(2011) 130 ITD 219 (Cochin) (TM) Dy. CIT, Circle 2(1), Range-2, Ernakulam v. Akay Flavours & Aromatics (P.) Ltd. A.Y.: 2004-05. Dated: 20-9-2010

Facts:
The assessee is a hundred percent export-oriented unit and is eligible for deduction u/s.10B of the Income-tax Act. The first relevant assessment year for which deduction u/s.10B claimed was A.Y. 1996- 97 and therefore the last assessment year for which the deduction will be available to assessee will be A.Y. 2005-06. During the assessment of return of income for A.Y. 2004-05, the AO noticed that the assessee had claimed set-off brought forward unabsorbed depreciation up to A.Y. 2000-01 against income computed under the head ‘Income from other sources’. The AO disallowed the claim of deduction under grounds of provision of section 10B(6) and while computing the income of the assessee during the assessment, the AO, first set off the brought forward business loss and unabsorbed depreciation against the income from the export unit and balance income was considered for deduction u/s.10B. Thus the AO neutralised the claim of deduction u/s.10B by setting off the brought forward loss and unabsorbed depreciation first and disallowed the assessee’s claim of set-off against income under the head ‘Income from other sources’.

The assessee, against said order of the AO, preferred an appeal to the CIT(A). The CIT(A) reversed the order of the assessing officer and upheld the claim of the assessee. The CIT(A) opined that reading of provision u/s.10B(6)(ii) clearly states that set-off of unabsorbed depreciation and business loss brought forward up to A.Y. 2000-01 will not be allowed to be carried forward beyond the tax holiday period. In the instant case, the last year of claim of deduction u/s.10B was A.Y. 2005-06, whereas the assessment year for which appeal was referred is A.Y. 2004-05, therefore the view of AO could not be upheld and the assessee’s claim was allowed.

Aggrieved the Revenue appealed before the ITAT.

Held:
(1) On simple reading of section 32 with section 72, it is apparent that unabsorbed depreciation can be set off against business income or under any head of income including ‘Income from other sources’. There is no provision in law which prohibits set-off of unabsorbed depreciation from income computed under head ‘Income from other sources’.

(2) The benefit given u/s.10B is deduction and not an exemption and is evident from the wordings of the said provision which states that only 90% of the business profits are allowed as deduction. Thus the balance 10% has to be treated only as business income. The perusal of section 10B(1) clearly reveals that deduction under the section from profits and gains derived by undertaking from the export has to be made first while computing income under the head ‘Income from business’ and not at a later stage of computation of the gross total income of the assessee.

(3) Provision of section 10B(6)(ii) states that no loss insofar as it relates to the business of the undertaking including unabsorbed depreciation, so far it relates to any relevant assessment year up to A.Y. 2000-01 shall be carried forward for set-off while computing income for any assessment year subsequent to the last relevant assessment year in which deduction under this section is claimed i.e., after the tax holiday period. Therefore, setoff of such brought forward business loss or unabsorbed depreciation can be made in accordance with provisions of section 32, section 71 and section 72 while computing the total income of the assessee for assessment year within the tax holiday period.

(4) Thus, set-off of brought forward business loss and unabsorbed depreciation up to A.Y. 2000-01 cannot be disallowed for A.Y. 2004- 05, where the last year of claim for deduction u/s.10B was A.Y. 2005-06 as the assessment year in consideration falls within the tax holiday period. Thus Revenue’s appeal stood dismissed and the view taken by the CIT(A) was upheld.