Income Tax Appellate Tribunal - Hyderabad
Indus Business Systems Ltd., Hyd, ... vs Assessee on 17 June, 2016
ITA No 766 of 2015 Indus Business Systems Ltd Hyderabad
IN THE INCOME TAX APPELLATE TRIBUNAL
Hyderabad ' B ' SMC Bench, Hyderabad
Before Smt. P.Madhavi Devi, Judicial Member
ITA No.766/Hyd/2015
(Assessment Year: 2010-11)
M/s Indus Business Income Tax Officer Ward (2)1
Systems Ltd Vs. Hyderabad
Hyderabad
PAN: AAACI 4749 M
(Appellant) (Respondent)
For Assessee : Shri V. Raghavendra Rao
For Revenue : Shri Venkata Reddy, DR
Date of Hearing : 07/06/2016
Date of Pronouncement : 17/06/2016
ORDER
This is assessee's appeal for the A.Y 2010-11. In this appeal, the assessee is aggrieved by the order of the CIT u/s 263 of the I.T. Act, holding the assessment order dated 26.03.2013 to be erroneous and prejudicial to the interests of the Revenue and directing the AO to set off the brought forward depreciation and loss before allowing the deduction u/s 10A of the I.T. Act.
2. Brief facts of the case are that the assessee company, engaged in the business of software development, filed its return of income for the A.Y 2010-11 on 24.09.2010 admitting income at Rs. Nil after claiming deduction u/s 10A i.e. Rs.6,05,63,431.
The AO allowed the dedeuctin u/s 10A of the Act of Rs.6,02,93,581. Subsequently the CIT, on perusal of the assessment records observed that 10A deduction at Page 1 of 14 ITA No 766 of 2015 Indus Business Systems Ltd Hyderabad Rs.6,02,93,581 has been allowed before setting off the brought forward business loss and depreciation to the extent of Rs.1,26,68,529 (depreciation loss Rs.42,80,324 and business loss of Rs.83,88,205) before allowing exemption u/s 10A of the Act. Therefore, a show cause notice u/s 263 of the Act was issued to the assessee.
3. Assessee vide its letter dated 26.05.2014 explained that the relevant A.Y is the 10th and the last year in which 10A deduction was being claimed and further that the deduction u/s 10A is to be first allowed and only on the balance of income, if any, the brought forward business loss and depreciation is to be set off. The CIT was however, not convinced with the assessee's contentions and observed that sub-section (6) of sections 10A and 10B were amended by Finance Act 2003 with retrospective effect from 1.4.2001 and observed that the deduction u/s 10A or 10B is to be allowed from the total income of the assessee. Thus, according to him, the brought forward loss and depreciation of the non eligible unit is to be first set off from the eligible unit in accordance with the provisions of section 72 of the Act and only on the balance, the deduction u/s 10A is to be allowed. He accordingly set aside the assessment order and directed the AO to give effect to the order of the CIT u/s 263 of the Act. Against the order of the CIT u/s 263, the assessee is in appeal before us.
4. The learned Counsel for the assessee submitted that the assessee was in the business of software development and was accordingly eligible for deduction u/s 10A of the Act. He submitted that in the earlier years, the assessee was allowed Page 2 of 14 ITA No 766 of 2015 Indus Business Systems Ltd Hyderabad deduction u/s 10A of the Act as claimed by the assessee and the A.Y before us being the last year, the AO has allowed exemption u/s 10A on the income of the 10A Unit. He submitted that the order of the CIT holding the assessment order erroneous and prejudicial to the interests of the Revenue is not correct as even after set off of brought forward loss and depreciation of the non eligible unit, there was no tax liability on the assessee and thus there was no prejudice caused to the interests of the Revenue. Even otherwise, according to him, the assessment order is also not erroneous as 10A deduction to be computed treating the 10A Unit as independent and on a stand alone basis for the period of 10 years from the initial period of claiming deduction u/s 10A of the Act out of the total period of 15 years and therefore, according to him, the AO has allowed deduction u/s 10A before set off of brought forward business loss and depreciation. In support of his contention, he placed reliance upon the following judgments:
a) CIT vs. TEI Technologies P Ltd (2012) 25 Taxmann.com 5 (Delhi) High Court of Delhi.
b) CIT vs. Black & Veatch Consulting P Ltd (2012) 20 Taxmann.com 727 (Bom) High Court of Bombay
c) CIT vs. Yokogawa India Ltd (2012) 21 Taxmann.com 154 (Karnataka), High Court of Karnataka AND
d) The judgment of the Andhra Pradesh High Court dated 28.08.2013 in ITA Nos. 360 of 2011, 407 of 2010, 279 of 2012, 361 of 2011 and 362 of 2011 in the case of M/s. CCL Products (India) Ltd.
He submitted that in all these cases, it has been held that the business loss of non eligible units should not be set off from the income of the undertakings eligible for exemption u/s 10A of the Act during the period of 10 years when the assessee was Page 3 of 14 ITA No 766 of 2015 Indus Business Systems Ltd Hyderabad claiming deduction u/s 10A of the Act. Thus, the learned Counsel for the assessee prayed that the order of the CIT be quashed.
5. The learned DR, on the other hand, supported the orders of the authorities below and placed reliance upon the decision of the Coordinate Bench of this Tribunal in ITA No.800/Hyd/2007 in the case of IIC Technologies Pvt Ltd, Hyderabad and in the case of Asstt. CIT vs. Bodhtree Consulting Ltd (Hyd.Trib.) (2010) 041 SOT 0230, wherein after considering the amended provisions of section 10A and 10B in which exemption has been converted into a deduction, it has been held that the deduction u/s 10B is to be computed after set off of brought forward business loss and depreciation brought forward from the earlier years. Thus, according to him, the order of the CIT is to be confirmed.
6. Having regard to the rival contentions and the material on record, we find that the assessee during the relevant financial year, had brought forward business losses and depreciation of earlier years pertaining to the non 10A units. It is also not in dispute that this is the final year of the exemption u/s 10A of the I.T. Act. The decision relied upon by the learned DR is the decision of the Coordinate Bench of the Tribunal dated 21.05.2010 for the A.Y 2004-05, whereas the decisions relied upon by the assessee's Counsel are of the Hon'ble Karnataka and Delhi High Courts for the A.Ys 2001-02 to 2006-07 and 2002-03 respectively. The Hon'ble High Courts have taken into consideration the amendment to section 10A and 10B and also Page 4 of 14 ITA No 766 of 2015 Indus Business Systems Ltd Hyderabad that the earlier exemption provision has been converted into a deduction and even in the present form, section 10A is an exemption provision and therefore, the deduction u/s 10A of the I.T. Act has to be allowed from the total income of the assessee and the question of un-absorbed business loss of non 10A Units being set off prior thereto would not arise. The relevant portion of the judgment is reproduced hereunder for ready reference:
"17. The question whether Section 10A provides for total exemption from tax or provides for only a deduction from the income of the assessee was debated at the Bar at considerable length. The section is placed in Chapter III of the Act which is titled "Incomes which do not form part of total income". Sub-section (1) of this section as it stood amended by the Finance Act, 2000 w. e. f. 01.04.2001, however, provides for "a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software......from the total income of the assessee". The language used has given rise to the argument that the section only provides for a deduction which means that the profits of the eligible undertaking will have to enter the field of taxation and be subjected to all the provisions of the Act and only the balance of profits, if any, will be deducted from the total income. This is in contrast to sub-section (1) as it stood prior to the aforesaid amendment, which provided that "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". This phraseology which we have noted earlier to conform to the title of Chapter III of the Act has given rise to the further argument from the department that w.e.f. 01.04.2001 there is a significant change and profits which were earlier exempt from income tax and were not includible in the assessee's total income are now so included, subject to deduction, and once the profits are included, all the provisions of the Act will have to be applied while arriving at the amount of deduction. In order to test this argument it is necessary to look at several aspects. Firstly, Section 10A even after being amended substantially by the Finance Act, 2000 has been retained in Chapter III of the Act, notwithstanding the change in the language of sub-section (1). If the department is right in its contention that after 01.04.2001 the section only provides for a deduction and not an exemption, it was open to the legislature to transpose the section from Chapter III to Chapter VIA of the Act which is titled "deductions to be made in computing total income".
This aspect of the matter has been adverted to and discussed by the Karnataka High Court in CIT v. Yokogawa India Ltd. [2012] 341 ITR 385 / 21 taxmann.com 154. It has been observed by the Karnataka High Court as follows: -
"The substituted section 10A continues to remain in Chapter III. It is titled as "Incomes which do not form part of total income". It may be noted that when section 10A was recast by the Finance Act, 2001, Parliament was aware of the character of relief given in Chapter III. Chapter III deals with incomes which do Page 5 of 14 ITA No 766 of 2015 Indus Business Systems Ltd Hyderabad not form part of total income. If Parliament intended that the relief under section 10A should be by way of deduction in the normal course of computation of total income, it could have placed the same in Chapter VI-A which houses the sections like 80HHC, 80-IA, etc. Parliament was aware of the various restricting and limiting provisions like section 80A and section 80AB which was in Chapter VI-A which do not appear in Chapter III. The fact that even after its recast, the relief has been retained in Chapter III indicates that the intention of Parliament it is to be regarded as an exemption and not a deduction. The Act of Parliament in consciously retaining this section in Chapter III indicates its intention that the nature of relief continues to be an exemption. Chapter VII deals with the incomes forming part of the total income on which no income-tax is payable. These are the incomes which are exempted from charge, but are included in the total income of the assessee. Parliament, despite being conversant with the implications of this Chapter, has consciously chosen to retain section 10A in Chapter III."
18. Secondly, we find that though sub-section (1) provides for a deduction of the eligible profits, there is good reason to think that it is not to be considered as a deduction because the sub-section further says that the deduction "shall be allowed from the total income of the assessee". Under the Income Tax Act, 1961 the income of an assessee under the various heads of income enumerated in Section 14 have to be computed in accordance with the provisions of the Act. The aggregate of such incomes constitutes the "gross total income" of the assessee within the meaning of Section 80B (5) which defines "gross total income" as the total income computed in accordance with the provisions of the Act before making any deduction under Chapter VIA. The expression "total income" is defined in 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. Section 4 which is charging section provides for the charge of income tax in respect of the total income of the previous year of every person. The position that emerges from a harmonious reading of these provisions is that the assessee is required to pay income tax on his total income of the previous year. The determination of the total income is the last point before the tax is charged and once the total income is determined or quantified, there is absolutely no scope for making any further deduction, having regard to the provisions referred to above. If this is the true legal position, as we think it to be, then it is not possible to understand sub- section (1) of Section 10A as providing for a "deduction" of the profits of the eligible unit "from the total income of the assessee". The definition of the expression total income given in Section 2(45) cannot be imported into the interpretation of sub-section (1) having regard to the context in which it is used and the scheme of the Act relating to the charge of the tax. It has to be kept in mind that the definition section would not apply if the context requires otherwise; in other words, if the scheme of the Act relating to the charge of income tax clearly makes it impossible for any deduction to be allowed once the total income is determined, then it would be futile to still insist on applying the definition of the expression "total income" under Section 2 (45) to the interpretation of the sub- section. In other words the context in which the expression "total income" is used in the sub-section requires us to abandon the definition of that expression as per Section 2 (45). Again this aspect of the matter has been dealt with in the judgment of the Karnataka High Court (supra ) in the following words: -
Page 6 of 14ITA No 766 of 2015 Indus Business Systems Ltd Hyderabad "A literal reading of the above provision requires deduction from the total income. There can be a deduction in computing the total income. However, there cannot be deduction from the total income which is the final result of the computation process. The language adopted in section 10A is different from the one adopted in section 80A. Section 10A provides for deduction from the 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 deduction in computing the total income but no mechanism for any deduction from the total income already computed is provided under the Act. Once the total income is computed, the next step is determination of tax by applying the applicable rates on the total income.
Section 2(45) defines "total income" to mean the total amount of income referred to in section 5 and computed in the manner laid down in the Income-tax Act. Section 5 defines the scope of total income and it is subject to the provisions of the Income-tax Act. Section 14 provides that "save as otherwise provided by the Income-tax Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income". Therefore, the total income in its strict sense requires computation for the purpose of levy of tax. The computation of total income begins only with Chapter IV and as section 10A is covered in Chapter III, the phrase "total income" used in section 10A cannot be understood in the same sense as in section 2(45). The phrase "total income" has been used in the Income-tax Act in several places with different connotations and shades. The phrase "total income" used in section 10A is one such variant. The phrase need not necessarily 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 undertakings and not to 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 might have several undertakings and section 28 does not envisage computation of income of each such undertaking. In other words, the profits of the business of the undertaking cannot be computed in isolation. The profits are computed under the head "Profits and gains of business or profession", as under the above head, the income from business as a whole has to be computed. 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 definition of any term given in section 2 will apply only when the context does not otherwise require. The placement, language and setting of section 10A cannot mean the total income computed in accordance with the provisions of the Act. Instead, such a phrase in the context of section 10A, means profits and gains of the STP undertaking as understood in its commercial sense."
19. There is further indication that Section 10A provides for an exemption and not merely a deduction and this is in the form of return of income prescribed by the Income Tax Rules, 1962. The return of income in Form No.ITR-6 shows that Page 7 of 14 ITA No 766 of 2015 Indus Business Systems Ltd Hyderabad the first step which an assessee is required while computing the income from business or profession is to commence the computation from the profit as per the profit and loss account. The second step is to adjust the profit figure by excluding receipts which are not subject to tax or which are subject to tax under other heads of income. The third step is to exclude exempt income credited to the profit and loss account. Fourth step is to add back claims which are disallowable under the various provisions of the Act. The fifth step is to claim any other allowance or deduction. This exercise gives the figure of profit or loss before deduction under Section 10A. Thereafter the assessee has to deduct the profits eligible under Section 10A. The form further prescribes the steps involved in the computation of total income. This shows that after aggregating the income from salary, house property, profits and gains from business, capital gains and income from other sources, the total is arrived at and it is from this total that the losses of the current year and the brought forward losses from the past years are to be set off. The resultant figure gives the gross total income of the assessee from which deductions under Chapter VIA are to be made in order to arrive at the total income. The steps given in the income tax return form also are an indication that it is before the adjustment of the losses of the current year and the brought forward losses from the past year that the profits eligible for the relief under Section 10A have to be given the relief. The form of return is also an indication that the relief under Section 10A has to be given before adjustment of the current as well as the past losses. This aspect of the matter is also considered by the Karnataka High Court in the judgment cited (supra) in the following manner: -
"Chapter IV deals with the computation of total income under various heads of income. Section 14 provides for classification of income under various heads of income for the purposes of charge of income-tax and computation of total income. The purpose of classification of any income under any head of income is to compute the same. The twin conditions of section 14 are that income is subject to charge of income-tax and is includible in the total income. As the relief under section 10A is in the nature of exemption although termed as deduction and the said relief is in respect of commercial profits, such income is neither subject to charge of income-tax nor includible in the total income. Therefore, the twin provisions of section 14 are not existing in the case of income of STP undertaking and accordingly such income is not liable to be computed under Chapter IV. Therefore, the correct view would be that the relief under section 10A will have to be given before Chapter IV. The deduction shall be given first and process of computation of "profits and gains of business or profession" begins thereafter. This proposition is in line with the form of return. Allowing deduction at the earliest stage of business income computation almost blurs the difference between the commercial profits and tax profits."
20. We may now refer to two judgments of the Bombay High Court on the issue. The first is Hindustan Unilever Ltd. v. Dy. CIT [2010] 325 ITR 102 / 191 Taxman 119 (Bom.). This case dealt with Section 10B of the Act which is substantially similar to Section 10A. In that case the assessment was sought to be reopened under Section 147 of the Act for several reasons. One of the reasons was that the assessee was wrongly allowed deduction under Section 10B in the amount of Rs. 11.11 crores in the assessment. The Assessing Officer observed that there was a Page 8 of 14 ITA No 766 of 2015 Indus Business Systems Ltd Hyderabad loss in the crab stick unit amounting to Rs. 1.33 crores and since this unit was exempt from taxation under Section 10B, the losses therein were wrongly set off against the normal business income of the assessee and thus there was escapement of income to the extent of Rs. 1.33 crores. The reopening was challenged before the Bombay High Court which held as follows: -
"There is merit in the submission which has been urged on behalf of the assessee that the Assessing Officer has while reopening the assessment ex facie proceeded on the erroneous premise that section 10B is a provision in the nature of an exemption. Plainly, section 10B as it stands is not a provision in the nature of an exemption but provides for a deduction. Section 10B was substituted by the Finance Act of 2000 with effect from April 1, 2001. Prior to the substitution of the provision, the earlier provision stipulated that any profits and gains derived by an assessee from a 100 per cent. export oriented undertaking, to which the section applies "shall not be included in the total income of the assessee". The provision, therefore, as it earlier stood was in the nature of an exemption. After the substitution of section 10B by the Finance Act of 2000, the provision as it now stands provides for a deduction of such profits and gains as are derived by a 100 per cent. export oriented undertaking from the export of articles or things or computer software for ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce. Consequently, it is evident that the basis on which the assessment has sought to be reopened is belied by a plain reading of the provision. The Assessing Officer was plainly in error in proceeding on the basis that because the income is exempted, the loss was not allowable. All the four units of the assessee were eligible under section 10B. Three units had returned a profit during the course of the assessment year, while the Crab Stick unit had returned a loss. The assessee was entitled to a deduction in respect of the profits of the three eligible units while the loss sustained by the fourth unit could be set off against the normal business income. In these circumstances, the basis on which the assessment is sought to be reopened is contrary to the plain language of section 10B."
21. It may be observed that in the Bombay High Court case the loss suffered by the eligible unit under Section 10B was set off against the normal business profit. The view taken by the Assessing Officer in that case was that Section 10B provided for an exemption which means that it does not enter the field of taxation and, therefore, the loss arising therefrom cannot be set off against the normal business profits. Disapproving the view taken by the Assessing Officer, the High Court held that Section 10B, as substituted by the Finance Act, 2000 was a Section providing for a deduction whereas prior to the substitution the earlier provision was in the nature of an exemption. It was thus held that the basis on which the assessment was sought to be reopened was wrong and the reassessment notice was struck down. This decision was followed by the Bombay High Court in the case of CIT v. Black & Veatch Consulting (P.) Ltd. [2012] 208 Taxman 144/20 taxmann.com 727. In this case the precise question which arose under Section 10A was whether the Tribunal was correct in holding that the brought forward unabsorbed depreciation and losses of the unit, the income from which Page 9 of 14 ITA No 766 of 2015 Indus Business Systems Ltd Hyderabad was not eligible for deduction under Section 10A cannot be set off against the current profit of the eligible unit for computing the deduction under Section 10A. Referring to its earlier judgment in the case of Hindustan Unilever Ltd. (supra) it was held as under: -
"2. Section 10A is a provision which is in the nature of a deduction and not an exemption. This was emphasised in a judgment of a Division Bench of this Court while construing the provisions of Section 10B in Hindustan Unilever Ltd v. Deputy Commissioner of Income Tax [2010] 325 ITR 102at para 24. The submission of the Revenue placed its reliance on the literal reading of Section 10A under which 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 is to be allowed from the total income of the assessee. The deduction under Section 10A, in our view, has to be given effect to at the stage of computing the profits and gains of business. This is anterior to the application of the provisions of Section 72 which deals with the carry forward and set off of business losses. A distinction has been made by the Legislature while incorporating the provisions of Chapter VI-A. Section 80A(1) stipulates that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of the Chapter, the deductions specified in Sections 80C to 80U. Section 80B(5) defines for the purposes of Chapter VI-A "gross total income" to mean the total income computed in accordance with the provisions of the Act, before making any deduction under the Chapter. What the Revenue in essence seeks to attain is to telescope the provisions of Chapter VI-A in the context of the deduction which is allowable under Section 10A, which would not be permissible unless a specific statutory provision to that effect were to be made. In the absence thereof, such an approach cannot be accepted. In the circumstances, the decision of the Tribunal would have to be affirmed since it is plain and evident that the deduction under Section 10A has to be given at the stage when the profits and gains of business are computed in the first instance. So construed, the appeal by the Revenue would not give rise to any substantial question of law and shall accordingly stand dismissed. There shall be no order as to costs."
22. It is interesting to note that though there is a divergence of opinion between the Karnataka High Court in Yokogawa India Ltd.'s case ( supra) and the Bombay High Court in Hindustan Unilever Ltd. (supra) as to the nature of Section 10A - whether it provides for exemption or deduction of the profits of the eligible unit, the ultimate decision in Black & Veatch Consulting (P.) Ltd. (supra) which purports to follow Hindustan Unilever Ltd. ( supra) was that such profits have to be eliminated at the first stage itself, that is, as soon as they are computed, suggesting that it is an exemption provision. It was held that the eligible profits are not to be subjected to the adjustment under Section 72 of the Act, and the brought forward loss from the unit eligible for the relief under Section 10B cannot be adjusted against the profits from the other three eligible units, which in effect reiterates the position that the loss does not enter the field of taxation just as the profits also do not enter the field. This, with respect, lends support more to the view that Section 10A and Section 10B are in the nature of exemption Page 10 of 14 ITA No 766 of 2015 Indus Business Systems Ltd Hyderabad provisions, rather than provisions for deduction. In the ultimate analysis it may perhaps be wise to fall back on the observations of Justice Narasimham, J. (as he then was) speaking for a Division Bench of the Orissa High Court in Ramachandra Mardaraj Deo v.Collector of Commercial Taxes [1957] 31 ITR 651 where he described the difference between "exemption" and "deduction" as "a fine distinction" and observed as under: -
"Whether a particular sum is claimed as an exemption or as a deduction, the net result is its immunity from taxation if the claim is allowed......."
23. This Court considered a somewhat similar question, though not identical, in CIT v. Dalmia Cement (Bharat) Ltd. [1980] 126 ITR 736. The question arose under the Companies (Profits) Surtax Act, 1964. Ranganathan, J. (as he then was) referred to the judgment of E. S. Venkataramiah, J. (as he then was) of the Karnataka High Court in Stumpp, Schuele & Somappa (P.) Ltd. v. Second ITO [1976] 102 ITR 320 where the position was summed up as under: -
"(a) Any amount in respect of which deduction is claimed under any of the provisions in sections 80C to 80V is already included in the gross total income of the assessee and, therefore, cannot be stated to be not includible in the income of the assessee.
(b) The expression "not includible" means not capable of being included. It cannot refer to an amount which already formed part of the total income. It refers to the classes of income, which Chap. III directs, "shall not be included" in the total income of the assessee.
(c) The concept of deductions by way of expenses, rebates, allowances, etc., under Chaps. IV & VI-A is totally different from that of non-inclusion."
24. Thus incomes which are enumerated in Chapter III of the Act have traditionally been considered as incomes which are exempt from tax rather than as deductions in the computation of the total income. The essential difference between an exemption and deduction seems to be that an exempt income does not enter the computation of total income at all, whereas a deduction, in the very nature of things, is first included in the total income and given a deduction subject to fulfillment of several conditions. The fact that the deduction may be given in respect of the entire income does not necessarily mean that it is an exempt income. At the same time, the fact that a particular class of income is only partially exempt from taxation does not necessarily mean that it is only a deduction. In a recent judgment, the Supreme Court has elucidated on the subject
- CIT v. Williamson Financial Services [2008] 297 ITR 17/[2007] 165 Taxman 638 where it was observed as under: -
"At this stage we have to analyse Chapter III which deals with incomes which do not form part of total income. Section 10 groups in one place various incomes which are exempt from tax. The incomes enumerated in section 10 are not only excluded from the taxable income of the assessee but also from his total income. The exemption embodied in section 10 can be divided into two Page 11 of 14 ITA No 766 of 2015 Indus Business Systems Ltd Hyderabad categories, namely, exemption to which certain classes of income from their very nature are entitled and the second category concerns exemption which the character of the assessee entitles him to claim. In the first category is agricultural income whereas in the second category of exempted income is the income of local authorities and diplomatic officers. We are concerned with the first category.
In addition to the above two categories there is a third kind of income. These incomes are wholly or partly tax-free incomes on account of special deductions under Chapter VI-A. We are essentially concerned with these tax- free incomes."
25. Again at paragraph 40 at page 34 of the report it was observed as under: -
"As stated above, there is a vital difference between income not chargeable to tax and not includible in the total income (for example, agricultural income) and income which forms part of total income but which is made tax-free. Deductions under Chapter VI-A fall in the category of tax-free incomes. In fact, history shows that some of the incomes in Chapter VI-A have been transferred from Chapter VII to Chapter VI-A. Chapter VII has been deleted. However, at the relevant time Chapter VII referred to incomes forming part of total income on which no tax was payable. That is why we have stated that there is a difference between "exempted incomes" and "tax-free incomes". This distinction is of some importance. As stated above, section 5 provides what the "total income" shall include. Chapter III refers to "incomes which do not form part of total income".
Chapter IV deals with "computation of total income". It classifies the "income" under different heads and the deductions to be made in respect of each of the different heads of income. In the Income-tax Act, the expression "income includible in the total income" has a definite connotation. Similarly, the expression "deduction and allowances" have particular connotation. Therefore, on the one hand we have "agricultural income" which is neither chargeable nor includible in the total income and on the other hand we have "incomes" under Chapter VI-A which are part of total income but which are tax-free."
26. In the case of TATA Power Company Ltd. v. Reliance Energy Ltd. (JT) 2009 (8) SC 562, the Supreme Court was confronted with the question whether Chapter headings and marginal notes should be taken into consideration for the purpose of interpretation of the main provisions. It was held that Chapter headings are parts of the statute and have been enacted by the Parliament and, therefore, they can be used as an aid to construction in case of ambiguity and doubt. The following observations are pertinent: -
"114. Chapter headings and the marginal note are parts of the statute. They have also been enacted by the Parliament. There cannot, thus, be any doubt that it can be used in aid of the construction. It is, however, well settled that if the wordings of the statutory provision are clear and unambiguous, construction of the statute with the aid of 'chapter heading' and 'marginal note' may not arise. It may be that heading and marginal note, however, are of a very limited use in interpretation because of its necessarily brief and inaccurate nature. They are, however, not Page 12 of 14 ITA No 766 of 2015 Indus Business Systems Ltd Hyderabad irrelevant. They certainly cannot be taken into consideration if they differ from the material they describe."
27. After referring to the views of the learned authors in "Interpretation of Statutes" by Vepa P. Sarathi (4th Edition) and "Principles of Statutory Interpretation" by Justice G. P. Singh on the relevance of Chapter heading, the Supreme Court summarised the position as under: -
"120. Chapter heading, therefore, is a permitted tool of interpretation. It is considered to be a preamble of that section to which it pertains. It may be taken recourse to where an ambiguity exists. However, where there does not exist any ambiguity, it cannot be resorted to. Chapter heading and marginal note, however, can be resorted to for the purpose of resolving the doubts."
28. In making the aforesaid observations the Court noted that "there is a drift from the old values in recent times, suggesting that the Courts are increasingly accepting the Chapter headings as an aid to construction or interpretation in case of ambiguity". The caveat, however, is that where the statute is clear and unambiguous that should prevail. In interpreting sub-section (1) of Section 10A after the amendment made by the Finance Act, 2000 w. e. f. 01.04.2001, one cannot deny that there is ambiguity or doubt, because of the language used, as to whether the sub-section provides for an exemption or a deduction. We have earlier referred to the difficulty caused by the language which says that the deduction shall be made from the total income, when the Act contains no provision to allow any deductions from the total income. The section has been interpreted by the Karnataka High Court (supra) as an exemption provision whereas the Bombay High Court has understood the same as a deduction section, though the ultimate result did not make any difference to the assessee's claim in Black & Veatch Consulting (supra). Therefore, it cannot be denied that there is uncertainty and lack of clarity or precision in the language employed in sub- section (1). It is, therefore, not impermissible to rely on the heading or title of Chapter III and interpret the section as providing for an exemption rather than a deduction.
29. The key to the problem seems to lie in appreciating the difference between a provision which exempts an income and a provision which provides for a deduction of the income or a part thereof in computing the total income of the assessee. We have attempted to outline the difference between the two kinds of provisions in the light of the authorities cited above. The matter is not altogether free from difficulty. However, as S. Ranganathan, J. (as he then was) has pointed out in CIT v. Dalmia Cement (Bharat) Ltd. (supra): -
"In the process of judicial assessment of such conflicting interpretations, there is no sensitive balance with which to weigh the pros and cons and determine with scientific accuracy which side is the weightier and, perhaps in the drawing of the ultimate inference one way or the other, the subjective element is not altogether excluded."
30. With this caution or disclaimer in mind we are inclined to hold that Section 10A is a provision exempting a particular kind of income even in its present form, that is to say, even after being amended by the Finance Act, 2000 w. e. f.
Page 13 of 14ITA No 766 of 2015 Indus Business Systems Ltd Hyderabad 01.04.2001. We are inclined, with respect, to agree with the view taken by the Karnataka High Court in the case of Yokogawa India Ltd. (supra). As noticed, the Bombay High Court reached the same conclusion which the Karnataka High Court reached in the case of Yokogawa India Ltd. ( supra), in its judgments in Hindustan Unilever Ltd. (supra) and Black & Veatch Consulting (P.) Ltd. ( supra), despite taking the view that the Section provides for a deduction and not an exemption". This judgment has been passed after considering the other precedents on the issue. In view of the same, we are of the opinion that the decision of the Hon'ble High Courts of Delhi, Karnataka and Bombay (cited Supra) are applicable to the case before us. Respectfully following the same, we quash the order of the CIT as the assessment order is not erroneous and prejudicial to the interests of the Revenue.
7. In the result, assessee's appeal is allowed.
Order pronounced in the Open Court on 17th June, 2016.
Sd/-
(P. Madhavi Devi) Judicial Member Hyderabad, dated 17th June,2016.
Vnodan/sps Copy to:
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2. IOTO Ward 2(1) 8th Floor, C Block IT Towers, AC Guards, Hyderabad
3. Principal Commissioner of Income Tax-2 Hyderabad
4. Add. Commissioner of Income Tax Range-2 Hyderabad
5. The DR, ITAT, Hyderabad
6. Guard File By Order Page 14 of 14