Mindtree Consulting (P) Ltd. Vs. Asstt. Cit - Court Judgment

Excerpt:
this appeal by assessee is directed against the order of learned commissioner (appeals)-iii, bangalore, dated 3-2-2005.the appellant- company filed its original return of income on 29-10-2001 declaring a total income of rs. 5,94,514 after claiming exemption under section 10b of the income tax act (the act).subsequently, the assessing officer issued notice under section 148 on 28-1-2003. meanwhile, the assessee filed a rectification petition under section 154 on 19-8-2003 seeking rectification of intimation to give effect to retrospective amendment to section 1ob(6)(i)(ii). the appellant claimed inter-head set off of business loss against income from other sources as permissible under section 71 of the act. a revised return was also filed on 19-8-2003 declaring loss to be carried forward of rs. 4,32,66,130 after setting off the income of other sources of rs. 5,94,514. the assessing officer concluded that the business income as returned by the assessee is loss of rs. 4,26,73,854.the assessee has earned certain income of rs. 13,40,576, which is not eligible for deduction under section 10b. the same was accordingly treated as business income chargeable under the act. he also taxed income from other sources of rs. 5,94,514 as declared by the assessee.it is seen that while passing the order on 29-12-2003, the ac has not taken cognizance of revised return filed as well as the rectification application filed. learned commissioner (appeals) held that interest income is not eligible for exemption under section 1oa/10b of the act.learned commissioner (appeals), while dismissing the appeal, held as under : "the appellant's submissions are carefully considered. section 10a/10b is placed under chapter iii of the act which deals with the income not forming part of total income. further, the objective of section 1oa/10b is not to tax the export profits from eou. the provisions of section 10a/10b provide for complete exemption. if the intention behind the amended provision was to change over to a pattern of allowing a deduction similar to 80hhc or 80hhe, it would have been shifted to chapter vi-a. as such, the word 'deduction' used in the amended provisions of section 1oa/10b have to be considered as an exemption only. even if it is assumed that section 10a provides for a deduction, the deduction or exclusion is required to be done at source from the total income and not after computing the gross total income. the 'total income' in this context means global income of the assessee. in my considered opinion, the income eligible for deduction under section 10a/10b does not enter into gross total income as it is to be deducted at source level itself from the global income. as the income or losses of the eou have to be excluded at source itself, the provisions of sections 70 to 72 will not be applicable to the losses of eou. further, there is no specific provision in the act to allow set off or carry forward of losses of eou. as such, the losses of eou cannot be set off against the income of other businesses. the case laws relied on by the appellant are also not relevant to the issue as section 10a is clearly an exemption section. in the circumstances. assessing officer's action of denying set off and carry forward of losses and depreciation is upheld".learned counsel for assessee shri pradeep, submitted that interest income is inextricably linked to eou as deposits were pledged with the bank for credit facility and bank guarantee margin. thus, the same is to be treated as income derived from the eligible unit. he further submitted that there is loss in the unit eligible for deduction under section 1oa/10b of the act. the assessing officer has held that income by way of interest is business income but not set off the loss of such business income against the other business income. this is contrary to provision of section 70 of the act. similarly, there is income from other sources by way of interest offered as such. the business loss declared by assessee is much more than such income. the business loss can be set off against income from other sources in the same year as per provisions of section 70 of the act. learned commissioner (appeals) has wrongly concluded that provisions of section 10a/10b provides for complete exemption as they are in chapter iii. there is a retrospective amendment in section 1ob(6) which provides for deduction instead of exemption with effect from 1-4-2001. thus, in view of amended provisions of section 10b(6) and provisions of section 70 as well as section 71 of the act, business loss is to be set off against other business income and income from other sources in the same year.learned commissioner smt. swati patil strongly supported the appellate order. she submitted that the word 'income derived from' is narrower in meaning than the word 'attributable to'. the income by way of interest cannot be considered as income derived from the eligible unit. thus, the same has to be separately taxed and exemption cannot be granted there against. the assessing officer has rightly relied upon the decision of hon'ble supreme court in the case of pandian chemicals ltd. v. cit (2003) 262 itr 278 (sc) for this proposition. section 10b falls in chapter iii, which starts with the title "income which do not form part of total income". since income eligible for exemption under section 10b do not form part of total income, similarly loss of such unit eligible for exemption under section 10b also do not form part of total income and hence sections 70 and 71 will have no operation. thus, the order of learned commissioner (appeals) is to be upheld.in reply, learned counsel for assessee submitted that similar issue has been decided by the tribunal, mumbai in the case of navin bharat industries ltd. v. dy. cit (2004) 90 itd 1 (mumbai) (tm). in the said case, it was held that the assessee cannot be forced to avail benefit of section 10a. if the assessee wants to put income under normal computation, there is no bar for doing so section 1oa(4)(ii) does not preclude operation of sections 70 and 71 and loss from industrial unit located in free trade zone can be set off against profits from other units. he submitted that sections 10a and 10b are in pari materia and hence in the present case also, the loss should be allowed to be set off.we have carefully considered the relevant facts and the arguments advanced. section 1ob(l) 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 iii, which is titled as "income 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 with effect from 1-4-2000. section 1ob(6)(ii) restricts carry forward and set off of loss under sections 72 and 74 but do not provide anything regarding intra-head set off under section 70 and inter-head set off under section 71 of the act. 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 of the act. 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 officer sources in the same year as per the provisions of section 71 of the act. the tribunal in the case of navin bharat industries ltd. (supra) held thus : "in the instant case, the benefit of section 10a was available to the assessee for five years. the assessee claimed benefit for three years.for the rest of the years, the assessee did not claim the benefit of section 10a. the assessee opted to get the profits of new industrial undertaking assessed under the normal provisions. there is 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 the benefit is conferred on the assessee, he cannot be forced to avail the same.section 10a, 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.coming to the applicability of section ioa(4)(ii), it put interdict qua sections 72 and 74. it does not preclude the operation of sections 70 and 71. section 14a is applicable in respect of 'expenditure'. loss is different from expenditure. as such, the assessee was entitled to setting-off of the loss incurred by the seepz unit".the decision of the tribunal also supports our view that the 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 of the act. the assessing officer is accordingly directed to set off the loss and compute the income.

Judgment:
This appeal by assessee is directed against the order of learned Commissioner (Appeals)-III, Bangalore, dated 3-2-2005.

The appellant- company filed its original return of income on 29-10-2001 declaring a total income of Rs. 5,94,514 after claiming exemption under section 10B of the Income Tax Act (the Act).

Subsequently, the assessing officer issued notice under section 148 on 28-1-2003. Meanwhile, the assessee filed a rectification petition under section 154 on 19-8-2003 seeking rectification of intimation to give effect to retrospective amendment to section 1OB(6)(i)(ii). The appellant claimed inter-head set off of business loss against income from other sources as permissible under section 71 of the Act. A revised return was also filed on 19-8-2003 declaring loss to be carried forward of Rs. 4,32,66,130 after setting off the income of other sources of Rs. 5,94,514. The assessing officer concluded that the business income as returned by the assessee is loss of Rs. 4,26,73,854.

The assessee has earned certain income of Rs. 13,40,576, which is not eligible for deduction under section 10B. The same was accordingly treated as business income chargeable under the Act. He also taxed income from other sources of Rs. 5,94,514 as declared by the assessee.

It is seen that while passing the order on 29-12-2003, the AC has not taken cognizance of revised return filed as well as the rectification application filed. Learned Commissioner (Appeals) held that interest income is not eligible for exemption under section 1OA/10B of the Act.

Learned Commissioner (Appeals), while dismissing the appeal, held as under : "The appellant's submissions are carefully considered. Section 10A/10B is placed under Chapter III of the Act which deals with the income not forming part of total income. Further, the objective of section 1OA/10B is not to tax the export profits from EOU. The provisions of section 10A/10B provide for complete exemption. If the intention behind the amended provision was to change over to a pattern of allowing a deduction similar to 80HHC or 80HHE, it would have been shifted to Chapter VI-A. As such, the word 'deduction' used in the amended provisions of section 1OA/10B have to be considered as an exemption only. Even if it is assumed that section 10A provides for a deduction, the deduction or exclusion is required to be done at source from the total income and not after computing the gross total income. The 'total income' in this context means global income of the assessee. In my considered opinion, the income eligible for deduction under section 10A/10B does not enter into gross total income as it is to be deducted at source level itself from the global income. As the income or losses of the EOU have to be excluded at source itself, the provisions of sections 70 to 72 will not be applicable to the losses of EOU. Further, there is no specific provision in the Act to allow set off or carry forward of losses of EOU. As such, the losses of EOU cannot be set off against the income of other businesses. The case laws relied on by the appellant are also not relevant to the issue as section 10A is clearly an exemption section. In the circumstances. assessing officer's action of denying set off and carry forward of losses and depreciation is upheld".

learned counsel for assessee Shri Pradeep, submitted that interest income is inextricably linked to EOU as deposits were pledged with the bank for credit facility and bank guarantee margin. Thus, the same is to be treated as income derived from the eligible unit. He further submitted that there is loss in the unit eligible for deduction under section 1OA/10B of the Act. The assessing officer has held that income by way of interest is business income but not set off the loss of such business income against the other business income. This is contrary to provision of section 70 of the Act. Similarly, there is income from other sources by way of interest offered as such. The business loss declared by assessee is much more than such income. The business loss can be set off against income from other sources in the same year as per provisions of section 70 of the Act. Learned Commissioner (Appeals) has wrongly concluded that provisions of section 10A/10B provides for complete exemption as they are in Chapter III. There is a retrospective amendment in section 1OB(6) which provides for deduction instead of exemption with effect from 1-4-2001. Thus, in view of amended provisions of section 10B(6) and provisions of section 70 as well as section 71 of the Act, business loss is to be set off against other business income and income from other sources in the same year.

learned Commissioner Smt. Swati Patil strongly supported the appellate order. She submitted that the word 'income derived from' is narrower in meaning than the word 'attributable to'. The income by way of interest cannot be considered as income derived from the eligible unit. Thus, the same has to be separately taxed and exemption cannot be granted there against. The assessing officer has rightly relied upon the decision of Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. v. CIT (2003) 262 ITR 278 (SC) for this proposition. Section 10B falls in Chapter III, which starts with the title "Income which do not form part of total income". Since income eligible for exemption under section 10B do not form part of total income, similarly loss of such unit eligible for exemption under section 10B also do not form part of total income and hence sections 70 and 71 will have no operation. Thus, the order of learned Commissioner (Appeals) is to be upheld.In reply, learned counsel for assessee submitted that similar issue has been decided by the Tribunal, Mumbai in the case of Navin Bharat Industries Ltd. v. Dy. CIT (2004) 90 ITD 1 (Mumbai) (TM). In the said case, it was held that the assessee cannot be forced to avail benefit of section 10A. If the assessee wants to put income under normal computation, there is no bar for doing so section 1OA(4)(ii) does not preclude operation of sections 70 and 71 and loss from industrial unit located in free trade zone can be set off against profits from other units. He submitted that sections 10A and 10B are in pari materia and hence in the present case also, the loss should be allowed to be set off.

We have carefully considered the relevant facts and the arguments advanced. Section 1OB(l) 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 III, which is titled as "Income 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 with effect from 1-4-2000. Section 1OB(6)(ii) restricts carry forward and set off of loss under sections 72 and 74 but do not provide anything regarding intra-head set off under section 70 and inter-head set off under section 71 of the Act. 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 of the Act. 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 officer sources in the same year as per the provisions of section 71 of the Act. The Tribunal in the case of Navin Bharat Industries Ltd. (supra) held thus : "In the instant case, the benefit of section 10A was available to the assessee for five years. The assessee claimed benefit for three years.

For the rest of the years, the assessee did not claim the benefit of section 10A. The assessee opted to get the profits of new industrial undertaking assessed under the normal provisions. There is 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 the benefit is conferred on the assessee, he cannot be forced to avail the same.

Section 10A, 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.

Coming to the applicability of section IOA(4)(ii), it put interdict qua sections 72 and 74. It does not preclude the operation of sections 70 and 71. Section 14A is applicable in respect of 'expenditure'. Loss is different from expenditure. As such, the assessee was entitled to setting-off of the loss incurred by the SEEPZ unit".

The decision of the Tribunal also supports our view that the 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 of the Act. The assessing officer is accordingly directed to set off the loss and compute the income.