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Total Number of Subscribers: 1626 |
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Date: 1st September 2010 |
Compiled by: M Sathya Kumar |
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The loss from a
software technology park unit can be set off against income from a non-STP
one. The Finance Act, 1981 inserted Section 10A to the
Income-Tax Act, 1961 to provide benefits to newly established undertakings in
free trade zones, software technology parks (STPs), etc. The section was amended several times till it was
finally substituted in its current form by the Finance Act, 2000, which
brought about a major change in the section leading to several controversies. Section 10A finds its place in Chapter III of the I-T
Act which deals with ‘Incomes which do not form part of total income'. Pre-amendment Prior to the amendment, the profits and gains derived by
an assessee from an industrial undertaking claiming the benefit under Section
10A never formed part of the total income of the assessee and got reduced at
the source level itself by way of an exemption. With effect from April 1,
2001, the existing provisions of Section 10A was substituted as below: “(1)Subject to the provisions of this section, a
deduction of such profits and gains as are derived by an undertaking from the
export of articles or things or computer software……. shall be allowed from
the total income of the assessee…” A harmonious reading of Section 10A and its placement in
Chapter III indicates that the tax holiday under Section 10A is in the nature
of an exemption; however, the computation mechanism provided in Section 10A
is by way of a deduction. Thus, from April 1, 2001, onwards Section 10A provided
to an assessee the tax holiday by way of a deduction. Set off of losses Section 10A(6)(ii) lays down a restriction for carry forward
and set off of losses under Sections 72(1) and 74(3) while computing the
total income of an assessee, where such loss relates to the period in which
the assessee is claiming a deduction under Section 10A. However, no specific
restriction is made for set off of losses under Sections 70 and 71. The question arises whether STP unit loss can be set off
against non-STP unit income under Sections 70 and 71 as no restriction is
provided in Section 10(6)(ii) for such set-off. This is explained with the
help of an example below: Example: A company has three units A, B and C, of which,
two units A and B are registered as STP and claim deduction under Section
10A. The third unit C is a non-STP unit. The profits and losses of the three
units are: A (STP) — Rs 1,000; B (STP) — Rs (700); and C (non-STP) — Rs
1,200. Considering the amendment in Section 10A and Section
10(6) (ii), the total income of the company can be computed as under: Unit A – STP income — Rs 1,000 Unit B – STP loss (set off in accordance with Section
70) — Rs (700) Unit C – Non-STP income — Rs 1,200 Less: Deduction under Section 10A for Unit A — Rs 1,000 Taxable income — Rs 500 In this scenario, the STP loss of Rs 700 is set off against
the non-STP income of Unit C of Rs 1,200 and STP income of Unit A has been
claimed as a deduction under Section 10A. The income-tax authorities may adopt a different
approach wherein the loss of the STP unit B is set off against the income of
the STP unit A and the balance amount is allowed as a deduction under Section
10A as indicated below: Unit A – STP income — Rs 1,000 Unit B – STP loss (set off in accordance with Section
70) — Rs (700) Unit C – non-STP income — Rs 1,200 Sub-total — Rs 1,500 Less: Deduction under Section 10A for unit A (Rs 1,000 –
Rs 700) — Rs 300 Taxable income — Rs 1,200 This approach would lead to a resultant taxable income
of Rs 1,200 instead of Rs 500 worked out above. In substance, as per the
above approach, the losses of unit B is ignored and income of unit A is
claimed exempt, resulting in a taxable income of Rs 1,200, which is nothing
but the income of non-STP unit C. In our view, the loss from an STP unit can be set off
against a non-STP unit income by virtue of Sections 70 and 71 read with
Section 10A(6)(ii). Furthermore, the entire profit of a STP unit is to be
allowed as a deduction and the same cannot be reduced by first adjusting the
loss of another STP unit as this would defeat the purpose of amendment. The deduction is to be allowed on such profit and gains
as are derived from the undertaking. Hence, to apply the provisions of
Section 10A, one has to consider the profit and gains as derived by an
undertaking. Moreover, the deduction under Section 10A is qua the
undertaking and not qua the assessee as has been held by the Bangalore
Tribunal in the Tata Consultancy Services Ltd vs ACIT (ITA No.590/Bang/08)
and Chennai Special Bench Scientific Atlanta India Technology Pvt. Ltd. vs
ACIT (ITA No.229/Mds/2007 & ITA No.352/Mds/2008) cases. Judicial analysis The Tribunal, in the Mindtree Consulting Pvt. Ltd. vs
ACIT (102 TTJ 691) case, observed that though Section 10B falls in Chapter
III, which is titled as ‘Income which do not form part of total income', yet
what is granted to the assessee is deduction as per the amended provisions of
Section 10B w.e.f. April 1, 2000. Section 10B(6)(ii) restricts carry forward
and set off of loss under Sections 72 and 74 but do not provide anything
regarding intra-head set off under Section 70 and inter-head set off under
Section 71 of the Act. This view is also fortified by other decisions of the
Tribunal in the Honeywell International ( 1) cases. This issue is however debatable and may lead to
litigation. Article by Anjana Singh and Priyanka Upadhyay , The authors are with Deloitte |
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