Ita/49/2010 Of The Commissioner Of Income Tax v. Patspin India Ltd

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE B.P.RAY TUESDAY, THE 6TH SEPTEMBER 2011 / 15TH BHADRA 1933 ITA.No. 49 of 2010() -------------------- ITA.582/COCH/2008 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT ---------------------------------------- THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/APPELLANT ------------------------ M/S. PATSPIN INDIA LIMITED, 3RD FLOOR, PALAL TOWERS, M.G.ROAD,KOCHI-16. ADV. SRI.S.PARTHASARATHI FOR R1 SRI.V.SREEKUMAR FOR R1 SRI.P.BALAKRISHNAN (E) FOR R-1 THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 28/06/2011, ALONG WITH ITA NOS.67, 75, 89 & 146 OF 2010, THE COURT ON 06/09/2011 DELIVERED THE FOLLOWING: APPENDIX(ITA 49/2010) ANNEXURE A: COPY OF ORDER U/S.143(3) DT.30.12.2006 FOR THE ASSESSMENT YEAR 2001-02. ANNEXURE B: COPY OF ORDER OF COMMISSIONER OF INCOME TAX (APPEALS). ANNEXURE C: COPY OF ORDER U/S.263 OF INCOME TAX ACT. ANNEXURE D: CERTIFIED COPY OF ORDER DT.24.7.2009 OF THE INCOME TAX APPELLATETRIBUNAL, COCHIN BENCH IN ITA NO.582/COCH/2008. TRUE COPY P.S. TO JUDGE C.N.RAMACHANDRAN NAIR &BHABANI PRASAD RAY, JJ. .................................................................... I.T. Appeal Nos.49,67,89,75 & 146 of 2010....................................................................Dated this the 6th day of September, 2011. C.R. JUDGMENT Ramachandran Nair, J. The short question arising in all the connected appeals filed bythe Revenue against the very same assessee is whether deduction ofexport profit for 100% export oriented industrial unit has to be grantedwith reference to the profit of the industrial unit computed under theprovisions of the Act which includes set off of unabsorbed depreciationcarried forward from earlier years as provided under Section 32(2) ofIncome Tax Act, (hereinafter called "the Act"). The assessmentsinvolved are for the years 2001-2002 to 2005-2006 (5 assessmentyears). The assessee filed returns for regular assessment on the profitdetermined under the provisions of the Act and in the alternative, forassessment on book profit as provided under Section 115JB of the Act.The controversy arose in the determination of deduction admissibleunder Section 10B(4) to both of the industrial units run by the assessee ITA 49/10 & conn. which are admittedly 100% EOUs eligible for deduction on exportprofits under the Act. The assessee computed eligible deduction ofexport profit under Section 10B from both the units without setting offunabsorbed depreciation as provided under Section 32(2) of the Actand besides this, assessee treated “interest income” as business incomeand also claimed excess benefit under Section 35D of the Act. Theassessments for the first four years were completed accepting theclaims made by the assessee. However, the Assessing Officer himselfproposed to rectify the assessments under Section 154 for correctingmistakes in the assessments. When this proposal was pending, theCommissioner of Income Tax issued notice under Section 263 of theAct and ordered revision of assessments for 2001-02 to 2004-2005holding that deduction under Section 10B(4) on export profit of boththe 100% EOUs have to be computed after setting off carried forwardunabsorbed depreciation as provided under Section 32(2) of the Act.Similarly, the Commissioner held that the treatment of “interestincome” as “business income” is incorrect and excess deduction ITA 49/10 & conn. ITA 49/10 & conn. allowable under Section 35D was also ordered to be corrected. So faras the assessment year 2005-2006 is concerned, the original assessmentitself was completed by computing deduction under Section 10B withreference to profit obtained after setting off carried forward unabsorbeddepreciation, against which assessee filed first appeal before the CIT(Appeals), who dismissed the same. The assessee filed second appealsbefore the Tribunal against the suo moto revisional orders issued by theCommissioner under Section 263 for the first four years and for theyear 2005-2006 second appeal was filed against the order of the CIT(Appeals) confirming the regular assessment. Even though severalgrounds were raised before the Tribunal, the assessee gave up theirclaim that interest income is business income and gave up claim ofexcess deduction under Section 35D by limiting the claim to the extentdeclared as eligible by the Commissioner of Income Tax andCommissioner of Income Tax (Appeals) etc. Ultimately the assesseepressed only one ground of appeal before the Tribunal i.e. whether asheld by the Commissioner in the order issued under Section 263 that ITA 49/10 & conn. the deduction admissible under Section 10B(4) of the Act on the exportprofit earned by 100% export oriented industrial units has to bedetermined based on “business income” computed under Sections 30 to43D of the Act including setting off of carried forward unabsorbeddepreciation under Section 32(2) or whether the eligible deduction is tobe computed without setting off carried forward unabsorbeddepreciation. The Tribunal by following one decision of theHyderabad Bench of the Tribunal in ITC TECHNOLOGIES PVT.LTD. Vs. DY. CIT and another decision of the Chennai Bench of theTribunal in the case of FORD BUSINESS SERVICES CENTRE PVT.LTD. allowed the assessee's claim by declaring that assessee is entitledto deduction under Section 10B(4) on the profit of eligible industrialunits determined under the provisions of the Act but before setting offunabsorbed depreciation carried forward from earlier years as providedunder Section 32(2) of the Act. It is against this common order of theTribunal the Revenue has filed these appeals. We have heard Seniorcounsel Sri.P.K.R. Menon appearing for the Revenue and Adv. ITA 49/10 & conn. Sri.Parthasarathi appearing for the respondent-assessee. 2. Before proceeding with the matter Senior counsel for theRevenue submitted that the same issue stands decided by decision ofthe Karnataka High Court in COMMISSIONER OF INCOME TAXVs. HIMATASINGIKE SEIDE LTD. reported in 286 ITR 255. However, counsel for the assessee contended that in the SLP filedagainst the above referred judgment, leave is granted by the SupremeCourt, in SLP No.21101/2006. When the Supreme Court grants leaveagainst the judgment relied on, we have to consider the issue on meritin our own way. 3. Since the issue pertains to method of computation of deduction eligible under Section 10B(4), we extract hereunder the relevantprovisions of Section 10B of the Act: "S.10B. Special provisions in respect of newlyestablished hundred per cent export-oriented undertakings:-(1) Subject to the provisions of this section, a deduction ofsuch profits and gains as are derived by a hundred per centexport-oriented undertaking from the export of articles orthings or computer software for a period of ten consecutiveassessment years beginning with the assessment year ITA 49/10 & conn. relevant to the previous year in which the undertakingbegins to manufacture or produce articles or things orcomputer software, as the case may be, shall be allowedfrom the total income of the assessee: ............... eligible under Section 10B(4), we extract hereunder the relevantprovisions of Section 10B of the Act: "S.10B. Special provisions in respect of newlyestablished hundred per cent export-oriented undertakings:-(1) Subject to the provisions of this section, a deduction ofsuch profits and gains as are derived by a hundred per centexport-oriented undertaking from the export of articles orthings or computer software for a period of ten consecutiveassessment years beginning with the assessment year ITA 49/10 & conn. relevant to the previous year in which the undertakingbegins to manufacture or produce articles or things orcomputer software, as the case may be, shall be allowedfrom the total income of the assessee: ............... (4) For the purposes of sub-section(1), the profitsderived from export of articles or things or computersoftware shall be the amount which bears to the profits ofthe business of the undertaking, the same proportion as theexport turnover in respect of such articles or things orcomputer software bears to the total turnover of the businesscarried on by the undertaking. ............... (6) Notwithstanding anything contained in any otherprovision of this Act, in computing the total income of theassessee of the previous year relevant to the assessment yearimmediately succeeding the last of the relevant assessmentyears, or of any previous year, relevant to any subsequentassessment year,-- (i) section 32, section 32A, section 33, section 35 andclause (ix) of sub-section (1) of section 36 shall apply as ifevery allowance or deduction referred to therein and relatingto or allowable for any of the relevant assessment yearsending before the 1st day of April, 2001, in relation to anybuilding, machinery, plant or furniture used for the purposesof the business of the undertaking in the previous yearrelevant to such assessment year or any expenditureincurred for the purposes of such business in such previous ITA 49/10 & conn. year had been given full effect to for that assessment yearitself and accordingly sub-section (2) of section 32, clause(ii) of sub-section (3) of section 32A, clause (ii) of sub-section (2) of section 33, sub-section (4) of section 35 or thesecond proviso to clause (ix) of sub-section (1) of section36, as the case may be, shall not apply in relation to anysuch allowances or deduction; ................ There is no controversy that deduction on export profit under Section10B(4) has to be determined with reference to the profit of eligibleindustrial unit i.e. 100% EOU. Assessee has two industrial unitsengaged in export qualifying both units for deduction under Section10B(4). The only question, therefore, to be considered is the methodof computation of relief eligible under Section 10B(4) of the Act. It isclearly stated in the said provision that exemption is on the entireprofits on exports which has to be computed on proportionate basiswith reference to total profits of the eligible industry. So much so,there can be no controversy that the profit to be reckoned for thepurpose of determining profit on exports is the business profit. Thisleaves us with the only question which is the meaning and content of ITA 49/10 & conn. “profits on business” of the undertaking. Respondent-assessee has nocase that the business profit has to be computed in any way other thanby applying Sections 30 to 43D as stated under Section 29 of the Act.This is exactly what the Commissioner of Income Tax has directed inthe order issued under Section 263 of the Act for the first four yearsand by CIT (Appeals) for 2005-2006. However, respondent-assesseeraised the contention that since Section 10B is an exemption clause,exclusion has to be first allowed before computation of businessincome including set off of carried forward depreciation. It is thisclaim of the respondent-assessee that was accepted by the Tribunalagainst which Revenue has filed the appeals. ITA 49/10 & conn. “profits on business” of the undertaking. Respondent-assessee has nocase that the business profit has to be computed in any way other thanby applying Sections 30 to 43D as stated under Section 29 of the Act.This is exactly what the Commissioner of Income Tax has directed inthe order issued under Section 263 of the Act for the first four yearsand by CIT (Appeals) for 2005-2006. However, respondent-assesseeraised the contention that since Section 10B is an exemption clause,exclusion has to be first allowed before computation of businessincome including set off of carried forward depreciation. It is thisclaim of the respondent-assessee that was accepted by the Tribunalagainst which Revenue has filed the appeals. 4. Senior counsel appearing for the Revenue contended that thetwo orders of the other Benches of the Tribunal relied on by the Cochin Bench are wrongly decided. He has placed reliance on the KarnatakaHigh Court's decision referred above in which it is clearly stated thatbusiness profit has to be first computed in accordance with Section 28to 43D of the Act and in the course of the same, unabsorbed ITA 49/10 & conn. depreciation carried forward should also be set off. However, in thetwo Tribunal decisions relied upon by the Cochin Bench the finding ofthe Tribunals is that in the course of computation of business profit,Section 10B(4) deduction has to be first made and thereafter onlyunabsorbed depreciation should be set off. We are unable to upholdthe order of the Tribunal following two other Bench decisions of theTribunal because business profit has to be first determined based onSection 30 to 43D as provided under Section 29 of the Act and it iswith reference to profit so determined deduction eligible under Section10B(4) has to be determined with reference to export turnover and thetotal turnover. The whole purpose of the exercise of computation byapplying Section 30 to 43D is to determine the total business profitswith reference to which the export profit of the unit has to bedetermined for granting deduction under sub-clause (4) of Section 10B.In fact, since respondent's two industrial units are eligible for deductionunder Section 10B(4), eligibility has to be determined with reference toexport turnover of each of the units and that has to be done after ITA 49/10 & conn. computing the business profit from the industrial units whichnecessarily has to be done after setting off unabsorbed depreciationcarried forward from previous years. We are also constrained tonotice that the principle of computation of deduction under Section10B(4) is similar to determination of eligible export profit fordeduction under Section 80HHC(3) of the Act. 5. Even though the Tribunal has not relied on sub-section (6) ofSection 10B to uphold the claim of respondent-assessee,they have referred to the said provision and said that sub-section (6) ofSection 10B also supports the case of the respondent-assessee. We areunable to accept this observation of the Tribunal also because Section10B(6) does not deal with computation of business profit during theperiod the assessee enjoys exemption under Section 10B(4) of the Act.On the other hand this sub-section is only an embargo against theassessee claiming any carried forward benefit under the sectionsreferred to therein in the assessment for the assessment year followingthe end of the tax holiday enjoyed by the assessee under Section 10B ITA 49/10 & conn. 5. Even though the Tribunal has not relied on sub-section (6) ofSection 10B to uphold the claim of respondent-assessee,they have referred to the said provision and said that sub-section (6) ofSection 10B also supports the case of the respondent-assessee. We areunable to accept this observation of the Tribunal also because Section10B(6) does not deal with computation of business profit during theperiod the assessee enjoys exemption under Section 10B(4) of the Act.On the other hand this sub-section is only an embargo against theassessee claiming any carried forward benefit under the sectionsreferred to therein in the assessment for the assessment year followingthe end of the tax holiday enjoyed by the assessee under Section 10B ITA 49/10 & conn. (4) of the Act. So much so, in our view, contrary to the finding of theTribunal sub-section (6) only supports Revenue's case that carriedforward depreciation should be set off in the computation of businessprofit even during the period assessee enjoys exemption under Section10B(4) of the Act. We agree with the view taken by the KarnatakaHigh Court in the decision above referred. In view of the abovefindings, we allow the appeals by reversing the orders of the Tribunaland by restoring the orders issued by the Commissioner of Income Taxunder Section 263 for the first four years and by upholding the order ofthe C.I.T.(Appeals) for the assessment year 2005-2006. Sd/-C.N.RAMACHANDRAN NAIRJudge Sd/-BHABANI PRASAD RAYJudge True copy P.S. to Judge