward business loss against the profits and gains derived by the undertaking under Section 10B of the Act.
5. It is argued by the learned Counsel for the Assessee that as per second proviso to Section 10B of the Act for the assessment year 2003-04, the deduction under Section 10B was required to be restricted to ninety percent of the profits and gains derived by the undertaking and the Assessing Officer was not justified in setting off of the brought forward loss against the profits and gains derived by the undertaking for the exemption to the extent of 90%. Further, she argued that the Assessing Officer should not have worked out 10% profits of the undertaking for the purpose of tax in the current year without first adjusting and setting off the brought forward loss against the entire business loss. The ld. Counsel for the Assessee relied on the Circular of the Board No. 26 dated 7.7.1955 in which with reference to the setting off of losses from one head against the income under two or more heads, it had been explained that "the general rule to be followed in all fiscal enactments is that where words used are neutral in import, a construction most beneficial to the assessee should be adopted." The said Circular is reproduced as under for clarification: 1. A question is raised as to the manner in which loss suffered by an assessee under one head can be set off against income, profit or gains under any other head, particularly where the total income, includes items of income which are 'tax free'. For instance for an assessment year the material figures in the case of an assessee are as follows:Interest on tax free securities Under Section 8 of the 1922 Act 6,000Property income Under Section 9 of the 1922 Act 13,000Loss in business other than in speculative -5,000Transaction Under Section 10 of the 1922 ActTotal 14,000 ------- An Income tax Officer proposes to set off the loss of Rs 5000/- against tax free income of Rs. 6,000/- and to tax Rs. 13,000/- out of the total income of Rs. 14,000/-. On the other hand, the assessee contends that the loss of Rs. 5,000/- shall be set off against the chargeable income of Rs. 13,000/- and only Rs. 8,000/- out of the total income of Rs. 14,000/-be taxed in his hands.
2. There is nothing in the Section 24(1) to indicate that a particular mode of set off shall be followed. In the absence of any such indication, the general rule to be followed in all fiscal enactments is that where words used are neutral in import, a construction most beneficial to the assessee should be adopted. The words 'he shall be entitled to have the amount of loss set off accruing in Section 24(1)' would seem to be consistent with the right. Hence, in the above illustration, the assessee's contention should prevail and the Department should adopt that mode which will give the assessee maximum benefits.
In support of her contention, she has drawn our attention to the decision of the Tribunal Bangalore Bench in the case of SET Software I.Pvt. Ltd. dated 19.6.2006 wherein it was held that profits and gains derived by an industrial undertaking ought to be excluded in their entirety and shall not be included in the total income of the tax payer for the eligible period. Finally she requested that the adjustment made by the Assessing Officer wrongly upheld by the C.I.T. (Appeals) in the impugned order requires to be reversed.
6. On the contrary, the learned Departmental Representative controverted the arguments advanced by the learned Counsel for the Assessee and stated the first appellate authority has passed the impugned order under the law and it is a well reasoned order according to the facts and circumstances of the case. He stated that method of computation adopted by the Assessee is neither in accordance with the provisions of the Act nor in consonance with the ratio of the decisions of various High Courts. He further argued that from the assessment year 2001-02 onwards, the provisions of Sections 10A & 10B of the Act have been brought at par with the other Sections dealing with deductions allowed under Chapter VIA of the Act. From 1^st April, 2001 onwards, the brought forward losses pertaining to the specified undertakings eligible for deduction under Section 10B of the Act are allowed to be carried forward and set off against the income of such undertakings in the future assessment years. As per the settled position of law, all the brought forward losses and depreciation are first required to be set off against the business profits of the current year before computing any deduction/exemption under the Act. In support of his contention, he cited the decision of the Hon'ble Karnatka High Court in the case of CIT v. Himatasingike Seide Ltd. [2006] 286 ITR 255 and the decision of the Tribunal in the case of Maruti Udyog Ltd. v. JCIT 285 ITR (AT.) 228 (Del) where in it was held that deduction under Chapter VIA are required to be reduced from the business profits before computing deduction under Section 80HHC of the Act. Finally he argued that the provisions of Section 10B of the Act are similar to the provisions of Section 80HHC of the Act which restricts the allowability of such deduction to a particular extent of such deduction in various assessment years. For the year under consideration, deduction under Section 10B of the Act was allowable only to the extent of 90% of eligible business profits and before claiming any exemption or deduction, the brought forward losses and depreciation are required to be reduced from the gross business profits and only the net profits so arrived are required to be considered for computing the deduction under the relevant provisions. He requested that the appeal filed by the Assessee may be dismissed upholding the order of the C.I.T.(Appeals).
7. We have heard both the parties and perused the records available with us. We are not accepting the arguments advanced by the learned Counsel for the Assessee. Section 10B of the Act cannot be read in isolation of other provisions. It is only an exemption provision.
Exemption cannot be fanciful and it has some rationale with other provisions of the Act. Therefore, a combined reading of the definition of exemption, total income-tax liability deductibility etc. one has to come to a conclusion that calculation as far as possible is to be in terms of Income-tax Act. The computation made by the Assessee in a particular manner has also to be scrutinized by the Department as otherwise there is every chance of exemption being misused by any one.
It may be true that even after taking into consideration, the unabsorbed loss, the Assessee may get exemption but nonetheless, he cannot take a portion of exemption just to suit his income for purpose of nil liability and adjust the balance. The computation of income should be in accordance with the provisions of the Act or in consonance with ratio of various High Courts. From the assessment year 2000-01 onwards, the provisions of Section 10A and 10B have been brought at par with other Section dealing with deduction allowed under Chapter VIA of the Act. From 1^st April, 2001 onwards, brought forward losses pertaining to the specified undertakings eligible for deduction under Section 10B are allowed to be carried forward and set off against income of such undertaking in the future assessment years. The decision relied upon by the Assessee's Counsel in the case of SET Software Solutions I. Pvt. Ltd. dated 19.6.2006 is totally distinguishable from the facts of the present case and is not helpful to the Assessee. No doubt, Section 10B of the Act has been incorporated in the Income-tax Act, 1961 with a view to providing incentive for earning foreign currency but it should be in accordance with the provisions of the Act or in consonance with ratio of various High Courts.
8. We observe that provisions of Section 10B(4) of the Act also make it clear that the quantum of deduction under Section 10B(1) is required to be computed with reference to the profits derived from the export of articles or things. The said profits, in our view, are required to be first computed in accordance with the provisions of the Act and only then the net profits are required to be considered for working out the proportion of the eligible amount We do not agree with the contention of the ld. Counsel for the Assessee that the second proviso to Section 10B of the Act has to be applied directly and immediately on the gross business profit before taking into consideration the brought forward unabsorbed business losses. If this procedure of computation is adopted, it will result in absurd results because 10% of taxable income gets worked out even before considering the set off of brought forward losses against the business profits. If this procedure is applied and upheld by the Courts, this will result in the taxation of much higher income in the hands of various Assessees for the assessment year 2003-04, if such Assessees do not have any brought forward losses/depreciation. Such a situation is not contemplated under the provisions of Section 10B of the Act. We find that the provisions of Section 10B of the Act are very clear on this issue and if there is any doubt, the same gets clarified if this provision is understood in the light of the position of law applicable to the similar other provisions of the Act. The situation contemplated by the Assessee could have been possible only in the period before 1.4.2001 when there was controversy whether brought forward losses are allowable to be set off against eligible profits under Section 10A/10B or not. The aforesaid controversy is no more after 1.4.2001 because these provisions have now been amended and brought them on par with the other exemptions/deductions allowed under Chapter VIA of the Act. As per the settled law, all the brought forward losses and depreciation are first required to be set off against the business profits of the current year before computing any deduction/exemption under the Act. Keeping in view the facts and circumstances of the case and the provisions of the Act, we are of the considered opinion that the C.I.T. (Appeals) was justified in confirming the finding of the Assessing Officer.
Accordingly, we uphold the impugned order.