Reg. Exemption U/s. 10B

[nasrullah_azhar]

Dear Sir,

If the AO disallows certain expenses on account of non-deduction of TDS, is it possible to claim exemption on the amount disallowed? Kindly clarify.

Regards
Azhar
Student

[pawansingla]

Yes . The profits of business has to be computed for as per provisions of sec. 28 to 43D. Sec. 40a(ia) is a part of these provisions.

[nasrullah_azhar]

Thank you very much for ur reply sir. But however under Section 10B provision, it states that "Exemption should be claimed in the return of income". Whether that phrase indicates the amount claimed or else is it just exemption(irrespective of the amt.) to be claimed? Pls clarify

Regards
Azhar
Student

[pawansingla]

There are many judgement supporting the view that after amendment sec. 10A/10B provides for deduction and not exemption. Even Bombay High Court has taken the same view. " loss from 10A/10B units can be adjusted against the normal business income". Further deduction under 10A/10B has to be given after set off of brought forward loss/unabsorbed depreciation.
As per the provisions of the section 10A, the assessees should first set-off the carry forward business losses against the gross total income and it is only on the resultant balance amount on which the assessee is entitled to claim the deduction u/s 10B of the Act."

The above contention is also supported by various rulings given by the High Court/ITAT. Some of the decisions which support the above contention are hereunder:-

(a)   ACIT vs. Jewellery Solutions International Pvt. Ltd. (2009) 28 SOT 405(Mumbai) in ITA NO.695/Mum/2007 dated 23.01.2009.
(b)   Sword Global India Pvt. Ltd. Vs. ITO (2008) 306 ITR [AT] 286 (Chennai).
(c)   CIT vs. Himatasingike Seide Ltd. (2006) 156 Taxman 151 (Karnataka).
  It has been judicially held by various appellate authorities that "for computing the profits and gains of business or profession of a hundred per cent EOU, the income has to be computed in accordance with sections 30 to 43D and thus effect has to be given to section 32 for computation of the profits and gains of the business or profession; consequently, deduction u/s 10A is to be allowed under the computation of income from profits and gains of business or profession of a hundred per cent EOU after adjusting the unabsorbed depreciation."
Income tax - Sec 10B - Whether deduction is to be allowed after setting off brought forward losses from previous year - YES, says ITAT
By TIOL News Service
NEW DELHI, NOV 25, 2010: THE issue before the ITAT is - Whether deduction u/s 10B is to be allowed after setting off the brought forward losses from previous year. YES is the Tribunal's answer.
Facts of the case
The assessee is a private Ltd. Company engaged in the business of 100% export of computer software services and software development, mainly to the USA and other countries. Initially the assessee company was incorporated in 1985 in the name and style of M/s.Gebbs Micro systems Pvt. Ltd. and was in the business of manufacturing computer monitors only. From the year 1999, its name was changed to M/s.Gebbs Infotech Ltd. and it started developing software, for exports. Further, the promoters incorporated another company viz., Gebbs Data Products Pvt. Ltd. in 1986, which was non-functional. In the year 1997, its name was changed to Gibs Software International Pvt. Ltd. In the year 1999, both the M/s.Gebbs Infotech Ltd. & Gibs Software International Pvt. Ltd. were amalgamated into Gebbs Infotech Ltd. Prior to the amalgamation, the business model was that GSI Inc. used to obtain orders from the US market, service its clients and deliver on site solutions. Offshore work was done either by GSIPL or GSI Inc. The assessee paid Associate enterprise, GSI Inc. for its services at arms length and the transactions were cleared by the transfer pricing wing in A.Y. 2003-04 & 2004-05 without any change. There was no reference made to the T.P.O. in A.Y. 2002-03 & 2005-06 also. The assessee claimed deduction u/s 10A in A.Y. 2001-02 for the first time. For the A.Y. 2002-03 there was loss and therefore no deduction u/s 10A of the Act was claimed. During the year under consideration, Return of Income was filed declaring the total income of Rs 2,112/- after claiming the deduction u/s 10B of the Act to Rs.3,61,86,121/-. The income from the 10B unit was at Rs.4,02,06,801/-, 90% of it was claimed by the assessee as deduction and balance of Rs.40,20,680/- was set off against brought forward losses of A.Y. 2001-02. The A.O. determined the income at Rs.1,09,88,220/- after disallowing the set off of carried forward loss and reducing the exemption u/s 10B. The A.O. was of the opinion that such a set off was not allowable u/s 10A/10B of the Act and relied on section 10B(6) of the Act to arrive at his conclusion. The CIT(A) after considering the submissions made before him, allowed the ground of the assessee.

The A.O. also disallowed the claim u/s 10B of Rs.3,60,04,610/-, of the assessee for on-site development of computer software at the site of customers abroad, on the ground that the employees who have worked onsite had left India for USA, before the date of setting up of SEEPZ Unit. The A.O further observed that the assessee was having two units, one which was located in SEEPZ i.e., on SEZ and one which was outside the SEZ i.e., STPI Unit on which it claimed deduction u/s 10A in earlier years. The A.O. allowed the deduction u/s. 80HHE on balance profits. On appeal, the CIT (A) allowed the claim of deduction u/s 10B of the Act. The AO also observed that the payments of R.13,69,950/- was made to certain companies on account of job work and concluded that as the assessee is not a manufacturer to that extent, the exemption u/s 10B should be worked out on proportionate basis. The CIT(A) deleted the additions made by the AO.

On appeal by the Revenue, the ITAT held that,
++ Sub-clause (2) of clause (6) to section 10A clearly states that no loss shall be carried forward or set-off where such loss relates to any of the relevant Assessment Years. There is no ambiguity in the Act and it is also an undisputed fact that the assessee was entitled to deduction u/s 10A which it had been allowed in the A.Y. 2001-02 and which it allegedly did not claim in the A.Y. 2002-03. It is also not in dispute by the A.O. that the assessee had not made a declaration as required u/s 10A(8) of the Act for not claiming deduction u/s 10A of the Act. In this regard the Counsel for the assessee has pointed out to the declaration vide letter dated 08.10.2002. In view of the above facts and circumstances of the case, the stand of the A.O. not allowing the set-off of carry forward loss incurred during the A.Y. 2002- 03 cannot be sustained;

++ from the facts it is clear that the finding of the AO that the employees do not belong to the Company is incorrect. All the employees belong to the company. They are the employees of M/s Geebs Software International P. Ltd. which has amalgamated to the assessee company. Just because the employees were allocated to other unit of the company which is exempt u/s 10A in the earlier years, and because these employees were assigned duties of the SEZ units in the impugned assessment year, it does not lead to a conclusion that the assessee cannot claim exemption u/s 10B. The AO has granted exemption u/s 80HHE. The allegation that the payments not made are at arm's length is also not correct because for the AU 2003-04 the TPO has passed an order u/s 92CA(3) upholding the price paid by the assessee as that which is an another employee. On these facts, the finding of the CIT(A) was upheld;

++ the AO has not given any finding in the assessment order, that what is got by the assessee from the job work contractors is a product by itself. The assessee had in fact contended before AO that only a part work was done through job work contracts. The AO, was wrong in coming to a conclusion that in the case of manufacture of software, no part job can be outsourced, as in the case of other manufacturing activities. Out of a total receipt on account of sale of software of 13.11 crores, the outsourcing billing was Rs.1.36 crores. A software product contains within its numerous sub software programmes which are integrated. On these facts the Tribunal upheld the finding of the CIT(A).
Revenue's appeal dismissed
(See 2010-TIOL-700-ITAT-MUM in 'Income Tax')

[pawansingla]

 S. 10A : Exemption – Export Oriented Unit – Computation – Brought forward loss and Unabsorbed Depreciation
Brought forward loss and unabsorbed depreciation of earlier years to be set off before allowing deduction under section 10A.
Intellinet Technologies India P. Ltd. vs. ITO (2010) 5 ITR 96 (Bang.)(Trib.)
376. S. 10B : Exemption – Computation – Set off of Unabsorbed Depreciation
Benefit of section 10B has to be allowed to the assessee before setting off of brought forward unabsorbed depreciation.
Patspin India Ltd vs. CIT (2010) 42 DTR 550 (Coch.)(Trib.)
There are many judgements including special bench in case of Specfic Atlanat which have held that exemption under section 10A/ 10B are units specfic. Hence loss from non EOU/STPI unit cannot be adjusted against the profits of 10A/10B units.
On the contrary there are judgements including Bombay High court in case of Hindustan unilever v/s DCIT.191 taxman 119(2010) which have held that loss from 10A/10B units can be set off against the normal business income.
Thus , assesse is put in a very benficial position in both the stage. If he has loss from 10A/10B , same will be set off against the normal business income.
On the other hand , if he has profit from 10A/10B units , he will claim deduction independently on units.
Absurd situation. But that how is the section has been interpreated by the appellte authorities.