Income Tax Appellate Tribunal - Chennai
Ford Business Services Center (P) Ltd. vs Assistant Commissioner Of Income Tax on 22 June, 2007
Equivalent citations: (2008)114TTJ(CHENNAI)881
ORDER
P.P. Parikh, Vice President These cross-appeals and cross-objection by the assessee arise from the order of the learned CIT(A) dt. 15th Dec, 2004 for asst. yr. 2001-02. We find it convenient to dispose all of them together by this combined order. The assessee's appeal is taken up first for consideration.
ITA No. 308/Mds/2005 (Assessee's appeal):1. The only grievance of the assessee is against not allowing the set off of business loss and unabsorbed depreciation of earlier assessment years against the profits and gains of a unit eligible for deduction under Section 10B of the IT Act, 1961 ('the Act').
2. The assessee is engaged in the business of IT enabled accounting services and also in the development of computer software. While determining the total income the AO did not consider the carried forward business loss and carried forward unabsorbed depreciation which were claimed to be set off by the assessee against the income of the unit on which deduction under Section 10B was claimed. The CIT(A) observed that Section 10B was included in Chapter III which was titled as "Incomes which do not form part of total income" and there was a distinction between the provisions contained in Chapter VI-A of the Act and those in Chapter III. According to him, once the profits and gains of the unit are eligible for Section 10B deduction, it cannot be taken into consideration for set off under Section 70 or Section 71 or for application of Section 72. He further observed that for all practical purposes the undertaking enjoys immunity from other provisions of the Act. Hence loss from other undertaking cannot be set off against this profit. He also held that carry forward of loss or unabsorbed depreciation cannot also be allowed since this unit is secluded for all purposes. Thus he confirmed the action of the AO.
3. The submission of the learned Counsel was that this was the first year for the claim of deduction under Section 10B for the assessee. The assessee had unabsorbed business loss and unabsorbed depreciation of earlier two years. The first argument of the learned Counsel was to distinguish the present provision contained in Section 10B with the provision contained in the earlier Section 10B. It was pointed out that in the earlier provision the word "exemption" was used whereas in the present provision, the word "deduction" has been used. Thus the contention was that whatever balance is left after claiming deduction under Section 10B of the Act, the same should be available for set off of earlier years' losses and depreciation. Referring to Sub-section (6) of Section 10B, it was pointed out that the carry forward of loss and depreciation was not allowed only after availing the deduction under Section 10B in the last year of the several years in which the deduction was available. In other words, it was contended that once the assessee had exhausted his deduction under Section 10B during all the years of eligibility, the unabsorbed losses and depreciation could not be set off in the years succeeding the years of eligibility for deduction under Section 10B of the Act. But within the 10 year period during which deduction is allowable, there was no such prohibition.
4. The learned Departmental Representative referred to the judgment of the Karnataka High Court in the case of CIT v. Himatasingike Seide Ltd. (2006) 206 CTR (Kar) 106 : (2006) 286 ITR 255 (Kar). It was contended that as per the said judgment the entire income had first to be computed according to the provisions of the Act, then the set off had to be allowed and then only if anything remained, the assessee would be entitled to deduction under Section 10B of the Act. According to him, this judgment had changed the entire gamut of computation of income in cases where deduction under Section 10B is claimed and this being the solitary judgment of any High Court, it was binding on the Tribunal. Alternatively, it was contended that since the AO has not considered this judgment the matter may be restored back to recompute the income afresh in the light of this judgment.
5. In reply, the contention of the learned Counsel was that the High Court in the above case was concerned with asst. yr. 1994-95 when Section 10B was an exemption provision unlike a deduction provision in the present assessment year and hence the same was not applicable.
6. We have duly considered the rival contentions and the material on record. It is not in dispute that the assessee is eligible for deduction under Section 10B of the Act. Undoubtedly, Section 10B is a part of Chapter III of the Act. It is true that heading of Chapter HI is "Incomes which do not form part of total income". However, this caption of Chapter HI cannot be conclusive about the exact purport of any provision contained in the said chapter. Earlier, this chapter contained only Section 10 which provided for the exclusion of several incomes from the total income. The opening sentence of Section 10 itself reads as "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 language of this sentence clearly indicates that the incomes of the type falling within the clauses in Section 10 will not be included in the total income of a person. In other words, these incomes do not enter the computation part at all. Subsequently also when Section 10A was first introduced by the Finance Act, 1981 w.e.f. 1st April, 1981, the said provision provided for total exemption of the income described in Section 10A. Similarly, when Section 10B was introduced for the first time by the Finance Act, 1988 w.e.f. 1st April, 1989, Sub-section (1) thereof provided for a clear exclusion of the income referred to in the said section from the total income of an assessee. Since these provisions provided for total exclusion from the total income, they were grouped along with Section 10 in Chapter III of the Act. However, later on, the nature of relief provided by these sections underwent a sea change insofar as that total exclusion of the income was removed and only deduction was provided for. This is clear from the language used in Section 10A, Section 10AA, Section 10B and Section 10BA. Again, Section 10C provides for total exclusion of the income derived by assessee from an industrial undertaking in any Integrated Infrastructure Development Centre or Industrial Growth Centre located in the North-Eastern region. Thus, wherever the legislature has intended for total exclusion of income it has specifically provided so and wherever it is not intended, the word "deduction" has been used in those sections.
7. Coming to the facts of the ease before us, the assessee has claimed deduction under Section 10B of the Act. Once when deduction under Section 10B has to be allowed, the total income of the undertaking will enter the computation and then only deduction will be given to the assessee. If that is the case, then the stand of the CIT(A) that Section 10B is a secluded provision cannot be accepted. Had it been a case where total exclusion from income was provided for, then perhaps, the observation of the CIT(A) that such income cannot be taken into consideration for set off under Section 70, 71 or 72 would have been proper. In the light of these provisions, we are inclined to agree with the contentions of the learned Counsel and accordingly we direct the AO to consider the set off of unabsorbed business losses and depreciation after availing deduction under Section 10B of the Act. We also agree with the contention that Section 10B(6) is applicable only for the last year of deduction and not for the earlier years of deduction. Accordingly, the claim of the assessee is allowed.
8. There is an additional ground raised by the assessee whereby it has challenged the direction of the CIT(A) that reimbursement received in foreign exchange amounting to Rs. 21,71,040 is to be excluded from "business profits" and "local turnover" for the purpose of deduction under Section 10B of the Act. The contention of the learned Counsel is that the assessee itself has excluded this reimbursement from the figure of turnover as well as profits. Therefore, it is contended that the direction of the CIT(A) may result into double exclusion of the reimbursement. Perhaps, the assessee might not have had the opportunity to explain this to the AO and accordingly we direct the AO to verify the claim of the assessee in this regard. If the assessee itself has excluded the figure from turnover as well as from profits, then the AO need not follow the direction of the CIT(A).
ITA No. 572/Mds/2005 (Departmental appeal):9. In this appeal, the only grievance of the Department is against the direction given by the CIT(A) in respect of the years following the year under appeal. The assessee had claimed a loss of Rs. 1,80,49,260 in respect of its unit "Ford Information Technology Services India (FITSI)". This loss was disallowed by the AO on the ground that the assessee has not yet commenced its business. The CIT(A) agreed with the AO that the claim of the assessee is not allowable since the commercial production has not commenced in the relevant previous year. However, he went a step further to observe that it does not mean that deductions cannot be allowed against the profits even in the future years. While making this observation he gave detailed direction to the AO to the effect that to the extent the expenditure relates to capital assets, the assessee is to capitalize the same and claim benefit of depreciation in the following years. In case the expenditure cannot be linked to any assets, to the extent certain expenditure relates to development of a particular software, such expenditure should be taken as cost of development of that particular software and allowed to be set off against the income from that software. In case it is a general expenditure which cannot be apportioned to any asset or any particular software, such expenditure is to be capitalized and allowed over next four years @ 25 per cent. Thus, it can be seen that the CIT(A) did not stop at merely making an observation but went into the computational aspect of four subsequent years to direct the AO to grant deduction at a particular rate for a specific period. This exercise of jurisdiction by the CIT(A) was not warranted because he had no such jurisdiction in terms of several judgments including those of the Supreme Court particularly in the case of ITO v. Murlidhar Bhagwan Das . Accordingly, we allow the ground of the Department and delete these directions which relate to the subsequent years.
C.O. No. 170/Mds/2005 (Assessee's cross-objection):
10. In its cross-objections, the assessee has claimed the deduction of entire expenses incurred as business expenditure during the year under consideration in which the business is claimed to have been set up and commenced. As mentioned earlier, the assessee had set up a unit called "FITSI" under the STP Scheme on 24th Nov., 2000 and deduction under Section 10A was claimed. However, the AO observed that no activities were commenced during the previous year and hence according to him the expenses claimed by the assessee were in the nature of pre-production expenses which could not be allowed. Accordingly, the claim for total expenses amounting to Rs. 1,80,49,260 was disallowed. The CIT(A) also agreed with the AO that no commercial production had commenced during the previous year and hence the claim of the assessee for the year under consideration was rightly disallowed.
11. The contention of the learned Counsel was that the Revenue authorities have mistaken the development of software with a normal production of an article or thing. This misunderstanding has led to the disallowance of the expenditure despite the fact that all evidences were placed before the Revenue authorities. Since the voluminous evidences placed before them have not been considered, the assessee had no objection if the matter had to be sent back for reconsideration. The learned Departmental Representative objected to the restoration of the matter for reconsideration on the ground that the CIT(A) had considered all the evidence that was before him and had then come to the right conclusion. In our view, no prejudice would be caused to either party if the matter is restored back for reconsideration.
12. Accordingly, we restore it to the file of the AO with the direction to consider the entire matter afresh after giving due opportunity of being heard to the assessee. The assessee shall be at liberty to place any evidence on record in support of its claim and shall also be at liberty to advance any argument that it thinks fit in support of the claim. The cross-objection of the assessee is disposed of accordingly.
13. In the result, appeal of the assessee (ITA No. 308/Mds/2005) is allowed, the appeal of the Department (ITA No. 572/Mds/2005) is allowed and cross-objection of the assessee (C.O. No. 170/Mds/2005) is allowed for statistical purposes.