Income Tax Appellate Tribunal - Delhi
Tecnotree Convergence Ltd., New Delhi vs Assessee on 14 March, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'H' DELHI
BEFORE SHRI U.B.S. BEDI AND SHRI K.G. BANSAL
ITA Nos. 5697 & 5698(Del)/2010
Assessment years: 2003-04 &2004-05
Technotree Convergence Ltd., Deputy Commissioner of Income
(Formerly known as Lifetree Vs. tax, Circle 4(1), New Delhi.
Convergence Ltd.)
C/o O.P. Sapra &Associates,
C-763, New Friends Colony,
New Delhi.
PAN: AAACL7345L
(Appellant) (Respondent)
Appellant by : Shri Sanjeev Sapra, Advocate
Respondent by: Shri C.B. Singh, Sr. DR
Date of hearing : 14.03.2012
Date of pronouncement: 30 .03.2012
ORDER
PER K.G. BANSAL : AM These two appeals of the assessee for two different years have been argued in a consolidated manner by the ld. counsel for the assessee and the ld. DR. Therefore, we find it convenience to pass a consolidated order.
2. We start with the appeal of the assessee for assessment year 2003-
04. In this appeal, the assessee has taken objection to the initiation of re- 2 ITA Nos. 5697 & 5698(Del)/2010 assessment proceedings initiated u/s 147 and completion thereof on 24.12.2009.
2.1 In the assessment order, it is mentioned that original assessment u/s 143(3) was completed in the month of January, 2006 at total income of Rs. 7,94,070/-. Thereafter, notice u/s 148 was issued on 26.08.2008 after obtaining the prior approval of the Commissioner of Income-tax. Following reasons were recorded for issuing notice u/s 148:-
"On examination of the records, it is seen that the assessment of the assessee company was made after scrutiny at an income of Rs. 7,94,070/- after allowing exemption of Rs. 27,95,494/- under section 10 and after special provision NIL income. The exemption of Rs. 27,95,494/- was allowed before setting off BF losses/unabsorbed depreciation amounting to Rs. 53,07,000/-, which is not correct.
In view of the above, I have reason to believe that the income of Rs. 27,95,494/- chargeable to tax has escaped assessment within the meaning of section 147/148."
2.2 The limited case of the ld. counsel before us is that the assessment pertains to assessment year 2003-04. Original assessment was completed u/s 143(3) in January, 2006. Notice u/s 148 was issued on 26.08.2008. Four years from the end of the assessment year expired on 31.03.2008. Thus, notice u/s 148 was issued after expiry of four years from the end of the relevant assessment year. Such a notice at that point 3 ITA Nos. 5697 & 5698(Del)/2010 of time could be issued only if income chargeable to tax escaped assessment by reason of failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment, as provided in the first proviso to section 147. There is no allegation in the reasons that there was any failure on the part of the assessee to disclose fully and truly all necessary facts for the assessment of this year. Thus, the notice is bad in law.
2.3 In reply, the ld. DR submitted that the profit of the eligible undertaking required to be excluded from the total income were computed by the assessee by taking into account unabsorbed depreciation and brought forward loss. This computation was wrong and, therefore, the assessee had not furnished truly and fully the material facts required for the purpose of assessment.
3. We have considered the facts of the case. The proviso to section 147 reads as under:-
Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has 4 ITA Nos. 5697 & 5698(Del)/2010 escaped assessment for such assessment yer by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub- section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year:
3.1 This proviso uses the words "disclose fully and truly all material facts necessary for assessment." A claim is based upon the material filed in the course of assessment. The material is in the form of various details. The claim itself may be correct or incorrect, however, that is not the material consideration for re-opening the assessment. What is material is that evidence filed with the return in the form of various material facts should be disclosed fully and truly. The fact that it has not been done so should come out from the reasons itself. Nothing has been mentioned in the recorded reasons to the effect that material facts were not fully and truly disclosed. Therefore, we are of the view that the reasons recorded by the AO do not conform to the provision contained in the aforesaid proviso. The provisions had to be strictly complied with for reopening the assessment. In absence of strict compliance, we are of the view that foundation for issuing notice u/s 148 is missing and, therefore, the AO has not properly assumed jurisdiction to issue notice u/s 148. Thus, the notice is bad in law. As the statutory provision has not been complied 5 ITA Nos. 5697 & 5698(Del)/2010 with, it is not necessary for us to discuss various case laws in the matter.
Accordingly, ground no. 1 is allowed.
3.2 In view of this finding, it is also not necessary for us to go into ground no. 2 regarding the merits of the claim of exemption u/s 10A.
4. Coming to assessment year 2004-05, the assessee has again taken up ground no. 1 against validity of the notice issued u/s 148 of the Act. The assessee has also taken up ground no. 2 regarding the reduction of claim of exemption u/s 10A. We proceed with ground no. 1 at the first instance. The facts mentioned in the assessment order are that original assessment u/s 143(3) was completed on 10.01.2006. Thereafter, notice was issued u/s 148 on 24.06.2008 after obtaining approval of the CIT. The reasons recorded for issuance of notice u/s 148 are as under:-
"The assessment was completed in scrutiny on an income of Rs. 25,209/- under normal provision and Rs. 9,57,987/- under special provision. On examination of the records, it is found that the assessee had unabsorbed depreciation of Rs. 4,44,952/- only to be set off, instead of Rs. 17,35,684/-, which was set off. Thus, a sum of Rs. 12,90,732/- has been set off in excess. In view of the above, I have reason to believe that the income of Rs. 12,90,732/- chargeable to tax has escaped assessment within the meaning of section 147/148."6 ITA Nos. 5697 & 5698(Del)/2010
4.1 It is further mentioned that the assessee is engaged in the business of developing software products used by telecommunication companies etc.. It claimed deduction u/s 10A of Rs. 32,72,468/-. While making claim, the unabsorbed depreciation and brought forward loss aggregating to Rs. 17,35,684/- were not deducted from the profits. The assessee objected to the notice. These objections were disposed off by way of an interim order on 18.11.2009. Thereafter, the assessee was granted an opportunity to state its case in respect of non-deduction of aforesaid loss and depreciation. However, the assessee again raised objections to 148 proceedings but remained silent on the issue of merits of the claim. The AO presumed that the assessee had nothing to say in the matter. Therefore, while computing exemption u/s 10A unabsorbed depreciation and brought forward loss, now computed at Rs. 4,44,952/- were deducted from the profits of the eligible unit.
4.2 The assessee challenged the reopening of the assessment as well as downward revision of the claim before the ld. CIT(Appeals). In respect of reopening of the assessment, his finding is that the AO did not consciously consider the claim and there was no application of mind in respect of non-deduction of brought forward loss and unabsorbed 7 ITA Nos. 5697 & 5698(Del)/2010 depreciation. In this connection, he considered certain decided cases, which according to him lead to the inference that the brought forward loss and unabsorbed depreciation should be deducted while computing the profit of the eligible business for deduction u/s 10A. Since there was no application of mind by the AO, the validity of the proceedings has been upheld. The ground on merit was also dismissed in view of the decision considered by him in respect of the validity of the reopening of the assessment.
5. Before us, the ld. counsel for the assessee submitted the sequence of events. It is mentioned therein that the return was filed on 01.11.2004 declaring total income of Rs. 25,210/- and adjusted book profit of Rs. 9,57,987/- u/s 115JB. Original assessment u/s 143(3) was completed on 10.01.2006, in which deduction was restricted to Rs. 32,72,468/- against the claim of Rs. 37,60,074/-. The working of the exemption is as under:-
Less: Exemption u/s 10A Profit of the business X Export turnover Turnover i.e. Rs. 50,08,152 X 8,41,09,477/-
Rs. 12,87,20,290/- = Rs. 32,72,468/-8 ITA Nos. 5697 & 5698(Del)/2010
5.1 This matter has been discussed by the CIT(Appeals) in order dated 07.03.2007, in which part relief has been granted. It is seen that the order deals only with realization of export sales and reversal of entries under the credit notes. It was the claim of the assessee that out of alleged export sales of Rs. 1,25,32,523/-, deduction u/s 10A can only be allowed against export sales of Rs. 18,02,700/- (67,100/- + 17,35,600/-).
Consequently, the assessee is entitled to deduction u/s 10A of Rs. 36,89,936/-, as per revised computation filed with him. The ld. CIT(Appeals) considered the facts and made observations about various contentions raised. Finally, the AO was directed to work out the foreign exchange remittances eligible u/s 10A in the light of his observations. Thus, it will be seen that the order does not deal with the issue at hand, namely, the treatment to be given to unabsorbed depreciation and brought forward loss.
5.2 The order of the Tribunal was passed on 12.12.2008, in which part relief was allowed. This order deals with the extension of time for realization of export proceeds beyond six months and setting off of marketing expenses against foreign remittances received. After considering these issues, the appeal of the assessee was partly allowed. 9 ITA Nos. 5697 & 5698(Del)/2010 The AO gave effect to it on 24.02.2009. The exemption u/s 10A was determined at Rs. 36,84,555/- against the claim of Rs. 37,60,074/-. It may be observed here that this order of the Tribunal also does not deal with the issue at hand regarding unabsorbed depreciation and brought forward loss. In the mean time, the AO had issued notice u/s 148 on 24.06.2008. The re-assessment proceedings were completed on 24.12.2009, in which deduction u/s 10A was computed at Rs. 29,81,724/-.
5.3 The main case of the ld. counsel is that the notice is bad in law as it is in violation of the provision contained in second proviso to section 147 which enacts that the Assessing Officer may assess or re-assess such income, other than the income involving matters which are subject matter in appeal, reference or revision, which is chargeable to tax and has escaped assessment.
5.4 In order to support the aforesaid contention, reliance is placed on the decision in the case of Indian Oil Corporation Ltd. Vs. Deputy CIT & Others (2011) 238 CTR (Bom.) 283. In this case, the AO noted that the dividend income of Rs. 206.95 crore, exempt u/s 10(33), was generated out of investments which were made through internal accruals and no 10 ITA Nos. 5697 & 5698(Del)/2010 borrowing was made for this purpose. From the reply of the assessee, it can be said that a fair disclosure was made that no expenditure has been incurred for earning the dividend income and that even in the immediately preceding year the AO had accepted the plea. It has been held that no action can be taken after expiry of four years from the end of the relevant assessment year unless it is shown that there has been a failure on the part of the assessee to disclose fully and truly all material facts. In the case of Prashant Projects Ltd. Vs. ACIT & Another (2011) 333 ITR 368 (Bom.), the challenge was by the assessee to the reopening of the assessment for assessment year 2002-03 in exercise of powers conferred u/s 147. The notice u/s 148 had been issued on a date beyond expiry of four years of the end of the relevant assessment year. The records disclosed that the assessee had furnished details of gross total income, claim of deduction u/s 80HHC, details of profit and loss account pertaining to export and domestic turnover, and relevant information in Form No. 10CCAC. The AO obviously applied his mind because it was mentioned in the assessment order that the assessee was carrying on manufacturing activity and it was exporting the manufactured goods. During the proceedings before CIT(Appeals) a remand report was called for and it was reported that the assessee has purchased the goods which 11 ITA Nos. 5697 & 5698(Del)/2010 were then exported, therefore, the case fell within the purview of sub- section (3)(b) of section 80HHC. The CIT(Appeals) accepted the contention of the assessee. This shows that there was a full and true disclosure of facts and application of mind by the AO. Therefore, it was held that the assessment could not be reopened after expiry of four years from the end of the relevant assessment year. It was also mentioned that under second proviso to section 147 the AO may assess or re-assess such income other than income involving matters which are subject matter of any appeal etc. The issue on which assessment was sought to be reopened was canvassed in appeal and it was decided. Therefore, the assessment could not be reopened by dint of this provision also. In the case of CIT Vs. Empire Industries Ltd. (1994) 210 ITR 267, the question before the court was- whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the ITO could not assume valid jurisdiction to proceed u/s 147(b) of the Income-tax Act, 1961? After referring to a number of decisions, it was held that re-assessment proceedings u/s 147(b) cannot be upheld when the notice has been issued on a ground which has already been decided by the Tribunal in appeal against the original assessment order. 12 ITA Nos. 5697 & 5698(Del)/2010 5.5 In reply, the ld. DR submitted that the issue regarding setting off of unabsorbed depreciation and brought forward loss was not there before the ld. CIT(Appeals) or Hon'ble Tribunal in appeal against the original order. Therefore, the ratio of aforesaid cases is not applicable. In this case, notice has been issued within a period of four years from the end of the relevant assessment year. The aforesaid decisions are not applicable in view of this factual position also.
6. We have considered the facts of the case and submissions made before us. We have already discussed the issues decided by the ld. CIT(Appeals) and the Tribunal. The issue was primarily in respect of computation of foreign exchange remittances received in India. The Tribunal also took into account the fact that foreign exchange remittances received in India beyond a period of six months could also be considered if requisite conditions are satisfied. It also considered the issue of setting off of marketing expenses against foreign exchange remittances. Thus, it can be said that none of these authorities considered the issue regarding setting off of unabsorbed depreciation and brought forward loss while computing deduction u/s 10A. Therefore, the facts of the aforesaid decisions are distinguishable. The notice has also been issued within a 13 ITA Nos. 5697 & 5698(Del)/2010 period of four years from the end of the relevant previous year. The facts are distinguishable in this respect also. As the matter regarding deduction of unabsorbed depreciation and brought forward loss was not considered earlier by the CIT(Appeals) or the Tribunal, it is held that second proviso to section 147 does not come to the aid of the assessee. 6.1 While still on the validity of notice u/s 148, the ld. counsel relied on various decisions, which are listed as under:-
(a) CIT Vs. Kelvinator of India Ltd., 320 ITR 551 (SC),
(b) CIT Vs. Foramer France, 264 ITR 566,
(c) Techspan India (P) Ltd. Vs. ITO, 283 ITR 212 (Del),
(d) United Electrical Co. (P) Ltd. Vs. CIT, 258 ITR 371 (Del),
(e) Jindal Photo Films Ltd. Vs. Deputy CIT, 234 ITR 170(Del),
(f) Direct Information (P) Ltd. Vs. ITO, 203 Raxman 70 (Bom.) While cases at (a) to (e) above were merely mentioned, it was submitted that the assessment for assessment year 2006-07 and 2007-08 was sought to be reopened in the case of Direct Information (P) Ltd.
(supra) for the purpose of withdrawing deduction u/s 10A. The Court did not approve of the action on the ground that it was a case of mere change 14 ITA Nos. 5697 & 5698(Del)/2010 of opinion. The cases relied upon by the AO and the ld. CIT(Appeals) have been distinguished primarily on the ground that in the instant case the claim is u/s 10A under Chapter III and not under any section in Chapter VIA, therefore, the words "total income" used in section 10A will have to be understood differently from the words "gross total income"
used in section 80B(5).
6.2 In reply, the ld. DR submitted that the issue regarding deduction of unabsorbed depreciation and brought forward loss was not specifically brought to the notice of the AO in the course of original assessment. This issue was also not raised by the AO. Thus, no opinion was formed in the mater. In such a situation, there could be no question of change of opinion, a concept on which the assessee has been relying for arguing that jurisdiction has not been assumed properly for issuing notice u/s 147.
7. We have considered the facts of the case and submissions made before us. It may be made abundantly clear that in this case notice has been issued within four years from the end of the relevant previous year. Therefore, first proviso to section 147 is not applicable. Further, it has never been shown before us that this question was discussed and debated 15 ITA Nos. 5697 & 5698(Del)/2010 in the course of original assessment proceedings. It has also not been shown to us that the issue was specifically brought to the notice of the AO. The cases relied upon by the ld. counsel for the assessee do hold that a case cannot be reopened merely on change of opinion. However, there are other cases which hold that just because material lies embedded in the evidence, which the assessing officer could have uncovered, but did not uncover, it is not a good ground to deny or strike down a notice u/s 148. In this connection, attention is drawn towards the decision in the case of Honda Siel Power Products Ltd. Vs.Dy. CIT (2011) 197 Taxman 415 (Del), which has been approved by the Hon'ble Supreme Court in SLP No. 1985/2011, reported in 2011-TIOL-72-SC-IT. Thus, a case has to be seen not only from the point of view of the concept of change of opinion but also from other aspects, namely, whether the details of the claim were available on record, specifically brought to the notice of the AO or such details were taken into account. This is because the words "change of opinion" do not find a specific mention in section 147. Having considered the rival submissions, we are of the view that since the details were not filed and the matter was not discussed in the original assessment at all, no opinion was formed. Thus, there is no question of change of opinion, Thus, the AO was within his jurisdiction to issue notice u/s 148. 16 ITA Nos. 5697 & 5698(Del)/2010
8. Ground no. 2 deals with the merits of the case. It is mentioned that there was no justification to hold that the deduction of Rs. 32,72,468/-
was not admissible to the assessee. It is further mentioned that there is a difference of opinion on the aforesaid issue and, therefore, the ld. CIT(appeals) ought to have decided the matter in favour of the assessee. 8.1 In this connection, it is mentioned in the assessment order that the assessee claimed deduction of Rs. 32,72,468/- before setting off brought forward losses and unabsorbed depreciation amounting to Rs. 17,35,684/-. It may be mentioned here that such loss and depreciation has been taken at Rs. 4,44,952/- in the computation of income. The finding of the AO is that deduction u/s 10A is allowed from the total income, which is arrived at after setting off brought forward loss. The brought forward loss has been computed at Rs. 4,44,952/-. The same has been deducted from the gross total income for the purpose of computing deduction u/s 10. 8.2 The finding of the ld. CIT(Appeals) is that unabsorbed depreciation and brought forward loss are to be deducted in the light of the decision in the case of CIT Vs. Himatasingike Seide Ltd. (2006) 286 ITR 255, therefore, he upheld the order of the AO.
17 ITA Nos. 5697 & 5698(Del)/2010
9. Before us, the ld. counsel for the assessee relied on the following case law:-
(a) KPIT Cummins Infosystems (Bangalore)(P) Ltd. Vs. ACIT, 120 TTJ 956 (Bangalore);
(b) Changepond Technologies (P) Ltd. Vs. ACIT, 22 SOT 220 (Chennai);
(c) Hindustan Unilever Ltd. Vs. DCIT, 325 ITR 102 (Bom.);
(d) Capegemini India (P) Ltd. Vs. Additional CIT, 144 TTJ 33 (Mum.)
(e) Honeywell International (India) (P) Ltd. Vs. DCIT, 108 TTJ 924 (Del).
9.1 It has also been submitted that where two views are possible, the one favourable to the assessee should be adopted, as held in the case of CIT Vs. Vegetable Products of India, 88 ITR 192.
9.2 In reply, the ld. DR relied on the finding of the ld. CIT(Appeals) in paragraph no. 5.1, which reads as under:-
"5.1 I have carefully considered the submissions made on behalf of the appellant, the findings of the Assessing Officer and the facts on record. In this context, reliance is placed on the decision of Bombay High Court in the case of Indian Rayon Corporation Ltd. Vs. CIT (2003) 261 ITR 98 (Bom.), wherein it has been observed that one cannot exclude depreciation allowance while computing profit derived from newly established undertaking for computing deductions 18 ITA Nos. 5697 & 5698(Del)/2010 under chapter VIA and it was held that assessee's claim for allowance of deduction u/s 80HH, without taking into consideration the current depreciation was to be rejected. The decision of the Karnataka High Court in the case of CIT Vs. Himatasingike Seide Ltd., (2006) 286 ITR 255 is also relevant to the issue wherein it was held that exemption u/s 10A could be granted only after adjustment for unabsorbed depreciation and brought forward loss. The issue is also covered against the assessee by the decision of Special Bench of ITAT in the case of Vahid Paper Cnverters (20050 98 ITD 165 (Alld.) (SB), wherein the decision in the case of Indian Rayon Corporation Ltd. Vs. CIT (supra) was also considered by the Special Bench. Reliance is also placed on the decisions of ITAT, Bangalore in the case of M/s Intellinet Technologies India Ltd. Vs. ITO dated 12.03.2010,(2010- TIOL-167-ITAT-Bang.) and M/s Tyco Electronic Tools India (P) Ltd. Vs. ACIT, dated 26.04.2010, 2010-TIOL-557-ITAT-
Bang., wherein it was held that exemption u/s 10A could be granted only after adjustment for unabsorbed depreciation and brought forward loss. Therefore, it is held that the action of the Assessing Officer in allowing exemption u/s 10A only after setting of unabsorbed depreciation and brought forward loss is in order. As a result, grounds of appeal no. 3 and 4 are dismissed."
9.3 In the rejoinder, it is submitted that the decision in the case of Intellinet Technologies India Ltd. and Tyco Electronic Tools India (P) Ltd. have been overruled by the Hon'ble Karnataka High Court in the case of Ukogava India Ltd. (2012) 341 ITR 385 (Karnataka).
10. We have considered the facts of the case and submissions made before us. We find that the ld. counsel merely furnished citations of 19 ITA Nos. 5697 & 5698(Del)/2010 various cases but discussed at length the decision in the case of Ukogava India Ltd. Since we have the benefit of two decisions of Karnataka High Court, we proceed to base our decision on these cases. 10.1 The case of Himatasingike Seide Ltd. (supra) was decided u/s 10B of the Act. The question was-whether, on the facts and in the circumstances of the case, the ITAT is right in law in holding that the assessment order passed by the AO allowing the claim of the assessee for adjustment of unabsorbed depreciation against the income from other sources was in order and hence cannot be considered to be erroneous or prejudicial to the interest of revenue and in cancelling the order u/s 263? The facts of the case are that the assessee is a hundred per cent export oriented business undertaking in terms of provisions of section 10B. Profits and gains derived by it from the undertaking are not liable to be included in the total income. Although the operations of the unit started in assessment year 1988-89, the assessee did not claim the benefit u/s 10B for assessment years 1988-89 to 1990-91. It claimed benefit from assessment year 1992-93 for a consecutive period of five years. In assessment year 1994-95, the assessee had other income over and above profits and gains of the business of the undertaking. The unabsorbed 20 ITA Nos. 5697 & 5698(Del)/2010 depreciation available to the assessee in assessment year 1988-89 was carried forward to this year and claimed against income from other sources. Thus, the income was reduced to nil. The AO accepted this position in the original assessment order. The Commissioner of Income- tax exercised his revisionary power in respect of adjustment of unabsorbed depreciation against income from other sources. The AO was directed that unabsorbed depreciation and unabsorbed investment allowance should be adjusted against income of the export oriented business undertaking. After hearing both the parties, the Hon'ble Court came to the conclusion that the CIT was fully justified in holding that the nil return was not correct. Accordingly, the question was answered in favour of the revenue. While doing so, the Hon'ble Court inter-alia considered the provisions contained in sections 4 and 5. It also considered the decision in the case of Distributors (Baroda) Pvt. Ltd. Vs. Union of India, (1985) 155 ITR 120 (SC); Cambay Electric Supply Co., 134 ITR 84 (SC); CIT Vs. Virmani Industries (P) Ltd. (1995) 216 ITR 607 (SC); CIT Vs. Sun Stone Engineering Industries (P) Ltd. (1996) 220 ITR 182 (Raj.); CIT Vs. Surendra Textiles (2002) 258 ITR 387 (Raj.); Indian Rayon Corporation Vs. CIT (2003) 261 ITR 98 (Bom.) and CIT Vs. HMT Ltd. (1993) 199 ITR 235 (Karnataka). In the case of Indian Rayon Corporation Ltd. 21 ITA Nos. 5697 & 5698(Del)/2010 (supra) it was inter-alia observed by the Hon'ble Bombay High Court that the scheme of sections 4 and 5 does indicate that income-tax is a tax in respect of income computed as per provisions of the Act. There is a dichotomy between cases of computation of normal income under the Act de-hors chapter VIA and computation of taxable income where a deduction is claimed under chapter VIA because the legislature has intended that these special deductions should be restricted to profits derived from a newly established undertaking. Thus, chapter VIA is a separate code unto itself. In order to compute total income, deduction computed u/s 80HH has to be reduced from the gross total income. This is a question falling under chapter VIA. Profits and gains of a newly established undertaking have got to be computed as per provisions of sections 29 to 43A (emphasis supplied) and if it claimed relief under chapter VIA of the Act, then it is not open to the assessee to disclaim depreciation allowance. This is because chapter VIA is an independent code by itself for computing special type of deductions. For this purpose, gross total income has to be computed from which deduction under chapter VIA is to be allowed. The gross total income had to be computed by taking into account the provisions contained in sections 29 to 43A, 22 ITA Nos. 5697 & 5698(Del)/2010 which also includes section 32(2). Thus, depreciation allowance cannot be ignored.
10.2 We may now consider the decision in the case of Ukogava (India) Ltd. (supra). The assessee claimed exemption of Rs. 3,95,99,100/- u/s 10A in respect of its STP unit. This had been claimed before set off of unabsorbed depreciation and carried forward loss. According to the AO, the deduction under this provision has to be allowed from the total income of the assessee. The total income was arrived at as per section 80B(5). Therefore, the exemption had to be given after setting off of brought forward losses and unabsorbed depreciation as provided in sections 72(2) and 32 respectively. On the facts, it was held that the assessee was not entitled to any exemption u/s 10A on the aforesaid basis. The AAC held that section 10A is placed in chapter III, which deals with incomes which do not form part of the total income. This income has to be excluded before arriving at the gross total income, otherwise the aforesaid provision would have been placed under Chapter VIA. The income has to be excluded at the threshold level. Therefore, the income would not enter into the gross total income. The loss of ineligible units cannot be set off against the profit of the eligible unit. Therefore, the AO was directed 23 ITA Nos. 5697 & 5698(Del)/2010 to allow exemption u/s 10A without setting off of losses of non-eligible units and consequently allowed the loss and the depreciation to be carried forward. The Tribunal mentioned that profits and gains to be excluded represent the profits and gains of the eligible undertaking. Such profits are to be computed in accordance with provisions contained in sections 29 to 43DA(emphasis supplied). Section 70 governs setting off of loss from one source against income from another source under the same head of income. Section 10A is not part of sections 30 to 43DA. Therefore, losses of ineligible units cannot be set off to ascertain the gains of eligible unit. Unabsorbed business loss is to be set off under section 72 of the Act. Again it is not mentioned in sections 29 to 43DA. Therefore, unabsorbed business losses will not be set off against profit of the undertaking engaged in the export of computer software. The unabsorbed depreciation of ineligible units can also not be set off against the profit of the eligible unit. Two questions were admitted for adjudication, which are as under:-
"(i) Whether the appellate authorities failed to take into consideration that the amendment to section 10A by the Finance Act of 2000 with effect from April 1, 2001, the deduction of profits and gains as earned 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 consequently the loss from the non-STP unit is required 24 ITA Nos. 5697 & 5698(Del)/2010 to be set off against the income of the other STP unit before allowing deduction under section 10A of the amended Act?
(ii) Whether the Tribunal was correct in holding that the deduction under section 10A or section 10B of the Act during the current assessment year has to be allowed without setting off brought forward unabsorbed losses and the depreciation from earlier assessment year or current assessment year either in the case of non-STP units or in the case of the very same undertaking?"
The finding of the Hon'ble Court has been recorded in placitum 33 on page 402, which is reproduced below:-
"As the income of the section 10A unit has to be excluded at source itself before arriving at the gross total income, the loss of the non-section 10A unit cannot be set off against the income of the section 10A unit under section 72. The loss incurred by the assessee under the head "Profits and gains of business or profession" has to be set off against the profits and gains, if any, of any business or profession carried on by such assessee. Therefore, as the profits and gains under section 10A is not to be included in the income of the assessee at all, the question of setting off the loss of the assessee of any profits and gains of business against such profits and gains of the undertaking would not arise. Similarly, as per section 72(2), unabsorbed business loss is to be first set off and thereafter unabsorbed depreciation treated as current year's depreciation under section 32(2) is to be set off. As deduction u/s 10A has to be excluded from the total income of the assessee the question of unabsorbed business loss being set off against such profit and gains of the undertaking would not arise. In that view of the matter, the approach of the assessing authority was quite contrary to the aforesaid statutory provisions and the Appellate Commissioner as well as the Tribunal were fully justified in setting aside the said assessment order and granting the benefit of section 25 ITA Nos. 5697 & 5698(Del)/2010 10A to the assessee. Hence, the main substantial question of law is answered in favour of the assessees and against the revenue."
10.3 From the decision of Hon'ble Bombay High Court in the case of Indian Rayon Corporation Ltd. (supra) and aforesaid decisions of Hon'ble Karnataka High Court, it is clear that profits of eligible unit to be excluded are to be computed under chapter III containing sections 28 to 44DA. Section 32 is contained therein but section 72 is not contained therein. Under section 32, unabsorbed depreciation of an earlier year becomes the depreciation of current year. Thus, unabsorbed depreciation has to be deducted from the profit of the current year, but brought forward losses cannot be so deducted as section 72 does not fall under chapter III. Thus, it is held that the ld. CIT(appeals) was not justified in setting off unabsorbed depreciation against the profits and gains of this year.
11. In the result, appeal in ITA No. 5697(Del)/2010 is allowed; and the appeal in ITA No. 5698(Del)/2010 is partly allowed.
Sd/- sd/-
(U.B.S. Bedi) (K.G. Bansal)
Judicial Member Accountant Member
SP Satia
26 ITA Nos. 5697 & 5698(Del)/2010
Copy of the order forwarded to:-
M/s Technotree Convergence Ltd., New Delhi.
DCIT, Circle 4(1), New Delhi.
CIT(A)
CIT,
The D.R., ITAT, New Delhi. Assistant Registrar.