Taxing the benefit: Some issues

Updated: Apr 30 2006, 05:30am hrs
Litigation involving companies claiming tax holiday benefit under sections 10A/10B of the Income tax Act, 1961 (Act) has been on the rise in recent times. Many of the issues raised have to be defended based on first principles. To add to this problem, litigation itself is a time-consuming exercise. This article highlights some of the issues that are being faced.

Setting off of loss incurred by a unit:

One of the issues is whether a loss incurred by an EOU/STPI unit can be set off against income from other sources of business (units) and other income (interest), in the same year. As per clauses (i) and (ii) of sub-section (6) of sections 10A/10B, depreciation and business losses relating to assessment year 2001-02 and onwards can be carried forward. The Finance Act 2003 introduced such a retrospective amendment.

The CBDT in its Circular No 7 (dated September 5, 2003) stated that since the existing provisions did not permit carry- forward of losses, the amendment was introduced with a view to rationalise the existing tax incentives. However, the assessing officer and the Commissioner Appeals, typically adopt a position that the loss of an EOU/STPI unit cannot be set off against other sources/ heads of income on the basis that sections 10A/10B are part of Chapter III of the Act.

Support for their contention is also drawn from Section 14A which prohibits claim of expenditure incurred in relation to income which does not form part of total income.

The Mumbai Tribunal in the case of Navin Bharat Industries Ltd v DCIT (90 ITD 1) held that since section 10A does not refer to sections 70 or 71 there can be no prohibition regarding set-off of the loss of such units against the income from other units.

In rendering its decision, the tribunal held that the decisions rendered in the context of Section 10 cannot be applied to Section 10A as the former is not a code in itself.

Further, the Judicial Member was of the view that section 14A is applicable only in respect of expenditure. And given that the term expenditure relates to spending / disbursements, whereas loss is not something that is expended, he was of the view that the loss of an EOU/STP unit should be eligible for set off against other income despite applicability of Section 14A.

Further, a recent judgement rendered by the Bangalore Tribunal reiterated that the benefit under Section 10B is a deduction from income and not an exemption though the Section falls in Chapter III.

Despite the above mentioned rulings, often the revenue authorities at the lower levels adopt a contrary position resulting in needless litigation and undue recovery of tax demand.

Determination of total turnover:

Another issue is with regard to the determination of total turnover for the purpose of computing the deduction under sections 10A/10B. The sections - unlike sections 80HHC/80HHE - do not define total turnover, though a definition of export turnover is provided for.

Revenue authorities, on occasions, do not agree to the aspect of parity between the numerator and denominator, as has been held in various judicial precedents in the context of section 80HHC, thereby adversely affecting the percentage of deduction that can be claimed.

However, an assessee can draw reference to a recent decision of the Delhi Tribunal in the case of DCIT Coy Circle v Lotus Trans Travels P Ltd (98 ITD 115) rendered in the context of section 80HHD.

The section provides for certain exclusions from the numerator (receipts in foreign exchange as reduced payments in Indian currency obtained by conversion of the said foreign currency) whereas does not provide a method for determination of the denominator (total receipts of the business). The tribunal held in this context that in order to work out the proportionate amount correctly, both the numerator and the denominator should be determined on a uniform basis.

However, given that the provisions of Section 80HHD are not identical to that of sections 10A/10B, the revenue authorities can seek to distinguish the decision.

In order to avoid large-scale litigation, the finance ministry can consider clarifying its position on such issues affecting a large class of assessees.

The writers are senior tax professionals with Ernst & Young