In a major relief to the Ernst & Young Pvt Ltd (EY), the Kolkata bench of the ITAT confirmed the original assessment order passed by the Assessing Officer allowing deduction under sections 10A and 10AA of the Income Tax Act to the Company without set off of loss of taxable unit.
The decision was based on the recent verdict of the Supreme Court in CIT vs Yokogawa India Ltd, wherein the Top-Court held that the provision of section 10A and 10AA of the Income Tax Act are deduction provisions but the stage of deduction would be while computing gross total income of eligible undertaking under Chapter-IV of the Act and not at the stage of computation of total income under Chapter-VI of the Act.
Assessee-Company is a management, technical, professional consultant and it is also engaged in the business of providing back office support service, i.e., Information Technology Enabled Services (ITES). Assessee had four units including SSL, SEZ for which exemption u/ss 10A and 10AA is available and also had a non-SSL and non-SEZ units for which income tax is payable under the provisions of the IT Act. For the year under consideration, units other than the Sec.10A and 10AA units, incurred loss of Rs.8,37,63,777. AO completed assessment u/s 143(3) of the Act wherein he allowed deduction u/s 10A and 10AA of the Act without set off of loss of taxable unit.
Later, the Commissioner of Income Tax quashed the above assessment order by invoking his revisionary power mainly on two grounds. Firstly, the deduction u/s 10A and 10AA of the Act was allowed without setting off of loss of units whose income was chargeable to tax. Secondly, deduction u/s 10A and 10AA of the Act ought to have been restricted to the total income computed under the head “ income from business” of Rs.55,86,57,869/-.
Before the Tribunal, assessee maintained that the Act provides for deductions “in” computing the total income but no mechanism is provided for any deduction “from” the total income already computed. They further contended that the issue as to whether provision of sections 10A and 10AA of the Act are deduction provisions or exempt provisions was a debatable issue which was concluded by the Apex Court recently in the case of CIT vs Yokogawa India Ltd, wherein the Court clarified that “though section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV and’ not at the stage of computation of the total income under Chapter VI.”
The bench observed that while completing the assessment, the AO has called for complete details of calculation of deduction u/s 10A and 10AA of the Act and the order was passed after conducting detailed enquiry. “We also are of the view that the AO was fully conscious of the issue where provision of section 10A and 10AA of the Act were to be construed as deduction provision or exemption provisions and had in the course of assessment proceedings called for calculation of deduction u/s 10A and 10AA of the Act. In fact perusal of the order of assessment u/s 143(3) of the Act shows that the AO has disallowed the expenses claimed by the assessee by way of provision for leave encashment while arriving at the eligible provision of section 10A and 10AA units. It cannot therefore be said that there was any failure on the part of the AO for proper or adequate enquiries to claim deduction u/s 10A and 10AA before completing the assessment.”
In view of the Supreme Court ruling in the case of CIT vs Yokogawa India Ltd, the bench observed that “the effect of the aforesaid decision would be that the provision of set off and carry forward as contemplated under Chapter-VI of the Act would not be attracted and therefore intra head set off sought to be done by the CIT by seeking to rely on the provision of section 70(1) of the Act and seeking to restrict the deduction u/s 10A and 10AA of the Act to the extent of gross total income as contemplated u/s 80A(2) of the Act, cannot be sustained.”
Read the full text of the Order below.
