Deduction under Sec 10A to be allowed only after setting off brought forward los

[pawansingla]

BANGALORE, APR 06, 2010: SECTION 10A is indeed one of the most disputed Sections in the I-T Act. When the Chennai Special Bench had given its decision in favour of the assessee in the case of Scientific Atlanta, it was thought that the issue has been settled. But that is not correct. In an interesting and bold decision, the Bangalore Bench of the Tribunal has differed with the Special Bench by observing that the perpetuating a mistake is not heroism and has finally gone by the decision of the Jurisdictional HC which has ruled in favour of the Revenue. Let's take a look at the intricacies of the facts.

Matrix of facts

Assessee claims Sec 10A benefits without setting off the brought forward loss - AO allows the claim after making certain adjustments in the export turnover - CIT takes the view the AO has allowed the deduction without application of mind and invokes powers u/s 263 to set aside the AO's order - Assessee contends that the CIT is wrong in setting aside the AO's order as the AO has taken one of the possible views available at the time of passing the assessment order - further argues that the view taken by the AO has also been reaffirmed by the Special Bench decision in the case of Scientific Atlanta India Technology (2010-TIOL-69-ITAT-MAD-SB) which has gone in favour of the assessee

The CIT (DR) argued that the total income of a particular assessment year has to be computed after aggregation of the profits/losses of the concerned assessment year under different heads of income and after the set off of brought forward business losses/unabsorbed depreciation relating to assessment years and the deduction u/s.10A has to be worked out after setting off of brought forward losses/unabsorbed depreciation. He relied on the Delhi Bench's decision in the case of Global Vantedge Pvt. Ltd., vs. DCIT 2010-TIOL-24-ITAT-DEL where the Tribunal has held that unabsorbed depreciation or unabsorbed business losses in respect of eligible 10A unit has to be set off against the profits for determining the amount of deduction available u/s.10A. He stated that Delhi Bench has considered the binding decision of the Karnataka High Court in the case of Commissioner of Income-tax vs. Himatasingike Seide Ltd. (2006-TIOL-448-HC-KAR-IT) and also earlier decisions of the Tribunal to come to the above conclusion and has observed that the earlier decisions of the Tribunal, were rendered in favour of the assessee, without the benefit of applying the decision of the Karnataka High Court and, therefore, not applicable to the issue any more.

Having heard the parties the Tribunal has held that,

++ it is true that the Bangalore Bench of the Tribunal has passed a series of orders accepting the arguments of the assessee holding that it is not necessary to set off the brought forward losses and unabsorbed depreciation of the earlier assessment years in working out the deduction available u/s.10A. As rightly pointed out by the counsel for the assessee, ITAT, Madras Special Bench has also taken the very same view;

++ but dehors all these Tribunal orders, there is a binding judgement of the Hon'ble jurisdictional High Court available before us which has been rendered by their Lordships in the case of Commissioner of Income-tax vs. Himatasingike Seide Ltd., (2006-TIOL-448-HC-KAR-IT). The HC examined the contention whether the deduction available to an assessee u/s.10B has to be allowed before setting off of unabsorbed depreciation and unabsorbed investment allowance. After examining the framework of law dealing with exemption u/s.10B, their lordships held that Section 10B cannot be read in isolation of other provisions. This is only an exemption provision.

++ The court went on to explain that after taking into consideration the unabsorbed depreciation, an assessee may get exemption but to a lesser extent and nonetheless it could not take only a portion of the depreciation just to suit its income for the purpose of nil liability and adjust the balance of unabsorbed depreciation against other business income. The ratio laid down by the Hon'ble High Court of Karnataka is equally applicable to the provisions of law contained in Section 10A as well;

++ The intent and purpose of the scheme of exemption provided in Sections 10A and 10B are analogous and obviously the judgement of the Hon'ble Karnataka High Court rendered in the context of Section 10B is equally applicable to Section 10A.

++ the ITAT, Delhi 'C' Bench has followed the said judgement of the Karnataka High Court in deciding the matter against the assessee, in the case of Global Vantedge Pvt. Ltd., Vs. DCIT 2010-TIOL-24-ITAT-DEL. While dealing the said appeal, the Tribunal has considered all the earlier orders of the Bangalore Bench and other decisions in favour of the assessee and has held that the relevance of those decisions do not have any binging effect when the judgement of a High Court is available on the issue;

++ it is a settled law that when the Hon'ble Supreme Court or a High Court declares the law on a subject, the declaration goes back to the date of enactment of that particular law so as to state that the law, from the date of its enactment itself was in the manner decided by the Court subsequently. When that universal rule of interpretation is accepted, we have to hold that unabsorbed depreciation and brought forward losses have to be set off against the profits while computing the deduction u/s.10A and this position of law has to be reckoned from the date of the enactment of the law itself.

++ Therefore, the necessary finding is that even when the Assessing Officer was passing the assessment order, the law on the subject of exemption available u/s.10A was always the law as explained by the Hon'ble High Court in the case of Commissioner of Income-tax vs. Himatasingike Seide Ltd. (2006-TIOL-448-HC-KAR-IT). Once the law on the subject has been declared by the High Court, the pronounced judgement dates back to the date of enactment and, therefore, by superimposition made by the judicial pronouncement, the assessment order has become erroneous. It is not only erroneous, but also prejudicial to the interests of Revenue inasmuch as the error has contributed in granting excessive relief to the assessee.

++ it is not out of context here, to refer to the decision of ITAT, Bangalore Bench rendered in the case of KPIT Cummins Infosystems (Bangalore) (P) Ltd., Vs. ACIT. In the said decision, the Tribunal has held in favour of the assessee, accepting the argument that brought forward loss/unabsorbed depreciation need not be set off against profits eligible for deduction u/s.10A. In fact, one of the Members from this bench was a party to that order. But, in the course of arguments, it was found that the said order might not be reflecting the correct position of law. The bench has no hesitation to state that perpetuating a mistake is not heroism.

Assessee's appeal dismissed and the CIT order u/s 263 upheld