In a recent judgment, the Madras High Court ruled that an assessee is entitled to claim the benefit of the Section 10B deduction under the Income Tax Act, 1961, even before the set-off of unabsorbed depreciation and brought-forward losses from prior years. This decision came in the case of a semiconductor manufacturing entity, which had contested the disallowance of its Section 10B deduction by the Income Tax Appellate Tribunal ( ITAT ) for the assessment year 2008-09.
The prime issue in the case was whether an export-oriented unit (EOU) could claim a deduction under Section 10B of ITA before adjusting unabsorbed depreciation and brought-forward losses. Section 10B of the tax statute provides a tax exemption for income generated by EOUs from exports, but the application of this provision has been the subject of significant legal scrutiny. The Income Tax Department, through the ITAT, had previously denied the appellant/assessee, Chettinad Quartz Products,the benefit of the deduction arguing that unabsorbed depreciation and losses from earlier years had to be adjusted first, effectively reducing the company’s taxable income to zero and, thus, disallowing the Section 10B deduction claim under the tax legislature.
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The ITAT’s decision had been based on a precedent set by the Supreme Court in CIT vs. Himatsingka Seide Ltd, which held that unabsorbed depreciation must be adjusted before computing any exemption under Section 10B of tax statute. This ruling restricted the scope of tax benefits available to EOUs.
However, the assessee challenged this order in the Madras High Court, arguing that the deduction under Section 10B of the tax legislature should be computed before the adjustment of unabsorbed depreciation and brought-forward losses. The company cited earlier decisions of the Karnataka High Court and the Supreme Court in CIT vs. Yokogawa India Ltd., which supported the contention that Section 10B of ITA benefits were to be calculated independently of prior-year adjustments.
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The appellant further pointed out that in an earlier case involving the same company for the assessment year 2007-08, the ITAT had ruled in its favor, allowing the deduction before setting off depreciation. The appellant also relied on the Madras High Court’s decision in Comstar Automotive Technologies Pvt. Ltd. vs. Deputy Commissioner of Income Tax, where a similar issue had been adjudicated in favor of the assessee, allowing the deduction under Section 10A without requiring the set-off of prior losses.
In its ruling, the High Court, presided over by Justice R. Suresh Kumar and Justice C. Saravanan acknowledged the conflict between various judicial interpretations but stressed that the principle established by the Yokogawa India Ltd. case remained valid. The court held that the deduction under Section 10B should indeed be allowed before the adjustment of unabsorbed depreciation and brought-forward losses, affirming the appellant’s stance.
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The court observed that the ITAT had, in the appellant’s own case for the prior assessment year, ruled similarly, making it inconsistent for the tribunal to now reverse its position. Furthermore, the High Court noted that while a batch of appeals related to similar issues was pending before the Supreme Court in the case of CIT vs. Hewlett Packard Global Soft Ltd., the matter had not yet been settled definitively. Despite this, the High Court ruled in favor of the assessee, asserting that as things currently stand, the law supports the appellant’s right to claim the Section 10B deduction before any set-off of unabsorbed depreciation or brought-forward losses.
In result, the Court quashed the ITAT’s order and restored the appellant’s entitlement to the deduction under Section 10B of ITA.
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