Facts of the Case

  1. In CIT v. Honeywell International (India) Pvt. Ltd., the assessee claimed a set-off of losses amounting to approximately ₹2,46,93,358 relating to a unit eligible for exemption under Section 10A against profits earned by other units during Assessment Year 2003-04.
  2. In Commissioner of Income Tax-V v. Qualcomm India Pvt. Ltd., the issue involved the assessee claiming adjustment of losses incurred by its Bangalore unit against profits of the Mumbai unit, despite the Bangalore unit being a Section 10A eligible unit while the Mumbai unit was not an eligible unit.
  3. The Revenue challenged the orders allowing such adjustment and contended that the same was contrary to the legal framework governing Section 10A.

Issues Involved

  1. Whether losses arising from a unit enjoying benefits under Section 10A can be set off against profits of other non-eligible units.
  2. Whether the Income Tax Appellate Tribunal erred in allowing adjustment of losses from eligible units against profits of non-eligible units.
  3. Whether CBDT Circular No. 7/DV/2013 permitted such set-off despite judicial precedents to the contrary.

Petitioner’s Arguments (Revenue)

  • The Revenue argued that losses from Section 10A eligible units cannot be adjusted against profits of other units.
  • Reliance was placed upon previous decisions of the Delhi High Court and Karnataka High Court supporting the proposition that such set-off is impermissible.
  • It was submitted that the legislative framework of Section 10A did not permit inter-unit adjustment in the manner claimed by the assessees.

Respondent’s Arguments (Assessee)

  • The assessees relied upon CBDT Circular No. 7/DV/2013 dated 16.07.2013.
  • It was argued that income under various heads should first be aggregated under Sections 70 and 71 and thereafter deductions under Section 10A should be considered.
  • The assessees submitted that losses of eligible units should be available for set-off and carry-forward in accordance with statutory provisions.

Court Findings / Order

The Delhi High Court held that:

  • The earlier judgments in CIT v. Tei Technologies Pvt. Ltd. and CIT v. Kei Industries Ltd. had already settled the legal position that set-off of losses from Section 10A eligible units against profits of other units is impermissible.
  • The Court found the reliance placed on CBDT Circular No. 7/DV/2013 to be unpersuasive.
  • The Court followed its earlier decisions and answered the question of law in favour of the Revenue and against the assessees.
  • Consequently, the appeal of the Revenue was allowed.

Important Clarification

The Court clarified that:

  • Losses arising from Section 10A eligible units cannot be set off against profits earned from non-eligible units.
  • Judicial precedents prevailed over the interpretation suggested through the CBDT Circular.
  • The judgment reaffirmed the principle laid down in CIT v. Tei Technologies Pvt. Ltd. and CIT v. Kei Industries Ltd., thereby reinforcing the position that Section 10A benefits cannot be expanded through inter-unit loss adjustment mechanisms.

Sections Involved

  • Section 10A – Special provision relating to newly established undertakings in Free Trade Zones/Export Oriented Units
  • Section 2(45) – Definition of Total Income
  • Section 70 – Set-off of loss from one source against income from another source under the same head
  • Section 71 – Set-off of loss from one head against income from another head
  • Section 72 – Carry forward and set-off of business losses
  • Chapter IV – Computation of Total Income
  • Chapter VI and Chapter VI-A – Aggregation of Income and Deductions

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2015:DHC:11060-DB/SRB20052015ITA9282007_122752.pdf 

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