CIT vs. Yokogawa India Ltd (Karnataka High Court)

DATE: (Date of pronouncement)
DATE: November 8, 2011 (Date of publication)

Click here to download the judgement (yokogawa_10A_exemption_loss_other_units.pdf)

S. 10A/B continue to “exempt” profits & so loss of other units (eligible & non-eligible, including B/f loss) not liable for set-off against s. 10A/B profits

The High Court had to consider two issues for AY 2001-02 & onwards: whether (i) the loss incurred by a non-eligible unit & (ii) the brought forward unabsorbed loss & unabsorbed depreciation of the eligible unit has to be set-off against the profits of the eligible unit before allowing deduction u/s 10A/ 10B. HELD answering both questions in favour of the assessee:

(a) On issue (i), s. 10A was amended by the FA 2000 w.e.f. 1.4.2001 to convert it from an “exemption” provision to a “deduction” provision. S. 10A allows deduction “from the total income“. The phrase “total income” in s. 10A means “the total income of the STP unit” and not “total income of the assessee. Consequently, s. 10A deduction has to be given before computing the “profits & gains of business” under Chapter IV. This proposition is in line with the form of return. Allowing deduction at the earliest stage of business income computation will blur the difference between “commercial profits” and “tax profits“. Further, though s. 10A was amended to make it a “deduction” provision, it continues to remain in Chapter III and was not moved to Chapter VI-A. The result is that even now s. 10A is in the nature of an “exemption” provision and the profits of the eligible unit have to be deducted at source level and do not enter into the computation of income. Consequently, the losses suffered by non-eligible units cannot be set-off against the eligible profits;

(b) On issue (ii), s. 10A(6) as amended by the FA 2003 w.r.e.f. 1.4.2001 provides that depreciation and business loss of the eligible unit relating to the AY 2001-02 & onwards is eligible for set-off & carry forward for set-off against income post tax holiday. This amendment does not militate against the proposition that the benefit of relief u/s 10A is in the nature of exemption with reference to commercial profits. However, to give effect to the legislative intention of allowing the carry forward of depreciation and loss suffered in respect of any year during the tax holiday for being set off against income post tax holiday, it is necessary that a notional computation of business income and the depreciation should be made for each year of the tax holiday period. Such loss is eligible to be carried forward. But, as the income of the 10A unit has to be excluded at source itself before arriving at the gross total income, the question of setting off the loss of the current year’s or the brought forward business loss (and unabsorbed depreciation) against the s. 10A profits does not arise.

Note: On issue (i) see Scientific Atlanta 129 TTJ 273 (Chennai)(SB); On issue (ii) see the contra view in Himatasingike Seide 286 ITR 255 (Kar) followed in Global Vantedge 1 ITR 326 (Del)(Trib). Issue (ii) is pending before a 5 Member Special Bench in Tandon Information Solutions

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