The deduction of the profits of a business should be made independently in respect of each business

The Hon’ble apex Court in the case of CIT vs. Yokogawa India Limited, Civil Appeal No. 8498 of 2013,  8497of 2013 and others has held that the deduction of the profits of a business should be made independently and before applying the provisions for set off and carry forward.

Issues involved- whether provisions of section 10A would apply equally to cases governed u/s 10B:

The perfect meaning and effect of the provisions of Section 10A of the Income Tax Act, 1961 was the main issue that arose for determination of the Court.

It was observed that the decision of the Apex Court regarding the provisions of Section 10A of the Act would equally apply to cases governed by Section 10B of the Act in view of the provisions of Section 10A of the Act though it guides another situation.

The following specific questions arose for consideration:

(i) Whether Section 10A of the Act was beyond the scope of the calculation of total income under the Act. As a result whether the income of a unit should have been excluded before arriving at the gross total income of a person?

(ii) Whether the term “total income” under Section 10A of the Act is similar to that appearing in Section 2(45) of the Act?

(iii) Whether even after the amendment on and from 1.4.2001, Section 10A continued to remain an exemption section and not a deduction one?

(iv) Whether losses of 10A Units or non 10A Units could be set off against the profits of 10A Units before deductions under Section 10A are affected?

(v) Whether carried forward business losses as well as unabsorbed depreciation of Units could be set off against the profits of other 10A Units of the same assessee?

Findings of the Apex Court- whether the profits to be calculated unit wise or business as one case?:

Section 10A of the Act before its amendment by the Finance Act of 2000 with effect from 1.4.2001; subsequent to the amendment and the provisions of Section 10A of the Act, as amended by the Finance Act, 2003 with effect from 1.4.2001 were set out.

It was noted that as per Section 10A of the Act, prior to the amendment made by the Finance Act, 2000, stated that subject to the provisions of this section, any profits made by an assessee from an industrial undertaking to which this section is applicable, shall not be included in his total income.

It further states that the section applies to industrial undertakings that satisfy the following conditions, namely:

1. In relation to an undertaking which manufactures any article on or after the 1.4.1995, its exports of such goods are not less than 75% of the total sales in the previous year. Provided the profits and gains referred above shall not be included in the total income of the assessee for any ten consecutive assessment years, starting from the assessment year relevant to the previous year in which the industrial undertaking starts manufacturing such goods.
2. In computing the total income of the assessee of the previous assessment year immediately succeeding the last assessment years, or of any previous year section 32, section 32A, section 33,section 35 and section 36 shall apply as if every allowance or deduction for any of the relevant assessment years, relating to any building, machinery or furniture used for the purposes of the business of the industrial undertaking or any expenditure incurred for such business in such previous year had been given full effect to for that assessment year and no deficiency referred to in sub-section (3) of section 80J, shall be carried forward or set off where such loss, deficiency relates to any of the relevant assessment years.
3. No deduction shall be allowed under section 80HH or section 80HHA or section 80-I or section 80-IA or section 80-IB or section 80J in relation to the profits and gains of the industrial undertaking; and in computing the depreciation allowance under section 32, the value of any asset used for the business of the industrial undertaking shall be computed as if the assessee had been actually allowed the deduction for any depreciation for the relevant assessment years.

Provisions of section 10A as amended:

Section 10A was substituted by the Finance Act, 2000 which states that a deduction of such profits and gains which are derived by an undertaking from the export of goods or computer software for ten consecutive assessment years starting with the relevant previous year in which the undertaking starts producing such goods or computer software, shall be allowed from the total income of the assessee.

Provided that where in computing the total income of the undertaking for any assessment year included by applying the provisions of Section 10A, the undertaking shall be allowed deduction only for the unexpired period of the said ten consecutive assessment years:

Further where an undertaking was initially located in any free business zone or export processing zone is subsequently located in an economic zone due to conversion of such free trade zone or export processing zone into a special economic zone, the period of ten consecutive assessment years shall be calculated from the assessment year relevant to the previous year in which the undertaking was established in such export processing zone:

Provided also that the profits and gains that arose from such domestic sales of goods or computer software do not exceed 25% of total sales shall be considered to be the profits of a business that arose from the export of goods or computer software.

Further no deduction shall be allowed to any undertaking for the assessment year starting from 1.4. 2010 and following years.

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