Citation Codes

Equivalent Citations

citation codes

Case Number

IT APPEAL NO. 60 (BANg.) OF 2008

Advocates

Padam Khincha

Judges

K. K. GUPTASHAILENDRA KUMAR YADAV

Acts

provision (b) to section 10(2)(vi) of the Indian Income-tax Act, 1922 and in section 32(2) of the Income-tax Act, 1961,
provisions of Income-tax Act, sections 29 to 43A, which include section 32(2). Section 32(2)
section 10A(6) and Circular No. 7 of 2003. If section 10A
FINANCE ACT 1981
section 32(1) of the Income-tax Act.
SECTION 14 INCOME TAX ACT
FINANCE ACT 2000
provision of the Income-tax Act
INCOME TAX ACT 1961
provisions of section 32(2).
provisions of section 72(1),
Act :(i) Section 36(1)( vii)
INCOME TAX ACT

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Smart Summary

Tribunal Order Summary (Accountant Member K.K. Gupta) — Assessment Year 2004-05 (Section 10A)

Factual and Procedural Background

The assessee filed its return of income for assessment year 2004-05 on 29-10-2004 claiming a deduction of Rs. 2,01,98,170 under section 10A. The company had an unabsorbed depreciation allowance (brought forward) from the year during which it had opted out of section 10A. The deduction under section 10A in the return was claimed without reducing the brought forward unabsorbed depreciation from profits. The case was selected for scrutiny and the assessment was completed on 31-10-2006 under section 143(3).

In the assessment order the Assessing Officer allowed deduction under section 10A only after reducing the brought forward unabsorbed depreciation from the profits of the business. The Assessing Officer also reduced telecommunication charges of Rs. 7,56,347 from the export turnover while calculating deduction under section 10A. On appeal, the Commissioner of Income Tax (Appeals) upheld the reduction of brought forward losses and unabsorbed depreciation (relying on decisions including Jt. CIT v. Infocon International Ltd. and Karnataka High Court decision in CIT v. Himatsingka Seide Ltd.), and also upheld the Assessing Officer's position on not reducing telecommunication charges from total turnover; the assessee further appealed to the Tribunal on these two points.

Legal Issues Presented

Whether unabsorbed depreciation allowance and brought forward business losses of earlier years must be reduced from current year profits before computing deduction under section 10A.
Whether telecommunication charges reduced from export turnover should also be correspondingly reduced from total turnover for the purpose of computing deduction under section 10A (i.e., whether the denominator used in the export-to-total-turnover ratio should be correspondingly adjusted).

Arguments of the Parties

Assessee's Arguments

The authorities below erred in holding that brought forward losses and unabsorbed depreciation of earlier years must be set off against the current year's business profits before claiming deduction under section 10A.
Decisions relied on by the CIT(A) are distinguishable on facts and law; income eligible for deduction under section 10A does not form part of total income and therefore does not follow the normal computation mechanism permitting reduction by brought forward losses/depreciation.
Profits eligible for section 10A should be treated as particular-year commercial/book profits of the eligible undertaking and should not be influenced by results of other units or by brought forward losses/unabsorbed depreciation.
Provisions granting incentives (sections 10A/10B) are to be given a beneficial interpretation so as to effectuate the relief and not to curtail it; hence brought forward losses/unabsorbed depreciation cannot be reduced at the threshold.
CBDT circulars (Circular No. 794 dated 9-8-2000 and Circular No. 308 dated 29-6-1981) and the format of departmental return forms (Form No.1; later ITR-6 and Schedule BP) demonstrate that deduction/exemption under section 10A operates at the source (i.e., the profits of the eligible unit are excluded/deducted before aggregation and set-off of brought forward losses).
Instruction for Form No.1 and Form ITR formats indicate that profit or loss before deduction under section 10A is to be shown, and deduction under section 10A is then separately recorded — supporting the assessee's method of computing section 10A deduction prior to setting off brought forward depreciation.
On the telecommunication charges issue, counsel relied on various ITAT Bangalore Bench decisions (Gate Global Solutions Ltd., Tata Elexsi Ltd., Infosys Technologies Ltd.) holding that the amount reduced from export turnover should also be correspondingly reduced from total turnover; counsel did not dispute the quantum (Rs. 7,56,347) reduced by AO from export turnover.

Revenue's Arguments (Ld. Departmental Representative)

The order of the CIT(A) and the Assessing Officer should be upheld: the jurisdictional Karnataka High Court decision (CIT v. Himatsingka Seide Ltd.) supports the proposition that profits of business referred to in section 10A should be computed in accordance with the provisions of the Income-tax Act (sections 29 to 43A), which include section 32(2), and therefore brought forward unabsorbed depreciation must be reduced while computing profits before granting section 10A deduction.
With respect to telecommunication charges, the D.R. agreed that the relevant ITAT Bangalore Bench decisions govern the position where the assessee does not dispute the quantum of charges reduced from export turnover.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Jt. CIT v. Infocon International Ltd. [2005] 2 SOT 444	Relied on by CIT(A) to support treating unabsorbed depreciation as current year's depreciation for computation affecting section 10A.	The CIT(A) relied on this ITAT Bangalore Bench decision; the Tribunal noted the CIT(A)'s reliance but proceeded to analyze statutory priority between sections before concluding on applicability of section 32(2).
CIT v. Himatsingka Seide Ltd. [2006] 286 ITR 255 (Karnataka High Court)	Held that unabsorbed depreciation and investment allowance must be set off against income of eligible units before computing exemption under section 10B; indicated that special income should be computed under sections 29–43A (including s.32(2)).	The Tribunal considered that decision was rendered in the context of the earlier form of section 10B (older law) and distinguished it as not applicable to the substituted section 10A under the facts before the Tribunal; the Tribunal therefore did not follow Himatsingka for this assessment year.
CBDT Circular No. 794 dated 9-8-2000 [245 ITR (St.) 1]	Described the substitution of section 10A/10B provisions and their rationalisation; noted changes but did not state that the basic character of section 10A was changed from exemption to deduction.	The Tribunal relied on the Circular to support the assessee's contention that the basic character of section 10A remained as an exemption and that the substitution did not indicate a change to treat section 10A as a post-computation deduction for the purpose of reducing unabsorbed depreciation.
CBDT Circular No. 308 dated 29-6-1981 [(1981) 131 ITR (St.) 119]	Explained earlier Finance Act changes and stated that "the income of STPI unit shall be exempt from tax".	Used by the Tribunal to support the view that the legislative intent preserved exemption-characteristics for STPI income and that section 10A should be understood in that light.
CIT v. Smt. P.K. Kochammu Amma Peroke [1980] 125 ITR 624 (Supreme Court)	Principle that departmental forms and the interpretation contained therein cannot be ignored and reflect executive opinion on the matter.	The Tribunal invoked this Supreme Court pronouncement to give weight to the format and instructions of return forms (Form No.1 / ITR-6) and departmental instructions which show deduction/exemption under section 10A operating at source.
Gate Global Solutions Ltd. v. Asstt. CIT [2008] 24 SOT 3 (Bang.) (URO)	ITAT Bangalore Bench decision on reducing amounts (communication charges) from both export turnover and total turnover when computing the export-to-total-turnover ratio.	The Tribunal held that this and other ITAT Bangalore decisions cover the telecommunication-charge issue in favour of the assessee; accordingly it allowed the assessee's contention partly so that the same amount reduced from export turnover is also reduced from total turnover.
Tata Elexsi Ltd. v. Dy. CIT (IT Appeal No. 315 (Bang.) of 2006, dated 16-10-2007)	ITAT Bangalore Bench authority referred to support the method of treating the reduction in export turnover as also reducing total turnover for ratio computation.	The Tribunal treated this and similar ITAT Bangalore Bench decisions as applicable precedent on the telecommunication-charge point and partly allowed the assessee on that ground.
Asstt. CIT v. Infosys Technologies Ltd. (IT Appeal Nos. 653 and 969 (Bang.) of 2006)	ITAT Bangalore Bench authority on similar issues relating to computation of export/total turnover and allocation of communication charges.	These decisions were relied upon by the assessee and considered by the Tribunal as covering the telecommunication-charge issue in favour of the assessee.
Siemens Information System Ltd. v. Asstt. CIT [2007] 293 ITR 548 (Bom.) and [2007] 295 ITR 333 (Bom.)	High Court decisions dealing with computation of incomes and related issues referred to by the Tribunal (noted as having impliedly doubted the correctness of Himatsingka).	The Tribunal observed that these Bombay High Court decisions had implicitly doubted the correctness of the Karnataka High Court decision relied upon by the revenue, and used that fact in distinguishing Himatsingka.
CIT v. H.M.T. Ltd. [1993] 199 ITR 235 (Kar.)	Earlier decision of the Karnataka High Court (referred to in context of comparing judicial approaches).	The Tribunal noted that the Himatsingka decision did not follow this earlier Karnataka High Court decision and therefore treated Himatsingka as distinguishable.
CIT v. Mother India Refrigeration Industries (P.) Ltd. [1985] 155 ITR 711 (Supreme Court)	Explained the limited purpose of the legal fiction in section 32(2): unabsorbed carried forward depreciation is deemed current depreciation only for a specific purpose (so it can be set off against other heads), and the fiction cannot be extended beyond that purpose.	The Tribunal relied on this Supreme Court explanation to conclude that the fiction in section 32(2) is limited and does not require giving effect to brought forward unabsorbed depreciation while computing profits of the undertaking eligible for section 10A.

Court's Reasoning and Analysis

The Tribunal considered the rival contentions, the statutory scheme, departmental forms and circulars, and relevant case law. Its reasoning proceeded along two parallel lines corresponding to the two issues:

Telecommunication charges issue:
- The Tribunal accepted that a line of ITAT Bangalore Bench decisions (Gate Global Solutions Ltd., Tata Elexsi Ltd., Infosys Technologies Ltd.) supports the assessee's position that the amount reduced from export turnover (communication charges) should be correspondingly reduced from total turnover when computing the export-to-total-turnover ratio used for section 10A deduction. The assessee did not dispute the quantum (Rs. 7,56,347). Consequently, this point was partly allowed so that the same amount is also reduced from total turnover for the ratio computation.
Brought forward unabsorbed depreciation / set-off issue:
- The Tribunal examined the statutory scheme and sequencing of provisions. It concluded that even if section 10A deduction is given effect to after applying sections 28 to 44D, the provisions of section 32(2) (the deeming fiction for unabsorbed depreciation) are not to be given effect to while computing profits of the undertaking eligible for section 10A. The Tribunal explained that section 32(2) is to be applied only after the provisions of section 72(1) are applied; the statutory prioritization means one must first give effect to set-off provisions in section 72(1) and only thereafter apply section 32(2).
- The Tribunal relied on the Supreme Court's articulation in CIT v. Mother India Refrigeration Industries (1985) that the legal fiction in section 32(2) is created for a specific purpose (to enable carried forward depreciation to be set off against other heads) and cannot be extended beyond that legitimate field. The Tribunal used this principle to limit the application of section 32(2) in the context of computing section 10A eligible profits.
- The Tribunal also placed weight on the format of departmental returns and instructions (Form No.1 / ITR-6 and respective schedules), and the Supreme Court's pronouncement in CIT v. Smt. P.K. Kochammu Amma Peroke that departmental forms and executive interpretation should not be ignored. The return formats and schedules (Schedule-B / Schedule BP / Part A and relevant columns) were interpreted as indicating that profits of an eligible undertaking are to be determined (commercial/book profits) and the deduction/exemption under section 10A is to be recorded separately before aggregation and set-off of brought forward losses/unabsorbed depreciation.
- The Tribunal distinguished the jurisdictional Karnataka High Court decision (Himatsingka Seide Ltd.) relied upon by the revenue, noting that Himatsingka concerned an earlier form of section 10B and decisions pertaining to deductions under Chapter VI-A; the Tribunal observed that those authorities and the factual-legal matrix in Himatsingka did not bind the present case and were distinguishable.
- On balance, the Tribunal concluded that unabsorbed depreciation of earlier years should not be factored into the computation of profits of the undertaking eligible for deduction under section 10A; rather, section 10A deduction should be computed for each eligible undertaking separately (under sections 28 to 44B), without factoring brought forward unabsorbed depreciation, and thereafter set-off/aggregation rules apply under Chapter VI.

Holding and Implications

HOLDING: The Tribunal allowed the assessee's appeal in part.

The Tribunal's operative conclusions were:

On brought forward unabsorbed depreciation: The Tribunal held that unabsorbed depreciation carried forward from earlier years is not to be reduced from the profits of the eligible undertaking while computing deduction under section 10A for the assessment year in question. Section 32(2)'s deeming fiction is confined to its specific statutory purpose and, in the Tribunal's view, does not require giving effect to brought forward depreciation in the computation of an undertaking's profits eligible for section 10A.
On telecommunication charges (Rs. 7,56,347): The Tribunal partly allowed the assessee's contention and held that the amount reduced from export turnover should also be correspondingly reduced from total turnover for the purpose of computing the export-to-total-turnover ratio applied in determining the section 10A deduction.

Implications for the parties:

The direct effect is that the assessee's computation of section 10A deduction is to be recalculated without reducing the brought forward unabsorbed depreciation from the eligible undertaking's profits; and the specified telecommunication charge amount is to be excluded from total turnover for ratio computation, matching the exclusion already applied to export turnover.
The Tribunal did not state that it was laying down any binding new precedent for courts beyond its decision; it primarily applied statutory sequencing, departmental return formats, and Supreme Court jurisprudence to resolve the issues in the facts before it. The decision therefore alters the computation for this assessment year as described above.

Result: The appeal is partly allowed in accordance with the analysis and directions summarized above.

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KPIT Cummins Infosystems (Bangalore) (P.) Ltd. v. Assistant Commissioner of Income-tax, Circle 11(2), Bangalore

ORDER

K.K. Gupta, Accountant Member. - The assessee is in appeal agitating the action of the ld. CIT (Appeals) mainly on two issues with respect to computation of deduction under section 10A.

2. The brief facts relating to the issues in dispute are the company filed its return of income for the assessment year 2004-05 on 29-10-2004. An amount of Rs. 2,01,98,170 was claimed as deduction under section 10A. The company had unabsorbed depreciation allowance under section 32(2), which was brought forward from the year during which the company had opted out of provisions of section 10A. Deduction under section 10A was claimed without reducing the unabsorbed depreciation allowance from the profits of the business. The case was selected for scrutiny and the assessment was completed on 31-10-2006 under section 143(3).

3. In the assessment order deduction under section 10A has been allowed after reducing the unabsorbed depreciation allowance from the profits of the business. Also, communicating charges of Rs. 7,56,347 has been reduced from the export turnover, while calculating the deduction under section 10A.

4. Aggrieved, the assessee appealed before the first appellate authority, who considered the case of the assessee-appellant and on the issue of claiming deduction under section 10A after reducing the brought forward losses and depreciation of earlier years, relying on the decision of the ITAT, Bangalore Bench in the case of Jt. CIT v. Infocon International Ltd. [2005] 2 SOT 444 and Karnataka High Court decision in the case of CIT v. Himatsingka Seide Ltd. [2006] 286 ITR 255 , held that unabsorbed depreciation is to be treated as current year's depreciation as per section 32(2) and to be deducted while computing profits of business under Chapter IV-D. The special incomes are required to be computed as per provisions of the Act, sections 29 to 43A which included section 32(2) and, therefore, is to be reduced from the profits derived from the undertaking for computing deduction under section 10A. With respect to the telecommunication charges being reduced from the export turnover, he upheld the contention of the Assessing Officer in not reducing the same from the total turnover for the purposes of computing deduction under section 10A. The assessee is in appeal before us on these two issues.

5. The ld. counsel for the assessee initiating his arguments on the issues involved submitted that the authorities below misdirected themselves to hold that brought forward losses and unabsorbed depreciation allowance of earlier years should be set off against current year's profits of business before claiming deduction under section 10A.

6. The case laws relied on by the ld. CIT (Appeals) are distinguishable both on facts and law. He pointed out that income which is eligible for deduction under section 10A does not form part of total income at all and hence it does not enter the normal computation mechanism so as to permit a reduction of brought forward business and depreciation losses.

7. The ld. CIT (Appeals) did not appreciate that the profits of business which is eligible for deduction under section 10A should be of a particular year and is, therefore, not to be influenced by business losses and unabsorbed depreciation allowance of the current year as well as previous years. The eligible undertaking for the purpose of computing deduction under section 10A is to be computed for the impugned assessment year uninfluenced by the results of the other units in that year. Income falling under Chapter III - "Incomes which do not form part of total income" need not be computed in the manner laid down in Chapter IV-D of the Income-tax Act and the same has to be understood as commercial profits or book profits. The special provisions granting incentives like sections 10A and 10B should be given a beneficial interpretation and in a manner which permits the benefit given under it and not to curtail or frustrate it. The brought forward losses end unabsorbed depreciation allowance of earlier years, therefore, cannot be reduced from the business profits at its threshold while computing the current year's income eligible for deduction under section 10A.

8. The ld. counsel for the assessee demonstrated the analogy by submitted a paper-book which has got compilations of the various judicial decisions and the case laws relied on for supporting the theory which has to be understood in the simple manner so as to bring out the legal fiction so created and understood otherwise by the authorities below. He submitted the profits will have to be determined on the basis of commercial principles, the deduction of such profits cannot fit into the computation scheme given under section 14 of the Income-tax Act. The deduction of such profits will have to be first given under section 10A and only if any balance remains, the same will have to be treated in accordance with the provisions of the Act. Under section 10A, as it stood prior to amendment with effect from 1-4-2001, it was provided that the profits shall not be included in the total income. At the time of substitution of section 10A with effect from 1-4-2001, it was stated by the CBDT in its Circular No. 794, dated 9-8-2000. [245 ITR (St.) 1] that the substitution has been effected with a view to rationalize the provisions of section 10A. In para 15.2 of Circular No. 794, it is stated as follows : "with a view to rationalize the concession and to phase these out by the end of the assessment year 2009- 10, the provisions of sections 10A and 10B have been substituted by new provisions." There is no mention in the aforesaid circular that the basic character of section 10A is being changed from an exemption to a deduction section. Circular No. 308, dated 29-6-1981 [(1981) 131 ITR (St.) 119] which explains the provisions of the Finance Act, 1981 had clarified that "the income of STPI unit shall be exempt from tax . . . . ." The above Intent of the Legislature has not been withdrawn or amended in section 10A as substituted by the Finance Act, 2000. As section 10A continues to remain an exemption section, the same would have to be given effect to without considering the brought forward losses or depreciation.

9. The profits and gains derived by STPI unit referred to in opening portion of section 10A is the current year's profits and such a profit gets completely excluded from total income. When the profits that get excluded are current year's profits, the total income referred to in the later portion of section 10A should be current year's total income only without setting off the carried forward and depreciation. Total income referred to in section 10A cannot have the same meaning as given in section 2(45). Incomes falling under Chapter III of the Act need not be computed in the manner laid down in the Act. Therefore, the definition given in section 2(45) will not apply. The term "total income" is contextual. One notices different shades of meaning of the term and its variants as employed in the Act :—

(i) Section 36(1)( vii) in its erstwhile format provided for a deduction at a percentage of total income, such total income being arrived at before deduction under that section and Chapter VI-A.
(ii) Section 80G(4) provides for the determination of the qualifying amount with reference to the "adjusted total income".
(iii) Section 80B(5) defines gross total income as the 'total income' arrived at after giving effect to all the provisions of the Act.
(iv) Section 14A refers to 'total income' under Chapter IV.

Apart from the above, there are certain variants to the phrase "total income". For example, Explanation (1) to section 44C refers to 'adjusted total income'. Sections 111A, 112, 115A, etc., provide for the total income to be split into two streams, one for being taxed at special rate and the balance being deemed to be total income for the purpose of normal rate of tax. The phrase 'total income' used in these sections indicates a figure which may not represent the entire total income.

10. The ld. counsel for the assessee submitted that section 10A provides for deduction from total income. In the scheme the Act, while various deductions are allowed in computing the total income, once the total income is computed, no further adjustment to the total is envisaged. The scheme of the Act provides for deductions in computing total income and provides no mechanism for any deduction from the total income already computed. Once the total income is computed, the next step is determination of tax by applying the applicable rates on the total income. Deduction under section 10A thus cannot be from the total income.

11. Under section 10A(1), the deduction "shall be allowed from the total income of the assessee". Instruction No. 18 in the "Instruction in filling Form No. 1" reads as follows "Item 18; sections 10A and 10C permit the claiming of deduction from incomes of some specified businesses. This item is meant to eliminate such income(s) from the computation of profits/gains". The Instructions are clear that section 10A would operate to eliminate the relevant income from the computation of profits and gains. In the context of the purpose, object and the placement of the section in Chapter III, it would be appropriate to rephrase sub-section (1) as follows : "the deduction shall be allowed while computing or arriving at the total income of the assessee". When section 10A is considered as exemption section, the eligible profits would be the commercial profits which would not enter the stream of computation of total income at all. The eligible commercial profits would be exempt at the source itself. Thus, there would be no occasion to reduce the eligible profits by the unabsorbed depreciation allowance and business loss of other units. The losses so suffered in other units or other business of the assessee would be set off and carried forward according to the provisions contained in Chapter VI - "Aggregation of income and set off and carry forward of loss" read with section 10A(6) and Circular No. 7 of 2003. If section 10A is regarded as having undergone a metamorphosis from an exemption to a deduction section, the same would have to be given effect to at the earliest after the computation of income, in accordance with the provisions of sections 28 to 44D.

12. The above view would be fortified by the format of Form No. 1. Form No. 1 (Return of Income for Companies) as was in force before it was replaced by New Income-tax Return ITR-6. In Form No. 1 deduction under section 10A is allowed under Schedule-B. Schedule-B deals with various aspects relating to income from "Profits and gains of business or profession". Deduction under section 10A is placed in this Schedule-B. Item 17 in Schedule-B deals with exempt incomes. Item 18 of Schedule-B specifically deals with deduction under section 10A/10C. The words used in Item 18 are "Amount claimed deductible included in total income". Further, Item 18 is placed after various items which help in computing the business profits. This supports the view that income from a 10A unit is first included for the purpose of computing business profits and then is deducted under Item 18 from the source itself to compute the profits from business. Even now the New Income-tax Return ITR-6 echoes the same views. In the new form, Computation of income from business or profession (other than speculative business) is provided in Part A of Schedule BP, the business income after applying the provisions of sections 30 to 44DB is to be mentioned in Col. 34. The description of Col. 34 is "Profit or loss before deduction under section 10A/10AA/10B/10BA". The deductions under the above sections are required to be mentioned separately under Col. 35. The deduction under each of the above sections is required to be mentioned in separate schedules designed for this purpose. Under these schedules, the deductions are required to be specified for each undertaking separately. Item No. 16(k) of the instructions for filling Form ITR-6 clarifies that the amount of deduction under section 10A would be for each undertaking separately and such amount would be the amount of deduction as specified in Item 17 of Form No. 56F being the report of audit under section 10A.

13. The Supreme Court in CIT v. Smt. P.K. Kochammu Amma Peroke [ 1980] 125 ITR 624 has laid down the principle that forms prescribed by the department cannot be ignored, and the interpretation of law contained therein reflects the executive opinion on the matter.

14. Thus, deduction under section 10A is to be allowed for each eligible undertaking separately under Chapter IV itself. After this, all the incomes are aggregated under Chapter VI. The applicability of Chapter VI-A would have to be considered subsequent to the role of Chapter VI. The total income would be computed after the deductions enumerated in Chapter-VI is given effect to.

15. He highlighted the relevant paras with the various case laws cited at the Bar in the compilation so furnished, which has been perused during the course of hearing. He also submitted that in case the copy of the return Form No. 1 as relevant to the impugned assessment year is also relevant for the assessment year 2007-08 having changed its format but keeping the contention of the law intact so as comply with the findings of the Hon'ble Apex Court in the case of Smt. P.K. Kochammu Amma Peroke (supra).

16. With respect to the next issue, he candidly submitted that the issue stands covered by the various decisions of the ITAT Bangalore Bench, wherein it is held that the amount reduced from the export turnover is to be correspondingly reduced from the total turnover in view of the fact that if the denominator was to include the hypothetical amount reduced from the export turnover, the formula would become unworkable insofar as the total turnover is arrived at by explaining and adding to the export turnover which already includes the said amount. He pointed out that the ITAT Bangalore Bench had settled this proposition in its various decisions in I Gate Global Solutions Ltd. v. Asstt. CIT [2008] 24 SOT 3 (Bang.) (URO) , Tata Elexsi Ltd. v. Dy. CIT [IT Appeal No. 315 (Bang.) of 2006, dated 16-10-2007], Asstt. CIT v. Infosys Technologies Ltd. [IT Appeal Nos. 653 and 969 (Bang.) of 2006], by pointing out that the question of dividing the amount so to be reduced as communication charges is not disputed by the assessee. This issue, therefore, stands partly covered by the various decisions of the Tribunal, which may kindly be considered in favour of the assessee.

17. The ld. DR supported the order of the ld. CIT (Appeals) and the Assessing Officer inasmuch as the Jurisdictional High Court decision has been relied on by the ld. CIT (Appeals) for holding that profits of business referred to in section 10A should not be profits computed under the head 'Profits and gains of business or profession'. The ld. CIT (Appeals), therefore, rightly held that the Hon'ble High Court proceeded by holding taxability of special income as computed under the provisions of Income-tax Act, sections 29 to 43A, which include section 32(2). Section 32(2) clearly incorporates that the brought forward unabsorbed depreciation is to be considered as current year's depreciation has to be reduced while computing profits of business under Chapter IV-D. She, therefore, submitted that the judgment of the Hon'ble Karnataka High Court was squarely applicable to the facts and circumstances of the assessee's case and the ld. CIT (Appeals) rightly upheld the order of the Assessing Officer in reducing the brought forward unabsorbed depreciation of earlier years from the profits of business of the assessee before computing deduction under section 10A.

18. With respect to the other issue agitated by the assessee that telecommunication charges to be reduced from the total turnover also, she agreed that the issue stands covered by the various decisions of the ITAT Bangalore Benches insofar as the assessee is not disputing the quantum of telecommunication charges to be reduced from the export turnover as defined in the said section.

19. We have heard the rival contentions and perused the material available on record. The second issue stands covered by the various decisions of ITAT Bangalore Benches as relied upon by the ld. counsel for the assessee by citing the various decisions which need not be repeated. The ld. counsel for the assessee has not disputed the quantum of telecommunication charges so considered to be reduced from the export turnover amounting to Rs. 7,56,347 and, therefore, stands partly allowed on the agitation of the assessee before us that the said amount is to be correspondingly reduced from the total turnover as well for the purpose of arriving at the deduction in the ratio of export turnover to the total turnover. This issue stands partly allowed.

20. On the other issue, we have perused the compilation of the case laws cited at the Bar and we have also carefully perused the decision of the Hon'ble jurisdictional High Court relied on by the revenue authorities, which the ld. counsel has been able to distinguish the case or the facts as have been considered by the authorities below. We are of the opinion that even if it is agreed that section 10A deduction is to be given effect to after applying sections 28 to 44D, the same would be without giving effect to the provisions of section 32(2). This is because section 32(2) is to be given effect to after the provisions of section 72 are applied. The prioritization between sections 72 and 32(2) is provided for in each of the said sections. Once the income of the present year is computed, one would have to first give effect to the provisions of section 72(1), and thereafter come back to section 32(2). In the process of giving effect to section 72(1), one would traverse out of the regime of Chapter IV-D. Therefore, the provisions of section 32(2) ore not to be given effect to while computing the profits of the undertaking eligible for deduction under section 10A. If this is the position, what is the significance of the fiction in section 32(2) that unabsorbed depreciation would partake of the nature of current year's depreciation? If the unabsorbed depreciation is to be regarded as part of current year's depreciation, it would have to give effect to simultaneously and along with the relevant year's depreciation. However this is not done. Though brought forward depreciation is regarded as current year's depreciation, it is given effect to only after the current year's depreciation has been given effect to and brought forward business losses have been set off. The fiction that brought forward depreciation is to be regarded as current year's depreciation, is a fiction for a specific purpose. The Supreme Court in the case of CIT v. Mother India Refrigeration Industries (P.) Ltd. [1985] 155 ITR 711 explained it in the following words : "The avowed purpose of the legal fiction created by the deeming provision contained in provision (b) to section 10(2)(vi) of the Indian Income-tax Act, 1922 and in section 32(2) of the Income-tax Act, 1961, is to make the unabsorbed carried forward depreciation partake of the same character as the current depreciation in the following year so that it is available unlike unabsorbed carried forward business loss, for being set off against other heads of income of that year. Such being the purpose for which the legal fiction is created, the fiction cannot by extended beyond its legitimate field and will have to be confined to that purpose. It cannot be said that because of the legal fiction, the unabsorbed carried forward losses should be given preference not merely over the unabsorbed carried forward depreciation but also over the current year's depreciation". Current year's depreciation is allowed as a deduction under section 32(1) of the Income-tax Act. If the net result of the computation after deducting the current year's depreciation is a loss, the said loss is characterized as loss under the head "Profits and gains of business or profession". At this stage, no distinction is drawn between business loss and depreciation loss. While giving effect to section 70 or 71 no distinction is drawn between losses due to depreciation or otherwise. Thus for example, if a person has loss under the head "Profits and gains of business or profession" and salary income, the law prohibits setting off of the business loss against salary income [section 71(2A)]. Such prohibition extends to even depreciation loss. At this stage therefore, depreciation loss forms part of and is not de hors the loss under the head "Profits and gains of business or profession". It is only when the deprecia- tion of an earlier year is in excess of the aggregate of incomes under all other heads for that year, warranting it to be carried forward, a distinction is made between depreciation loss and business loss. Thus, the distinction emerges only after having completed the exercise of arriving at the income for the current year. In other words, the distinction is relevant for the purpose of carrying forward and set off against the income of the subsequent years. This distinction is with a purpose.

21. Having entered the computation process all over again, section 32(2) creates a fiction that the unabsorbed depreciation is to be regarded as a part of current year's depreciation. The purpose, as already noted above, in the wording of the Supreme Court, is to enable such loss being set off not only against business incomes but also income under other heads. Even under the ITR Form 6, return of income and fringe benefits for companies, the total of deductions under sections 10A, 10AA, 10B and 10BA are reported in col. 35(v) of part A of Schedule BP. The business income after reducing the above deductions is reported in col. 36 of part A of Schedule BP. Schedule CYLA and BFLA pertains to details of income after set off of current year losses and brought forward losses (including b/f depreciation allowance) of earlier years respectively. In respect of losses to be set off against the business income the starting point is the income from business which remains after allowing deductions under sections 10A, 10AA, 10B and 10BA. Thus, the format prescribed by the CBDT through its circulars and notifications also provides that the unabsorbed depreciation allowance and brought forward business loss should not be included in the computation of deduction under section 10A. The format of return of income prescribed by CBDT through its circulars and notifications being binding on the revenue authorities, they should not be allowed to take a contrary stand.

22. The lower authorities in support of their stand have relied on the decision of Karnataka High Court in the case of Himatasingika Seide Ltd. (supra). The Karnataka High Court held that unabsorbed depreciation and investment allowance have to be set off against income of eligible units before the computation of exemption under section 10B. It was also held that the income eligible for exemption has to be computed as per the provision of the Income-tax Act and not on a commercial basis. The case before the Karnataka High Court pertained to assessment year 1994-95. Section 10B at the relevant time excluded certain incomes in the process of arriving at the total income. Section 10B at the relevant time operated as an exemption section. The terminology of section 10B has not been changed. The section currently provides for a deduction from total income. This change was brought about when section 10B was substituted. Thus, the decision of the Karnataka High Court having rendered in the context of old section 10B, cannot be made applicable to the present case. Also the various citations referred and relied by the Hon'ble Karnataka High Court pertain to deductions conferred under Chapter VI-A of the Income-tax Act, 1961. Section 10A is placed in Chapter III - Incomes do not form part of total income and not in Chapter VI-A. The judicial principles rendered in the context of sections conferring deductions under Chapter VI-A cannot be considered while allowing deduction under section 10A. Thus, the decision in Himatasingika Seide Ltd.'s case (supra) being rendered, relying on case laws pertaining to Chapter VI-A deductions and without considering the various implications of section 10A as have been detailed hereinabove cannot be made applicable to the present case. The decision did not take into consideration the matter of computation of total income as provided by the CBDT in the case of Siemens Information System Ltd. v. Asstt. CIT [2007] 293 ITR 548 (Bom.) and Siemens Information System Ltd. v. Asstt. CIT [2007] 295 ITR 333 (Bom.) has impliedly doubted the correctness of the aforesaid decision. Further, the aforesaid decision does not follow the earlier decision of the same court in CIT v. H.M.T. Ltd. [1993] 199 ITR 235 (Kar.) . The decision as reported does not contain reference to any elaborate arguments. The decision is distinguishable on facts and law.

23. Therefore, the process ascertaining the total income where section 10A deduction is involved, would comprise by computing profits and gains derived by the unit and in this process the unabsorbed depreciation which is not part of the depreciation of the impugned assessment year is not to be factored, then the deduction as computed which will be available for carrying out set off of unabsorbed depreciation. Section 10A deduction is to be done under sections 28 to 44B but separately and independent of computation of profits and gains from eligible business and without factoring unabsorbed depreciation. This ground agitated, therefore, stands allowed.

24. In the result, the appeal by the assessee is partly allowed as discussed above.

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