The entire controversy with respect to the stage at which the tax incentives under sections 10A and 10B are to be computed arose on account of the use of the words ‘deduction from total income’ in these sections despite the sections being placed in Chapter III of the Act, which deals with ‘Incomes which do not form part of Total Income’ i.e. which are exempt at source itself.

The underlying difference between an “exemption” and a “deduction” is that exempt income will not enter the computation of total income of an assessee in the first place, whereas a deduction is allowed after computing the total income i.e. after aggregating the income under different heads i.e. ‘income from salary’, ‘income from house property’, ‘profits and gains of business’, ‘capital gains’ and ‘income from other sources’, and after setting off the unabsorbed business losses and unabsorbed depreciation.

However, with respect to incentives under sections 10A and 10B, even though the sections use the term ‘deduction’, this has been interpreted by various tax payers as the deduction of the profits of the eligible undertaking at the stage of computing the ‘profits and gains’ of business of the undertaking (and not from the gross total income), considering the placement of these provisions under Chapter III of the Act that deals with ‘exemption’ provisions. The ‘deduction’ provisions are contained in Chapter VI-A of the Act, and come into play after aggregating the income under different heads of the income and after setting off the unabsorbed business loss and the depreciation. However, the term ‘deduction’ has to be interpreted differently for the purpose of sections 10A/10AA/10B due to the placement of these provisions under Chapter-III of the Act. This view of the assessees has been endorsed in several Tribunal decisions. Thereafter, the Karnataka High Court, in the case of Yokogawa India Ltd (341 ITR 385), had reached a conclusion in favour of the assessee that the benefit of deduction under section 10A is available at the stage of computing profits of the eligible undertaking before set off of losses and that the assessee would be eligible to claim the benefit of unabsorbed business loss and unabsorbed depreciation post expiry of the tax holiday under section 10A.

This view has also been confirmed by the Mumbai High Court in the case of CIT vs. Black & Veatch Consulting (348 ITR 72) and the Delhi High Court in the case of TEI Technologies (78 DTR 225).

SKP’s Comments

The view taken by CBDT is clearly in contrast to the various rulings delivered by several High Courts that have ruled in favour of the assessees.

The circular has not considered the following observations made in the aforesaid favourable judgements:

• Sections 10A/10AA/10B have been retained in Chapter III and have not been placed under Chapter VI.
• Sections 10A/10AA/10B provide for deduction from total income. Determination of total income is the last point before the tax is charged. Upon determination of total income there will be no scope for further deduction. Thus, for sections 10A/10AA/10B, total income would mean profits and gains of the business of the undertaking in its commercial sense.
• The Revenue cannot treat sections 10A/10AA/10B of the Act as part of Chapter VI without any specific provision to that effect in the Act.
• Relief under sections 10A/10AA/10B should be provided at the stage of computation of profits and gains from business and profession, which is also supported by the Income Tax Return Form.

Binding Nature of Circulars

The circulars issued by the department are normally meant to be followed and accepted by the tax authorities and they are binding on the Income-tax officers even if the directions contained therein deviate from the provisions of the Act.  

At the same time, it is also known that circulars cannot bind any appellate authority, Tribunal, Court or even the assessee. On a practical front, most of the assesses (having eligible units under section 10A/10B/10AA/10BA) must have relied on the favourable Court decisions and filed their tax returns without setting off the brought forward losses against the profits of the eligible units, or have carried forward the losses arising from their eligible units for set off post the tax holiday period. As discussed above, the circular is not binding on the assessee and various High Courts have already endorsed the views taken by the assessees. Hence, in our view, an assessee could still take shelter under the various High Court decisions for contesting matters related to sections 10A and 10B before different appellate authorities. However, one will have to wait and watch how the Supreme Court deals with this circular when the matter reaches the Supreme Court.

For assessees claiming the tax incentive under section 10AA, the tax authorities at the first level itself would allow this incentive only after setting off the unabsorbed business loss and depreciation, and hence, they are in for a long round of litigation.