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CBDT issues Circular on setting-off losses of tax holiday units
The Central Board of Direct Taxes (CBDT) has issued Circular No 07/2013 wherein it has been clarified that any losses are required to off-set against the profits of a STP/EOU/SEZ unit (eligible unit), before the deduction under section 10A/10B of the Income Tax Act (Act) is allowed. Taxand India explores how this new Circular will affect taxpayers.
Whether the benefit provided under section 10A/10AA/10B/10BA of the Act is in the nature of a deduction or an exemption has been a debated topic. Prior to the amendment made in section 10A/10B of the Act via the Finance Act 2000, the sections were worded such that profits and gains derived by eligible units would not be included in the total income of the taxpayer, ie the same would be exempt. However, pursuant to the amendment in the year 2000, the sections were amended to read that a deduction of the profits and gains derived by the eligible units would be allowed from the total income of the taxpayer. Though there was an amendment in the language of the sections, they were retained under Chapter III of the Act which deals with incomes which do not form part of total income.
As a fall out of this change, there has been litigation between taxpayers and the Revenue Authorities (RA) on whether the benefit under section 10A/10B of the Act should be allowed before setting off of current year losses from non-eligible units of the taxpayer and the brought-forward business losses of previous years, or whether the benefit should be allowed after such losses are set-off. Courts, at various levels, have held divergent views. While generally the rulings have held that the benefit under section 10A/10B of the Act should be granted without setting-off the losses, there are contrary rulings as well.
The CBDT has, via the Circular, clarified its stand that irrespective of their continued placement in Chapter III, section 10A/10B of the Act provide for a deduction of the profits and gains derived by an eligible unit. The CBDT, while highlighting the contrast between the pre and post substitution of section 10A/10B of the Act, has articulated that the new provisions provide for a “deduction” from the total income of the taxpayer and not an “exemption” in respect of profits and gains derived by an eligible unit.
It is a well settled law that CBDT Circulars are binding only on the RA and not on the taxpayer and the appellate authorities or courts. Therefore, the issuance of the Circular by itself is not likely to settle the position of law on this matter as tax payers could still take a view contrary to the Circular. On the contrary, the RA at the ground level would rely on the said circular as the same would be binding on them and hence the litigation on this matter can be expected to continue.