Income Tax Appellate Tribunal - Bangalore
Assistant Commissioner Of Income Tax vs Yokogawa India Ltd. on 4 August, 2006
Equivalent citations: (2007)111TTJ(BANG)548
ORDER
N.L. Kalra, A.M.
1. The Revenue has filed this appeal against the order of learned CIT(A)-III, Bangalore, dt. 26th Oct., 2005.
2. The effective grounds of appeal raised by the Revenue are as under:
(i) The learned CIT(A) erred in directing the AO to allow exemption under Section 10A without setting off the losses of the non-lOA unit and consequently allow the carry forward of losses and depreciation of the non-l0A unit.
(ii) The CIT(A) ought to have noted that under Section 10(1) of the IT Act, 1961, the deduction in respect of profits and gains derived by an undertaking from the export of articles or things or computer software is required to be allowed from the total income of the assessee and as per Section 2(45) of the Act, the 'total income' means the total amount of income referred to in Section 5 computed in the manner laid down in the Act.
(iii) The CIT(A) ought to have held that as the 'total income' has to be first computed before allowing the deduction under Section 10A, the losses from the non-10A units have to be first set off against the income from Section 10A unit in the process of computing the total income, from which the deduction under Section 10A(1) is to be allowed.
3. before the learned CIT(A), it was contended as under:
(a) Income enumerated in Chapter III are not only to be excluded from the total income at the source itself but also cannot be considered as part of the taxable income. Section 10A is contained in Chapter III.
(b) Section 10A is not one of the deductions contained in Chapter VI-A. The income of Section 10A unit is to be excluded before arriving at the gross total income. Section 8013(5) would not come into operation.
(c) The change in nomenclature from exemption to deduction in the provisions of Section 10A would not be a determining factor as the provisions of Section 10A are contained in Chapter III.
(d) Even if the income under Sections 10A, 10B unit is to be considered for deduction, the deduction has to be considered at root level itself.
4. The learned CIT(A) after considering the above submissions concluded his findings after observing as under:
The assessee's submissions are carefully considered. From the Scheme of the Act, it is evident that Section 10A is placed in Chapter III which deals with the items which do not form part of total income. The main object of Section 10A is not to tax the export profits from STP unit. I am in agreement with the assessee's contention that the income of Section 10A unit has to be excluded before arriving at the gross total income otherwise the provisions of Section 10A would have been shifted to Chapter VI-A which deals with deductions from gross total income. In my considered opinion, the income of Section 10A unit has to be deducted at the source itself and not after computing the gross total income. The total income used in the provisions of Section 10A in this context means global income of the assessee. Hence, the income eligible for exemption under Section 10A would not enter into gross total income as the same has to be deducted at source level. As the income of Section 10A unit has to be excluded at the source itself before arriving at the gross total income, loss of non-lOA unit cannot be set off against the income of Section 10A unit. In the circumstances, the AO is directed to allow exemption under Section 10A without setting off the losses of non-lOA unit and consequently allow the carry forward of losses and depreciation of non-l0A unit.
5. During the course of proceedings before us, the learned Departmental Representative submitted that Section 10A refers to the deduction and it is not mentioned in that section that income derived from industrial undertaking as mentioned in Section 10A is exempt. Such income is part of the total income and total income is defined in Section 2(45) of the IT Act. The total income is to be computed as per provisions of the IT Act. For computation of total income, the first step is to compute the income under different heads. When income is to be computed under business head then loss from one unit is to be set off against the loss from other unit or other business. The balance is includible in the total income. Hence, deduction is to be restricted to the quantum of income included in the total income. It was therefore urged that learned CIT(A) erred in giving the direction that income as referred in Section 10A is to be excluded without setting it off from loss of other business.
6. The learned Authorised Representative has filed the written submissions. It was submitted that the company operates the following 3 divisions:
(a) Software service division
(b) Product service division
(c) Systems service division
7. The software service division is registered as a Software Technology Park Unit with STPI. The software service division is making profits and such profit has been claimed as exemption under Section 10A. The operation in the other 2 units has resulted in loss and losses and unabsorbed depreciation of these two units have been carried forward.
8. Section 10A was inserted w.e.f. 1st April, 1981. At the time of its inception, Section 10A excluded certain incomes from being charged to tax. Section 10A was substituted by Finance Act, 2000 w.e.f. 1st April, 2001. In the substituted section, a deduction of the profits derived by the undertaking from the export of computer software is allowed from the total income assessed. Hence, instead of exemption as provided in Section 10A earlier, now the section speaks of the deduction. The learned Authorised Representative submitted that CBDT vide Circular No. 794, dt. 9th August, 2000 [(2000) 162 CTR (St) 9] mentioned that substitution has been effected with a view to rationalize the provisions of Section 10A. The learned Authorised Representative submitted that there is no mention in this circular that basic character of Section 10A is being changed from exemption to a deduction section. Section 10A is a part of the Chapter III of the IT Act and the heading of Chapter HI is incomes which do not form part of the total income. A chapter heading indicates the drift of the section and throws light on the intention of the legislature. The learned Authorised Representative relied on the decision of Andhra Pradesh High Court in the case of Smt. Abida Khatoon v. CIT for the proposition that incomes referred in Chapter III are not assessable at all, while incomes in Chapter VII are assessable though taxes are not payable. The learned Authorised Representative submitted that the use of the term 'total income' under unamended as well as the present section indicates that there is no material change in the character of the section so far as the issue of exclusion of income of the nature of Section 10A is concerned. It was submitted that operative portion of Section 2 starts with an expression 'unless the context otherwise requires'. In view of such operative portion, the learned Authorised Representative argued that the total income referred under Section 10A cannot have the same meaning as given in Section 2(45). Section 11 is also part of Chapter III. The CBDT has stated that term 'income' would refer to commercial profits. In Circular No. 5P, dt. 19th June, 1968, the CBDT clarified; "it would accordingly be incorrect to assign to the word 'income' used in Section ll(1)(a), the same meaning as has been specifically assigned to the expression 'total income' vide Section 2(45)".
9. Gross total income is defined under Section 80B(5) and it means that total income computed in accordance with the provisions of this Act before making any deduction under this chapter. It means that other provisions of the Act are to be given effect to before any deduction is given in Chapter VI-A. Deductions under Chapter VI-A are the last stage of giving effect to all types of deductions permissible under the Act. Hence, the amount computed under Section 10A is not to be deducted from the total income as referred under Section 8013(5). It was further argued that in the context of Section 10A, the provision of Sections 28 to 44D are however to be applied to each undertaking and not to each business. This is because Section 10A is undertaking specific. Hence, there will be no occasion to invoke and apply Section 32(2) of the IT Act. Section 10A has not used the expression profits and gains under the head 'Profits and gains of business or profession' as used in Section 80HHE. Thus, legislature created a fiction under Sections 80-IA and 80-IB and according to which the eligible undertaking is to be considered as only source of income for the assessee. Due to such fiction unabsorbed depreciation and carry forward business are given effect to. In absence of similar fiction, the same would not hold good for Section 10A. It was further submitted that brought forward depreciation is given effect to after setting off of the brought forward business losses. As per Section 32(2), brought forward depreciation is to be treated as current year depreciation but the effect is not given along with current year depreciation. The fiction under Section 32(2) is for the specific purpose, so that, such unabsorbed depreciation can be set off against other heads of income of that year. Such legal fiction cannot be extended beyond its legitimate field and will have to be confined to that purpose. The learned Authorised Representative concluded the written submissions by submitting as under:
(i) The words 'total income' or 'profits' in Section 10A should be read as referring to commercial profits;
(ii) In the alternative, if the provisions of Chapter IV-D are applicable, the process of ascertaining the total income where Section 10A deduction is also involved would comprise of the following:
(a) First, compute the profits and gains derived by the STPI unit. In this process, unabsorbed depreciation is not to be factored;
(b) Determined the deduction under Section 10A;
(c) Give effect to the deduction;
(d) Compute the balance business income and taxable income.
In other words, computation of deduction under Section 10A is to be done under Sections 28 to 44D but separately and independent of the computation of profits and gains from non-eligible business, and without factoring unabsorbed depreciation.
10. We have heard both the parties. It will be relevant to reproduce the relevant sections.
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:
Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to deduction referred to in this sub-section only for the unexpired period of the aforesaid ten consecutive assessment years:
Provided further that where an undertaking initially located in any free trade zone or export processing zone is subsequently located in a special economic zone by reason of conversion of such free trade zone or export processing zone into a special economic zone, the period of ten consecutive assessment years referred to in this sub-section shall be reckoned from the assessment year relevant to the previous year in which the undertaking began to manufacture or produce such articles or things or computer software in such free trade zone or export processing zone:
Provided also that for the assessment year beginning on the 1st day of April, 2003, the deduction under this sub-section shall be ninety per cent of the profits and gains derived by an undertaking from the export of such articles or things or computer software:
Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, 2010 and subsequent years."
Section 2(45)
2. In this Act, unless the context otherwise requires,:
(45) 'total income' means the total amount of income referred to insertion 5, computed in the manner laid down in this Act;
Section 80B (5) 'gross total income' means the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter;
11. Section 10A inserted by Finance Act, 2000 w.e.f. 1st April, 2000 mentions the deduction of such profits and gains as derived by undertaking from the export of articles or things or computer software. This section does not refer that such profits and gains derived by undertaking from the export will not be included in the total income. Under Section 10, the operative part of the section is that any income falling within the clause in Section 10 shall not be included in computing the total income. From wording of Sections 10 and 10A, it is clear that the legislature was fully aware of the meaning of the words "amount not to be included and the deduction to be allowed". Hence, we are not inclined to accept the contention of the learned Authorised Representative that substituted Section 10A should also be interpreted to mean that profits as mentioned under Section 10A should not be included in the total income.
12. The learned Calcutta High Court in the case of Royal Calcutta Turf Club v. CIT observed at p. 714 as under:
In computing the total income, certain incomes are not included under Section 10 of the IT Act. It depends on the particular case where certain income, in respect of which the Act is made inapplicable to the scheme of the Act, and in such a case, the profit and loss resulting from such a source does not enter into the computation at all. But, there are other sources which for certain economic reasons are not included or excluded by the 'will' of the legislature. In such a case, we must look to the specific exclusion that has been made.
13. In view of the above referred judgment, we have to consider the exclusion or deduction as pers. 10A. As pointed out earlier, Section 10A specifically states that a deduction is to be given. The deduction is in respect of profits and gains and the word 'such' mentioned before the profits and gains refers to the profits and gains of the undertaking, which is related (engaged) in the export of articles or things or computer software. Before the word 'undertaking', it is qualified by the word 'an'. It means that it refers to a single undertaking. The words 'profits and gains' and its computation are mentioned under Section 29 of the IT Act. As per Section 29, profits and gains of business or profession are to be computed in accordance with the provisions contained under Sections 30 to 43D. Section 70 of the IT Act governs the setting off a loss from one source against income from another source under the same head of income. Section 10A is not part of the section mentioned in Section 29 of the IT Act. Hence, business losses of the undertaking whose income is not exempt under Section 10A cannot be set off to ascertain the profits and gains derived by an undertaking from the export of computer software. Hence, business losses of other units will not be set off against the profits of the undertaking engaged in export of computer software for the purposes of determining the allowable deduction under Section 10A of the IT Act. Unabsorbed business loss is to be set off under Section 72 of the IT Act and the same is not mentioned under Section 29 of the IT Act. Hence, unabsorbed business losses will not be set off against the profit of the undertaking engaged in the export of computer software for the purposes of ascertaining the deduction admissible under Section 10A.
14. As per Section 72(2), unabsorbed business loss is to be first set off and thereafter unabsorbed depreciation treated as current years depreciation under Section 32(2) is to be set off. For computing deduction under Section 10A, we are concerned only with the profit derived from export of computer software. As already observed unabsorbed business losses of other units cannot be set off and therefore unabsorbed depreciation which is to be set off after the unabsorbed business loss as per Section 72(2) also cannot be set off for ascertaining the deduction under Section 10A.
15. In the instant case, there is no unabsorbed depreciation or unabsorbed business loss in respect of software services division and therefore profits and gains of the software services division will be exempt under Section 10A without setting off the loss of other division or the setting off of carry forward losses of other division. In view of above discussion, we hold that learned CIT(A) was justified in directing the AO to allow exemption under Section 10A without setting ofi loss of non-l0A unit and consequentially allowed carry forward of such losses and depreciation of non-l0A unit.
In the result, the appeal is dismissed.