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Manner of Computation of Relief Under Section 10A of the Act - Ruling of the Karnatak
The Karnataka High Court has recently pronounced an important decision enunciating the principles for computing relief under section 10A of the Income Tax Act, 1961. In a number of appeals filed by the Revenue Authorities against Yokogawa India Limited and other related cases, the KHC has ruled that although section 10A has been amended to indicate the tax holiday to be a deduction from the total income as against the exemption, it would need to be read as being a deduction in the computation of total income. Taxand India provides a summary of the facts of the case and the decision delivered by the KHC.
Facts of the case
Yokogawa India Limited, had two separate business divisions, one of which was a unit registered under the Software Technology Park of India scheme. The Company had claimed a relief under section 10A of the Act in respect of the said STPI unit, prior to setting off of brought forward losses and depreciation.
Contention of the Revenue
Section 10A of the Act provides for profits and gains derived by an undertaking from exports shall be allowed as a deduction from the "total income of the assessee" in accordance with the computation formula laid down under section 10A(4).
Section 10A of the Act finds a place in Chapter-III of the Act which deals with incomes which generally do not form part of the total income. Under section 72(1), what could be set off against the profits earned is the carry forward losses or depreciation, which is to be taken into consideration at the stage of computation of income under Chapter VI of the Act.
Ruling of the KHC
The KHC has upheld the order of the ITAT in favour of the taxpayer, with certain observations. Even subsequent to the amendment with effect from 1 April 2001, sections 10A/10B of the Act, providing a deduction of profits and gains of an eligible undertaking (as against exemption, pre amendment) are placed in Chapter III which pertain to "incomes which do not form part of total income".
Taxand India gives a more in-depth analysis of the full case
The judgment of the Karnataka High Court will settle a protracted litigation on the manner of computation of the tax holiday when there are other business losses. The judgment is also timely as it will give some finality to one of the important issue on tax holiday computation, at a time when the tax holiday period has ended. The KHC has however not referred to or distinguished its earlier decision in the case of Himatsingike Seide Ltd (286 ITR 255) wherein it has been held that in granting exemption under section 10B, unabsorbed depreciation allowance and investment allowance of past years should be reduced. This decision was rendered in the context of the law as it stood prior to the amendment (ie, when relief under section 10A/10B was an exemption).
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