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Sec 10A of Income Tax Act is no longer an ‘Exemption Provision’, it is a provision for ‘Deduction’: SC [Read Judgment]

In a recent decision, the two-judge bench of the categorically held that section 10A of the Income Tax Act is a provision for “deduction” and not “exemption”.

The Court, however, clarified that, the stage of deduction would be while computing the gross total income of the eligible undertaking and not at the stage of computation of the total income.

It was contended that after the amendment in the year 2000, the nature of section 10A has been changed from being an exemption section to a provision providing for deduction. Yet, Section 10A continued to remain in Chapter III of the Act which Chapter deals with incomes which do not form part of the total income.the problem was that, some of the circulars and the Income Tax Forms refers s. 10A as ‘deduction’ whereas, some continues to refer the same as ‘exemption’. The appellant-Revenue contended that it is apparent from the provision itself that s. 10A provides for deductions from the gross total income and exemptions provided for under the old Section 10A have been discontinued by the Legislature.

The assessee, on the other hand, contended that some features of deduction brought in by the amendment to Section 10A, the legislature sustained the provision in Chapter III, which implies that the section does not changed its true nature. They further contended that Deductions from the total income which is nowhere envisaged under the Act and the reference to the total income of the undertaking, referred to in several sub- sections of Section 10A, would indicate that the total income referred to in Section 2(45) has no application to the computation under Section 10A and the reference therein is only to the total income of the eligible unit/undertaking.

The Court observed that the retention of Section 10A in Chapter III of the Act after the amendment made by the Finance Act, 2000 would be merely suggestive.

“The true and correct purport and effect of the amended Section will have to be construed from the language used and not merely from the fact that it has been retained in Chapter III.The introduction of the word ‘deduction’ in Section 10A by the amendment, in the absence of any contrary material, and in view of the scope of the deductions contemplated by Section 10A as already discussed, it has to be understood that the Section embodies a clear enunciation of the legislative decision to alter its nature from one providing for exemption to one providing for deductions.” The Court said.

The Court further noted that though the expressions “exemptions” and “deductions” may appear same, its application and practical effects are different.

The two judge bench comprising of Justice Ranjan Gogoi and Justice P.C Pant observed that the retention of Sections 80HHC and 80HHE, despite the amendment of Section 10A indicates that some additional benefits to eligible Section 10A units, not contemplated by Sections 80HHC and 80HHE, was intended by the legislature.In the opinion of the Court, such a benefit can only be understood by a legislative mandate to understand that the stages for working out the deductions under Section 10A and 80HHC and 80HHE are substantially different.”

“From a reading of the relevant provisions of Section 10A it is more than clear to us that the deductions contemplated therein is the eligible undertaking of an assessee standing on its own and without reference to the other eligible or non-eligible units or undertakings of the assessee. The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee.”

“If the specific provisions of the Act provide [first proviso to Sections 10A(1); 10A (1A) and 10A (4)] that the unit that is contemplated for grant of benefit of deduction is the eligible undertaking and that is also how the contemporaneous Circular ofthe department (No.794 dated 09.08.2000) understood the situation, it is only logical and natural that the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore, immediately after the stage of determination of its profits and gains. At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in Sections 70, 72 and 74 of the Act would be premature for application. The deductions under Section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression “total income of the assessee” in Section 10A has already been dealt with earlier and in the overall scenario unfolded by the provisions of Section 10A the aforesaid discord can be reconciled by understanding the expression “total income of the assessee” in Section 10A as ‘total income of the undertaking’.”

Read the full text of the Judgment below.

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