The Delhi High Court has ruled that a business loss suffered by a unit eligible for deduction under Section 10B of the Income Tax Act, 1961 can be set off against taxable profits of other eligible or non-eligible business units.
The bench of Justice Dinesh Mehta and Justice Rajneesh Kumar Gupta has observed that the computation of export profits for determining the quantum of deduction under Section 10B does not alter the ordinary treatment of the unit’s profit or loss while computing the assessee’s overall income.
The assessee operated 10 units in the software-export business, six of which were export-oriented units eligible for benefits under Section 10B. During the relevant assessment year, its Unit V at Gurgaon incurred a business loss of ₹1,34,24,747.
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While preparing its return of income, the assessee claimed that the loss suffered by the Gurgaon unit could be set off against profits earned by its other business undertakings. The Assessing Officer, however, rejected the claim.
According to the Assessing Officer, income eligible for deduction under Section 10B was not required to enter the gross total income in the ordinary manner because the deduction was to be considered at an earlier stage. The AO consequently took the view that the loss of the eligible undertaking could not be set off against income of other undertakings and that the Act contained no provision permitting such set-off or carry-forward of the loss.
The assessee challenged the assessment before the Commissioner of Income Tax (Appeals). The CIT(A) allowed the appeal, holding, among other things, that Section 10B was a provision for deduction rather than an exemption provision. The CIT(A) relied upon the Bombay High Court’s decision in Hindustan Unilever Ltd. v. DCIT.
The department challenged the CIT(A)’s decision before the ITAT. The Tribunal relied upon the legal position emerging from decisions including the Delhi High Court’s judgment in CIT v. KEI Industries Ltd. and the Karnataka High Court’s ruling in CIT v. Yokogawa India Ltd., which had subsequently been affirmed by the Supreme Court.
The Tribunal concluded that the Section 10B deduction was to be determined with reference to the eligible undertaking independently. It held that where the eligible undertaking suffered a loss, there was no question of allowing a Section 10B deduction, but the loss also could not be set off against the business income of other eligible or non-eligible units. The Tribunal accordingly allowed the Revenue’s ground and denied set-off of the ₹1.34 crore loss.
Before the High Court, senior counsel appearing for the assessee argued that the Tribunal had proceeded on an incorrect understanding of the law.
The assessee pointed out that the earlier version of Section 10B had operated as an exemption provision, whereas the provision had subsequently been transformed into a deduction provision. According to the assessee, the legal position applicable after the amendment had been clarified by the Supreme Court in Yokogawa India Ltd.
The assessee argued that the Supreme Court had approved the Karnataka High Court’s approach that the deduction under Section 10A, a provision pari materia with Section 10B for the relevant issue, was to be computed at the stage of determining the gross total income of the eligible undertaking.
The assessee further relied upon the Karnataka High Court’s observations that once the relevant computations were made, an assessee remained entitled to the statutory benefits of set-off and carry-forward of losses under Section 72, irrespective of the nature of the business or the fact that the undertaking was covered by Section 10B.
The Delhi High Court noted the Supreme Court’s decision in Yokogawa India Ltd., which had held that although Section 10A, as amended, was a provision for deduction, the stage at which the deduction was to be given was while computing the gross total income of the eligible undertaking under Chapter IV, rather than at the stage of computing total income under Chapter VI.
This distinction was important because provisions governing aggregation of income and set-off of losses under Sections 70, 71 and 72 operate in the overall computation of income.
The assessee also placed reliance on CBDT Circular No. 7/DV/2013 dated July 16, 2013, which was issued to clarify the position concerning set-off and carry-forward of losses of eligible units.
The Revenue defended the Tribunal’s decision, contending that losses of a Section 10B unit could not be set off against profits or income of other units.
The department argued that Section 10B contemplated “profit and gains” and did not specifically use the expression “loss”. Therefore, according to the Revenue, a loss incurred by an eligible unit could not receive the benefit of set-off merely because the unit was otherwise entitled to Section 10B benefits.
The High Court, however, rejected this approach after examining the statutory scheme, the Supreme Court’s judgment and the CBDT clarification.
The central observation of the Delhi High Court was that Section 10B requires the profit or gain of each eligible unit from export turnover to be separately calculated. However, this separate calculation is required only for determining the quantum of deduction available under Section 10B.
The Court held that such computation does not change the manner in which the profit or loss of each unit is treated when the assessee’s combined business income is calculated.
In other words, the special computation prescribed under Section 10B is confined to determining the deduction under that provision. It does not override the normal statutory provisions governing set-off and carry-forward of business losses.
The Court therefore categorically held that there could be no denial of the set-off or carry-forward of the loss suffered by an eligible undertaking.
The High Court found further support in Paragraph 5.3 of CBDT Circular No. 7/DV/2013.
The circular clarifies that where, after aggregation of income under Sections 70 and 71, the resultant amount is a loss pertaining to an eligible unit, the loss is eligible for carry-forward and set-off under Section 72. It similarly addresses losses from ineligible units and their subsequent set-off in accordance with the statutory framework.
The circular thus reinforced the Court’s conclusion that the special treatment applicable to Section 10B profits for deduction purposes does not eliminate the ordinary statutory mechanism for dealing with business losses.
The Delhi High Court ultimately answered the substantial question of law in favour of the assessee.
The question before the Court was whether the Tribunal had erred in law by refusing to allow the set-off of the loss suffered by a Section 10B-eligible unit against taxable profits of other non-eligible units, particularly when profits of other eligible units had not themselves been brought to tax.
The Court answered the question in the affirmative and held that the assessee was entitled to the claimed set-off.
Consequently, the High Court set aside both the Tribunal’s order dated May 21, 2019 and the assessment order dated December 31, 2008. The appeal was allowed and the pending application was also disposed of.
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