Stage of deduction us 10A is at gross total income computation under Chapter IV, not at computation of total income under Chapter VI-SC

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Stage of deduction us 10A is at gross total income computation of eligible undertaking under Chapter IV, not at computation of total income under Chapter VI-Supreme Court

Stage of deduction us 10A

ABCAUS Case Law Citation:
ABCAUS 1093 (2017) (01) SC

Important Case Laws cited:
Tata Power Co. Ltd. vs. Reliance Energy Ltd (SC)

Substantial Question of Law:

(i) Whether Section 10A of the Act is beyond the purview of the computation mechanism of total income as defined under the Act. Consequently, is the income of a Section 10A unit required to be excluded before arriving at the gross total income of the assessee?

(ii) Whether the phrase “total income” in Section 10A of the Act is akin and pari materia with the said expression as appearing in Section 2(45) of the Act?

 (iii) Whether even after the amendment made with effect from 1.04.2001, Section 10A of the Act continues to remain an exemption section and not a deduction section?

(iv) Whether losses of other 10A Units or non 10A Units can be set off against the profits of 10A Units before deductions under Section 10A are effected?

(v) Whether brought forward business losses and unabsorbed depreciation of 10A Units or non 10A Units can be set off against the profits of another 10A Units of the assessee.

The Hon’ble Supreme Court clarified that the decision with regard to the provisions of Section 10A of the Income Tax Act, 1961 would equally be applicable to cases governed by the provisions of Section 10B in view of the said later provision being pari materia with Section 10A of the Act though governing a different situation.

Contentions of the Revenue:
It was contended that, ex facie, from the language appearing in Section 10A it was crystal clear that section 10A as amended by Finance Act, 2000 provided for deductions from the gross total income, notwithstanding the use of the words ‘total income’ in Section 10A.  Exemptions provided for under the old Section 10A had been discontinued by the Legislature.

Placing reliance on the decision of the Hon’ble Supreme Court in the case of Tata Power Co. Ltd. it was contended that where the purport and effect of the statute is clear from the language used, there is no scope to turn to Chapter notes or the marginal notes so as to understand Section 10A to be an exemption section on the basis that the said provision is still included in Chapter III of the Act.

It was submitted that by virtue of the amendment made by Finance Act, 2000, deductions under Section 10A are required to be made and allowed at the stage of computation of total income under Chapter VI of the Act notwithstanding the absence of any specific provision in Chapter VI to the said effect. In view of the clear language of Section 10A, as brought about by the amendment, a parallel or consequential amendment in Chapter VI of the Act was wholly unnecessary.

Observations made by the Apex Court:
It was observed that the section 10A was substituted by the Finance Act, 2000 with effect from 1.4.2001. Quoting the following opinion of Rowlatt, J. in Cape Brandy Syndicate vs. Inland Revenue Commissioner, the Hon’ble Supreme Court regarded it as having virtually become locus classicus;

“…in a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.”

The Hon’ble Court observed that the amendment of Section 10A by the Finance Act, 2000 with effect from 1.4.2001, specifically uses the words ‘deduction’. However, despite other provisions suggestive of the fact that Section 10A had changed its colour from being an exemption section to a provision providing for deduction. Yet, Section 10A continued to remain in Chapter III of the Income Tax Act which Chapter deals with incomes which do not form part of the total income.

It was also observed that several CBDT Circulars on the subject are having a fair amount of ambiguity therein as to the true nature and effect of the amendment. Specifically, Circular No. 7 dated 16.07.2013 and Circular No. 01/2013 dated 17.01.2013 which appear to be conflicting and contradictory to each other. In the former, section 10A was referred to as providing for deductions whereas the later Circular uses the expression “exemption”

It was further noted that even the Income Tax Return (ITR) Forms i.e. Form No. 1 dated 17.08.2001 and Form No. 6 for the assessment year 2012-13 are equally contradictory

The Court opined that the true and correct purport and effect of the amended Section will have to be construed from the language used and not merely from the fact that it has been retained in Chapter III. The introduction of the word ‘deduction’ in Section 10A, in the absence of any contrary material, and in view of the scope of the deductions contemplated by Section 10A, has to be understood that the Section embodies a clear enunciation of the legislative decision to alter its nature from one providing for exemption to one providing for deductions.

The Court observed that the difference between the two expressions ‘exemption’ and ‘deduction’, though broadly appear to be the same i.e. immunity from taxation, the practical effect of it in the light of the specific provisions contained in different parts of the Income Tax Act would be wholly different particularly for loss making eligible units and/or by non-eligible assessees seeking the benefit of adjustment of losses against profits made by eligible units.

According to the Court, the absence of any reference to deduction under Section 10A in Chapter VI of the Act could be understand by acknowledging that any such reference or mention would have been a repetition of what has already been provided in Section 10A.

Further, the Court opined that the retention of Section 80HHC and 80HHE, despite the amendment of Section 10A, indicates that some additional benefits to eligible Section 10A units, not contemplated by Sections 80HHC and 80HHE, was intended by the legislature as the stages for working out the deductions under Section 10A and 80HHC and 80HHE are substantially different.

The Court pointed out that the deductions u/s 10A is available to the individual eligible undertaking of an assessee without reference to the other eligible or non-eligible units or undertakings of the assessee the fact which is clear from CBDT Circular No. 794/2000.

The Court was of the view that it is only logical and natural that the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore, immediately after the stage of determination of its profits and gains. At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in Sections 70, 72 and 74 of the Act would be premature for application.

Thus the Hon’ble Supreme Court opined that deductions under Section 10A would be prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income.

The stage of deduction us 10A is computing gross total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of the total income under Chapter VI.

Stage of deduction us 10A

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