INCOME TAX ACT, 1961

--Deduction under section 10BComputation Setting off of losses of eligible units--Assessee-company had three units out of which two units were eligible for deduction under section 10B and remaining one unit was non-eligible unit. The eligible units were suffering from losses and its losses were set off against profit from non-eligible units by the assessee. The assessing officer rejected assessee's computation made under section 10B which was confirmed by the Commissioner (Appeals). Held :Rightly so. Losses of eligible units could not be set off against profit of non-eligible unit as provisions of section 10B(6) allow such losses to be kept in suspense to be set off of after tax holiday period was over.

The Honble Karnataka High Court in the case of Yokogawa India Ltd. (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 under section 10B was to be allowed. The Honble Court in para 10 to 20 of its judgment dealt with the issue. The Honble Court noticed that section 10-A(1) of the Act (which is in pari materia with section 10-B of the Act. The expression 'Deduction' and 'shall be allowed from the total income of the assessee' used in the aforesaid provisions was considered by the Honble 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 under section 2(45) 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 Honble Court thereafter held that though the expression used in section 10A was 'Deduction' but in effect it was only an exemption section. These conclusions clearly emanate from para 17 of the Honble Courts judgment.[Para 17] This Tribunal is therefore unable to accept the plea of the learned counsel for the Assessee that the Honble Karnataka High Court has only held that income of the section 10B unit has to be excluded before arriving at the gross total income and not after computing the gross total income.[Para 18] As far as the plea of the assessee that (a) when there is positive income of the eligible unit then the same should be allowed deduction under section 10B of the Act without setting of the loss of non-eligible unit; (b) when the eligible unit incurs loss, then that will have to be set off against income if any of the non-eligible unit. It is no doubt true that the Honble Karnataka High Court in the case of Yokogawa (supra) was concerned with situation (a) as set out above. But the second substantial question of law dealt with by the Honble Court was with regard to set off of brought forward unabsorbed losses and depreciation of earlier years/current year, either of the non-STP unit or the very same undertaking. This aspect has been dealt with by the Honble Karnataka High Court in para 21 to 33 of its order. The Honble High Court in para 21 noticed that the provisions of section 10B(6) as it existed prior to its amendment with effect from 1-4-2001 provided that the loss of the eligible unit has to be ignored altogether. In para-22 to 24, the Honble Court noticed that after the amendment the position. [Para 19] It is clear from the provisions as explained by the Honble High Court that during the period when the eligible unit enjoys exemption under section 10B, if it suffers a loss then the same will be quarantined and carried forward to the assessment years immediately following the last of the assessment years for which the assessee is entitled to claim exemption under section 10B for being set off in accordance with law as if it were any other loss to be dealt with in accordance with section 70 to 72 and 32(2) of the Act. It is also clear that the loss suffered by the eligible unit under section 10-B during the period it claims exemption without opting out of those provisions will only remain in suspension to be revived immediately after the tax holiday period. Therefore the set off of the eligible unit loss against income of non eligible unit during the tax holiday period when the assessee has not opted out of the incentive provisions for this year cannot be allowed and has been rightly not allowed by the revenue authorities.[Para 20] If the claim of the assessee is accepted then that would mean that the assessee will have two benefits under section 10B. The first benefit is an exemption of the commercial profits during the tax holiday period on a stand-alone basis without the threat of those profits being set off against loss of any other undertaking of the assessee which may be another eligible undertaking or non-eligible business of the assessee. The second benefit is that its losses during the tax holiday period can be set off against the income of the non-eligible undertaking. The second benefit is not available during the tax holiday period and the provisions of section 10B(6) allow them to be kept in suspense to be set off after the tax holiday period. Therefore hold that the claim of the assessee in the present case was rightly not accepted by the revenue authorities.[Para 21]