Court/Forum: ITAT
Bench: Bangalore 'A' Bench, Shri N.V. Vasudevan, Judicial Member and Shri Jason P. Boaz, Accountant Member
Order Date: 2014-04-30
Outcome: Mixed
Sections: Section 147, Section 143(3), Section 10B, Section 35(2AB), Section 14A, Section 234C, Section 234D
The provisions of Section 10B are exemption provisions, and profits of the eligible unit should not be set off against losses of non-eligible units.
The appeal by the assessee was partly allowed for statistical purposes, while the appeal by the revenue was dismissed. The tribunal upheld some of the CIT(A)'s decisions and remanded others for further consideration.
Mixed
The central legal question was whether the reassessment proceedings were valid and whether the deductions claimed under Sections 10B and 35(2AB) were correctly computed.
M/s. Biocon Limited, engaged in manufacturing enzymes and pharmaceutical ingredients, challenged the reassessment proceedings initiated by the AO under Section 147 and the disallowance of deductions claimed under Sections 10B and 35(2AB).
The assessee argued that the reassessment proceedings were based on a mere change of opinion and that the deductions under Sections 10B and 35(2AB) were correctly claimed.
The revenue contended that the reassessment was valid and that the deductions claimed by the assessee were excessive and not in accordance with the provisions of the Income-tax Act.
Section 147 - Reassessment proceedings; Section 10B - Deduction for export-oriented units; Section 35(2AB) - Weighted deduction for scientific research; Section 14A - Disallowance of expenditure related to exempt income.
The tribunal held that the provisions of Section 10B are exemption provisions, meaning the profits of the eligible unit do not enter the computation of total income and should not be set off against losses of non-eligible units. The tribunal also upheld the CIT(A)'s decision on the weighted deduction under Section 35(2AB) for scientific research expenditure.
The quantum of ESOP expenses to be allowed as deduction was remanded for recomputation.
Practitioners should note the distinction between exemption and deduction provisions, particularly in the context of Sections 10A and 10B, and the implications for set-off of losses.
ITA NOs. A.Y. APPELLANT
248/Bang/2010 2004-05 The Deputy Commissioner of Income Tax, LTU Bangalore. M/s. Biocon Limited, 20 th KM, Hosur Road, Electronic City, Hebbagodi, Bangalore – 560 100.
368/Bang/2010 369/Bang/2010 370/Bang/2010 371/Bang/2010 1206/Bang/2010
2003-04 2004-05 2005-06 2006-07 2007-08 M/s. Biocon Limited, Bangalore.
The Deputy Commissioner of Income Tax, LTU / Cir. 11(2), Bangalore.
Revenue by : Shri O.P. Yadav, CIT-I(DR) Assessee by : Shri H. Padamchand Khincha, C.A.
Date of hearing : 08.04.2014 Date of Pronouncement : 30.04.2014
Per Bench
ITA 368/Bang/2010
This is an appeal by the assessee against the order dt. 13.11.2009 of Commissioner of Income-tax (Appeals) (LTU), Bangalore relating to assessment year 2003-04.
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 2 of 36 2. Ground no.1 raised by the assessee is general in nature and calls for no specific adjudication.
3. Ground nos.2 to 6 raised by the assessee challenge the validity of initiation of reassessment proceedings by the Assessing Officer u/s.147 of the Act. Ground no.2 in this regard reads as follows : "2. The learned CIT (A) has erred in law and in fact in passing a single order in respect of two appeals preferred by the assessee, one in respect of scrutiny order passed by the learned Assessing Officer ("AO") under section 143(3) of the Act and the order in respect of the reassessment order passed by the learned A O under section 143(3) read with section 147 of the Act."
The objections raised in ground no.2 in our view cannot be sustained as there is no bar for the Commissioner of Income-tax (Appeals) to pass a consolidated order. In any event doing so will not render the initiation of reassessment proceedings illegal or void.
4. Ground no.4 raised by the assessee reads as follows : "4. The learned CIT (A) has erred in law and in fact in not appreciating that the re-assessment order was passed by the learned A O beyond a period of four years from the end of the relevant assessment year although scrutiny assessment proceedings were carried out earlier in the case of the Appellant and there was no failure on the part of the Appellant to truly or fully disclose all material facts and hence the reassessment order passed by learned Assessing Officer was time barred in light of the proviso to section 147 that inter alia provides that no action can be taken beyond a period of four years from the end of the relevant assessment year."
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 3 of 36 5. As far as ground no.4 is concerned, we are of the view that the grievance projected by the assessee is without any basis. The assessee has sought to invoke the condition laid down by the proviso to reopen an assessment completed u/s.143(3) of the Act after expiry of 4 years from the end of the relevant assessment year. In the present case the assessment year is 2003-04 and the period of 4 years from the end of relevant assessment year is 31.03.2008. The proceedings u/s.147 were initiated by issue of notice u/s.148 on 14.02.2008 which is well within the period of 4 years from the end of the relevant assessment year. There is therefore no merit in ground no.4 raised by the assessee.
6. Ground nos.3, 5 and 6 raised by the assessee read as follows : "3. The learned CIT (A) has erred in law and in fact by upholding the validity of the reassessment proceedings carried out by the A O under section 147 of the Act.
5. The learned CIT (A) has erred in law not appreciating the reassessment proceedings carried out by the A O were merely on account of change in opinion by the learned Assessing Officer on the same set of facts in the Appellant's case and there was no income that escaped.
6. The learned CIT (A) has erred in law and in fact in upholding the view of the A O that the matters regarding deduction under section 35(2AB) of the Act in respect of ESOP expenses and scientific research expenses pertaining to the Units claiming relief under section 10B of the Act were not examined during the course of the scrutiny assessment proceedings."
7. The facts which are relevant for adjudicating the validity of initiation of reassessment proceedings challenged in the aforesaid grounds are as follows:
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 4 of 36 The assessee is a company. It is engaged in the business of manufacture of enzymes and pharmaceutical ingredients. For A. Y. 2003- 04 the assessee filed return of income on 01.12.2003. Assessment was completed u/s.143(3) on 27.03.2006. Some of the additions made by the Assessing Officer in such assessment was challenged by the assessee before the Commissioner of Income-tax (Appeals). During the pendency of the proceedings before the Commissioner of Income-tax (Appeals) the Assessing Officer issued notice u/s.148 of the Act. While completing the assessment u/s.143(3) of the Act, the Assessing Officer had disallowed the claim of the assessee for deduction on account of expenditure incurred on Employees' Stock Option Plan (ESOP) and also excluded Sales-tax and Excise duty from the Export turnover while computing deduction u/s.80HHC of the Act.
8. In the reasons recorded for reopening the assessment (copy of which is at page nos.141 to 143 of the assessee's paper book), the Assessing Officer has recorded the fact that the assessee had claimed deduction u/s.35(2AB) of the Act, which allows a company engaged in the business of biotechnology deduction of expenditure, including expenditure of a capital nature, on scientific research or on creating an in-house research and development facility approved by the prescribed authority. The deduction allowed is a sum equal to one and half times of the expenditure so incurred. Similarly, the assessee had also claimed deduction u/s.10B of the Act in respect of its unit known as 'BCZ'.
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 5 of 36 According to the Assessing Officer while claiming deduction u/s.10B of the Act, the assessee should have considered the deduction u/s.35(2AB) of the Act and the profits of 10B unit should have been arrived at after such deduction. Failure on the part of the Assessee do so has resulted in the deduction u/s.10B of the Act being allowed at a higher sum and the other taxable income of the Assessee getting reduced to that extent. According to the Assessing Officer failure of the assessee to do so has resulted in excess claim being allowed u/s.10B of the Act. Apart from the above reason the Assessing Officer has also referred to the expenditure relating to ESOP having been allowed as a deduction and allowed by the Assessing Officer. According to the Assessing Officer, in the light of the assessment in the case of the assessee for A. Y. 2005-06, the claim of the assessee for deduction of expenditure relating to ESOP was disallowed and accordingly in the assessment year 2003-04 also the same should be disallowed. We may at this stage clarify that expenditure on ESOP was not allowed by the Assessing Officer in 143(3) assessment and therefore this reason recorded by the Assessing Officer for initiating proceedings u/s.147 of the Act cannot be sustained. We are thus left with one reason recorded by the Assessing Officer which is with regard to the deduction claimed by the assessee u/s.10B of the Act.
9. On grounds 3, 4 & 6, it was the submission of the ld. counsel for the assessee that while concluding the original assessments, the AO had gone into the question of deduction u/s. 10B of the Act and had allowed the claim
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 6 of 36 of the assessee. Though there is no discussion in the order of assessment on this aspect, yet it has to be presumed that the AO has applied his mind to all the aspects of deduction u/s.10B of the Act, since the order passed was an order u/s. 143(3) of the Act. According to him, the AO has resorted to reassessment proceedings u/s. 147 of the Act by merely changing his opinion, which he had formed while concluding the assessment u/s. 143(3) of the Act. It was submitted that no tangible material came to the possession of the AO which necessitated the AO looking into the claim of the assessee for deduction u/s. 10B of the Act. In this regard, reliance was placed by the ld. counsel for the assessee on the decision of the Hon'ble Supreme Court in the case of CIT v. Kelvinator of India Ltd., 228 CTR 488 (SC).
10. The ld. DR, on the other hand, brought to our notice the decision of the Hon'ble Karnataka High Court rendered in the case of CIT v. Rinku Chakraborthy, 242 CTR (Kar) 425, wherein the Hon'ble Karnataka High Court, after referring to the decision of the Hon'ble Supreme Court in the case of Kelvinator of India (supra), held that the omission to form an opinion in the original assessment on the basis of existing material then, cannot be termed as change of opinion. The Hon'ble Court held that for reopening assessment, it is not necessary that the information must be derived from external source of any kind or that there must be disclosure of new and important matters, subsequent to original assessment. Where income liable to tax has escaped in the original assessment due to
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 7 of 36 oversight and inadvertence or a mistake committed by the AO, then he has jurisdiction to reopen the assessment.
11. In the light of the aforesaid judicial pronouncement of the Hon'ble Karnataka High Court, we are of the view that the argument advanced by the ld. counsel for the assessee that initiation of reassessment proceedings us/. 147 of the Act is on a change of opinion and therefore not valid, cannot be accepted. Consequently grounds No.3, 4 & 6 are dismissed.
12. Grounds 7 to 12 raised by the assessee are with regard to disallowance of deduction claimed by the Assessee while computing income from business expenditure incurred on Employee stock option plan amounting to Rs.3,38,63,779. On the above issue, we find that the Special Bench of Bangalore Tribunal in Assessee’s case has held that the expenses on account of ESOP is allowable expenses. The Special Bench has, however, directed the AO to decide the quantum of amount to be allowed afresh in the light of the directions given by the Special Bench in the aforesaid order. However, we find that in the present case, while passing the order u/s. 143(3) of the Act, the AO has disallowed the aforesaid sum and added the same to the total income of the assessee. This was therefore not an item of income, which had escaped assessment and could not be the subject matter of proceedings u/s. 147 of the Act. In the order passed by the AO u/s. 147 of the Act, he has computed the total income by taking the income from business as computed in the original
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 8 of 36 assessment order, which is would include total income returned + disallowance on account of Employees Stock Compensation expenses of Rs.3,38,63,779. The order of the CIT(A) against which the present appeal is filed, is an order passed u/s. 147 of the Act dated 19.12.2008. Against the order passed u/s.143(3) of the Act wherein this sum was disallowed, an appeal before CIT(A) had been filed. Both the appeals were heard together and a common order was CIT(A). In the assessment order u/s.147 of the Act no addition on account of ESOP expenses was made. Consequently, this issue becomes academic, as far as the present order of the CIT(A) is concerned. These grounds are therefore dismissed as not arising out of the order of CITA, insofar as it relates to the order of assessment passed u/s. 147 of the Act.
13. Grounds No.13, 14, 15 & 16. “Re-computation of relief under section 10B in respect of deduction under section 35(2AB)
13. The learned CIT(A) erred in law and in fact upholding deduction of the amount of Rs.1,266,329 representing deduction claimed under section 35(2AB) of the Act in respect of fifty percent of the scientific research expenses pertaining to the Units eligible for claming relief under section 10B of the Act in the computation of relief under section 10B of the Act.
14. The learned CIT(A) erred in law and in fact in not appreciating that the provisions of section 14A of the Act apply only to expenditure in relation to income which does not form part of total income under the Act and therefore such provisions would not apply to income eligible for relief under section 10B of the Act.
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 9 of 36 Disallowance of deduction under section 35(2AB) of the Act in respect of ESOP expenses 15. The learned CIT(A) erred in law and in fact in upholding the disallowance of Rs.1,692,952 being fifty percent of the ESOP expenditure of Rs.3,385,904 considered for deduction under section 35(2AB) of the Act.
16. The learned CIT(A) erred in law and in fact by upholding the action of the AO of relying on the assessment order for assessment year 2005-06 in disallowing expenditure incurred in connection with ESOP expenses while computing deduction under section 35(2AB) of the Act.” 14. To understand the issue that arises for consideration in the aforesaid grounds, some factual details need to be narrated. As we have already seen, the assessee is a manufacturer of enzymes and pharmaceutical ingredients. Under section 35(2AB) of the Act, if an assessee which is engaged in the business of biotechnology or in the business of manufacture of production of any drugs, pharmaceuticals; incurs any expenditure on scientific research or in-house research & development facility as approved by the prescribed authority, then there shall be allowed deduction of a sum equal to 150% of the expenditure so incurred. It is not in dispute that the assessee was entitled to claim deduction u/s. 35(2AB) of the Act in a sum of Rs.8,67,25,576 which is 150% of the expenditure incurred on carrying out scientific research of Rs.5,78,17,050. In the assessment completed u/s. 143(3) of the Act on 27.3.2001, the assessee was allowed the aforesaid deduction while computing its total income.
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 10 of 36 15. After conclusion of assessment, the AO noticed that the assessee claimed deduction u/s. 10B of the Act in respect of its unit known as “BCZ” (hereinafter referred to as 10B unit) for which the assessee maintained separate books of account. Out of the 100% expenditure incurred on scientific research of Rs.5,78,17,050, a sum of Rs.28,14,064 was incurred in 10B unit. The said sum of Rs.28,14,064 was considered in the P&L account of 10B unit while arriving at the income of section 10B unit. The deduction u/s. 35(2AB) of the Act was claimed by the assessee at 150% of the expenditure. In the P&L account of the section 10B unit, only 100% of Rs.28,14,064 had been debited whereas the debit to P&L account of the section 10B unit ought to have been 150% of Rs.28,14,064 viz., Rs.42,21,096. The profit of the 10B unit on which deduction u/s. 10B of the Act was allowed should have therefore been reduced by Rs.14,07,032 (42,21,096 – 28,14,064). The deduction u/s. 10B of the Act on income of section 10B unit should accordingly stand revised as follows:- Rs.
(1) Deduction allowed u/s. 10B of the Act on 90% of the adjusted profit was (90% of Rs.5,47,46,551) = 4,93,71,896
(2) Reworked adjusted profit = Rs.5,57,46,551 Less: 50% of 28,14,064 14,07,032 ------------------ Rs.5,33,39,519
Deduction u/s. 10B = 90% of the above 4,80,05,567
Gross amount allowed as deduction u/s. 10A (4,92,71,896 – 4,80,05,567) = 12,66,329
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 11 of 36
16. The above reworking of the AO was done in the proceedings u/s. 148 of the Act. According to the AO, u/s. 35(2AB)(2) of the Act, there was also a bar for deduction allowed u/s. 35(2AB) being again allowed under any other provisions of the Act.
17. We have also seen that expenses on ESOP was claimed by the assessee at a sum of Rs.3,38,63,779 while computing assessee’s income from business. The same was disallowed by the AO. Out of the sum of Rs.3,38,63,779, the sum of Rs.33,85,804 so disallowed pertained to expenses on ESOP of employees, who were engaged in scientific research on which deduction u/s. 35(2AB) of the Act had been claimed at 150%, while allowing deduction u/s. 35(2AB) of the Act. The expenditure on ESOP had been disallowed in the assessment completed u/s. 143(3) of the Act on the ground that the liability of the assessee did not crystallize during the previous year relevant to A.Y. 2003-04. The weighted deduction allowed to the assessee u/s. 35(2AB) of the Act had therefore to be worked out by the AO in the reassessment proceedings because while allowing deduction u/s. 35(2AB) of the Act, the expenses on ESOP in respect of employees engaged in scientific research of Rs.33,85,904 had not been excluded.
18. Going by what the AO says as above in the order u/s. 148 of the Act, the AO should have excluded 150% of Rs.33,85,904. The AO has,
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 12 of 36 however, added only 50% of Rs.33,85,904 in the computation of total income in the order u/s. 148 to the total income computed as per the order u/s. 143(3) of the Act. The reason, as we could see, is that Rs.3,38,63,779 which was claimed as deduction on account of ESOP expenses which include Rs.33,85,904 being ESOP expenses on employees engaged in scientific research had already been disallowed in the order u/s. 143(3) of the Act and therefore what remains to be disallowed is only the weighted deduction portion of 50% of Rs.33,85,904.
19. The CIT(Appeals) confirmed the order of the AO. In so far as computation of deduction u/s. 10B of the Act is concerned, the CIT(A) sustained the order of the AO by relying on the provisions of section 14A of the Act. In so far as expenses on ESOP is concerned, the CIT(A) upheld the order of the AO.
20. Aggrieved by the order of the CIT(A), the assessee has raised ground Nos. 13 to 16 before the Tribunal.
21. We have heard the rival submissions. In so far as ground Nos. 13 to 14 are concerned, according to the revenue, the reworking of deduction u/s. 10B of the Act is proper as the deduction u/s. 35(2AB) of the Act is allowed only when computing income u/s. 28 of the Act under the head ‘income from business’. As far as income of section 10B unit is concerned, the same has to be worked out only on commercial basis as the same does not form part of the total income under the Act. Weighted deduction u/s.
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 13 of 36 35(2AB) of the Act will not be available while determining income on commercial lines where the computation provisions under the Act will not come into play. Therefore, the deduction in excess of 100% of expenses incurred on scientific research (which are presumed to be research expenditure) alone can be allowed and the excess 50% had to be disallowed to arrive at the correct income of section 10B unit. The revenue also relied on the Hon’ble Karnataka High Court decision in the case of Yokogawa (supra) wherein the Hon’ble High Court has taken the view that section 10B deduction is in fact an exemption provision, though stated to be a deduction provision.
22. The ld. counsel for the assessee has, on the other hand, placed reliance on CBDT view in File No.279/Misc./M-116/2012-ITJ dated 16.7.2013 circulated to the Assessing officers wherein after referring to conflicting views on whether section 10A and 10B provisions are deduction provisions or exemption provisions, expressed in some High Court decisions, the CBDT has expressed its view that section 10A/10B provisions are deduction provisions. According to him, therefore, weighted deduction u/s. 35(2AB) of the Act has to be allowed when computing income of section 10B unit and therefore the action of the AO in the order u/s. 148 of the Act has to be disapproved.
23. We are of the view that the CBDT Circular cannot obliterate the interpretation of a provision by the Hon’ble High Court. Therefore, the
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 14 of 36 decision of the Hon’ble Karnataka High Court in the case of Yokogawa (supra) will continue to be followed as a binding precedent. The Circular referred to by the ld. counsel for the assessee cannot also be said to be a benevolent Circular, inasmuch as treating the provisions of section 10A/10B as a deduction provision results in hardship to the assessee, especially in the context of set off losses of non-10A/10B units against the profits of 10A/10B unit before allowing deduction u/s. 10A/10B of the Act. The same Circular could turn out to be a benevolent circular when there is loss in the 10A/10B unit against taxable income of non-10A/10B unit. In this scenario, it would be most appropriate to follow the binding decision of the Hon’ble High Court of Karnataka in the case of Yokogawa (supra). The Hon’ble Karnataka High Court in the case of Yokogawa (supra) noticed that deduction u/s. 10A/10B of the Act has to be allowed from the “total income” and not while computing total income. The Hon’ble Court also noticed that the net result of all the computations under the Act is the total income and therefore there cannot be any deduction from “total income”. The Hon’ble Court therefore concluded that the expression “from the total income” found in section 10A/10B of the Act has to be contextually understood as referring to “total income of STP unit” or “10A/10B unit”. The Hon’ble Court, therefore, concluded that deduction u/s. 10A of the Act has to be given before Chapter IV of the Act. The Hon’ble Court also noticed in para 16 of its judgment that when section 10A of the Act was recast by the Finance Act, 2001, the Parliament was aware of the relief given in Chapter III of the
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 15 of 36 Act as being one which does not form part of the total income under the Act and yet chose to retain section 10A in Chapter-III of the Act which means that the said provisions shall remain as ‘exemption provision’ and not ‘deduction provision’.
24. Thus, when the provisions of section 10A/10B of the Act are held to be exemption provisions, the provisions of section 35(2AB) of the Act which are contained in Chapter IV of the Act will not be applicable. Resultantly, the weighted deduction at 150% u/s. 35(2AB) of the Act will not be allowed while computing income of section 10A/10B unit. The 10A/10B unit will get only 100% deduction of revenue expenditure. The excess 50% allowed as deduction u/s. 35(2AB) of the Act has to be withdrawn as it will pull down the profits of the non-10A/10B unit which is taxable. Therefore, the withdrawal of 50% deduction allowed u/s. 35(2AB) of the Act while computing income of non-10A/10B unit has to be upheld both on general principles as well as by relying on the provisions of section 14A of the Act.
25. For the reasons given above, we do not find any infirmity in the order of the CIT(Appeals) on this issue. Consequently, ground Nos. 13 & 14 are dismissed.
26. As far as ground Nos. 14 and 15 relating to expenditure on ESOP is concerned, the assessee will get consequential relief depending on the revised computation of expenses on ESOP to be allowed, consequent to the directions of the Special Bench. In other words, these grounds stand
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 16 of 36 allowed to the extent of ESOP expenses allowable to the extent permitted by the Special Bench.
27. In the result, the appeal by the assessee is treated as partly allowed for statistical purposes.
28. ITA 248/10 is an appeal by the revenue, while ITA 369/10 is an appeal by the assessee. Both these appeals are directed against the order dated 13.11.2009 of the CIT(Appeals), LTU, Bangalore relating to A.Y. 2004-05.
(Revenue’s Appeal) (AY 04-05)
29. We will first deal with the appeal by the revenue. The grounds of appeal raised by the revenue reads as follows:- “1. The order of CIT(A), LTU is opposed to law and facts of the case.
2. The order of the CIT(A) has erred in allowing deduction on expenditure u/s 35(2AB) on such idle assets which are not commissioned during the year 3. The CIT(A) has allowed the deduction on expenditure u/s 35(2AB) even the assessee did not furnish concrete evidence regarding commissioning of the machine & carrying out the research activity during the year using those machines.
4. The CIT(A) has allowed the deduction u/s 35(AB) on acquiring assets which is not used in the research activity during the year. Unless, the research is carried out using the assets deduction can not be allowed on such an acquisition.
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 17 of 36 5. For these and such other grounds that may be urged at the time of hearing of appeal it is humbly prayed that the order of the CIT(A) be set aside and that of AO restored.
6. The appellant craves to add / alter amend and / or delete any of the grounds on or before the hearing of the appeal.” 30. We have already seen that the assessee was entitled to claim deduction u/s. 35(2AB) of the Act. In the A.Y. 2004-05, the assessee claimed deduction of Rs.18,00,45,138. It comprises of revenue expenditure as well as capital expenditure, the break-up of which is as follows:- Capital Expenditure incurred in connection with the R & D activity (excluding capital expenditure on construction of buildings) Rs. 7,82,25,431
Total Revenue Expenditure incurred (including expenditure incurred by the by the 100% EOU and ESOP expenses) Rs.14,43,47,594
Less: Patent Fees paid outside India Rs. 1,23,19,395
Less: Fees for sponsored research Rs. 2,32,500
Total Expenditure on the Approved R&D centre Rs. 21,00,21,130
Less: Donations/payments for sponsored research programmes (shown as income in the audited financial statements) Rs. 63,81,716
Net expenditure eligible for deduction Rs. 20,36,39,414 Weighted Deduction claimed u/s 35(2AB) Rs. 31,18,40,837 Less: Revenue Expenditure already debited to the P&L a/c Rs. 13,17,95,699
Additional Deduction claimed under Section 35(2AB) Rs. 18,00,45,138
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 18 of 36
31. As far as capital expenditure incurred in connection with R&D activity of Rs.7,82,25,431 is concerned, the AO noticed that the aforesaid expenditure included a sum of Rs.2,72,59,589 incurred on 3 items of machinery viz., Protein Purification System, Robotic Sample Processing system and RND PDP Lab HPL chromatography. The AO also noticed that the above three items of machinery have not been installed and commissioned. He therefore concluded that the above three machineries could not have been put to use for scientific research during 2004. The AO referred to the provisions of section 35(2AB) of the Act which says that expenditure should be incurred on scientific research. According to the AO, the word “incurred” means that scientific research should have been actually carried out and only then the expenditure incurred qualifies for weighted deduction u/s. 35(2AB) of the Act. The AO was of the view that since the machineries in question had not been used at all, scientific research could not have been carried out using those machines. The AO accordingly denied weighted deduction of Rs.4,08,89,393 [2,72,59,589 X 150%] u/s. 35(2AB) of the Act.
32. On appeal by the assessee on the aforesaid disallowance, the CIT(Appeals) after making a reference to the provisions of section 35(2AB) of the Act held that section 35(2AB) speaks of : (i) Development of facilities;
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 19 of 36 (ii) Incurring of expenditure by the appellant for development of such facilities; iii) Approval of facility by the prescribed authority, which is
iv) Allowance of weighted deduction on the expenditure so incurred by the appellant. According to the CIT(A) from a plain reading of the Section it was clear that it contemplates only developing facility, which presupposes incurring expenditure in this behalf and filing application to the prescribed authority who, after following the proper procedure, will approve the facility. In such an event the Assessee will be entitled to weighted deduction in respect of all expenditure so incurred. The provision nowhere suggests or implies that machinery will be acquired, installed and commissioned before the expiry of the relevant previous year. He also held that the provision postulates approval of ‘R & D’ facility, which implies that a development facility shall be in existence which, in turn, presupposes that the assessee must have incurred expenditure in this behalf. The CIT(A) also held that if the interpretation of the AO is accepted, it creates absurdity in this provision in as much as the words which are not provided in the statute are to be read into, which is against the settled proposition of law with regard to plain and simple meaning of the provision. He also found that Rule 6(5A) and 6(7A) also provide only to the effect that, if the conditions are fulfilled, the prescribed authority shall pass an order in Form No.3CM. The prescribed authority shall submit its report in relation to the approval of
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 20 of 36 in-house research and development facility in Form No.3CL to the Director-General of Income-tax (Exemptions) within sixty days of its granting its approval. According to him the provisions nowhere refers to any cut-off date for eligibility of weighted deduction. Similarly, Form No.3CM, which is the order of approval, does not provide any power to the prescribed authority or any stipulation to set out a cut-off date in this behalf. The CIT(A) therefore concluded that a plain and harmonious reading of the provisions, rule and form clearly suggest that, once the facility is approved, the entire expenditure incurred in respect of ‘R & D’ facility has to be allowed for weighted deduction as provided by section 35(2AB). The CIT(A) also drew support from the decision of the Hon’ble High Court of Gujarat in the case of CIT vs Claris Life Sciences Ltd. (2008) 174 Taxman 113 wherein it was held that use of assets is not a condition for grant of deduction u/s.35(2AB) of the Act.
33. Aggrieved by the order of the CIT(Appeals), the revenue has preferred the present appeal before the Tribunal.
34. We have heard the submissions of the ld. DR, who relied on the order of the Assessing Officer. The ld. counsel for the assessee, however, submitted that the issue raised by the assessee in its appeal is no longer res integra and has been decided by the Hon’ble Gujarat High Court in the case of CIT v. Gujarat Aluminium Extrusions Pvt. Ltd., 263 ITR 453 (Guj)
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 21 of 36 and the Hon’ble Orissa High Court in the case of Belpahar Refractories Ltd., 207 ITR 144 (Orissa). In the case of Gujarat Aluminium Extrusions Pvt. Ltd. (supra), the AO refused deduction u/s. 35 of the Act in which a deduction is allowed on expenditure incurred by the assessee on scientific research inclusive of capital expenditure. The revenue refused to allow deduction u/s. 35 of the Act in respect of capital expenditure on construction of a building on the ground that the construction of the building was not over and building was not put to use during the previous year. On the above facts, the Hon’ble Gujarat High Court held as follows:- “The object behind the enactment of s. 35 is to encourage research and development activities by the assessee. As an incentive, the legislature has given this benefit by way of deduction in respect of the capital expenditure incurred by the assessee. This is a provision for the benefit of the assessee and if the assessee incurs capital expenditure for the purpose of research and development during the relevant previous year, the Revenue should not deprive the assessee of the benefit of deduction under the provisions of s. 35 even if the asset is not put to use for research and development. It is a settled legal position that the provision for exemption or relief should be construed liberally and in favour of the assessee. If the section is interpreted in the manner suggested by the Revenue, the assessee would be deprived of the benefit which legislature desires to give to the assessee. From the provisions of the Circular No. 5-P (LXXVI-63) of 1967 dt. 9th Oct., 1967 also, intention of the Revenue is patent. The intention is to give benefit to the assessee who incurs expenditure on scientific research related to his business. Even the circular issued by the Department does not make use of the capital asset a condition precedent for claiming deduction under the provisions of s. 35. Both the appellate authorities have rightly considered the spirit with which s. 35 has been enacted by the legislature and the circular referred to hereinabove while allowing deduction to the assessee under the provisions of s. 35. When the legislature has not expected the assessee to put the asset to actual use, it would not be open to the Revenue to deprive the assessee of the benefit of deduction under the provisions of s. 35 if the asset is not used in the previous year in which the capital expenditure is incurred. It is also relevant to note that the deduction is given not on the count of user. Had it been so, the assessee would have been given benefit in the nature of depreciation. Here, the legislature wants the assessee to spend more amount for scientific research and it also wants the assessee to get the benefit immediately in the year in which he incurs
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 22 of 36 the expenditure in the nature of revenue or capital for scientific research and therefore the legislature refers to incurring of the expenditure and not the using of the asset. Once it is established that the expenditure was incurred for the purpose of scientific research and the conditions incorporated in s. 35 are fulfilled, the Revenue cannot expect the assessee to start using the asset immediately. In a given case the assessee might have to go on incurring expenditure for several years before putting the asset to actual use. If the interpretation advanced by the Revenue is accepted, the assessee would not be in a position to avail the deduction under s. 35 to the extent to which the legislature intends to give to the assessee. It is also pertinent to note that the deduction under the provisions of s. 35 is given only during the previous year in which the expenditure is incurred. If the assessee has taken several years to construct or acquire a particular asset, the assessee would be deprived of the benefit of s. 35 because he can put the asset to use only when construction of the asset is completed and it would not be open to him to claim deduction in respect of expenditure incurred during the earlier previous years because looking to the provisions of s. 35 the assessee can avail the benefit of deduction of the amount of expenditure incurred only during the previous year and not for the earlier period unless his case is covered under the provisions of an exception to s. 35(2)(ia). For the reasons stated hereinabove, the Tribunal was right when it confirmed the order passed by the CIT(A) who had deleted the disallowance.”
35. In the case of Belpahar Refractories Ltd. (supra), the Hon’ble Orissa High Court held that expenditure incurred during the previous year is eligible for deduction u/s. 35 of the Act and the fact that the liability in respect of expenditure incurred during the previous year was discharged by the assessee by actual payment in a subsequent assessment year cannot be the basis to deny the claim of the assessee for deduction u/s. 35 of the Act.
36. In view of the aforesaid judicial pronouncements which are rendered in the context of section 35(2) of the Act, the wordings of which are in pari materia to that of section 35(2AB) of the Act, we are of the view that there
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 23 of 36 is no substance in this appeal by the revenue. Accordingly the same is dismissed. ITA 369/Bang/2010 (Assessee’s appeal) (AY 04-05)
37. Ground No.1 raised by the assessee is general in nature and calls for no adjudication.
38. Grounds 2 to 7 deal with the issue with regard to disallowance of expenses connected with ESOP. We have already seen that the Special Bench has considered the aforesaid issue and given directions in its order to compute the amount of expenses that has to be allowed as deduction while computing the total income. In principle, it has been held by the Special Bench that the amount has to be allowed as deduction while computing total income, but the quantum of deduction was directed to be determined in the manner set out in the order of the Special Bench. In the circumstances, it would be just and proper to direct the AO to follow the directions of the Special Bench and arrive at the quantum of expenses on account of ESOP to be allowed as a deduction while computing the total income. Thus, the aforesaid grounds are treated as allowed.
39. Grounds No. 8, 9 & 10 read as under:- “Recomputation of relief under section 10B of the Act in respect of deduction under section 35(2AB) of the Act 8. The learned CIT(A) erred in law and in fact upholding deduction of the amount of Rs.22,305,662 representing deduction claimed under section 35(2AB) of the Act in respect of
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 24 of 36 fifty percent of the scientific research expenses pertaining to the Units eligible for claiming relief under section 10B of the Act in the computation of relief under section 10B of the Act.
9. The learned CIT(A) erred in law and in fact in not appreciating that the provisions of section 14A of the Act apply only to expenditure in relation to income which does not form part of total income under the Act and therefore such provisions would not apply to income eligible for relief under section 10B of the Act. Disallowance of deduction under section 35(2AB) of the Act in respect of ESOP expenses 10. The learned CIT(A) has erred in law and in fact in upholding the disallowance of Rs.1,019,222 being fifty percent of the ESOP expenditure of Rs.2,038,444 considered for deduction under section 35(2AB) of the Act.”
40. The above grounds are identical to grounds No.13 to 16 raised by the assessee in ITA No.368/Bang/2010 for the A.Y. 2003-04. For the reasons stated therein, grounds No. 8 & 9 are dismissed, while ground No.10 is treated as partly allowed for statistical purposes to determine the quantum of expenses to be disallowed.
41. In the result, the appeal by the revenue is dismissed, while the appeal by the assessee is partly allowed for statistical purposes. ITA 370/Bang/2010 (Assessee’s appeal for AY 05-06)
42. In this appeal, the grounds No. 1 to 10 raised by the assessee against the order dated 13.11.2009 of the CIT(Appeals), LTU, Bangalore for the A.Y. 2005-06 are identical to the grounds raised by the assessee in ITA No.369/Bang/2010 for the A.Y. 2004-05. For the reasons stated
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 25 of 36 therein, ground No.1 is general in nature and does not call for any specific adjudication. Grounds No. 2 to 7 are allowed for statistical purposes. Grounds 8 & 9 are dismissed. Ground No.10 is partly allowed for statistical purposes.
43. Ground Nos.11 & 12 raised by the assessee were not pressed and therefore, they are dismissed as not pressed.
44. Ground No.13 with regard to levy of interest u/s. 234C and 234D is purely consequential and the AO is directed to give consequential relief.
45. In the result, the appeal is partly allowed. ITA 371/Bang/2010 (Assessee’s appeal AY 06-07)
46. This appeal is against the order dated 13.11.2009 of the CIT(Appeals), LTU, Bangalore relating to A.Y. 2006-07.
47. Grounds No.1 to 9 raised by the assessee are identical to grounds No.1 to 9 raised by the assessee in ITA No.370/Bang/2010 for the A.Y. 2005-06. For the reasons stated while deciding the said grounds in A.Y. 2005-06, it is held that ground No.1 does not call for any specific adjudication; while ground Nos. 2 to 7 are treated as allowed for statistical purposes; and ground Nos. 8 & 9 are dismissed.
48. Ground Nos. 10 & 11 raises the same issue that was raised by the assessee in ground No.10 in ITA No.370/B/2010. For the reasons stated
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 26 of 36 while deciding the aforesaid ground, grounds 10 & 11 are partly allowed for statistical purposes.
49. Ground No.12 raised by the assessee in this appeal reads as follows:- “12. The learned CIT(A) erred in not providing consequential relief irrespective of depreciation on energy saving device amounting to Rs.687,555 disallowed in the assessment order for AY 2005-06 by the learned AO.”
50. As can be seen from the aforesaid ground, the assessee seeks consequential relief in respect of depreciation on energy saving devices disallowed in the previous assessment year. In the A.Y. 2005-06, the assessee had claimed depreciation at 100% on energy saving devices of the value of Rs.13,75,111. Since these machineries were purchased after 1.10.2004, depreciation was restricted to 50%. The assessee in this assessment year had claimed the remaining 50% depreciation which was not allowed by the AO. Despite a specific ground, the CIT(Appeals) did not adjudicate the issue. We are of the view that it would be just and proper to direct the CIT(Appeals) to consider the claim of the assessee in this regard in accordance with law. For statistical purposes, this ground is treated as allowed.
51. Ground No.13 with regard to levy of interest u/s. 234C and 234D is purely consequential and the AO is directed to give consequential relief.
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 27 of 36 52. In the result, the appeal is treated as partly allowed for statistical purposes. ITA 1206/Bang/2010 (Assessee’s appeal for AY 07-08)
53. This appeal by the assessee is against the order dated 26.8.2010 of the CIT(Appeals), LTU, Bangalore relating to assessment year 2007-08.
54. Ground No.1 is general in nature and calls for no specific adjudication.
55. Ground Nos.2 to 7 are identical to grounds No.2 to 7 raised by the assessee in ITA No.369/B/2010. For the reasons stated therein, these grounds are treated as allowed for statistical purposes. Ground No.8 is identical to ground No.10 decided in ITA No.369/B/2010 for the A.Y. 2004- 05. For the reasons stated therein, this ground of appeal is treated as partly allowed for statistical purposes.
56. Ground Nos. 9 to 14 raised by the assessee reads as follows:- “Denial of carry forward of unabsorbed depreciation
9. The learned CIT(A) has erred in law and in fact in denying the benefit of carry forward of unabsorbed depreciation in respect of the amount of Rs.1,012,203,277 as reflected by the appellant in its return of income.
10. The learned CIT(A) has erred in law and in fact in holding the Assessing Officer’s order that the loss of Rs.1,012,203,277 sought to be carried forward represents relief under section 10B of the Act in excess of total income.
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 28 of 36 11. The learned CIT(A) has erred in fact in holding that the unabsorbed depreciation and loss proposed to be carried forward by the Appellant pertains to Units eligible for relief under section 10B of the Act.
12. The learned CIT(A) has erred in law and in fact holding that the relief under section 10B of the Act in excess of total income cannot be treated as business loss to be carried forward in accordance with the provisions of the Act.
13. The learned CIT(A) has erred in law and in fact in setting off the losses of the Appellant prior to claiming relief under section 10B of the Act and thereby disregarding the fact that provisions of the Act provide for relief under section 10B of the Act undertaking wise.
14. The learned CIT(A) has erred in law and in fact in holding that the relief under section 10B of the Act would be available only of the extent of total income, there by resulting in the loss of the Appellant pertaining to other business being set off against the profits of the Units eligible for relief under section 10B of the Act.” 57. The facts material for adjudication of the aforesaid grounds of appeal are as follows. The assessee during the previous year had four units which were entitled to claim deduction u/s. 10B of the Act viz., CMZ Unit, SAP Unit, RHI Unit and IFP Unit. The assessee had claimed deduction u/s. 10B of the Act in respect of the aforesaid units totaling Rs.157,22,33,066 which is the sum total of deduction u/s. 10B for the four units as follows:- (1) CMZ Unit : 6,87,70,229 (2) SAP Unit : 76,60,29,880 (3) RHI Unit : 52,42,56,278 (4) IFP Unit : 21,31,76,679 -------------------- Total 157,22,33,066 --------------------
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 29 of 36 58. The assessee had non-10B units as well. In those non-10B units, there was a loss of Rs.105,92,19,172. In the return of income filed by the assessee, the assessee sought to carry forward the loss of non-10B units for set off against the profits of non-10B units in the subsequent assessment years. The AO firstly noticed that there was income from other sources to the extent of Rs.4,71,15,896 and such had to be set off against the loss of the non-10B units. Accordingly, the AO held that the loss of the non-10B units that had to be considered for carry forward would be Rs.101,21,03,280.
59. Thereafter, the AO was of the view that income of the 10B units had to be set off against the loss of the non-10B units and if it is so set off, there will be no loss that needs to be carried forward. In coming to the aforesaid conclusion, the AO expressed the opinion that provisions of section 10B are deduction provisions and therefore effect will have to be given to the provisions of section 72 of the Act, even in respect of profits of the 10B unit. Accordingly, the claim of the assessee for carry forward of loss of non-10B unit was not allowed by the AO.
60. On appeal by the assessee, it was contended that the provisions of section 10A and section 10B are exemption provisions and therefore the profit of 10A and 10B units will not enter the computation of total income at all and therefore the profits of these units need not be set off against the loss of non-10B unit by invoking the provisions of section 72 of the Act.
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 30 of 36 61. The CIT(Appeals) did not agree with the contention of the assessee and in doing so, he placed reliance on the decision of the Hon’ble Karnataka High Court in the case of CIT v. Himatsingike Seide Ltd., 286 ITR 255 (Kar). In the aforesaid decision, the Hon’ble High Court has taken the view that deduction u/s. 10B has to be allowed after set off of unabsorbed depreciation and unabsorbed investment allowance. The Hon’ble Court took the view that the aforesaid provision was only an exemption provision. The CIT(Appeals) noticed that the aforesaid decision was followed by the ITAT Bangalore Bench in the case of Intelnet Technologies India Pvt. Ltd. v. ITO, ITA No.1021/Bang/2009 dated 12.3.2010. Similar view expressed by the Delhi Bench of the Tribunal in the case of Global Vantage Pvt. Ltd. v. DCIT, 2010 TIOL 24 ITAT (DEL) was also referred to by the CIT(A). A contrary view was expressed by the Bangalore Bench of the Tribunal in the case of KPIT Cummins Info Systems (Bangalore) Pvt. Ltd. v. ACIT, 120 TTJ 956. The CIT(A) found that in the case of Global Vantage Pvt. Ltd. (supra) decided by the Delhi Tribunal this decision has been held to be not in tune with the decision of the Hon’ble High Court of Karnataka in the case of Himatsingike Seide Ltd. (supra). The CIT(A) also referred to the decision of the Chennai Bench of the Tribunal in the case of Sword Global India Pvt. Ltd. v. ITO, 306 ITR 286 (AT), wherein the provisions of section 10A and 10B have been held to be deduction provisions and not exemption provisions. For all the above reasons, the CIT(Appeals) confirmed the order of the Assessing Officer.
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 31 of 36 62. Aggrieved by the order of the CIT(Appeals), the assessee has raised grounds No.9 to 14 before the Tribunal. We have heard the submissions of the ld. counsel for the assessee, who reiterated the submissions as were made before the CIT(Appeals) and further placed strong reliance on the decision of Hon’ble High Court of Karnataka in the case of Yokogawa India Ltd., 341 ITR 385 (Kar). The ld. DR relied on the order of CIT(Appeals).
63. We have given a careful consideration to the rival submissions. The issue as to whether the provisions of Sec.10B of the Act are deduction provisions or exemption provisions will assume great importance. The reason is that if the provisions are considered as exemption provisions then they will not enter the computation of total income and therefore the loss of the eligible unit cannot be set off against the profits of the non-eligible unit. This issue has already been settled by the Hon’ble Karnataka High Court in the case of Yokogawa India Ltd. (supra). The Hon’ble Karnataka High Court in the case of Yokogawa (supra) had to deal with two substantial question of law. The first substantial question of law was on the right of set off of loss of non-eligible unit against the profit of the eligible unit on which deduction u/s.10B was to be allowed. The Hon’ble Court in para 10 to 20 of its judgment dealt with the issue. The Hon’ble Court noticed that Sec.10- A(1) of the Act (which is in pari materia with Sec.10-B of the Act) read as follows: “10B. Special provisions in respect of newly established undertaking in free trade zone etc.,-(1) Subject to the provisions
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 32 of 36 of this section, a deduction of such profits and gains as are derived by undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the Previous-year in which the under-taking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee : ” (emphasis supplied)
64. The expression “Deduction” and “shall be allowed from the total income of the Assessee” used in the aforesaid provisions was considered by the Hon’ble High Court and it held in para 13 to 15 of its judgment that the expression “ shall be allowed from the total income of the Assessee” does not mean total income as defined u/s.2(45) of the Act but that expression means “profits and gains of the STP undertaking as understood in its commercial sense or the total income of the STP unit. Thus the view expressed is that income of the STP undertaking gets quarantined and will not be allowed to be set off against loss of either another STP undertaking or a non STP undertaking. The Hon’ble Court thereafter held that though the expression used in Sec.10A was “Deduction” but in effect it was only an exemption section. These conclusions clearly emanate from para 17 of the Hon’ble Court’s judgment.
65. The situation with which we are concerned in the present case is a situation where there is positive income of the eligible unit then the same should be allowed deduction u/s.10B of the Act without setting of the loss of non-eligible unit. The Hon’ble Karnataka High Court in the case of
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 33 of 36 Yokogawa (supra) was concerned with similar situation as set out above. In view of the aforesaid decision of the Hon’ble Karnataka High Court, we are of the view that the claim as made by the Assessee for carry forward of loss of the non-eligible unit had to be allowed without set off of profits of the 10A/10B unit. We hold accordingly and allow the relevant grounds of appeal of the Assessee.
66. We may also observe that the Hon’ble Karnataka High Court’s decision in the case of Himatasingike Seide (supra) has held that unabsorbed depreciation (and business loss) of same (s. 10A/10B) unit brought forward from earlier years have to be set off against the profits before computing exempt profits. The assessee in that case set up a 100% EOU in AY 1988-89. For want of profits it did not claim benefits u/s 10B in AYs 1988-89 to 1990-91. From AY 1992-93 it claimed the said benefits for a connective period of 5 years. In AY 1994-95, the assessee computed the profits of the EOU without adjusting the brought forward unabsorbed depreciation of AY 1988-89. It claimed that as s. 10B conferred “exemption” for the profits of the EOU, the said brought forward depreciation could not be set-off from the profits of the EOU but was available to be set-off against income from other sources. It was also claimed that the profits had to be computed on a “commercial” basis. The AO accepted the claim though the CIT revised his order u/s 263 and directed that the exemption be computed after set-off. On appeal by the assessee, the Tribunal reversed the order of the CIT. On appeal by the department, the High Court in CIT Vs.
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 34 of 36 Himatasingike Seide Ltd. 286 ITR 255 (Kar) reversed the order of the Tribunal and held that the brought forward depreciation had to be adjusted against the profits of the EOU before computing the exemption allowable u/s 10B. In Civil Appeal No.1501 of 2008 dated 19.9.2013 against the aforesaid decision of the Hon’ble Karnataka High Court, the Hon’ble Supreme Court observed as follows while dismissing the appeal:- “Having perused the records and in view of the facts and circumstances of the case, we are of opinion that the civil appeal being devoid of any merit deserves to be dismissed and is dismissed accordingly.”
67. Thus the ratio has to be confined to the facts and circumstances of the case. The aforesaid observations have to be confined to the facts of that case and as applicable to a case where brought forward losses and depreciation of the very same STP undertaking are not adjusted while arriving at the profits of the 10B unit for allowing deduction u/s.10A/10B of the Act and not in respect of brought forward losses and depreciation of other undertakings/non-10A/10B units. S. 10A/10B(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 which means that they need not be so set off as mandated in the decision of the Hon’ble Karnataka High Court in the case of Himatasingike Seide Ltd. (supra). As we have already seen, in Yokogawa India Ltd. 341 ITR 385 (Kar), it was
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 35 of 36 held that even after s. 10A/10B were converted into a “deduction” provision w.e.f 1.4.2001, the benefit of relief u/s 10A/10B is in the nature of “exemption” with reference to “commercial profits” and that as the income of the s. 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. Therefore the decision of the Hon’ble Karnataka High Court in the case of Himatasingike Seide (supra) will not apply to the facts of the present case.
68. Gr.No.15 raised by the Assessee with regard to charging of interest u/s.234-D of the Act is purely consequently and the AO is directed to give consequential relief to the Assessee.
69. In the result, ITA No.248/Bang/2010 by the Revenue is dismissed, while the other appeals by the Assessee are partly allowed. Pronounced in the open court on this 30 th day of April, 2014.
Sd/- Sd/-
Accountant Member Judicial Member
Bangalore, Dated, the 30 th April, 2014.
/D S/
ITA Nos.248, 368 to 371 & 1206/Bang/2010 Page 36 of 36
Copy to:
1. Appellant 2. Respondent
4. CIT(A)
5. DR, ITAT, Bangalore.
6. Guard file
By order
Assistant Registrar / Senior Private Secretary ITAT, Bangalore.