Saturday, June 19, 2010

ITR Volume 324 : Part 3

INCOME TAX REPORTS (ITR) HIGHLIGHTS ISSUE DATED 21-6-2010

Volume 324 : Part 3

SUPREME COURT JUDGMENTS

>>

>>Mandatory condition of payment of admitted tax cannot be read into provision relating to Appellate Tribunal : CIT v. Pawan Kumar Laddha p. 324

>>Doctrine of incorporation has to be clearly spelt out : CIT v. Pawan Kumar Laddha p. 324

>>Amount on which interest for period during which tax not refunded will include amount of tax deducted at source : CIT v. H. E. G. Ltd. p. 331

HIGH COURT JUDGMENTS

>>Charging of Modvat to profit and loss account not a ground for reassessment : Jay Bharat Maruti Ltd. v. CIT (Delhi) p. 289

>>Notice on basis of escape of an item of income : Other items of income cannot be assessed : Jay Bharat Maruti Ltd. v. CIT (Delhi) 289

>>Lifting goods to be delivered to purchaser but not delivering : Assessee owner of goods liable to tax on them : D. N. Singh v. CIT (Patna) p. 304

>>Finding of user for purpose of business entitled to depreciation : CIT v. Panacea Biotech Ltd. (Delhi) p. 311

>>Invoice issued and purchase consideration accounted in assessee's books : Assessee entitled to claim in relevant assessment year : CIT v. Panacea Biotech Ltd. (Delhi) p. 311

>>Tribunal allowing expenditure on research and development on basis of survey report explaining expenditure : Proper : CIT v. Panacea Biotech Ltd. (Delhi) p. 311

>>Borrowed capital advanced to sister concern without charging interest : Interest paid by assessee not deductible : CIT v. Accelerated Freeze Drying Co. Ltd. (Ker) p. 316

>>Duty of Tribunal to decide case on the basis of facts : CIT v. Accelerated Freeze Drying Co. Ltd. (Ker) p. 316

>>Assessee to be given an opportunity to deal with distinguishable features of case relied on : Inventure Growth and Securities Ltd. v. ITAT (Bom) p. 319

>>Interest from short-term deposits to be treated under head "Business income" : CIT v. J. J. Exporters Ltd. (Cal) p. 329

>>Company unable to reach target on account of change in law for a public limited company and suffering losses and selling all its assets : Addition made by AO deleted : AGM Protection Devices Ltd. v. Deputy CIT (Delhi) p. 334

STATUTES

>>Rules :

Income-tax (Fourth Amendment) Rules, 2010
(Contd.)

JOURNAL

>>A non-resident is not under an obligation to apply for PAN, for TDS purposes, as per section 206AA (S. K. Tyagi, Advocate) p. 1

F Revised Discussion Paper on the Direct Taxes Code p. 15

>>Whether amalgamation/merger can only be of companies carrying on similar businesses ? (T. N. Pandey, Retd. Chairman, CBDT) p. 11

NEWS-BRIEF

>>Speech of the hon'ble Finance Minister during the 26th of Annual Conference of Chief Commissioners and Director Generals of Income-tax at New Delhi on 9th June, 2010

Tax collection

Direct Taxes, now the major resource provider to the Central Government, have grown at an average annual rate of 24 per cent. in the last five years and have nearly trebled from Rs. 1,32,771 crores in the financial year 2004-05 to about Rs. 3,78,000 crores in financial year 2009-10, increasing its share from 4.1 per cent. to 6.1 per cent. of the gross domestic product (GDP). This tremendous growth has been made possible not only due to rationalisation of tax structure and improvement in tax administration leading to better tax compliance, but also persistent and unrelenting efforts of employees of the Income-tax Department.

Tax reforms

2. To improve the compliance further, tax laws need to be simple, stable and robust; tax rates should remain moderate; and multiplicity of tax exemptions and deductions should be gradually phased out in order to widen and deepen the tax base. The tax administration needs to be further toned up by appropriate use of technology on the one hand, and improving professional competence and responsiveness of the employees on the other.
3. A major tax reform initiative has already been announced in the proposed "Direct Taxes Code 2009" to simplify, rationalise and consolidate the laws and procedure, relating to direct taxes. Its draft is under revision, taking into consideration the areas of concern expressed by various stakeholders, and the discussion paper will be shortly in the public domain before introduction in Parliament in the forthcoming monsoon session. It will indeed be legislation for the 21st century, which will witness the emergence of an economically strong and vibrant India. I anticipate that the new Code will usher in major changes in procedures and practices of direct tax. The Department, therefore, needs to draw a roadmap for administratively meeting the challenges and the changes that will be introduced by the new Code. The Human Resource Directorate of the Department should draw up plans for training in co-operation with tax training institutes for capacity building for implementation of the Direct Taxes Code. The transition from existing law to DTC would require completion of delegated legislation in a time bound manner. The CBDT should ensure smooth transition by planning the activities schedule well in advance.

International taxation

4. Growth in international trade and commerce driven by globalisation is throwing up new and complex challenges. Globalisation offers a global market for product and services but at the same time it also poses challenges. The recent financial crisis has shown how an economic difficulty of one country can get exported to other countries. Similarly, the development of tax shelter products and use of tax havens is another challenge, which emanates from globalization. In our response to global challenges we have set up two Income-tax Overseas Units (ITOUs) within Indian Missions in Singapore and Mauritius to facilitate exchange of information. Eight more such units in USA, UK, Netherlands, Japan, Cyprus, Germany, France and UAE are also being created on similar lines. I am hopeful that these measures would result in seamless flow of tax-related information from foreign tax jurisdictions and would strengthen our fight against menace of tax evasion using cross border transactions.

Taxpayer services

5. The Department needs to improve its infrastructure to match global standards of delivery of taxpayer services. The effective roll out of Sevottam and Aayakar Sewa Kendra (ASK) would require adequate infrastructure. It is necessary to make the infrastructure state-of-the art to improve the working environment and to make a visit to the tax office a pleasant experience. Processing of tax returns, now done on the National Computer Network, has to be made more efficient. Towards this, two more Centralized Processing Centres (CPCs) at Pune and Manesar should be set up expeditiously. Efforts should be made to further popularise and increase electronic filing of tax returns and electronic payment of taxes to reduce paper-work and make taxpayer services environmentally friendly. The scope of Large Taxpayer Units (LTUs), presently operational in four metropolitan cities, needs to be expanded for deepening of tax base as well as for centralized services to large taxpayers.

6. While taxpayer services have improved there are still large numbers of taxpayer grievances, including grievances relating to tax refunds and credit of TDS, which need to be attended on urgent basis. At the systemic level CBDT should ensure that Directorate of Systems take immediate steps to streamline the issue of credit of TDS. Apart from systemic changes, the grievance redressal mechanism including Ombudsman need to be integrated and streamlined. A holistic approach needs to be developed to cater to the rising expectations of taxpayers. The CBDT should immediately come up with a comprehensive and net-based grievance redressal mechanism in line with the best global practices.

7. A number of services offered by the Department have become technology driven. It may not be possible to deliver the services of desired quality in the existing structure of tax administration. The CBDT may come out with a new structure, which leads to faster adoption of technology and innovation. The CBDT may, therefore, consider hiving off its technology driven taxpayer services to a special purpose vehicle (SPV), which can better deliver such services in the public-private-partnership mode. This will lead to innovation in delivery of services to taxpayers and also involvement of public in delivering the services.

Strategies for meeting tax collection target

8. For the current financial year, the direct tax collection target has been fixed in the Budget Estimates at Rs. 4,30,000 crores at a growth of 13.7 per cent. over the actual collection last year. We have deliberately called this conference in the beginning of the financial year to deliberate strategies and draw action plan to achieve this target. Apart from concentrating on big cities and towns, the Department should also look to smaller towns and cities for widening of tax base. The smaller towns and centres have emerged as centres of growth due to inclusive growth agenda of Government. The Department may also develop special strategies to monitor TDS compliance at the District level, State level and at Central level.

9. The GDP is poised to grow at 8.5 per cent. during 2010-11. Sectors of the economy performing well should be monitored for tax compliance and we should get our due taxes. The Department should also make attempts to widen and deepen the tax-base further. It should improve utilization of information relating to high value transactions available through Annual Information Returns (AIR), Central Information Branches (CIB) and other sources. Using multisource data, the Department should refine risk profiling of taxpayers and assessments and investigations should be carried out accordingly. Using this intelligence data the Department should develop credible deterrence for taxpayers, who are habitual tax evaders.

Strengthening manpower and improving employee welfare

10. Skills of the personnel working in the Department need constant upgradation in view of changing tax regulations, technology and global economic environment. Though I find that the CBDT has taken some steps in this direction through knowledge management by yearly publication of the book titled "Let us Share", containing the best orders and practices, yet further steps need to be expeditiously taken in its training and skill upgradation programmes adopting the best global practices. I understand that CBDT is already providing exposure to probationers at NADT about international practices through international attachments. This has to be taken forward by suitably designing mid-career training programmes for officers at regular intervals. This will equip officers to face challenges of dealing with complex international transactions and menace of tax avoidance schemes using tax havens and low tax jurisdictions. This will also help us in getting our due share of taxes especially from cross border transactions. I am happy to announce that Advanced Mid-Career Training Programme (AMCTP) for IRS officers would be started during the current year.

11. A satisfied work force is the backbone and strength of an organisation. We have modified the transfer policy for the Indian Revenue Service (IRS) officers to improve satisfaction levels and minimise unwarranted service litigation with our own employees. The Standing Committee on Finance, in its report for 2009-10, has expressed concern about shortages of manpower in the Department. This needs to be addressed urgently, especially in the face of the exponentially increasing workload, and the challenges of maximising revenue generation along with efficient taxpayer service. I am told that cadre restructuring of the CBDT is pending for quite some time, which has adversely affected the implementation of core areas of work in the Income-tax Department. The tax laws can be implemented effectively by aligning the tax administration with the intent of tax policy. If there is a mismatch, then it may be difficult to implement a tax policy, however good it may be. The CBDT should ensure that deployment of human resources is in consonance with requirement of the tax laws and this should be ensured by completing the timely exercise of cadre restructuring and by holding regular Departmental Promotional Committee (DPC) as per the Department of Personnel and Training (DoPT) calendar. In the long-term, we should aim for human resource policy, which is conducive for specialisation, promotes administrative innovation, provides equal opportunity and keeps employees in high state of motivation.

12. In the last year's conference, I had emphasised the need for expediting vigilance matters. I find that though there is improvement, the progress is not at the desired levels. More focussed approach with proper adherence to prescribed time-lines is needed to expedite vigilance matters. I want to see that no charge sheets are filed against our own employees at the last day of retirement after more than 30 years of service to Government. We should ensure that guilty is punished but at the same time ensuring that those who have performed their duties and victims of frivolous complaints should be adequately protected. The Department need to focus on preventive vigilance and adopt a strategy for zero tolerance for corruption. The CBDT should set up a committee to examine the vigilance practices and procedures in few select countries. The experience of other countries can be used to streamline and strengthen the vigilance administration in Income-tax Department.

Alternate dispute resolution mechanism

13. The rising litigation with the taxpayers and the quantum of revenue locked in appeals is a matter of serious concern. The strengthening of Settlement Commission, setting up Dispute Resolution Panel (DRP) may address the litigation issues with the taxpayers to some extent. I am told that under mutual agreement procedure (MAP) negotiations under the Indo-USA DTAA a tax demand of Rs. 800 crores in 48 cases has been confirmed. This is a good development and taxpayers should be encouraged to invoke MAP, which has emerged as a preferred alternate dispute resolution mechanism. In spite of these efforts, we need to develop more strategies to reduce the litigation with the taxpayers. I would like the CBDT to come out with a comprehensive proposal to address the issue of unwanted litigation with taxpayers and also to realise locked up revenue in appeals.

Income-tax welfare fund

14. Before I close, I am happy to announce the operationalisation of the Income-tax Welfare Fund, which was pending since 1998. The Fund has a corpus of Rs. 100 crores kept in interest-bearing deposit. The interest earned annually on this deposit, and other annual accruals to the Fund, will be available for welfare activities of employees of the Income-tax Department. I am sure that the CBDT will come out with innovative welfare measures, which will further motivate employees of the Department to excel in their area of work.


SC: Interest earned by a co-operative society , not falls within ambit of 80 P

[2010] 1 taxmann 71 (SC)

Interest earned by a co-operative credit society on surplus funds invested in short-term deposits with banks and in govt. securities cannot fall within meaning of ex-pression "profits and gains of business" mentioned in section 80P(2)

The words "the whole of the amount of profits and gains of business" in section 80P(2)(a) emphasise that the income in respect of which deduction is sought must constitute the operational income and not the other income which accrues to the Society.

SUPREME COURT OF INDIA

The Totgars' Cooperative Sale Society Ltd.
v.
Income tax officer

CIVIL APPEAL NO. 1622 OF 2010

FEBRUARY 8, 2010


RELEVANT EXTRACTS :

** ** ** ** ** **

At the outset, an important circumstance needs to be highlighted. In the present case, the interest held not eligible for deduction under Section 80P(2)(a)(i) of the Act is not the interest received from the members for providing credit facilities to them. What is sought to be taxed under Section 56 of the Act is the interest income arising on the surplus invested in short-term deposits and securities which surplus was not required for business purposes. Assessee(s) markets the produce of its members whose sale proceeds at times were retained by it. In this case, we are concerned with the tax treatment of such amount. Since the fund created by such retention was not required immediately for business purposes, it was invested in specified securities. The question, before us, is - whether interest on such deposits/securities, which strictly speaking accrues to the members' account, could be taxed as business income under Section 28 of the Act? In our view, such interest income would come in the category of "Income from other sources", hence, such interest income would be taxable under Section 56 of the Act, as rightly held by the Assessing Officer. In this connection, we may analyze Section 80P of the Act. This section comes in Chapter VI-A, which, in turn, deals with "Deductions in respect of certain Incomes". The Headnote to Section 80P indicates that the said section deals with deductions in respect of income of Cooperative Societies. Section 80P(1), inter alia, states that where the gross total income of a cooperative Society includes any income from one or more specified activities, then such income shall be deducted from the gross total income in computing the total taxable income of the assessee-Society. An income, which is attributable to any of the specified activities in Section 80P(2) of the Act, would be eligible for deduction. The word "income" has been defined under Section 2(24)(i) of the Act to include profits and gains. This sub-section is an inclusive provision. The Parliament has included specifically "business profits" into the definition of the word "income". Therefore, we are required to give a precise meaning to the words "profits and gains of business" mentioned in Section 80P(2) of the Act. In the present case, as stated above, assessee-Society regularly invests funds not immediately required for business purposes. Interest on such investments, therefore, cannot fall within the meaning of the ex-pression "profits and gains of business". Such interest income cannot be said also to be attributable to the activities of the society, namely, carrying on the business of providing credit facilities to its members or marketing of the agricultural produce of its members. When the assessee-Society provides credit facilities to its members, it earns interest income. As stated above, in this case, interest held as ineligible for deduction under Section 80P(2)(a)(i) is not in respect of interest received from members. In this case, we are only concerned with interest which accrues on funds not required immediately by the assessee(s) for its business purposes and which have been only invested in specified securities as "investment". Further, as stated above, assessee(s) markets the agricultural produce of its members. It retains the sale proceeds in many cases. It is this "retained amount" which was payable to its members, from whom produce was bought, which was invested in short-term deposits/securities. Such an amount, which was retained by the assessee-Society, was a liability and it was shown in the balance-sheet on the liability-side. Therefore, to that extent, such interest income cannot be said to be attributable either to the activity mentioned in Section 80P(2)(a)(i) of the Act or in Section 80P(2)(a)(iii) of the Act. Therefore, looking to the facts and circumstances of this case, we are of the view that the Assessing Officer was right in taxing the interest income, indicated above, under Section 56 of the Act. An alternative submission was advanced by the assessee(s) stating that, if interest income in question is held to be covered by Section 56 of the Act, even then, the assessee-Society is entitled to the benefit of Section 80P(2)(a)(i) of the Act in respect of such interest income. We find no merit in this submission. Section 80P(2)(a)(i) of the Act cannot be placed at par with Explanation (baa) to Section 80HHC, Section 80HHD(3) and Section 80HHE(5) of the Act. Each of the said sections has to be interpreted in the context of its subject-matter. For example, Section 80HHC of the Act, at the relevant time, dealt with deduction in respect of profits retained for export business. The scope of Section 80HHC is, therefore, different from the scope of Section 80P of the Act, which deals with deduction in respect of income of cooperative Societies. Even Explanation (baa) to Section 80HHC was added to restrict the deduction in respect of profits retained for export business. The words used in Explanation (baa) to Section 80HHC, therefore, cannot be compared with the words used in Section 80P of the Act which grants deduction in respect of "the whole of the amount of profits and gains of business". A number of judgements were cited on behalf of the assessee(s) in support of its contention that the source was irrelevant while construing the provisions of Section 80P of the Act. We find no merit because all the judgements cited were cases relating to Cooperative Banks and assessee-Society is not carrying on Banking business. We are confining this judgement to the facts of the present case. To say that the source of income is not relevant for deciding the applicability of Section 80P of the Act would not be correct because we need to give weightage to the words "the whole of the amount of profits and gains of business" attributable to one of the activities specified in Section 80P(2)(a) of the Act. An important point needs to be mentioned. The words "the whole of the amount of profits and gains of business" emphasise that the income in respect of which deduction is sought must constitute the operational income and not the other income which accrues to the Society. In this particular case, the evidence shows that the assessee- Society earns interest on funds which are not required for business purposes at the given point of time. Therefore, on the facts and circumstances of this case, in our view, such interest income falls in the category of "Other Income" which has been rightly taxed by the Department

under Section 56 of the Act.

 

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Friday, June 18, 2010

ITAT (Chennai):-Business losses of a non-eligible unit, whose income is not eligible for deduction under section 10A cannot be set off against the profits of the undertaking eligible for deduction

[2010] 1 taxmann 69 (Chennai - ITAT)

Business losses of a non-eligible unit, whose income is not eligible for deduction under section 10A cannot be set off against the profits of the undertaking eligible for deduction under section 10A for purpose of determining the allowable deduction under section 10A

The deduction under section 10A is not an exemption but only a deduction under Chapter III of the Income-tax Act and the provisions of section 80AB of Chapter VIA would not be applicable to such deduction under section 10A, and also deduction under section 10A is undertaking specific

ITAT, BENCH `C' [SPECIAL BENCH] CHENNAI

Scientific Atlanta India Technology Pvt. Ltd.
v.
ACIT

ITA Nos. 229/Mds/2007 & 362/Mds/ 2008

February 5, 2010

_____________ORDER__________

PER N. BARATHVAJA SANKAR. VICE PRESIDENT:

The Hon'ble President, Income Tax Appellate Tribunal, vide orders dated 24.04.2009 and 08.05.2009 constituted the present Special Bench to dispose of the captioned appeals as well as to adjudicate the following question of law:-

"Whether the business losses of a non eligible unit, whose income is not eligible for deduction under section 10A of the Act, have to be set off against the profits of the undertaking eligible for deduction under section 10A for the purposes of determining the allowable deduction under section 10A of the Act?"

2. The brief facts are that the assessee is a private limited company incorporated on July 17, 2000. In respect of assessment year 2003-04, the assessee filed a return claiming relief under section 10A of the Income-tax Act. During the years under appeal, the assessee had carried out business from two locations, viz. Chennai and Delhi. The Chennai Unit iseligible unit which was situated at Tidel Park, Taramani and registered with Software Technology Parks of India, was engaged in the business of software development. The Delhi Unit of the assessee carried out trading activities of various products in the field of video communication. For the assessment year 2003-04, the profit as per the memo of total income of the eligible unit (Chennai Unit) amounts to Rs.3,23,43,230/-. The trading Unit (Delhi Unit) reported a loss of Rs.61,25,224/-. The assessee's computation of deduction under section 10A was as under-

I
Net profit of the eligible unit
Rs.3,23,43,230

Less 90% of the above amount claimed as exempt (Statutory
eligibility for this AY)
Rs. (2,91,08,907)



Taxable profits of the eligible unit
Rs. 32,34,323

II
Loss incurred by the Trading unit at New Delhi
Rs. (61,25,224)


Less Taxable profits of the eligible unit
Rs. 32,34,323



Rs. (28,90,901)

III
Income from other sources
Rs. 22,01,134


Business loss (II - III) to be carried forward
Rs. (6,89,768)


The Assessing Officer recomputed the benefit under Section 10A as follows:-

I
Net business profit (profits of the eligible unit reduced by the
loss of the Trading unit)
Rs.2,62,18,006


Less: Deduction under section 10A Restricted to the net business profit
Rs. (2,62,18,006)


Income from Business
NIL

II.
Income from other sources
Rs. 22,01,134


Tax on the above
Rs. 4,80,212


For the assessment year 2004-05, the assessee's computation of deduction under section 10A is as follows:-

I
Net Profit of the eligible unit
Rs. 88,28,657


Less 10A deduction
Rs. (88,28,657)


Taxable profits of the eligible unit
Rs. NIL

II
Loss incurred by the Trading unit at New Delhi
Rs. (77,23,636)

III
Income from other sources
Rs. 27,05,303


Business loss (II-III) to be carried forward
Rs. (50,18,333)


The Assessing Officer recomputed the benefit under section 10A as follows:-

I
Net business profit (profits of the eligible unit reduced by the loss of the Trading unit)
Rs. 11,05,021


Less: Deduction under section 10A Restricted to the net business profit
Rs. (11,05,021)


Income from Business
NIL

II
Income from other sources
Rs.27,36,980


Tax on the above
Rs. 9,81,891


For both the assessment years, the assessee went in appeal before the CIT(Appeals). Vide order dated 11th October, 2006, the CIT(Appeals) accepted the plea of the assessee that the unit in Delhi was not aneligible unit and was engaged only in trading activity. However, the CIT(Appeals) recomputed the benefit under section 10A as follows:-

I
Eligible Profits
Rs. 3,23,43,230


Less Trading loss
Rs. (61,25,224)


Net business income
Rs. 2,62,18,006


Add Income from other sources
Rs. 22,01,134


Total income
Rs.2,84,19,140


Eligible deduction under section 10A restricted to total income of Rs.2,84,19,140.


The assessee has been permitted to carry forward the unabsorbed eligible deduction under section 10A amounting to Rs.6,89,767/- for assessment year 2003-04.


For the assessment year 2004-05, the CIT(Appeals) recomputed benefit under section 10A as under-

I

Rs.88,28,657


Less Trading loss
Rs. (77,23,636)


Net business income
Rs. 11,05,021


Add Income from other sources
Rs.27,05,303


Total income
Eligible Profits Rs. 38,10,324


Eligible deduction under section 10A restricted to total income of Rs.38,10,324. Further, the CIT(A) has not specifically made any observation with respect to the carry forward of the remaining losses.


3. For the assessment year 2003-04, appeals by both - the assessee and Revenue and for the assessment year 2004-05 the assessee's appeal are before us.

4. In the above facts and circumstances, let us first decide the question referred by the Hon'ble President to the Special Bench, namely, "Whetherthe business losses of a non eligible unit, whose income is not eligible for deduction under section 10A of the Act, have to be set off against the profits of the undertaking eligible for deduction under section 10A for the purposes of determining the allowable deduction under section 10A of the Act?"

5. The learned counsel for the assessee placed on record paper-books I, II and III. Paper-book I contains the following:

1. 11.09.00 - Approval issued by the Software Technology Parks of India

2. 13.08.01 - Approval of Department of Industrial Policy and Promotion, Ministry of Commerce and Industry.

3. 21.08.02 - Fresh Certificate of incorporation consequent of change of name issued by the Registrar of Companies, Tamil Nadu

4. 07.09.00 - Application submitted by the Appellant for approval of unit under the Software Technology Park Scheme. Sample Invoices

5. Various Dates - Sample Invoices

6. 31.05.00 - Orders passed by the Commercial Taxes Department

Paper-book II contains the following :-

1. Computation of relief u/s 10A (A.Y, 2003- 04) along with Form 56F

2. Computation of relief u/s 10A (A.Y. 2004- 05) along with Form 56F

3. Written submissions filed before the Commissioner of Income Tax (Appeals) in respect of A.Y. 2003-04

4. Written submissions filed before the Commissioner of Income Tax (Appeals) in respect of A.Y. 2004-05

And Paper-book III consists of the case laws as indexed therein. By placing the above paper-books on record, the learned counsel for the assessee submitted as under:-

6. Section 10A(1) provides that a deduction of such profits and gains derived by an undertaking from the business of export of computer software shall be allowed from the total income of the assessee. The total income of the assessee would comprise of various items, viz.

(a) Trading income/loss

(b) Income/loss-from house property

(c) Income from the eligible unit

(d) Interest income

(e) Income from other sources
_______________
Total income

The sum total of the above (below the line) will be the total income of the assessee. Under section 10A, the income computed as per the formula in section 10A being the income from theeligible undertaking (item (c) above) will be allowed as deduction "from the total income". This means in the above example, the income from theeligible unit would have to be removed as being the eligible deduction and total income computed excluding the same.

7. Section 10A was introduced in the year 1981. The section was substituted in the year 2001. It forms part of Chapter III of the income-tax Act, which deals with "Incomes that do not form part oftotal income". Sub-section (1) of section 10 commences with "in computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included". The placement of section 10A in Chapter III leads to an inescapable conclusion that the income from the enumerated sources should not be subject to income-tax and is to be excluded from thetotal income, without any restriction whatsoever. Had the intention of legislature been that the profits derived from the eligible unit be subject to a restriction or a reduction in the manner provided under Chapter VIA, section 10A would have been part of Chapter VIA of the Income-tax Act, thus making it subject to the provisions of section 80AB and section 80B of the IT. Act. In this connection, the judgement of the Hon'ble Supreme Court in the case of CIT v. V. Venkataehalam reported in 201 ITR 737 (SC) may be referred. This decision is in the context of section 80T of the Income-tax Act. Section 80T, which until 1st of April, 1993 was a part of Chapter VIA of the income-tax Act provided for deductions to be made from capital gains. The assessee, in this case had derived capital gains during the relevant previous year. A deduction was claimed under section 80T of the Income-tax Act. The assessing authority, however, set offthe business loss incurred by the assessee against the amount of capital gains, and accordingly conferred a deduction under section 80T to the balance gains alone. This was challenged in appeal and the assessee succeeded before both the first appellate authority and the Income Tax Appellate Tribunal which held that deduction under section 80T should be applied in respect of the entire sum of capital gains and the same should not be restricted. The issue as to whether deduction under section 80T should be applied in respect of the entire sum of capital gains or the amount of capital gains as restricted after reduction of the loss was carried at the instance of the Revenue to the Hon'ble Supreme Court. The Hon'ble Supreme Court considered the provisions of section 80T which reads as follows:

"Where the gross total income of an assessee not being a company includes any income chargeable under the head "capital gains" relating to capital assets other than short term capital assets (.............) there shall be allowed in computing the total income of the assessee a deduction from such income of an amount equal to..........."

The Hon'ble Supreme Court noted that the words used in the section stipulated that the deduction has to be granted from "such income" being the "total income" computed by the Assessing Officer in accordance with the Act. Even so, the Hon'ble Supreme Court rejected the argument of the Revenue that the deduction would be restricted to the "total income", after reduction of the loss incurred. In the instant case, section 10A is not even part of Chapter VIA, but stands as part of Chapter III of the Income-tax Act. Applying the above ruling of the Hon'ble Apex Court, the words "total income" contained in sub-section (1) would not amount to placing any fetters on the allowability of the entire profit of the eligible unit without restriction to the available total income.

8. Deduction under section 10A is available in respect of each undertaking. The provisions of sections 28 to 44D are to be applied to each undertaking and not each business. This is because section 10A is undertaking specific. That, the section is undertaking specific is discernible from the following:

(i) Under sub-section (1) profits derived by the undertaking from the export of articles and things qualify for deduction;

(ii) Sub-section (2) prescribes certain conditions to be fulfilled by the undertaking for being eligible to the benefits of section 10A;

(iii) Under sub-section (4), it is profits of the business of the undertaking that qualify for deduction. Similarly, the definition of export turnover refers to the sale proceeds to the exports made by the undertaking;

(iv) Under sub-section (5), an audit report is to be furnished in support of claim of deduction. Such an audit report is to be submitted for each eligible undertaking.

In its structure and application, section 10A is undertaking specific. Circular No.528 dated 16.12.1998 (1989) 176 ITR (St.) 154 also mentions about the profit of the undertaking being exempt. In Circular No.1 of 2005 (2005) 272 ITR (St.) 6, the CBDT has considered various situations and given a clarification on the applicability or otherwise of section 10B in those situations. The examples considered by the CBDT are undertaking specific. The ratio of Circular No.1 and the answers to the examples thereunder would be equally applicable to section 10A.

The assessee may have many undertakings. An undertaking cannot be equated with an assessee. The distinction between an assessee and an undertaking was explained among others by the Madras High court in Madras Machine Tools Manufacturers Ltd. v. CIT (1975) 98 ITR 119 (Mad). The observations of the court were as under:-

"A company may own or run many undertakings some of which may be entitled to the benefit of section 84 and others may not be so entitled. It is not, therefore, possible to equate the undertaking with the company. When a company owns more than one undertaking the application of section 84 has to be with respect to the particular undertaking and not to the company in general. When we apply section 84 to a particular undertaking it has to be seen when that undertaking commenced the manufacture or production of articles. It is true that the word "undertaking" has not been defined under the Income-tax Act. But in common parlance it is taken as a concern started or formed for a specific purpose or a project engaged in.

In the context of section 84(80J), a predecessor to sections 80-l, 80-IA etc. it had been clarified that the tax holiday benefit attaches to an undertaking and not to the assessee. The circular states that "The Board agrees that the benefit of section 84(80J) of the Income-tax Act 1961, attaches to the undertaking and not the owner thereof. The successor will be entitled to the benefit for the unexpired period of five years provided the undertaking is taken over as a " running concern" =[F.No. 15/563-IT(AT) dated 13.12.1963 issued by CBR]."

Though issued in the context of section 80J, the ratio would apply with equal force to section 10A as well.

Considering the above circular, in the following cases it has been held that deduction under section 80J/80-I/80-IA of the Act is attached to an undertaking and not to the owner thereof::

(a) Kerala State Cashew Dev Corp v. CIT 205 ITR 19 (Ker);

(b) CIT v. Tyresoles Concessionaries Pvt. Ltd. 213 ITR 660 (Bom);

(c) CIT v. Dandeli Feroy Alloy (P) Ltd. 212 ITR 1 (Bom);

(d) P.K. Engineering & Forging Pvt. Ltd. 87 Taxman 101 (Board's Circular for 84/80J is applicable to 80-I/80-IA also)

(e) A.G.S. Tiber and Chemical Industries (P) Ltd. v. CIT (1998) 233 ITR 207 (Mad)

(f) ITO v. Hindustan Petroleum Corpn. Ltd. (1986) 16 ITD 574 (Bom);

(g) ITO v. SLAA Maneklal Industries Ltd. (1986) 17 ITD 515 (Ahd);

(h) Shah Granites (P) Ltd. v. ITO (1987) 21 ITD 282 (Bom)

Considering the above circular/decisions, the Chennai ITAT in the following cases has held that deduction under section 10A would be available to the transferee of the eligible undertaking for the unexpired period of tax holiday:-

(1) Premier Mills Pvt. Ltd. v. ACIT I.T.A. No. 2551/Mds/2005 AY 1999-2000 & Premier Fine Yarns Pvt. Ltd: v. ACIT I.T.A. No. 2552, 2553. 2554, 2555 A 2556/Mds/2005 AY's 2000-01 to 2004-05 decision dated 26.09.2008.

(2) ITO v. Heartland KG Information Ltd. I.T.A. No. 1884/Mds/2006 AY 04-05 decision dated 21.11.2008

9. The learned counsel for the assessee submitted that the Revenue has attempted to restrict the deduction available under section 10A to the total income of the assessee and brought to our attention the provisions of sub-section (1) of section 10A which reads as follows:-.

"10A. Special provision in respect of newly established undertakings in free trade zone, etc. - (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an 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 such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee."

The learned counsel further submitted that the section specifically allows a deduction of such profits of an undertaking and the intention of the legislature, thus clearly indicates that all the profits and gains that are derived by an eligible unit from the eligible activity would be entitled to the benefit of section 10A. It is, thus apparent that the benefit would cover only the profits that are derived by the eligible unit. The ld. counsel placed reliance on the following decisions:-

1. Tata Consultancy Services Ltd. 2. Subex Limited

3. Yokogawa India Ltd. 111 TTJ (Bang) 548

The ld. counsel contended that looking at the language of section 10A(1) and section 10A(4) of the Act (both prior and subsequent to amendment to Finance Act, 2001), it can be inferred deduction under section 10A has to be claimed undertaking-wise or unit-wise and not to be computed business wise and is available to the extent of profits derived from export of computer software. Even if an assessee has more than one undertaking, then deduction under section 10A is to be computed for different undertakings. In support of this argument, the ld counsel placed reliance on the following:-

1. Circular Explaining amendments made by Finance Act, 2001

2. Memorandum explaining the Finance Bill, 2001

3. Techspan India (P) Ltd. A Anr v. ITO (283 ITR 212)(Del)

4. Tata Consultancy Services Ltd.

The ld. counsel also brought to our attention the CBDT Circular No.014 of 2001 which clarifies as follows:-

"21. Rationalization of the provisions relating to undertakings in free trade zones, export processing zones, special economic zones and export oriented units.

Under Section 10A of the Income-tax Act, newly established undertakings in free trade zones are entitled to a tax holiday for a ten year period. Similarly, section 10B of the Income-tax Act provides for a ten year tax holiday in respect of newly established hundred per cent export oriented undertakings. The Finance Act, 2000 substituted sections 10A and 10B of the Income-tax Act. The newly substituted provisions of sections 10A and 10B provide for deduction of profits and gains of business derived by an undertaking from export of products or articles or things or computer software for a period of ten consecutive assessment years in a manner that the deductions are gradually phased out over the subsequent period. The definition of "export turnover" has been amended to clarify that the working of the proportionate deduction on export profits are meant to be of the undertaking, and of the business, as a whole."

The learned counsel vehemently argued that what is relevant and is to be taken into consideration for the purpose of computation of deduction under section 10A is the profit of the undertaking specifically and not the business as a whole. This indicates clearly that legislature intended the eligible undertaking to be a separate island, unconnected to the rest of the assessee's business. The ld. counsel further added that it is also clear that the spirit and intention behind the introduction section 10A in 1981 as seen from Circular 308/1981 continues notwithstanding the substitution of the section in 2001 and any interpretation contrary to the same may not be permitted. Section 10A was introduced into the Income-tax Act vide Finance Act 1981. Circular No.308 dated 29.6.1981 sets out as follows:

"With a view to encouraging establishment of export-oriented industries in the free trade zones, the Bill seeks to provide for complete tax exemption in respect of the profits and gains derived from industrial undertaking set up in these zones for a period of five initial assessment years. This concession will also apply in relation to other free trade zones that may be set up in future. The tax concession will be available to all taxpayers, including foreign companies and non-resident non-corporate taxpayers. The proposed "tax holiday" will be in lieu of all other tax concessions, e.g., investment allowance, the existing partial tax holiday, concessions available to industries set up in backward areas, etc. It is being provided that after the expiry of the tax holiday period, there will be no carry forward of any unabsorbed losses, depreciation, development rebate, investment allowance, tax holiday deficiency or any other deduction or allowance admissible under the Income-tax Act. For the purposes of depreciation, the written down value of the assets used in the industrial undertakings for the assessment years subsequent to the tax holiday period will be determined as if the depreciation allowable under the existing provisions had actually been claimed and allowed. Some of the existing tax concessions, such as, the deduction available in relation to new industrial units set up in backward areas and small-scale industrial undertakings established in rural areas extend over a period exceeding five years. Units availing of the complete tax holiday now proposed will not be entitled to such concessions even after the expiry of the tax holiday period. The industrial units set up during any of the previous year relevant to the assessment years 1977-78 to 1980-81 will, at their option, be entitled to complete tax holiday for the unexpired period of five years. The tax concession in relation to the existing units is being made optional on the consideration that some taxpayers may find it more profitable to avail of the general tax concessions which are allowed in relation to new industrial undertakings under the existing provisions. Where the existing units exercise their option for complete tax holiday for the unexpired period of five years, no refund of any tax for any of the assessment years 1977-78 to 1980-81 will be allowed.

This amendment will take effect from 1st April 1981 and will accordingly apply in relation to the assessment year 1981-82 and subsequent years".

The learned counsel also placed reliance on circular No.8 of 2002 dated 27.8.2002. Para 19 of the said circular sets out the amendment to the provisions relating to deduction under section 10A units in free trade zones, etc and section 10B of the Act.

"19. Under the existing provisions of section 10A a deduction is given of 100 per cent of profits and gains from export earnings of new undertakings established in Free Trade Zones, Software Technology Parks, Electronic Hardware Technology Parks or Special Economic Zones (SEZs), which are engaged in manufacture or production of articles or things or computer software.

91.1 ...........

19.4 In view of the need for resource mobilization in the short run, the Finance Act, 2002 seeks to restrict the 100% deduction under sections 10A and 10B, for one assessment year, i.e. 2003-04 to 90% of such profits and gains as are derived by an undertaking from the export of articles or things or computer software."

The ld. counsel further added that sub-para 4 of para 19 above specifies an isolated instance relating to assessment year 2003-04 alone whereas legislature itself has allowed only 90% of such profits and gains of the eligible profits and gains as deduction and justifies the reason for the grant of restricted benefits in the same paragraph. The ld. counsel highlighted the emphasis on deduction being granted in respect of 100 per cent of profits and gains from export earnings and the eligible undertakings. There is absolutely no justification for the interpretation of the Revenue that the deduction would be in respect of anything less than 100% as clarified by legislature. In fact, the stand taken by the Revenue is directly contrary to the letter and spirit of the circulars issued by the CBDT extracted above. The ld. counsel placed reliance on the following judgements of the Hon'ble Supreme Court for the proposition that any stand contrary to a CBDT circular is illegal and liable to be struck down.

(1) Navnit Lal C. Javeri v. K.K.Sen,AAC, Bombay (56 ITR 198)

(2) UCO Bank v. CIT (237 ITR 889)

10. On the meaning of total income, the learned counsel for the assessee submitted that the term 'total income' is contextual. One notices difference shades of meaning of the term and its variants as employed in the Act:

(i) Section 36(1) (vii) in its erstwhile format provided for a deduction at a percentage of total income, such total income being arrived at before deduction under that section and Chapter VI A.

(ii) Section 80G(4) provides for the determination of the qualifying amount with reference to the "adjusted total income".

(iii) Section 80B(5) defines Gross total income as the 'total income' arrived at after giving effect to all other provisions of the Act.

(iv) Apart from the above, there are certain variants to the phrase 'total income. For example, Explanation (i) to section 44C refers to 'adjusted total income.

Sections 111A, 112, 115A etc provide for the total income to be split into two streams, one for being taxed as special rate and the balance being deemed to be total income for the purpose of normal rate of tax. The phrase 'total income' used in these sections indicates a figure which may not represent the entire total income.

The learned counsel for the assessee strongly contended that the phrase 'total income' used in section 10A is one such variant. The phrase does not mean the total income as computed in accordance with the provisions of the Act. The relief under this section is with reference to the STP undertaking and not the assessee. In other words, the relief travels with the undertaking irrespective of who owns the same. The computation of relief as provided in section 10A(4) is also with reference to the undertaking. A business may have several undertakings and section 28 does not envisage computation of income of each such undertaking. In other words, under the head 'profits and gains of business or profession', income from a business as a whole has to be computed and not that of the individual undertaking. The phrase 'total income' used in section 10A(1) is therefore to be understood as the total income of the STP unit. This is clear from the first proviso to section 10A(1) which makes a reference to the total income of the undertaking and not to the total income of the assessee. The counsel highlighted the terminology in various sections under Chapter III as follows:

Section
Operative portion

19A(1A)
The deduction, in computing the total income of an undertaking, which begins to manufacture or produce articles or things or computer software during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2003, in any special economic zone shall be.................

10AA
Subject to the provisions of this section, in computing the total income of an assessee, being an entrepreneur as referred to in clause (j) of section 2 of the Special Economic Zones Act, 2005, from his Unit, who begins to manufacture or produce articles or things or provide any services during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2006, a deduction of.............

10BA
Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export out of India of eligible articles or things, shall be allowed from the total income of the assessee.

10C
Subject to the provisions of this section, any profits and gains derived by an assessee from industrial undertaking which has begun or begins to manufacture or produce any article or thing on or after the 1st day of April, 1998 in any Integrated Infrastructure Development Centre or Industrial Growth Centre located in the North- Eastern Region (hereafter in this section referred to as the industrial undertaking), shall not be included in the total income of the assessee

11
Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income.............

13A
Any income of a political party which is chargeable under the head "Income from house property" or "Income from other sources" or ["Capital gains" or] any income by way of voluntary contributions received by a political party from any person shall not be included in the total income of the previous year of such political party.


The difference in terminology notwithstanding, there is no inherent difference in the character of the deduction under various sections. It is appropriate therefore that the deduction under section 10A is given effect to in the process of or while computing the total income. In other words, section 10A continues to operate as an "exemption" section.

Again, deeply going through section 10A, the learned counsel submitted that section 10A provides for deduction from total income. In the scheme of the Act, while various deductions are allowed in computing the total income, once the total income is computed, no further adjustment to the total income is envisaged. The scheme of the Act provides for deductions in computing total income and provides no mechanism for any deduction from the total income already computed. Once the total income is computed, the next step determination of tax by applying the applicable rates on the total income. Deduction under section 10A thus cannot be from the total income. Section 2(45) defines "total income" as follows:

"(45) "total income" means the total amount of income referred to in section 5, computed in the manner laid down in this Act."

"Total income" is therefore defined to mean the total of the income referred to in section 5, computed in the manner laid down in the Act. The total amount of income cannot therefore be confused with or replaced by the concept of gross total income contained in section 80AB and section 80B. This is for a multitude of the reasons.

(a) Firstly, the restriction placed by the Department in the interpretation of section 10A would apply only if section 80AB and section 80B in Chapter VI-A are made applicable to section 10A, while there is no provision in law to that effect. Reliance in this regard is placed on:

(a) Webspectrum Software (P) Ltd. ITA No. 382/Bang/2006

(b) Stumpp Schuele & Somappa (P) Ltd. 102 ITR 320 (Karn), affirmed by Supreme Court in 187 ITR 108 (SC)

(c) Schraper Scovill Duncan Ltd. 132 ITR 822 (Cal)

(d) Century Spg and Mfg Co. Ltd. 111 ITR 6 (Bom)

The ex-pression "total income" figuring towards the end of sub-section (1) is referable to the income of the eligible unit only and cannot be interpreted to mean the total income of all the business carried on by the assessee. In fact, the Hon'ble Supreme Court, in the judgement referred to supra, has accepted a similar proposition in the aforementioned case, wherein the phrase 'such income in 80T has been interpreted to mean and refer to the special category of income alone (in this case, the eligible profits alone) and not the total income. The stand of the Revenue amounts to insertion of Section 80AB and Section 80B into Chapter III, which is impermissible.

(b) Section 80AB commences thus, "Where any deduction is required to be made or allowed under any section included in this Chapter under the heading "deductions in respect of certain incomes .............". The overriding effect of Section 80AB and 80B are statutorily applicable only to deductions claimed under Chapter VI-A. The rules of interpretation do not permit insertion of a section or of any words in the statute and a strict interpretation would have to be extended to the section as it stands.

(c) Chapter III, admittedly, does not contain any statutory provision in pari meteria with Section 80AB and Section 80B contained in Chapter VI-A.

(d) As stated earlier, the words "total income" contained in sub-section (1) of section 10A is defined in sub-section (45) of section 2 to mean the "total amount of income". Section 4 of the Act seeks to charge tax on the total income of the assessee during the previous year. In other words, total income represents the "final line" item on which taxes are levied by the statute. If Section 10A is interpreted to hold that the deduction is available only from such total income, then it would make section 4 unworkable. Further, wherever the Act intended that specific adjustments be effected to the total income, the legislature has specifically provided for the same (Section 112 of the Act etc). This position has also been acknowledged in the case of KPIT Cummins (26 SOT 529). It is a trite law that a head-on-clash between two provisions should be avoided and the sections should be interpreted in a harmonious manner as to best fit in the whole setting of the Act. Accordingly, the total amount of income in respect of which the assessee would be entitled to the benefit of Section 10A would be such profits that are derived by the eligible unit from the eligible activity.

(e) Chapter III deals with incomes that are excluded from total income. The marginal note therefore supports the argument advanced to the effect that the interpretation of the words "total income" in Section 10A would be neither as defined under section 2(45) of the Act nor be influenced by the concept of gross total income as set out in section 80AB and section 80B in Chapter VI of the Act. Reliance is placed on the following judicial precedents:

(i) Enercon Wind Farms (Krishna) Ltd. v. ACIT 21 SOT 29(Mum)

(ii) Tyco Electronics Corporation India (P) Ltd. I.T.A. No. 1229/2007 (Bang)

(iii) KPIT Cummins Infosystems (Bangalore) Ltd. v. ACIT 26 SOT 529 (Bang)

11. The learned counsel further submitted that deduction under section 10A is required to be granted at the source level from the total income and not after computing gross total income i.e., income eligible for deduction under section 10A would not enter gross total income at all as it is to be deducted at source level itself. The concept of granting deductions at source level has been appreciated in following precedents:-

(1) Webspectrum Software (P) Ltd. (I.T.A. No. 382/Bang/2006)

(2) CIT v. S.K. Nayak (145 ITR 791) (Kar)

(3) CIT v. Lalji Agarwal (234 ITR 820) (All)

In this regard, reliance is also placed on the return form of the Companies. The form notified by CBDT for filing return of income also supports the view that the deduction under section 10A is to be granted at the time of computing income under the head 'profits and gains from business or profession'. An extract of the relevant portions of Part II of Schedule B of Form 1 has been given hereunder:-

S.No.
Particulars

14.
Net profit or loss as per consolidated profit and loss account.

....
............

18.
Is section 10A/10B/10C applicable in your case?


.................


Deduct: Amount claimed deductible/not includible in total income not arrived at above.

.....
...............

26
Profits and gains of business or profession other than speculation business


The relevance of forms prescribed under Income-tax Rules has been upheld in following precedents:

(1) KPIT Cummins Infosystems (Bangalore) Ltd. v. ACIT 26 SOT 529 (Bang)

(2) Honeywell International India Pvt. Ltd. v. DCIT 108 TTJ 924 (Delhi)

(3) Nous Infosystems (P) Ltd. v. ITO I.T.A No. 1042/Bang/2007 = (4) P.K.Kochammu Amma Peroke 125 ITR 624 (SC)

Under section 10A(1), the deduction "shall be allowed from the total income of the assessee." Instruction No. 18 in the "Instruction in filling form No.1" reads as follows. "Item 18: Section 10A, 10A and 10C permit the claiming of deduction from incomes of some specified businesses. This item is meant to eliminate such income(s) from the computation of profits/gains" (emphasis supplied). The instructions are clear that section 10A would operate to eliminate the relevant income from the computation of profits and gains. In the context of the purpose, object and the placement of the section in Chapter III, it would be appropriate to rephrase sub-section (1) as follows, "the deduction shall be allowed while computing or arriving at the total income of the assessee."

Section 10A(1) provides deduction of such profits and gains derived by an undertaking. Profits and gains of business an undertaking are to be computed in accordance with provisions pertaining to head of income 'profits and gains of business or profession' i.e. section 30 to section 43D while the setting off a loss from one source against income from another source under the same head of income is governed by section 70. Therefore the loss of any other unit cannot be set off before allowing deduction under section 10A of the Act.

This has been upheld in the decision of Yokogawa India Ltd 111 TTJ Bang) 548 .

12. While stressing, the exceptions specifically carved out under section 10A, the learned counsel for the assessee submitted that there is no specific mention that the deduction should be restricted to the total income of the assessee computed under the provisions of the Act before allowing such deduction. Wherever the legislature wanted to restrict the deduction, the legislature has provided such restrictions. For eg. In section 24, deduction in respect of interest is restricted as per proviso to section 24(b). deduction under Chapter VI-A are to be restricted in view of section 80A(2), Section 57 etc. He placed reliance on the following decisions:-

(1) Medreich Ltd. (I.T.A. No. 632/Bang/2008)

(2) Changepond Technology (P) Ltd. (22 SOT 220) (Chennai)

(3) Webspectrum (Unreported)

In addition, Chapter III contains certain instances wherein Legislature has carved out exceptions to the exempted categories of income. For instance, while Section 11 exempts income from property that is held for charitable or religious purposes, there is an exception in Section 13 which enumerates certain instances wherein income from property held by a Trust in certain designated situations would not be eligible to the exemption under section 11. It follows therefore, that if the Legislature had intended to place a restriction on the benefit available under section 10A, it would have provided for the same explicitly.

In fact, a specific restriction has been carved out vide insertion of provision to section 92C as follows:-

"Provided that no deduction shall be allowed under section 10A (or section 10AA) or section 10B or under Chapter VI A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this subsection."

The provisions of section 92C have been amended to provide that where the total income of an assessee as computed by the Assessing Officer is higher than that declared by the assessee deduction under section 10A or 10B or under Chapter VIA shall be rejected in respect of amount by which the income has been enhanced by the Assessing Officer. It is only under this specific and special circumstance that the income of an eligible unit can be tampered with or adjusted and no other. This supports the assessee's submission that the intention of the legislature is that section 10A is a special code in respect of which no adjustment is permissible except in special cases that have been demarcated by legislature.

13. Viewing section 10A as an incentive section, the learned counsel for the assessee submitted that section 10A is a beneficial section that was introduced to benefit a certain sector of industry. This is an admitted position accepted by various Courts and Tribunals. The interpretation now sought to be applied by the Department would result in curtailing the benefit intended by the Legislature and cannot therefore be upheld. The Hon'ble Supreme Court in the case of Bajaj Tempo has reiterated that the statutory provisions inserted with the avowed object of benefiting the assessee should be likewise interpreted and construed beneficially. As per the principle of harmonious construction, the applicable provisions should be read harmoniously to arrive at the intended object.

14. Per contra, the learned Standing Counsel submitted that section 10A which finds a place in Chapter III of the Income-tax Act was originally enacted as an exemption provision, in that its profits and gains did not form part of total income at all. Section 10A(1) read in 1981, when it was first introduced: "Subject to the provisions of this section, any profits and gains derived by an assessee from an industrial undertaking to which this section applies shall not "be included in the total income of the assessee." As such, regardless of whether there is profit or loss in the total income of the assessee, the income from the 10A unit will not included in the total income.

15. She also brought to our attention that after the amendment to the section, section 10A(1) reads as: "Subject to the provisions of this section, a deduction of such profits and gains derived as are derived by undertaking --- ....shall be allowed from the total income of the assessee." Thus, while the amount derived would not form part of the total income in the old section, subsequent to the amendment, it would be allowed as a deduction from the total income. At the same time, it must be noted that the provisions continue to remain in Chapter 111 which refers to "Incomes not forming part of total income", and has not been moved to Chapter VIA.

16. The learned Standing Counsel contended that the assessee's stand is that the total income refers to "such profits" in section 10A and the profits should be isolated and the total income of the assessee computed separately and they argue that the loss in the other units should be carried forward as such, and total exemption be granted to the profits of the 10A unit. It is submitted that such an interpretation would amount to ignoring the amendment, and treating the deduction as an exemption as was originally envisaged prior to the amendment. It is well settled that while interpreting a statute, the words of the amended section should be given their clear and plain meaning. In the amended section, clearly, a deduction of the profits derived by the undertaking shall be allowed from the total income of the assessee.

The section envisages a total income which is a whole from which the deduction should be made of the profits of the undertaking.

The total income can only be calculated as per the provisions of the Act. Section 2(45) defines "total income" to mean the total amount of income referred to in section 5, computed in the manner laid down in this Act". Once the total income so computed is a loss, it would not be possible to ignore the same and as such loss would have to necessarily be set off against the profits derived from the undertaking and it does not make sense to ignore the loss in the total income, and isolate the profits and gains of the undertaking.

An interpretation cannot be given that is totally at variance with the wordings of the amended section, and the plain meaning thereof.

17. She submitted that it is now settled law that when a deduction is granted of any profits and gains from the total income, such a profit or gain can only refer to a positive figure arrived at after setting off the losses of other units.

(1) In the case of IPCA Laboratory Ltd. v. DCIT (2004) 266 ITR 521, the Supreme Court has held that profits and gains can only refer to a positive profit, and as such, the losses have to be set off to see whether the resultant figure is a positive profit or a loss; and deduction will be available only in the case of positive profit.

(2) In ITO v. Induflex Products Pvt. Ltd. (2006) 280 ITR 0001 the Supreme Court has once again reiterated that deduction under section 80HHC would be available only after adjusting losses.

(3) Although these judgements are with reference to section 80HHC, they would be equally applicable to deduction under section 10A/10B, inspite of the fact that there is no section similar to section 80AB in Chapter III.

(4) The fact that section 10A talks about deduction from total income, and 'total income has been defined under section 2(45) of the Act to mean the total amount of income referred to in section 5, computed in the manner laid down in the Act, make it clear that the total income from which the profits and gains of the eligible undertaking are to be deducted have to be computed only after setting off the losses. Thus, the ratio of the Supreme Court's rulings are squarely applicable to deduction under section 10A also.

(5) The method of computation of the deduction under section 10A/10B is similar to the method of computation of the deduction under sections 80HHC and 80HHE of the Act. Therefore, in the absence of the definition of total turnover in sections 10A/10B, the definition/clarifications should be borrowed from sections 80HHC/80HHE, which provide for a similar adjustment of total turnover.

18. She further submitted that in all the cases pertaining to losses (copies of which are included in our paper-book), the Tribunal has repeatedly held that the loss of the 10A unit can be set off against the
profits of the other units.

(1) In the case of Mindtree Consulting Pvt. Ltd. v. ACIT (102 TTJ (Bang) 691 = , the Tribunal has held that since the section now talks about deduction and not exemption, loss from the eligible unit can be set off against the profits of the other units. Similar view has been taken in Honeywell International (India) Pvt. Ltd. (108 TTJ 924 (Del); etc.

(2) If the profits and gains of the 10A unit are to be isolated (as claimed by the assessee) and are not to be affected by the losses of the other units, such a stand cannot be taken. The interpretation of the section, and computation of the deduction is to be made in a consistent and logical manner, whether the assessee makes a loss or a profit in the 10A unit.

19. The learned Standing Counsel contended that while all the Tribunal decisions cited agree with 10A grants a deduction and not an exemption, divergent stands are being taken on the total income from which the deduction should be granted. It is important that a uniform method of computation be taken, and deduction allowed from the total income, having computed the same in accordance with the Act.

20. She further submitted that the assessee contends that the return form shows the deduction at a stage prior to set off of losses, and so the losses from the other units cannot be set off before grant of deduction. A similar argument was raised by the Revenue before the Madras High Court in the case of Chemplast Sanmar & other cases (314 ITR 231), but the High Court turned it down holding that once the intention is clear from the section, the form could not go beyond the provisions of the Act. In the present case, after the amendment, it is very clear from the provisions that the profits of the eligible undertaking is to be deducted from the total income, which is computed as per the provisions of the Act. Computation as per the provisions of the Act will include setting off of losses.

21. Finally, the learned Standing Counsel summed up her argument as under-

(1) Profits and gains derived from eligible unit under section 10A are to be deducted from the total income.

(2) Total income is to be arrived at by computation as per the Act, which includes setting off of losses.

(3) Once the section specifies that the deduction shall be made from the total income, it should be seen that if the total income is negative, deduction from the same may only result in reducing the carry forward loss.

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80IA : Favor of revenue and against the assessee

Income Tax – benefit u/s 80IA, 80IB – initial year is the year in which commercial production starts, not trial production; Even if there was sale of only one water cooler and one air-conditioner, it amounts to commercial production: Madras HC

ITA Nos. 1154/2009 and 1204/2009 were heard on 25th November, 2009 and judgment reserved. Within few days other three ITAs were heard on 9th December, 2009. Though the assessees are different in the two sets of appeals, questions of law are common. In fact, ITA Nos. 1154/2009 and 1204/2009 are filed by the Revenue as the Income Tax Appellate Tribunal (ITAT) has decided the matter in favour of the assessee. On the other hand, in other appeals it is the assessee who is the appellant and is aggrieved by the order of the ITAT.

Both the sets of appeals are taken up together.

Both Revenue and the Assessee are in appeal before the High Court with the same question of law, but under different sets of facts and both lost.

First Set: ITA No. 1154/2009 and ITA No. 1204/2009

The assessee M/s Nestor Pharmaceuticals Limited is in the business of manufacturing of pharmaceuticals formulations in bulk drugs and supplying the drugs to the Government hospitals, institutions besides selling the product in domestic and foreign markets. It is claiming depreciation on plant and machinery for benefit under Section 80IA/80IB of the Income Tax Act. The assessee had carried out trial production from 20th March, 1998. On that basis the Assessing Officer treated assessment year 1998-99 as the initial year for benefit under the aforesaid provision. Since this benefit is allowable for five years, according to the Assessing Officer, this benefit as admissible from assessment years 1998-99 to assessment year 2002-03. The assessee on the other hand was claiming benefit from assessment year 1999-2000 to assessment year 2003-04. The ITA No. 1204/2009 refers to assessment year 2003-04. For this reason, in respect of this assessment year, the benefit was entirely disallowed.

The Commissioner of Income Tax (Appeals) confirmed the order of the Assessing Officer but the ITAT has reversed that order holding that since Section 80IA/80IB of the Act being beneficial legislation, the benefit should be extended to the assessee. It further held that as on 20th March, 1998 only trial production started which is different from commercial production and benefit of that Section would be allowed in the year in which commercial production started i.e. in the assessment year 1999-2000 and, therefore, would be extendable up to the assessment year 2003-04.

There is no quarrel that the assessee qualifies as the industrial undertaking as specified in the said Section for the purpose of deriving benefit of the said provision. This provision allows deduction from profits and gains of an amount equal to hundred per cent of profits and gains derived from such business for the first five assessment years commencing at the time during the periods as specified in Sub-section (2) and the dispute is as to which are the first five assessment years. These five years are to commence at any time during the periods as specified in Sub-section (2).

The initial assessment year, for the purpose of Section 80IA, is the assessment year relevant to previous year in which the "industrial undertaking begins to manufacture or produce articles or things. In the present case, the trial production began on 20th March, 1998 in its Goa plant as per the details given in the audit report furnished by the assessee along with its return of income for assessment year 2003-04 and 2004-05. According to the Assessing Officer this amounted to manufacture of its products on the date which means during the previous year relevant to assessment year 1998-99 and therefore that was the initial assessment year in which the assessee company was entitled to deduction under Section 80IA and the five years period expires on 2002-03. The assessee was, therefore, not entitled to deduction @ 100% of the profits of Goa unit and restricted the same to 30% of the profits from assessment year 2003-04.

The plea of the assessee was that trial production did not amount to manufacture of its products. It is only when commercial production commences, which according to the assessee commenced only in the assessment year 1999-2000, the assessee would become entitled to deduction under Section 80IA/80IB as per Clause(c) of Sub-section 12 of Section 80IA.

There is no dispute that first sale from Goa unit was made on 23rd April, 1998 which would be the period relevant to assessment year 1999-2000. The assessee had also produced evidence in the form of no objection certificate from local authority for manufacture operation in Goa unit as well as approval for release of HT power obtained by the assessee, which were granted only in the month of April, 1998. The assessee did not even have the requisite minimum number of employees employed in the previous year relevant to assessment year 1998-99. As against this, the plea of the Revenue is that closing stock of finished goods of given unit as on 31st March, 1998 was shown by the assessee-company at Rs.1,49,405/- and there was no commercial production as claimed by the assessee, how the closing stock of finished goods could be valued at the aforesaid figure.

The High Court was of the opinion that merely because some closing stock was shown as on 31st March, 1998, would not lead to the conclusion that there was commercial production as well. Naturally, even for the purpose of trial production material would be needed and there would be production which will result in stock of finished goods. Otherwise, there is overwhelming evidence produced by the assessee, and accepted by the Tribunal as well, from which it is clear that there was only a trial production in the assessment year 1998-99 and commercial and full-fledged production commenced only in the year 1999-2000.

The controversy, thus, boils down to the limited sphere namely whether, even with the start of trial production, with no commercial production in a particular year, it will be treated as "initial year" for the purpose of Section 80IA/80IB. The CIT(A) held so and this opinion of the CIT(A) did not found favour with the ITAT.

Challenging this decision of the Tribunal, present appeal is preferred and the question of law which arises is as under:

"Whether the Ld. ITAT erred in allowing benefit of deduction u/s 801A/802B of the Act from the AY 98-99 (by treating the same as initial year of production) to AY 2003-04."

In view of consistent view taken by various High Courts, the High Court did not find any reason to take a different view and are in respectful agreement with the dicta laid down in the judgments. It is more so when even this Court, way back in the year 1984, in Commissioner of Income Tax vs. Food Specialities Ltd., followed the ratio of Hindustan Antibiotics Ltd as is clear from the following:

"As regards the year of manufacture, on the question whether there can be an experimental period, a reference was made to the case of CIT v. Hindustan Antibiotics Limited, 93 ITR 548 and Madras Machine Tools Manufacturers Ltd. v. CIT, 98 ITR 119 in both of which it was held that manufacturing for the purpose of section 15C of the 1922 Act and section 84 of the 1961 Act was the date of "commercial" manufacture and the period during which experimental work, particularly manufacture, was effected had to be disregarded."

The High Court answered the question against the Revenue and in favour of the assessee and as consequence dismissed these appeals.

The second Set: ITA No. 160/2008, ITA No. 161/2008 & ITA No. 793/2009

Question involved in all these three appeals is same discussed earlier. It also arises under Section 80IA of the Act. The Tribunal has even taken note of judgment of Bombay High Court, Allahabad High Court as well as Madras High Court, holding that there should be regular production and not the trial production. However, on facts, the Tribunal decided the case against the assessee. What weighed with the Tribunal was that the assessee had not only produced the goods for trial purposes but there was, in fact, sale of one water cooler and air-conditioner in the assessment year 1998-99 relevant to the previous year/financial year 1997-98. The explanation of the assessee that this was done to file the registration under the Excise Act as well as the Sales Tax Act. This did not find favour with the ITAT.

Thus, the distinguishing feature is that after the production, commercial sale also took place as well before on 31st March, 1998. In this factual scenario following question of law was framed in these appeals:

"Whether the ITAT was correct in law and on facts to hold that sale of one water cooler and one air-conditioner as on 31.03.1998 for the purposes of obtaining registration of excise ad sales tax was `manufacturing' within the meaning of Section 80IA?"

The High Court observed, "When we carefully examine the ratio laid down in various judgments while dealing with ITA No. 1154/2009, we arrive at irresistible conclusion that the decision rendered by the Tribunal is without blemish and does not call for any interference. The provisions of Income Tax Act use the word "manufacture". Trial production is not regarded as beginning to manufacture or to produce articles because of the reason that the assessee has to produce trial production to verify whether it can be used ultimately in the manufacture of the final article. These are, therefore, "trial runs". The article is tested to find out as to whether it can be launched as a final product in the market or not. Therefore, with mere trial production, the manufacture for the purpose of marketing the goods has not started which starts only with commercial production namely when final product to the satisfaction of the manufacturer has been brought into existence and is now fit for marketing."

In the present case, the assessee had sold one water cooler and one air-conditioner before April, 1998. Thus, the stage of trial production had been crossed over and the assessee had come out with the final saleable product which was in fact sold as well. The quantum of commercial sale would be immaterial. With sale of those articles marketable quality was established, more particularly when assessee failed to show that the dealer returned those goods on the ground that there was any defect in the water cooler or air-conditioner produced and sold by the assessee to the dealer. Things would have been different if that had happened. The Tribunal, in the circumstances, is right that the two types of conditions stipulated in Section 80IA were fulfilled with the commercial sale of the two items in that assessment year. Whether the purpose of that sale was to obtain registration of excise or sales tax would be immaterial.

This question is answered against the assessee and in favour of the Revenue and the appeals are dismissed.

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