DCIT, Bangalore v. M/s Biocon Limited, Bangalore

ITA 248/BANG/2010 | misc
Pronouncement Date: 30-04-2014

Appeal Details

RSA Number 24821114 RSA 2010
Assessee PAN AAACB7461R
Bench Bangalore
Appeal Number ITA 248/BANG/2010
Duration Of Justice 44 year(s) 3 month(s) 28 day(s)
Appellant DCIT, Bangalore
Respondent M/s Biocon Limited, Bangalore
Appeal Type Income Tax Appeal
Pronouncement Date 30-04-2014
Appeal Filed By Department
Assessment Year misc
Appeal Filed On 01-01-1970
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN JUDICIAL MEMBER AND SHRI JASON P. BOAZ ACCOUNTANT MEMBER ITA NOS. A.Y. APPELLANT VS. RESPONDENT 248/BANG/2010 2004-05 THE DEPUTY COMMISSIONER OF INCOME TAX LTU BANGALORE. M/S. BIOCON LIMITED 20 TH KM HOSUR ROAD ELECTRONIC CITY HEBBAGODI BANGALORE 560 100. PAN: AAACB7461R 368/BANG/2010 369/BANG/2010 370/BANG/2010 371/BANG/2010 1206/BANG/2010 2003-04 2004-05 2005-06 2006-07 2007-08 M/S. BIOCON LIMITED BANGALORE. PAN: AAACB7461R THE DEPUTY COMMISSIONER OF INCOME TAX LTU / CIR. 11(2) BANGALORE. REVENUE BY : SHRI O.P. YADAV CIT-I(DR) ASSESSEE BY : SHRI H. PADAMCHAND KHINCHA C.A. DATE OF HEARING : 08.04.2014 DATE OF PRONOUNCEMENT : 30.04.2014 O R D E R PER BENCH ITA 368/BANG/2010 THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORD ER DT. 13.11.2009 OF COMMISSIONER OF INCOME-TAX (APPEALS) (LTU) BANG ALORE RELATING TO ASSESSMENT YEAR 2003-04. ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 2 OF 36 2. GROUND NO.1 RAISED BY THE ASSESSEE IS GENERAL IN NATURE AND CALLS FOR NO SPECIFIC ADJUDICATION. 3. GROUND NOS.2 TO 6 RAISED BY THE ASSESSEE CHALLEN GE THE VALIDITY OF INITIATION OF REASSESSMENT PROCEEDINGS BY THE ASSES SING OFFICER U/S.147 OF THE ACT. GROUND NO.2 IN THIS REGARD READS AS FOLLO WS : '2. THE LEARNED CIT (A) HAS ERRED IN LAW AND IN FA CT IN PASSING A SINGLE ORDER IN RESPECT OF TWO APPEALS PREFERRED BY THE ASSESSEE ONE IN RESPECT OF SCRUTINY ORDER PASSED BY THE LEAR NED ASSESSING OFFICER ('AO') UNDER SECTION 143(3) OF THE ACT AND THE ORDER IN RESPECT OF THE REASSESSMENT ORDER PASSED BY THE LEA RNED A O UNDER SECTION 143(3) READ WITH SECTION 147 OF THE A CT.' THE OBJECTIONS RAISED IN GROUND NO.2 IN OUR VIEW CA NNOT BE SUSTAINED AS THERE IS NO BAR FOR THE COMMISSIONER OF INCOME-TAX (APPEALS) TO PASS A CONSOLIDATED ORDER. IN ANY EVENT DOING SO WILL NOT RENDER THE INITIATION OF REASSESSMENT PROCEEDINGS ILLEGAL OR VOID. 4. GROUND NO.4 RAISED BY THE ASSESSEE READS AS FOLL OWS : '4. THE LEARNED CIT (A) HAS ERRED IN LAW AND IN FA CT IN NOT APPRECIATING THAT THE RE-ASSESSMENT ORDER WAS PASSE D BY THE LEARNED A O BEYOND A PERIOD OF FOUR YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEAR ALTHOUGH SCRUTINY ASSESSME NT PROCEEDINGS WERE CARRIED OUT EARLIER IN THE CASE OF THE APPELLANT AND THERE WAS NO FAILURE ON THE PART OF THE APPELLA NT TO TRULY OR FULLY DISCLOSE ALL MATERIAL FACTS AND HENCE THE REASSESSM ENT ORDER PASSED BY LEARNED ASSESSING OFFICER WAS TIME BARRED IN LIGHT OF THE PROVISO TO SECTION 147 THAT INTER ALIA PROVIDES THA T NO ACTION CAN BE TAKEN BEYOND A PERIOD OF FOUR YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEAR.' ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 3 OF 36 5. AS FAR AS GROUND NO.4 IS CONCERNED WE ARE OF TH E VIEW THAT THE GRIEVANCE PROJECTED BY THE ASSESSEE IS WITHOUT ANY BASIS. THE ASSESSEE HAS SOUGHT TO INVOKE THE CONDITION LAID DOWN BY THE PROVISO TO REOPEN AN ASSESSMENT COMPLETED U/S.143(3) OF THE ACT AFTER EX PIRY OF 4 YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEAR. IN THE PRESEN T CASE THE ASSESSMENT YEAR IS 2003-04 AND THE PERIOD OF 4 YEARS FROM THE END OF RELEVANT ASSESSMENT YEAR IS 31.03.2008. THE PROCEEDINGS U/S .147 WERE INITIATED BY ISSUE OF NOTICE U/S.148 ON 14.02.2008 WHICH IS WELL WITHIN THE PERIOD OF 4 YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEAR. THERE IS THEREFORE NO MERIT IN GROUND NO.4 RAISED BY THE ASSESSEE. 6. GROUND NOS.3 5 AND 6 RAISED BY THE ASSESSEE R EAD AS FOLLOWS : '3. THE LEARNED CIT (A) HAS ERRED IN LAW AND IN FAC T BY UPHOLDING THE VALIDITY OF THE REASSESSMENT PROCEEDI NGS CARRIED OUT BY THE A O UNDER SECTION 147 OF THE ACT. 5. THE LEARNED CIT (A) HAS ERRED IN LAW NOT APPRECI ATING THE REASSESSMENT PROCEEDINGS CARRIED OUT BY THE A O WER E MERELY ON ACCOUNT OF CHANGE IN OPINION BY THE LEARNED ASSESSI NG OFFICER ON THE SAME SET OF FACTS IN THE APPELLANT'S CASE AND T HERE WAS NO INCOME THAT ESCAPED. 6. THE LEARNED CIT (A) HAS ERRED IN LAW AND IN FACT IN UPHOLDING THE VIEW OF THE A O THAT THE MATTERS REGA RDING DEDUCTION UNDER SECTION 35(2AB) OF THE ACT IN RESPECT OF ESOP EXPENSES AND SCIENTIFIC RESEARCH EXPENSES PERTAINING TO THE UNITS CLAIMING RELIEF UNDER SECTION 10B OF THE ACT WERE NOT EXAMIN ED DURING THE COURSE OF THE SCRUTINY ASSESSMENT PROCEEDINGS.' 7. THE FACTS WHICH ARE RELEVANT FOR ADJUDICATING TH E VALIDITY OF INITIATION OF REASSESSMENT PROCEEDINGS CHALLENGED IN THE AFORE SAID GROUNDS ARE AS FOLLOWS: ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 4 OF 36 THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN THE BUSINESS OF MANUFACTURE OF ENZYMES AND PHARMACEUTICAL INGREDIEN TS. FOR A. Y. 2003- 04 THE ASSESSEE FILED RETURN OF INCOME ON 01.12.200 3. ASSESSMENT WAS COMPLETED U/S.143(3) ON 27.03.2006. SOME OF THE AD DITIONS MADE BY THE ASSESSING OFFICER IN SUCH ASSESSMENT WAS CHALLENGED BY THE ASSESSEE BEFORE THE COMMISSIONER OF INCOME-TAX (APPEALS). D URING THE PENDENCY OF THE PROCEEDINGS BEFORE THE COMMISSIONER OF INCOME-T AX (APPEALS) THE ASSESSING OFFICER ISSUED NOTICE U/S.148 OF THE ACT. WHILE COMPLETING THE ASSESSMENT U/S.143(3) OF THE ACT THE ASSESSING OFF ICER HAD DISALLOWED THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF E XPENDITURE INCURRED ON EMPLOYEES' STOCK OPTION PLAN (ESOP) AND ALSO EXCLUD ED SALES-TAX AND EXCISE DUTY FROM THE EXPORT TURNOVER WHILE COMPUTIN G DEDUCTION U/S.80HHC OF THE ACT. 8. IN THE REASONS RECORDED FOR REOPENING THE ASSE SSMENT (COPY OF WHICH IS AT PAGE NOS.141 TO 143 OF THE ASSESSEE'S P APER BOOK) THE ASSESSING OFFICER HAS RECORDED THE FACT THAT THE AS SESSEE HAD CLAIMED DEDUCTION U/S.35(2AB) OF THE ACT WHICH ALLOWS A C OMPANY ENGAGED IN THE BUSINESS OF BIOTECHNOLOGY DEDUCTION OF EXPENDITURE INCLUDING EXPENDITURE OF A CAPITAL NATURE ON SCIENTIFIC RESEARCH OR ON C REATING AN IN-HOUSE RESEARCH AND DEVELOPMENT FACILITY APPROVED BY THE P RESCRIBED AUTHORITY. THE DEDUCTION ALLOWED IS A SUM EQUAL TO ONE AND HAL F TIMES OF THE EXPENDITURE SO INCURRED. SIMILARLY THE ASSESSEE H AD ALSO CLAIMED DEDUCTION U/S.10B OF THE ACT IN RESPECT OF ITS UNIT KNOWN AS 'BCZ'. ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 5 OF 36 ACCORDING TO THE ASSESSING OFFICER WHILE CLAIMING D EDUCTION U/S.10B OF THE ACT THE ASSESSEE SHOULD HAVE CONSIDERED THE DEDUCT ION U/S.35(2AB) OF THE ACT AND THE PROFITS OF 10B UNIT SHOULD HAVE BEEN AR RIVED AT AFTER SUCH DEDUCTION. FAILURE ON THE PART OF THE ASSESSEE DO SO HAS RESULTED IN THE DEDUCTION U/S.10B OF THE ACT BEING ALLOWED AT A HIG HER SUM AND THE OTHER TAXABLE INCOME OF THE ASSESSEE GETTING REDUCED TO T HAT EXTENT. ACCORDING TO THE ASSESSING OFFICER FAILURE OF THE ASSESSEE TO DO SO HAS RESULTED IN EXCESS CLAIM BEING ALLOWED U/S.10B OF THE ACT. APA RT FROM THE ABOVE REASON THE ASSESSING OFFICER HAS ALSO REFERRED TO T HE EXPENDITURE RELATING TO ESOP HAVING BEEN ALLOWED AS A DEDUCTION AND ALLO WED BY THE ASSESSING OFFICER. ACCORDING TO THE ASSESSING OFFI CER IN THE LIGHT OF THE ASSESSMENT IN THE CASE OF THE ASSESSEE FOR A. Y. 20 05-06 THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF EXPENDITURE RELATING TO E SOP WAS DISALLOWED AND ACCORDINGLY IN THE ASSESSMENT YEAR 2003-04 ALSO THE SAME SHOULD BE DISALLOWED. WE MAY AT THIS STAGE CLARIFY THAT EXPE NDITURE ON ESOP WAS NOT ALLOWED BY THE ASSESSING OFFICER IN 143(3) ASSESSME NT AND THEREFORE THIS REASON RECORDED BY THE ASSESSING OFFICER FOR INITIA TING PROCEEDINGS U/S.147 OF THE ACT CANNOT BE SUSTAINED. WE ARE THUS LEFT W ITH ONE REASON RECORDED BY THE ASSESSING OFFICER WHICH IS WITH REGARD TO TH E DEDUCTION CLAIMED BY THE ASSESSEE U/S.10B OF THE ACT. 9. ON GROUNDS 3 4 & 6 IT WAS THE SUBMISSION OF TH E LD. COUNSEL FOR THE ASSESSEE THAT WHILE CONCLUDING THE ORIGINAL ASSESSM ENTS THE AO HAD GONE INTO THE QUESTION OF DEDUCTION U/S. 10B OF THE ACT AND HAD ALLOWED THE CLAIM ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 6 OF 36 OF THE ASSESSEE. THOUGH THERE IS NO DISCUSSION IN THE ORDER OF ASSESSMENT ON THIS ASPECT YET IT HAS TO BE PRESUMED THAT THE AO HAS APPLIED HIS MIND TO ALL THE ASPECTS OF DEDUCTION U/S.10B OF THE ACT SINCE THE ORDER PASSED WAS AN ORDER U/S. 143(3) OF THE ACT. ACCORDING TO HIM THE AO HAS RESORTED TO REASSESSMENT PROCEEDINGS U/S. 147 OF THE ACT BY MERELY CHANGING HIS OPINION WHICH HE HAD FORMED WHILE CONCLUDING THE A SSESSMENT U/S. 143(3) OF THE ACT. IT WAS SUBMITTED THAT NO TANGIBLE MATE RIAL CAME TO THE POSSESSION OF THE AO WHICH NECESSITATED THE AO LOOK ING INTO THE CLAIM OF THE ASSESSEE FOR DEDUCTION U/S. 10B OF THE ACT. IN THIS REGARD RELIANCE WAS PLACED BY THE LD. COUNSEL FOR THE ASSESSEE ON THE D ECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT V. KELVINATOR OF INDIA LTD. 228 CTR 488 (SC) . 10. THE LD. DR ON THE OTHER HAND BROUGHT TO OUR NOTICE THE DECISION OF THE HON'BLE KARNATAKA HIGH COURT RENDERED IN THE CA SE OF CIT V. RINKU CHAKRABORTHY 242 CTR (KAR) 425 WHEREIN THE HON'BLE KARNATAKA HIGH COURT AFTER REFERRING TO THE DECISION OF THE HON'B LE SUPREME COURT IN THE CASE OF KELVINATOR OF INDIA (SUPRA) HELD THAT THE OMISSION TO FORM AN OPINION IN THE ORIGINAL ASSESSMENT ON THE BASIS OF EXISTING MATERIAL THEN CANNOT BE TERMED AS CHANGE OF OPINION. THE HON'BLE COURT HELD THAT FOR REOPENING ASSESSMENT IT IS NOT NECESSARY THAT THE INFORMATION MUST BE DERIVED FROM EXTERNAL SOURCE OF ANY KIND OR THAT TH ERE MUST BE DISCLOSURE OF NEW AND IMPORTANT MATTERS SUBSEQUENT TO ORIGINAL A SSESSMENT. WHERE INCOME LIABLE TO TAX HAS ESCAPED IN THE ORIGINAL AS SESSMENT DUE TO ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 7 OF 36 OVERSIGHT AND INADVERTENCE OR A MISTAKE COMMITTED B Y THE AO THEN HE HAS JURISDICTION TO REOPEN THE ASSESSMENT. 11. IN THE LIGHT OF THE AFORESAID JUDICIAL PRONOUNC EMENT OF THE HON'BLE KARNATAKA HIGH COURT WE ARE OF THE VIEW THAT THE A RGUMENT ADVANCED BY THE LD. COUNSEL FOR THE ASSESSEE THAT INITIATION OF REASSESSMENT PROCEEDINGS US/. 147 OF THE ACT IS ON A CHANGE OF OPINION AND T HEREFORE NOT VALID CANNOT BE ACCEPTED. CONSEQUENTLY GROUNDS NO.3 4 & 6 ARE DISMISSED. 12. GROUNDS 7 TO 12 RAISED BY THE ASSESSEE ARE WITH REGARD TO DISALLOWANCE OF DEDUCTION CLAIMED BY THE ASSESSEE W HILE COMPUTING INCOME FROM BUSINESS EXPENDITURE INCURRED ON EMPLOY EE STOCK OPTION PLAN AMOUNTING TO RS.3 38 63 779. ON THE ABOVE ISSUE W E FIND THAT THE SPECIAL BENCH OF BANGALORE TRIBUNAL IN ASSESSEES CASE HAS HELD THAT THE EXPENSES ON ACCOUNT OF ESOP IS ALLOWABLE EXPENSES. THE SPECIAL BENCH HAS HOWEVER DIRECTED THE AO TO DECIDE THE QUANTUM OF AMOUNT TO BE ALLOWED AFRESH IN THE LIGHT OF THE DIRECTIONS GIVEN BY THE SPECIAL BENCH IN THE AFORESAID ORDER. HOWEVER WE FIND THAT IN THE PRESENT CASE WHILE PASSING THE ORDER U/S. 143(3) OF THE ACT THE AO HA S DISALLOWED THE AFORESAID SUM AND ADDED THE SAME TO THE TOTAL INCOM E OF THE ASSESSEE. THIS WAS THEREFORE NOT AN ITEM OF INCOME WHICH HAD ESCAPED ASSESSMENT AND COULD NOT BE THE SUBJECT MATTER OF PROCEEDINGS U/S. 147 OF THE ACT. IN THE ORDER PASSED BY THE AO U/S. 147 OF THE ACT HE HAS COMPUTED THE TOTAL INCOME BY TAKING THE INCOME FROM BUSINESS AS COMPUT ED IN THE ORIGINAL ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 8 OF 36 ASSESSMENT ORDER WHICH IS WOULD INCLUDE TOTAL INCO ME RETURNED + DISALLOWANCE ON ACCOUNT OF EMPLOYEES STOCK COMPENSA TION EXPENSES OF RS.3 38 63 779. THE ORDER OF THE CIT(A) AGAINST WH ICH THE PRESENT APPEAL IS FILED IS AN ORDER PASSED U/S. 147 OF THE ACT DA TED 19.12.2008. AGAINST THE ORDER PASSED U/S.143(3) OF THE ACT WHEREIN THIS SUM WAS DISALLOWED AN APPEAL BEFORE CIT(A) HAD BEEN FILED. BOTH THE APPE ALS WERE HEARD TOGETHER AND A COMMON ORDER WAS CIT(A). IN THE ASS ESSMENT ORDER U/S.147 OF THE ACT NO ADDITION ON ACCOUNT OF ESOP E XPENSES WAS MADE. CONSEQUENTLY THIS ISSUE BECOMES ACADEMIC AS FAR A S THE PRESENT ORDER OF THE CIT(A) IS CONCERNED. THESE GROUNDS ARE THEREFO RE DISMISSED AS NOT ARISING OUT OF THE ORDER OF CITA INSOFAR AS IT REL ATES TO THE ORDER OF ASSESSMENT PASSED U/S. 147 OF THE ACT. 13. GROUNDS NO.13 14 15 & 16. RE-COMPUTATION OF RELIEF UNDER SECTION 10B IN RESP ECT OF DEDUCTION UNDER SECTION 35(2AB) 13. THE LEARNED CIT(A) ERRED IN LAW AND IN FACT UPH OLDING DEDUCTION OF THE AMOUNT OF RS.1 266 329 REPRESENTIN G DEDUCTION CLAIMED UNDER SECTION 35(2AB) OF THE ACT IN RESPECT OF FIFTY PERCENT OF THE SCIENTIFIC RESEARCH EXPENSES PERTAIN ING TO THE UNITS ELIGIBLE FOR CLAMING RELIEF UNDER SECTION 10B OF TH E ACT IN THE COMPUTATION OF RELIEF UNDER SECTION 10B OF THE ACT. 14. THE LEARNED CIT(A) ERRED IN LAW AND IN FACT IN NOT APPRECIATING THAT THE PROVISIONS OF SECTION 14A OF THE ACT APPLY ONLY TO EXPENDITURE IN RELATION TO INCOME WHICH DOE S NOT FORM PART OF TOTAL INCOME UNDER THE ACT AND THEREFORE SU CH PROVISIONS WOULD NOT APPLY TO INCOME ELIGIBLE FOR RELIEF UNDER SECTION 10B OF THE ACT. ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 9 OF 36 DISALLOWANCE OF DEDUCTION UNDER SECTION 35(2AB) OF THE ACT IN RESPECT OF ESOP EXPENSES 15. THE LEARNED CIT(A) ERRED IN LAW AND IN FACT IN UPHOLDING THE DISALLOWANCE OF RS.1 692 952 BEING FIFTY PERCEN T OF THE ESOP EXPENDITURE OF RS.3 385 904 CONSIDERED FOR DEDUCTIO N UNDER SECTION 35(2AB) OF THE ACT. 16. THE LEARNED CIT(A) ERRED IN LAW AND IN FACT BY UPHOLDING THE ACTION OF THE AO OF RELYING ON THE ASSESSMENT O RDER FOR ASSESSMENT YEAR 2005-06 IN DISALLOWING EXPENDITURE INCURRED IN CONNECTION WITH ESOP EXPENSES WHILE COMPUTING DEDUC TION UNDER SECTION 35(2AB) OF THE ACT. 14. TO UNDERSTAND THE ISSUE THAT ARISES FOR CONSIDE RATION IN THE AFORESAID GROUNDS SOME FACTUAL DETAILS NEED TO BE NARRATED. AS WE HAVE ALREADY SEEN THE ASSESSEE IS A MANUFACTURER OF ENZYMES AND PHARMACEUTICAL INGREDIENTS. UNDER SECTION 35(2AB) OF THE ACT IF AN ASSESSEE WHICH IS ENGAGED IN THE BUSINESS OF BIOTECHNOLOGY OR IN THE BUSINESS OF MANUFACTURE OF PRODUCTION OF ANY DRUGS PHARMACEUTI CALS; INCURS ANY EXPENDITURE ON SCIENTIFIC RESEARCH OR IN-HOUSE RESE ARCH & DEVELOPMENT FACILITY AS APPROVED BY THE PRESCRIBED AUTHORITY T HEN THERE SHALL BE ALLOWED DEDUCTION OF A SUM EQUAL TO 150% OF THE EXPENDITURE SO INCURRED. IT IS NOT IN DISPUTE THAT THE ASSESSEE WAS ENTITLED TO CLAIM DEDUCTION U/S. 35(2AB) OF THE ACT IN A SUM OF RS.8 67 25 576 WHICH IS 150% OF THE EXPENDITURE INCURRED ON CARRYING OUT SCIENTIFIC RESEARCH OF RS. 5 78 17 050. IN THE ASSESSMENT COMPLETED U/S. 143(3) OF THE ACT ON 27.3 .2001 THE ASSESSEE WAS ALLOWED THE AFORESAID DEDUCTION WHILE COMPUTING ITS TOTAL INCOME. ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 10 OF 36 15. AFTER CONCLUSION OF ASSESSMENT THE AO NOTICED THAT THE ASSESSEE CLAIMED DEDUCTION U/S. 10B OF THE ACT IN RESPECT OF ITS UNIT KNOWN AS BCZ (HEREINAFTER REFERRED TO AS 10B UNIT) FOR WHICH THE ASSESSEE MAINTAINED SEPARATE BOOKS OF ACCOUNT. OUT OF THE 100% EXPENDI TURE INCURRED ON SCIENTIFIC RESEARCH OF RS.5 78 17 050 A SUM OF RS. 28 14 064 WAS INCURRED IN 10B UNIT. THE SAID SUM OF RS.28 14 064 WAS CONS IDERED IN THE P&L ACCOUNT OF 10B UNIT WHILE ARRIVING AT THE INCOME OF SECTION 10B UNIT. THE DEDUCTION U/S. 35(2AB) OF THE ACT WAS CLAIMED BY TH E ASSESSEE AT 150% OF THE EXPENDITURE. IN THE P&L ACCOUNT OF THE SECTION 10B UNIT ONLY 100% OF RS.28 14 064 HAD BEEN DEBITED WHEREAS THE DEBIT TO P&L ACCOUNT OF THE SECTION 10B UNIT OUGHT TO HAVE BEEN 150% OF RS.28 1 4 064 VIZ. RS.42 21 096. THE PROFIT OF THE 10B UNIT ON WHICH DEDUCTION U/S. 10B OF THE ACT WAS ALLOWED SHOULD HAVE THEREFORE BEEN REDUCED BY RS.14 07 032 (42 21 096 28 14 064). THE DEDUCTION U/S. 10B OF THE ACT ON INCOME OF SECTION 10B UNIT SHOULD ACCORDINGLY STAND REVISED A S FOLLOWS:- RS. (1) DEDUCTION ALLOWED U/S. 10B OF THE ACT ON 90% OF THE ADJUSTED PROFIT WAS (90% OF RS.5 47 46 551) = 4 93 71 896 (2) REWORKED ADJUSTED PROFIT = RS.5 57 46 551 LESS: 50% OF 28 14 064 14 07 032 ------------------ RS.5 33 39 519 DEDUCTION U/S. 10B = 90% OF THE ABOVE 4 80 05 567 GROSS AMOUNT ALLOWED AS DEDUCTION U/S. 10A (4 92 71 896 4 80 05 567) = 12 66 329 ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 11 OF 36 16. THE ABOVE REWORKING OF THE AO WAS DONE IN THE P ROCEEDINGS U/S. 148 OF THE ACT. ACCORDING TO THE AO U/S. 35(2AB)( 2) OF THE ACT THERE WAS ALSO A BAR FOR DEDUCTION ALLOWED U/S. 35(2AB) BEING AGAIN ALLOWED UNDER ANY OTHER PROVISIONS OF THE ACT. 17. WE HAVE ALSO SEEN THAT EXPENSES ON ESOP WAS CLA IMED BY THE ASSESSEE AT A SUM OF RS.3 38 63 779 WHILE COMPUTING ASSESSEES INCOME FROM BUSINESS. THE SAME WAS DISALLOWED BY THE AO. OUT OF THE SUM OF RS.3 38 63 779 THE SUM OF RS.33 85 804 SO DISALLOW ED PERTAINED TO EXPENSES ON ESOP OF EMPLOYEES WHO WERE ENGAGED IN SCIENTIFIC RESEARCH ON WHICH DEDUCTION U/S. 35(2AB) OF THE ACT HAD BEEN CLAIMED AT 150% WHILE ALLOWING DEDUCTION U/S. 35(2AB) OF THE ACT. THE EXPENDITURE ON ESOP HAD BEEN DISALLOWED IN THE ASSESSMENT COMPLETE D U/S. 143(3) OF THE ACT ON THE GROUND THAT THE LIABILITY OF THE ASSESSE E DID NOT CRYSTALLIZE DURING THE PREVIOUS YEAR RELEVANT TO A.Y. 2003-04. THE WE IGHTED DEDUCTION ALLOWED TO THE ASSESSEE U/S. 35(2AB) OF THE ACT HAD THEREFORE TO BE WORKED OUT BY THE AO IN THE REASSESSMENT PROCEEDINGS BECAU SE WHILE ALLOWING DEDUCTION U/S. 35(2AB) OF THE ACT THE EXPENSES ON ESOP IN RESPECT OF EMPLOYEES ENGAGED IN SCIENTIFIC RESEARCH OF RS.33 8 5 904 HAD NOT BEEN EXCLUDED. 18. GOING BY WHAT THE AO SAYS AS ABOVE IN THE ORDER U/S. 148 OF THE ACT THE AO SHOULD HAVE EXCLUDED 150% OF RS.33 85 904. THE AO HAS ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 12 OF 36 HOWEVER ADDED ONLY 50% OF RS.33 85 904 IN THE COMP UTATION OF TOTAL INCOME IN THE ORDER U/S. 148 TO THE TOTAL INCOME CO MPUTED AS PER THE ORDER U/S. 143(3) OF THE ACT. THE REASON AS WE COULD SE E IS THAT RS.3 38 63 779 WHICH WAS CLAIMED AS DEDUCTION ON ACCOUNT OF ESOP E XPENSES WHICH INCLUDE RS.33 85 904 BEING ESOP EXPENSES ON EMPLOYE ES ENGAGED IN SCIENTIFIC RESEARCH HAD ALREADY BEEN DISALLOWED IN THE ORDER U/S. 143(3) OF THE ACT AND THEREFORE WHAT REMAINS TO BE DISALLOWED IS ONLY THE WEIGHTED DEDUCTION PORTION OF 50% OF RS.33 85 904. 19. THE CIT(APPEALS) CONFIRMED THE ORDER OF THE AO. IN SO FAR AS COMPUTATION OF DEDUCTION U/S. 10B OF THE ACT IS CON CERNED THE CIT(A) SUSTAINED THE ORDER OF THE AO BY RELYING ON THE PRO VISIONS OF SECTION 14A OF THE ACT. IN SO FAR AS EXPENSES ON ESOP IS CONCERNE D THE CIT(A) UPHELD THE ORDER OF THE AO. 20. AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSES SEE HAS RAISED GROUND NOS. 13 TO 16 BEFORE THE TRIBUNAL. 21. WE HAVE HEARD THE RIVAL SUBMISSIONS. IN SO FAR AS GROUND NOS. 13 TO 14 ARE CONCERNED ACCORDING TO THE REVENUE THE REW ORKING OF DEDUCTION U/S. 10B OF THE ACT IS PROPER AS THE DEDUCTION U/S. 35(2AB) OF THE ACT IS ALLOWED ONLY WHEN COMPUTING INCOME U/S. 28 OF THE A CT UNDER THE HEAD INCOME FROM BUSINESS. AS FAR AS INCOME OF SECTIO N 10B UNIT IS CONCERNED THE SAME HAS TO BE WORKED OUT ONLY ON COMMERCIAL BA SIS AS THE SAME DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. W EIGHTED DEDUCTION U/S. ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 13 OF 36 35(2AB) OF THE ACT WILL NOT BE AVAILABLE WHILE DETE RMINING INCOME ON COMMERCIAL LINES WHERE THE COMPUTATION PROVISIONS U NDER THE ACT WILL NOT COME INTO PLAY. THEREFORE THE DEDUCTION IN EXCESS OF 100% OF EXPENSES INCURRED ON SCIENTIFIC RESEARCH (WHICH ARE PRESUMED TO BE RESEARCH EXPENDITURE) ALONE CAN BE ALLOWED AND THE EXCESS 50 % HAD TO BE DISALLOWED TO ARRIVE AT THE CORRECT INCOME OF SECTI ON 10B UNIT. THE REVENUE ALSO RELIED ON THE HONBLE KARNATAKA HIGH COURT DEC ISION IN THE CASE OF YOKOGAWA (SUPRA) WHEREIN THE HONBLE HIGH COURT HAS TAKEN THE VIEW THAT SECTION 10B DEDUCTION IS IN FACT AN EXEMPTION PROVI SION THOUGH STATED TO BE A DEDUCTION PROVISION. 22. THE LD. COUNSEL FOR THE ASSESSEE HAS ON THE OT HER HAND PLACED RELIANCE ON CBDT VIEW IN FILE NO.279/MISC./M-116/20 12-ITJ DATED 16.7.2013 CIRCULATED TO THE ASSESSING OFFICERS WHER EIN AFTER REFERRING TO CONFLICTING VIEWS ON WHETHER SECTION 10A AND 10B PR OVISIONS ARE DEDUCTION PROVISIONS OR EXEMPTION PROVISIONS EXPRESSED IN SO ME HIGH COURT DECISIONS THE CBDT HAS EXPRESSED ITS VIEW THAT SEC TION 10A/10B PROVISIONS ARE DEDUCTION PROVISIONS. ACCORDING TO HIM THEREFORE WEIGHTED DEDUCTION U/S. 35(2AB) OF THE ACT HAS TO BE ALLOWED WHEN COMPUTING INCOME OF SECTION 10B UNIT AND THEREFORE THE ACTION OF THE AO IN THE ORDER U/S. 148 OF THE ACT HAS TO BE DISAPPROVED. 23. WE ARE OF THE VIEW THAT THE CBDT CIRCULAR CANNO T OBLITERATE THE INTERPRETATION OF A PROVISION BY THE HONBLE HIGH C OURT. THEREFORE THE ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 14 OF 36 DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF YOKOGAWA (SUPRA) WILL CONTINUE TO BE FOLLOWED AS A BINDING PRECEDEN T. THE CIRCULAR REFERRED TO BY THE LD. COUNSEL FOR THE ASSESSEE CAN NOT ALSO BE SAID TO BE A BENEVOLENT CIRCULAR INASMUCH AS TREATING THE PROVI SIONS OF SECTION 10A/10B AS A DEDUCTION PROVISION RESULTS IN HARDSHI P TO THE ASSESSEE ESPECIALLY IN THE CONTEXT OF SET OFF LOSSES OF NON- 10A/10B UNITS AGAINST THE PROFITS OF 10A/10B UNIT BEFORE ALLOWING DEDUCTION U /S. 10A/10B OF THE ACT. THE SAME CIRCULAR COULD TURN OUT TO BE A BENEVOLENT CIRCULAR WHEN THERE IS LOSS IN THE 10A/10B UNIT AGAINST TAXABLE INCOME OF NON-10A/10B UNIT. IN THIS SCENARIO IT WOULD BE MOST APPROPRIATE TO FOLL OW THE BINDING DECISION OF THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF YOKOGAWA (SUPRA) . THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF YOKOGAWA (SUPRA) NOTICED THAT DEDUCTION U/S. 10A/10B OF THE ACT HAS TO BE ALLOWED FROM THE TOTAL INCOME AND NOT WHILE COMPUTING TOTAL INCOME. THE HONBLE COURT ALSO NOTICED THAT THE NET RESULT OF ALL THE COMPUTATIONS UNDER THE AC T IS THE TOTAL INCOME AND THEREFORE THERE CANNOT BE ANY DEDUCTION FROM TOTAL INCOME. THE HONBLE COURT THEREFORE CONCLUDED THAT THE EXPRESSION FROM THE TOTAL INCOME FOUND IN SECTION 10A/10B OF THE ACT HAS TO BE CONTEXTUALL Y UNDERSTOOD AS REFERRING TO TOTAL INCOME OF STP UNIT OR 10A/10B UNIT. T HE HONBLE COURT THEREFORE CONCLUDED THAT DEDUCTION U/S. 10A OF THE ACT HAS TO BE GIVEN BEFORE CHAPTER IV OF THE ACT. THE HONBLE COURT AL SO NOTICED IN PARA 16 OF ITS JUDGMENT THAT WHEN SECTION 10A OF THE ACT WAS R ECAST BY THE FINANCE ACT 2001 THE PARLIAMENT WAS AWARE OF THE RELIEF G IVEN IN CHAPTER III OF THE ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 15 OF 36 ACT AS BEING ONE WHICH DOES NOT FORM PART OF THE TO TAL INCOME UNDER THE ACT AND YET CHOSE TO RETAIN SECTION 10A IN CHAPTER-III OF THE ACT WHICH MEANS THAT THE SAID PROVISIONS SHALL REMAIN AS EXEMPTION PROVISION AND NOT DEDUCTION PROVISION. 24. THUS WHEN THE PROVISIONS OF SECTION 10A/10B OF THE ACT ARE HELD TO BE EXEMPTION PROVISIONS THE PROVISIONS OF SECTION 35(2AB) OF THE ACT WHICH ARE CONTAINED IN CHAPTER IV OF THE ACT WILL NOT BE APPLICABLE. RESULTANTLY THE WEIGHTED DEDUCTION AT 150% U/S. 35(2AB) OF THE ACT WILL NOT BE ALLOWED WHILE COMPUTING INCOME OF SECTION 10A/10B UNIT. TH E 10A/10B UNIT WILL GET ONLY 100% DEDUCTION OF REVENUE EXPENDITURE. THE EX CESS 50% ALLOWED AS DEDUCTION U/S. 35(2AB) OF THE ACT HAS TO BE WITHDRA WN AS IT WILL PULL DOWN THE PROFITS OF THE NON-10A/10B UNIT WHICH IS TAXABL E. THEREFORE THE WITHDRAWAL OF 50% DEDUCTION ALLOWED U/S. 35(2AB) OF THE ACT WHILE COMPUTING INCOME OF NON-10A/10B UNIT HAS TO BE UPHE LD BOTH ON GENERAL PRINCIPLES AS WELL AS BY RELYING ON THE PROVISIONS OF SECTION 14A OF THE ACT. 25. FOR THE REASONS GIVEN ABOVE WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(APPEALS) ON THIS ISSUE. CONSEQUENTLY G ROUND NOS. 13 & 14 ARE DISMISSED. 26. AS FAR AS GROUND NOS. 14 AND 15 RELATING TO EXP ENDITURE ON ESOP IS CONCERNED THE ASSESSEE WILL GET CONSEQUENTIAL RELI EF DEPENDING ON THE REVISED COMPUTATION OF EXPENSES ON ESOP TO BE ALLOW ED CONSEQUENT TO THE DIRECTIONS OF THE SPECIAL BENCH. IN OTHER WORD S THESE GROUNDS STAND ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 16 OF 36 ALLOWED TO THE EXTENT OF ESOP EXPENSES ALLOWABLE TO THE EXTENT PERMITTED BY THE SPECIAL BENCH. 27. IN THE RESULT THE APPEAL BY THE ASSESSEE IS TR EATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA 248 & 369/2010 28. ITA 248/10 IS AN APPEAL BY THE REVENUE WHILE I TA 369/10 IS AN APPEAL BY THE ASSESSEE. BOTH THESE APPEALS ARE DIR ECTED AGAINST THE ORDER DATED 13.11.2009 OF THE CIT(APPEALS) LTU BANGALOR E RELATING TO A.Y. 2004-05. ITA 248/2010 (REVENUES APPEAL) (AY 04-05) 29. WE WILL FIRST DEAL WITH THE APPEAL BY THE REVEN UE. THE GROUNDS OF APPEAL RAISED BY THE REVENUE READS AS FOLLOWS:- 1. THE ORDER OF CIT(A) LTU IS OPPOSED TO LAW AN D FACTS OF THE CASE. 2. THE ORDER OF THE CIT(A) HAS ERRED IN ALLOWING DE DUCTION ON EXPENDITURE U/S 35(2AB) ON SUCH IDLE ASSETS WHIC H ARE NOT COMMISSIONED DURING THE YEAR 3. THE CIT(A) HAS ALLOWED THE DEDUCTION ON EXPENDIT URE U/S 35(2AB) EVEN THE ASSESSEE DID NOT FURNISH CONCRETE EVIDENCE REGARDING COMMISSIONING OF THE MACHINE & CARRYING O UT THE RESEARCH ACTIVITY DURING THE YEAR USING THOSE MACHI NES. 4. THE CIT(A) HAS ALLOWED THE DEDUCTION U/S 35(AB) ON ACQUIRING ASSETS WHICH IS NOT USED IN THE RESEARCH ACTIVITY DURING THE YEAR. UNLESS THE RESEARCH IS CARRIED OUT USING THE ASSETS DEDUCTION CAN NOT BE ALLOWED ON SUCH AN ACQUISITION . ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 17 OF 36 5. FOR THESE AND SUCH OTHER GROUNDS THAT MAY BE URG ED AT THE TIME OF HEARING OF APPEAL IT IS HUMBLY PRAYED T HAT THE ORDER OF THE CIT(A) BE SET ASIDE AND THAT OF AO RESTORED. 6. THE APPELLANT CRAVES TO ADD / ALTER AMEND AND / OR DELETE ANY OF THE GROUNDS ON OR BEFORE THE HEARING OF THE APPEAL. 30. WE HAVE ALREADY SEEN THAT THE ASSESSEE WAS ENTI TLED TO CLAIM DEDUCTION U/S. 35(2AB) OF THE ACT. IN THE A.Y. 200 4-05 THE ASSESSEE CLAIMED DEDUCTION OF RS.18 00 45 138. IT COMPRISES OF REVENUE EXPENDITURE AS WELL AS CAPITAL EXPENDITURE THE BRE AK-UP OF WHICH IS AS FOLLOWS:- CAPITAL EXPENDITURE INCURRED IN CONNECTION WITH THE R & D ACTIVITY (EXCLUDING CAPITAL EXPENDITURE ON CONSTRUCTION OF BUILDINGS) RS. 7 82 25 431 TOTAL REVENUE EXPENDITURE INCURRED (INCLUDING EXPENDITURE INCURRED BY THE BY THE 100% EOU AND ESOP EXPENSES) RS.14 43 47 594 LESS: PATENT FEES PAID OUTSIDE INDIA RS. 1 23 19 3 95 LESS: FEES FOR SPONSORED RESEARCH RS. 2 32 500 TOTAL EXPENDITURE ON THE APPROVED R&D CENTRE RS. 21 00 21 130 LESS: DONATIONS/PAYMENTS FOR SPONSORED RESEARCH PROGRAMMES (SHOWN AS INCOME IN THE AUDITED FINANCIAL STATEMENTS) RS. 63 81 716 NET EXPENDITURE ELIGIBLE FOR DEDUCTION RS. 20 36 3 9 414 WEIGHTED DEDUCTION CLAIMED U/S 35(2AB) RS. 31 18 4 0 837 LESS: REVENUE EXPENDITURE ALREADY DEBITED TO THE P&L A/C RS. 13 17 95 699 ADDITIONAL DEDUCTION CLAIMED UNDER SECTION 35(2AB) RS. 18 00 45 138 ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 18 OF 36 31. AS FAR AS CAPITAL EXPENDITURE INCURRED IN CONNE CTION WITH R&D ACTIVITY OF RS.7 82 25 431 IS CONCERNED THE AO NOT ICED THAT THE AFORESAID EXPENDITURE INCLUDED A SUM OF RS.2 72 59 589 INCURR ED ON 3 ITEMS OF MACHINERY VIZ. PROTEIN PURIFICATION SYSTEM ROBOTI C SAMPLE PROCESSING SYSTEM AND RND PDP LAB HPL CHROMATOGRAPHY. THE AO ALSO NOTICED THAT THE ABOVE THREE ITEMS OF MACHINERY HAVE NOT BEEN IN STALLED AND COMMISSIONED. HE THEREFORE CONCLUDED THAT THE ABOV E THREE MACHINERIES COULD NOT HAVE BEEN PUT TO USE FOR SCIENTIFIC RESEA RCH DURING 2004. THE AO REFERRED TO THE PROVISIONS OF SECTION 35(2AB) OF TH E ACT WHICH SAYS THAT EXPENDITURE SHOULD BE INCURRED ON SCIENTIFIC RESEAR CH. ACCORDING TO THE AO THE WORD INCURRED MEANS THAT SCIENTIFIC RESEA RCH SHOULD HAVE BEEN ACTUALLY CARRIED OUT AND ONLY THEN THE EXPENDITURE INCURRED QUALIFIES FOR WEIGHTED DEDUCTION U/S. 35(2AB) OF THE ACT. THE AO WAS OF THE VIEW THAT SINCE THE MACHINERIES IN QUESTION HAD NOT BEEN USED AT ALL SCIENTIFIC RESEARCH COULD NOT HAVE BEEN CARRIED OUT USING THOS E MACHINES. THE AO ACCORDINGLY DENIED WEIGHTED DEDUCTION OF RS.4 08 89 393 [2 72 59 589 X 150%] U/S. 35(2AB) OF THE ACT. 32. ON APPEAL BY THE ASSESSEE ON THE AFORESAID DISA LLOWANCE THE CIT(APPEALS) AFTER MAKING A REFERENCE TO THE PROVIS IONS OF SECTION 35(2AB) OF THE ACT HELD THAT SECTION 35(2AB) SPEAKS OF : (I) DEVELOPMENT OF FACILITIES; ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 19 OF 36 (II) INCURRING OF EXPENDITURE BY THE APPELLANT FOR DEVELOPMENT OF SUCH FACILITIES; III) APPROVAL OF FACILITY BY THE PRESCRIBED AUTHOR ITY WHICH IS DSIR; IV) ALLOWANCE OF WEIGHTED DEDUCTION ON THE EXPENDI TURE SO INCURRED BY THE APPELLANT. ACCORDING TO THE CIT(A) FROM A PLAIN READING OF THE SECTION IT WAS CLEAR THAT IT CONTEMPLATES ONLY DEVELOPING FACILITY WHIC H PRESUPPOSES INCURRING EXPENDITURE IN THIS BEHALF AND FILING APP LICATION TO THE PRESCRIBED AUTHORITY WHO AFTER FOLLOWING THE PROPE R PROCEDURE WILL APPROVE THE FACILITY. IN SUCH AN EVENT THE ASSESS EE WILL BE ENTITLED TO WEIGHTED DEDUCTION IN RESPECT OF ALL EXPENDITURE SO INCURRED. THE PROVISION NOWHERE SUGGESTS OR IMPLIES THAT MACHINER Y WILL BE ACQUIRED INSTALLED AND COMMISSIONED BEFORE THE EXPIRY OF THE RELEVANT PREVIOUS YEAR. HE ALSO HELD THAT THE PROVISION POSTULATES A PPROVAL OF R & D FACILITY WHICH IMPLIES THAT A DEVELOPMENT FACILITY SHALL BE IN EXISTENCE WHICH IN TURN PRESUPPOSES THAT THE ASSESSEE MUST HAVE INCURRED EXPENDITURE IN THIS BEHALF. THE CIT(A) ALSO HELD TH AT IF THE INTERPRETATION OF THE AO IS ACCEPTED IT CREATES ABSURDITY IN THIS PROVISION IN AS MUCH AS THE WORDS WHICH ARE NOT PROVIDED IN THE STATUTE ARE TO BE READ INTO WHICH IS AGAINST THE SETTLED PROPOSITION OF LAW WIT H REGARD TO PLAIN AND SIMPLE MEANING OF THE PROVISION. HE ALSO FOUND THAT RULE 6(5A) AND 6(7A) ALSO PROVIDE ONLY TO THE EFFECT THAT IF THE CONDITIONS ARE FULFILLED THE PRESCRIBED AUTHORITY SHALL PASS AN ORDER IN FOR M NO.3CM. THE PRESCRIBED AUTHORITY SHALL SUBMIT ITS REPORT IN REL ATION TO THE APPROVAL OF ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 20 OF 36 IN-HOUSE RESEARCH AND DEVELOPMENT FACILITY IN FORM NO.3CL TO THE DIRECTOR-GENERAL OF INCOME-TAX (EXEMPTIONS) WITHIN SIXTY DAYS OF ITS GRANTING ITS APPROVAL. ACCORDING TO HIM THE PROVISI ONS NOWHERE REFERS TO ANY CUT-OFF DATE FOR ELIGIBILITY OF WEIGHTED DEDUCT ION. SIMILARLY FORM NO.3CM WHICH IS THE ORDER OF APPROVAL DOES NOT PR OVIDE ANY POWER TO THE PRESCRIBED AUTHORITY OR ANY STIPULATION TO SET OUT A CUT-OFF DATE IN THIS BEHALF. THE CIT(A) THEREFORE CONCLUDED THAT A PLAIN AND HARMONIOUS READING OF THE PROVISIONS RULE AND FORM CLEARLY SUGGEST THAT ONCE THE FACILITY IS APPROVED THE ENTIRE EXP ENDITURE INCURRED IN RESPECT OF R & D FACILITY HAS TO BE ALLOWED FOR W EIGHTED DEDUCTION AS PROVIDED BY SECTION 35(2AB). THE CIT(A) ALSO DREW SUPPORT FROM THE DECISION OF THE HONBLE HIGH COURT OF GUJARAT IN TH E CASE OF CIT VS CLARIS LIFE SCIENCES LTD. (2008) 174 TAXMAN 113 WHE REIN IT WAS HELD THAT USE OF ASSETS IS NOT A CONDITION FOR GRANT OF DEDUCTION U/S.35(2AB) OF THE ACT. 33. AGGRIEVED BY THE ORDER OF THE CIT(APPEALS) THE REVENUE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 34. WE HAVE HEARD THE SUBMISSIONS OF THE LD. DR WH O RELIED ON THE ORDER OF THE ASSESSING OFFICER. THE LD. COUNSEL FO R THE ASSESSEE HOWEVER SUBMITTED THAT THE ISSUE RAISED BY THE ASSESSEE IN ITS APPEAL IS NO LONGER RES INTEGRA AND HAS BEEN DECIDED BY THE HONBLE GUJARAT HIGH C OURT IN THE CASE OF CIT V. GUJARAT ALUMINIUM EXTRUSIONS PVT. LTD. 263 ITR 453 (GUJ) ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 21 OF 36 AND THE HONBLE ORISSA HIGH COURT IN THE CASE OF BELPAHAR REFRACTORIES LTD. 207 ITR 144 (ORISSA) . IN THE CASE OF GUJARAT ALUMINIUM EXTRUSIONS PVT. LTD. (SUPRA) THE AO REFUSED DEDUCTION U/S. 35 OF THE ACT IN WH ICH A DEDUCTION IS ALLOWED ON EXPENDITURE INCURRED BY THE ASSESSEE ON SCIENTIFIC RESEARCH INCLUSIVE OF CAPITAL EXPENDITURE. THE REV ENUE REFUSED TO ALLOW DEDUCTION U/S. 35 OF THE ACT IN RESPECT OF CAPITAL EXPENDITURE ON CONSTRUCTION OF A BUILDING ON THE GROUND THAT THE C ONSTRUCTION OF THE BUILDING WAS NOT OVER AND BUILDING WAS NOT PUT TO USE DURING THE PREVIOUS YEAR. ON THE ABOVE FACTS THE HONBLE GUJARAT HIGH COURT HEL D AS FOLLOWS:- THE OBJECT BEHIND THE ENACTMENT OF S. 35 IS TO ENC OURAGE RESEARCH AND DEVELOPMENT ACTIVITIES BY THE ASSESSEE. AS AN INCEN TIVE THE LEGISLATURE HAS GIVEN THIS BENEFIT BY WAY OF DEDUCTION IN RESPE CT OF THE CAPITAL EXPENDITURE INCURRED BY THE ASSESSEE. THIS IS A PRO VISION FOR THE BENEFIT OF THE ASSESSEE AND IF THE ASSESSEE INCURS CAPITAL EXPENDITURE FOR THE PURPOSE OF RESEARCH AND DEVELOPMENT DURING THE RELE VANT PREVIOUS YEAR THE REVENUE SHOULD NOT DEPRIVE THE ASSESSEE O F THE BENEFIT OF DEDUCTION UNDER THE PROVISIONS OF S. 35 EVEN IF THE ASSET IS NOT PUT TO USE FOR RESEARCH AND DEVELOPMENT. IT IS A SETTLED L EGAL POSITION THAT THE PROVISION FOR EXEMPTION OR RELIEF SHOULD BE CONSTRU ED LIBERALLY AND IN FAVOUR OF THE ASSESSEE. IF THE SECTION IS INTERPRET ED IN THE MANNER SUGGESTED BY THE REVENUE THE ASSESSEE WOULD BE DEP RIVED OF THE BENEFIT WHICH LEGISLATURE DESIRES TO GIVE TO THE AS SESSEE. FROM THE PROVISIONS OF THE CIRCULAR NO. 5-P (LXXVI-63) OF 19 67 DT. 9TH OCT. 1967 ALSO INTENTION OF THE REVENUE IS PATENT. THE INTEN TION IS TO GIVE BENEFIT TO THE ASSESSEE WHO INCURS EXPENDITURE ON SCIENTIFI C RESEARCH RELATED TO HIS BUSINESS. EVEN THE CIRCULAR ISSUED BY THE DEPAR TMENT DOES NOT MAKE USE OF THE CAPITAL ASSET A CONDITION PRECEDENT FOR CLAIMING DEDUCTION UNDER THE PROVISIONS OF S. 35. BOTH THE APPELLATE A UTHORITIES HAVE RIGHTLY CONSIDERED THE SPIRIT WITH WHICH S. 35 HAS BEEN ENA CTED BY THE LEGISLATURE AND THE CIRCULAR REFERRED TO HEREINABOV E WHILE ALLOWING DEDUCTION TO THE ASSESSEE UNDER THE PROVISIONS OF S . 35. WHEN THE LEGISLATURE HAS NOT EXPECTED THE ASSESSEE TO PUT TH E ASSET TO ACTUAL USE IT WOULD NOT BE OPEN TO THE REVENUE TO DEPRIVE THE ASSESSEE OF THE BENEFIT OF DEDUCTION UNDER THE PROVISIONS OF S. 35 IF THE ASSET IS NOT USED IN THE PREVIOUS YEAR IN WHICH THE CAPITAL EXPE NDITURE IS INCURRED. IT IS ALSO RELEVANT TO NOTE THAT THE DEDUCTION IS GIVE N NOT ON THE COUNT OF USER. HAD IT BEEN SO THE ASSESSEE WOULD HAVE BEEN GIVEN BENEFIT IN THE NATURE OF DEPRECIATION. HERE THE LEGISLATURE WANTS THE ASSESSEE TO SPEND MORE AMOUNT FOR SCIENTIFIC RESEARCH AND IT AL SO WANTS THE ASSESSEE TO GET THE BENEFIT IMMEDIATELY IN THE YEAR IN WHICH HE INCURS ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 22 OF 36 THE EXPENDITURE IN THE NATURE OF REVENUE OR CAPITAL FOR SCIENTIFIC RESEARCH AND THEREFORE THE LEGISLATURE REFERS TO IN CURRING OF THE EXPENDITURE AND NOT THE USING OF THE ASSET. ONCE IT IS ESTABLISHED THAT THE EXPENDITURE WAS INCURRED FOR THE PURPOSE OF SCI ENTIFIC RESEARCH AND THE CONDITIONS INCORPORATED IN S. 35 ARE FULFILLED THE REVENUE CANNOT EXPECT THE ASSESSEE TO START USING THE ASSET IMMEDI ATELY. IN A GIVEN CASE THE ASSESSEE MIGHT HAVE TO GO ON INCURRING EXP ENDITURE FOR SEVERAL YEARS BEFORE PUTTING THE ASSET TO ACTUAL USE. IF TH E INTERPRETATION ADVANCED BY THE REVENUE IS ACCEPTED THE ASSESSEE W OULD NOT BE IN A POSITION TO AVAIL THE DEDUCTION UNDER S. 35 TO THE EXTENT TO WHICH THE LEGISLATURE INTENDS TO GIVE TO THE ASSESSEE. IT IS ALSO PERTINENT TO NOTE THAT THE DEDUCTION UNDER THE PROVISIONS OF S. 35 IS GIVEN ONLY DURING THE PREVIOUS YEAR IN WHICH THE EXPENDITURE IS INCURRED. IF THE ASSESSEE HAS TAKEN SEVERAL YEARS TO CONSTRUCT OR ACQUIRE A PARTI CULAR ASSET THE ASSESSEE WOULD BE DEPRIVED OF THE BENEFIT OF S. 35 BECAUSE HE CAN PUT THE ASSET TO USE ONLY WHEN CONSTRUCTION OF THE ASSE T IS COMPLETED AND IT WOULD NOT BE OPEN TO HIM TO CLAIM DEDUCTION IN RESP ECT OF EXPENDITURE INCURRED DURING THE EARLIER PREVIOUS YEARS BECAUSE LOOKING TO THE PROVISIONS OF S. 35 THE ASSESSEE CAN AVAIL THE BENE FIT OF DEDUCTION OF THE AMOUNT OF EXPENDITURE INCURRED ONLY DURING THE PREV IOUS YEAR AND NOT FOR THE EARLIER PERIOD UNLESS HIS CASE IS COVERED U NDER THE PROVISIONS OF AN EXCEPTION TO S. 35(2)(IA). FOR THE REASONS STATE D HEREINABOVE THE TRIBUNAL WAS RIGHT WHEN IT CONFIRMED THE ORDER PASS ED BY THE CIT(A) WHO HAD DELETED THE DISALLOWANCE. 35. IN THE CASE OF BELPAHAR REFRACTORIES LTD. (SUPRA) THE HONBLE ORISSA HIGH COURT HELD THAT EXPENDITURE INCURRED DURING TH E PREVIOUS YEAR IS ELIGIBLE FOR DEDUCTION U/S. 35 OF THE ACT AND THE F ACT THAT THE LIABILITY IN RESPECT OF EXPENDITURE INCURRED DURING THE PREVIOUS YEAR WAS DISCHARGED BY THE ASSESSEE BY ACTUAL PAYMENT IN A SUBSEQUENT ASSE SSMENT YEAR CANNOT BE THE BASIS TO DENY THE CLAIM OF THE ASSESSEE FOR DEDUCTION U/S. 35 OF THE ACT. 36. IN VIEW OF THE AFORESAID JUDICIAL PRONOUNCEMENT S WHICH ARE RENDERED IN THE CONTEXT OF SECTION 35(2) OF THE ACT THE WOR DINGS OF WHICH ARE IN PARI MATERIA TO THAT OF SECTION 35(2AB) OF THE ACT WE ARE OF TH E VIEW THAT THERE ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 23 OF 36 IS NO SUBSTANCE IN THIS APPEAL BY THE REVENUE. ACC ORDINGLY THE SAME IS DISMISSED. ITA 369/BANG/2010 (ASSESSEES APPEAL) (AY 04-05) 37. GROUND NO.1 RAISED BY THE ASSESSEE IS GENERAL I N NATURE AND CALLS FOR NO ADJUDICATION. 38. GROUNDS 2 TO 7 DEAL WITH THE ISSUE WITH REGARD TO DISALLOWANCE OF EXPENSES CONNECTED WITH ESOP. WE HAVE ALREADY SEEN THAT THE SPECIAL BENCH HAS CONSIDERED THE AFORESAID ISSUE AND GIVEN DIRECTIONS IN ITS ORDER TO COMPUTE THE AMOUNT OF EXPENSES THAT HAS TO BE AL LOWED AS DEDUCTION WHILE COMPUTING THE TOTAL INCOME. IN PRINCIPLE IT HAS BEEN HELD BY THE SPECIAL BENCH THAT THE AMOUNT HAS TO BE ALLOWED AS DEDUCTION WHILE COMPUTING TOTAL INCOME BUT THE QUANTUM OF DEDUCTIO N WAS DIRECTED TO BE DETERMINED IN THE MANNER SET OUT IN THE ORDER OF TH E SPECIAL BENCH. IN THE CIRCUMSTANCES IT WOULD BE JUST AND PROPER TO DIREC T THE AO TO FOLLOW THE DIRECTIONS OF THE SPECIAL BENCH AND ARRIVE AT THE Q UANTUM OF EXPENSES ON ACCOUNT OF ESOP TO BE ALLOWED AS A DEDUCTION WHILE COMPUTING THE TOTAL INCOME. THUS THE AFORESAID GROUNDS ARE TREATED AS ALLOWED. 39. GROUNDS NO. 8 9 & 10 READ AS UNDER:- RECOMPUTATION OF RELIEF UNDER SECTION 10B OF THE A CT IN RESPECT OF DEDUCTION UNDER SECTION 35(2AB) OF THE ACT 8. THE LEARNED CIT(A) ERRED IN LAW AND IN FACT UPHO LDING DEDUCTION OF THE AMOUNT OF RS.22 305 662 REPRESENTI NG DEDUCTION CLAIMED UNDER SECTION 35(2AB) OF THE ACT IN RESPECT OF ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 24 OF 36 FIFTY PERCENT OF THE SCIENTIFIC RESEARCH EXPENSES P ERTAINING TO THE UNITS ELIGIBLE FOR CLAIMING RELIEF UNDER SECTION 10 B OF THE ACT IN THE COMPUTATION OF RELIEF UNDER SECTION 10B OF THE ACT. 9. THE LEARNED CIT(A) ERRED IN LAW AND IN FACT IN N OT APPRECIATING THAT THE PROVISIONS OF SECTION 14A OF THE ACT APPLY ONLY TO EXPENDITURE IN RELATION TO INCOME WHICH DOE S NOT FORM PART OF TOTAL INCOME UNDER THE ACT AND THEREFORE SU CH PROVISIONS WOULD NOT APPLY TO INCOME ELIGIBLE FOR RELIEF UNDER SECTION 10B OF THE ACT. DISALLOWANCE OF DEDUCTION UNDER SECTION 35(2AB) OF THE ACT IN RESPECT OF ESOP EXPENSES 10. THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FACT IN UPHOLDING THE DISALLOWANCE OF RS.1 019 222 BEING FI FTY PERCENT OF THE ESOP EXPENDITURE OF RS.2 038 444 CONSIDERED FOR DEDUCTION UNDER SECTION 35(2AB) OF THE ACT. 40. THE ABOVE GROUNDS ARE IDENTICAL TO GROUNDS NO.1 3 TO 16 RAISED BY THE ASSESSEE IN ITA NO.368/BANG/2010 FOR THE A.Y. 2 003-04. FOR THE REASONS STATED THEREIN GROUNDS NO. 8 & 9 ARE DISMI SSED WHILE GROUND NO.10 IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES TO DETERMINE THE QUANTUM OF EXPENSES TO BE DISALLOWED. 41. IN THE RESULT THE APPEAL BY THE REVENUE IS DIS MISSED WHILE THE APPEAL BY THE ASSESSEE IS PARTLY ALLOWED FOR STATIS TICAL PURPOSES. ITA 370/BANG/2010 (ASSESSEES APPEAL FOR AY 05-06) 42. IN THIS APPEAL THE GROUNDS NO. 1 TO 10 RAISED BY THE ASSESSEE AGAINST THE ORDER DATED 13.11.2009 OF THE CIT(APPEA LS) LTU BANGALORE FOR THE A.Y. 2005-06 ARE IDENTICAL TO THE GROUNDS R AISED BY THE ASSESSEE IN ITA NO.369/BANG/2010 FOR THE A.Y. 2004-05. FOR THE REASONS STATED ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 25 OF 36 THEREIN GROUND NO.1 IS GENERAL IN NATURE AND DOES NOT CALL FOR ANY SPECIFIC ADJUDICATION. GROUNDS NO. 2 TO 7 ARE ALLOWED FOR S TATISTICAL PURPOSES. GROUNDS 8 & 9 ARE DISMISSED. GROUND NO.10 IS PARTL Y ALLOWED FOR STATISTICAL PURPOSES. 43. GROUND NOS.11 & 12 RAISED BY THE ASSESSEE WERE NOT PRESSED AND THEREFORE THEY ARE DISMISSED AS NOT PRESSED. 44. GROUND NO.13 WITH REGARD TO LEVY OF INTEREST U/ S. 234C AND 234D IS PURELY CONSEQUENTIAL AND THE AO IS DIRECTED TO GIVE CONSEQUENTIAL RELIEF. 45. IN THE RESULT THE APPEAL IS PARTLY ALLOWED. ITA 371/BANG/2010 (ASSESSEES APPEAL AY 06-07) 46. THIS APPEAL IS AGAINST THE ORDER DATED 13.11.20 09 OF THE CIT(APPEALS) LTU BANGALORE RELATING TO A.Y. 2006- 07. 47. GROUNDS NO.1 TO 9 RAISED BY THE ASSESSEE ARE ID ENTICAL TO GROUNDS NO.1 TO 9 RAISED BY THE ASSESSEE IN ITA NO.370/BANG /2010 FOR THE A.Y. 2005-06. FOR THE REASONS STATED WHILE DECIDING THE SAID GROUNDS IN A.Y. 2005-06 IT IS HELD THAT GROUND NO.1 DOES NOT CALL FOR ANY SPECIFIC ADJUDICATION; WHILE GROUND NOS. 2 TO 7 ARE TREATED AS ALLOWED FOR STATISTICAL PURPOSES; AND GROUND NOS. 8 & 9 ARE DISMISSED. 48. GROUND NOS. 10 & 11 RAISES THE SAME ISSUE THAT WAS RAISED BY THE ASSESSEE IN GROUND NO.10 IN ITA NO.370/B/2010. FOR THE REASONS STATED ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 26 OF 36 WHILE DECIDING THE AFORESAID GROUND GROUNDS 10 & 1 1 ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. 49. GROUND NO.12 RAISED BY THE ASSESSEE IN THIS APP EAL READS AS FOLLOWS:- 12. THE LEARNED CIT(A) ERRED IN NOT PROVIDING CON SEQUENTIAL RELIEF IRRESPECTIVE OF DEPRECIATION ON ENERGY SAVIN G DEVICE AMOUNTING TO RS.687 555 DISALLOWED IN THE ASSESSMEN T ORDER FOR AY 2005-06 BY THE LEARNED AO. 50. AS CAN BE SEEN FROM THE AFORESAID GROUND THE A SSESSEE SEEKS CONSEQUENTIAL RELIEF IN RESPECT OF DEPRECIATION ON ENERGY SAVING DEVICES DISALLOWED IN THE PREVIOUS ASSESSMENT YEAR. IN THE A.Y. 2005-06 THE ASSESSEE HAD CLAIMED DEPRECIATION AT 100% ON ENERGY SAVING DEVICES OF THE VALUE OF RS.13 75 111. SINCE THESE MACHINERIES WERE PURCHASED AFTER 1.10.2004 DEPRECIATION WAS RESTRICTED TO 50%. THE ASSESSEE IN THIS ASSESSMENT YEAR HAD CLAIMED THE REMAINING 50% DEPRE CIATION WHICH WAS NOT ALLOWED BY THE AO. DESPITE A SPECIFIC GROUND THE CIT(APPEALS) DID NOT ADJUDICATE THE ISSUE. WE ARE OF THE VIEW THAT IT W OULD BE JUST AND PROPER TO DIRECT THE CIT(APPEALS) TO CONSIDER THE CLAIM OF TH E ASSESSEE IN THIS REGARD IN ACCORDANCE WITH LAW. FOR STATISTICAL PURPOSES THIS GROUND IS TREATED AS ALLOWED. 51. GROUND NO.13 WITH REGARD TO LEVY OF INTEREST U/ S. 234C AND 234D IS PURELY CONSEQUENTIAL AND THE AO IS DIRECTED TO GIVE CONSEQUENTIAL RELIEF. ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 27 OF 36 52. IN THE RESULT THE APPEAL IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA 1206/BANG/2010 (ASSESSEES APPEAL FOR AY 07-08) 53. THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDE R DATED 26.8.2010 OF THE CIT(APPEALS) LTU BANGALORE RELATING TO ASSESS MENT YEAR 2007-08. 54. GROUND NO.1 IS GENERAL IN NATURE AND CALLS FOR NO SPECIFIC ADJUDICATION. 55. GROUND NOS.2 TO 7 ARE IDENTICAL TO GROUNDS NO.2 TO 7 RAISED BY THE ASSESSEE IN ITA NO.369/B/2010. FOR THE REASONS STA TED THEREIN THESE GROUNDS ARE TREATED AS ALLOWED FOR STATISTICAL PURP OSES. GROUND NO.8 IS IDENTICAL TO GROUND NO.10 DECIDED IN ITA NO.369/B/2 010 FOR THE A.Y. 2004- 05. FOR THE REASONS STATED THEREIN THIS GROUND OF APPEAL IS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 56. GROUND NOS. 9 TO 14 RAISED BY THE ASSESSEE READ S AS FOLLOWS:- DENIAL OF CARRY FORWARD OF UNABSORBED DEPRECIATION 9. THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FACT IN DENYING THE BENEFIT OF CARRY FORWARD OF UNABSORBED DEPRECIATION IN RESPECT OF THE AMOUNT OF RS.1 012 203 277 AS REF LECTED BY THE APPELLANT IN ITS RETURN OF INCOME. 10. THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FACT IN HOLDING THE ASSESSING OFFICERS ORDER THAT THE LOSS OF RS.1 012 203 277 SOUGHT TO BE CARRIED FORWARD REPRESENTS RELIEF UNDE R SECTION 10B OF THE ACT IN EXCESS OF TOTAL INCOME. ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 28 OF 36 11. THE LEARNED CIT(A) HAS ERRED IN FACT IN HOLDING THAT THE UNABSORBED DEPRECIATION AND LOSS PROPOSED TO BE CAR RIED FORWARD BY THE APPELLANT PERTAINS TO UNITS ELIGIBLE FOR RELIEF UNDER SECTION 10B OF THE ACT. 12. THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FACT HOLDING THAT THE RELIEF UNDER SECTION 10B OF THE ACT IN EXC ESS OF TOTAL INCOME CANNOT BE TREATED AS BUSINESS LOSS TO BE CAR RIED FORWARD IN ACCORDANCE WITH THE PROVISIONS OF THE ACT. 13. THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FACT IN SETTING OFF THE LOSSES OF THE APPELLANT PRIOR TO CLAIMING R ELIEF UNDER SECTION 10B OF THE ACT AND THEREBY DISREGARDING THE FACT THAT PROVISIONS OF THE ACT PROVIDE FOR RELIEF UNDER SECT ION 10B OF THE ACT UNDERTAKING WISE. 14. THE LEARNED CIT(A) HAS ERRED IN LAW AND IN FACT IN HOLDING THAT THE RELIEF UNDER SECTION 10B OF THE ACT WOULD BE AVAILABLE ONLY OF THE EXTENT OF TOTAL INCOME THERE BY RESULT ING IN THE LOSS OF THE APPELLANT PERTAINING TO OTHER BUSINESS BEING SE T OFF AGAINST THE PROFITS OF THE UNITS ELIGIBLE FOR RELIEF UNDER SECTION 10B OF THE ACT. 57. THE FACTS MATERIAL FOR ADJUDICATION OF THE AFOR ESAID GROUNDS OF APPEAL ARE AS FOLLOWS. THE ASSESSEE DURING THE PRE VIOUS YEAR HAD FOUR UNITS WHICH WERE ENTITLED TO CLAIM DEDUCTION U/S. 1 0B OF THE ACT VIZ. CMZ UNIT SAP UNIT RHI UNIT AND IFP UNIT. THE ASSESSE E HAD CLAIMED DEDUCTION U/S. 10B OF THE ACT IN RESPECT OF THE AFO RESAID UNITS TOTALING RS.157 22 33 066 WHICH IS THE SUM TOTAL OF DEDUCTIO N U/S. 10B FOR THE FOUR UNITS AS FOLLOWS:- (1) CMZ UNIT : 6 87 70 229 (2) SAP UNIT : 76 60 29 880 (3) RHI UNIT : 52 42 56 278 (4) IFP UNIT : 21 31 76 679 -------------------- TOTAL 157 22 33 066 -------------------- ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 29 OF 36 58. THE ASSESSEE HAD NON-10B UNITS AS WELL. IN THO SE NON-10B UNITS THERE WAS A LOSS OF RS.105 92 19 172. IN THE RETUR N OF INCOME FILED BY THE ASSESSEE THE ASSESSEE SOUGHT TO CARRY FORWARD THE LOSS OF NON-10B UNITS FOR SET OFF AGAINST THE PROFITS OF NON-10B UNITS IN THE SUBSEQUENT ASSESSMENT YEARS. THE AO FIRSTLY NOTICED THAT THER E WAS INCOME FROM OTHER SOURCES TO THE EXTENT OF RS.4 71 15 896 AND SUCH HA D TO BE SET OFF AGAINST THE LOSS OF THE NON-10B UNITS. ACCORDINGLY THE AO HELD THAT THE LOSS OF THE NON-10B UNITS THAT HAD TO BE CONSIDERED FOR CARRY F ORWARD WOULD BE RS.101 21 03 280. 59. THEREAFTER THE AO WAS OF THE VIEW THAT INCOME OF THE 10B UNITS HAD TO BE SET OFF AGAINST THE LOSS OF THE NON-10B UNITS AND IF IT IS SO SET OFF THERE WILL BE NO LOSS THAT NEEDS TO BE CARRIED FORWARD. IN COMING TO THE AFORESAID CONCLUSION THE AO EXPRESSED THE OPINION THAT PROVI SIONS OF SECTION 10B ARE DEDUCTION PROVISIONS AND THEREFORE EFFECT WILL HAVE TO BE GIVEN TO THE PROVISIONS OF SECTION 72 OF THE ACT EVEN IN RESPEC T OF PROFITS OF THE 10B UNIT. ACCORDINGLY THE CLAIM OF THE ASSESSEE FOR CARRY FO RWARD OF LOSS OF NON-10B UNIT WAS NOT ALLOWED BY THE AO. 60. ON APPEAL BY THE ASSESSEE IT WAS CONTENDED THA T THE PROVISIONS OF SECTION 10A AND SECTION 10B ARE EXEMPTION PROVISION S AND THEREFORE THE PROFIT OF 10A AND 10B UNITS WILL NOT ENTER THE COMP UTATION OF TOTAL INCOME AT ALL AND THEREFORE THE PROFITS OF THESE UNITS NEED N OT BE SET OFF AGAINST THE LOSS OF NON-10B UNIT BY INVOKING THE PROVISIONS OF SECTION 72 OF THE ACT. ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 30 OF 36 61. THE CIT(APPEALS) DID NOT AGREE WITH THE CONTENT ION OF THE ASSESSEE AND IN DOING SO HE PLACED RELIANCE ON THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT V. HIMATSINGIKE SEIDE LTD. 286 ITR 255 (KAR) . IN THE AFORESAID DECISION THE HONBLE HIGH COUR T HAS TAKEN THE VIEW THAT DEDUCTION U/S. 10B HAS TO BE ALLOWED AFTER SET OFF OF UNABSORBED DEPRECIATION AND UNABSORBED INVESTMENT A LLOWANCE. THE HONBLE COURT TOOK THE VIEW THAT THE AFORESAID PROV ISION WAS ONLY AN EXEMPTION PROVISION. THE CIT(APPEALS) NOTICED THA T THE AFORESAID DECISION WAS FOLLOWED BY THE ITAT BANGALORE BENCH IN THE CAS E OF INTELNET TECHNOLOGIES INDIA PVT. LTD. V. ITO ITA NO.1021/BA NG/2009 DATED 12.3.2010. SIMILAR VIEW EXPRESSED BY THE DELHI BENCH OF THE TR IBUNAL IN THE CASE OF GLOBAL VANTAGE PVT. LTD. V. DCIT 2010 TIOL 24 ITAT (DEL) WAS ALSO REFERRED TO BY THE CIT(A). A CONTRARY VIE W WAS EXPRESSED BY THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF KPIT CUMMINS INFO SYSTEMS (BANGALORE) PVT. LTD. V. ACIT 120 TTJ 956. THE CIT(A) FOUND THAT IN THE CASE OF GLOBAL VANTAGE PVT. LTD. (SUPRA) DECIDED BY THE DELHI TRIBUNAL THIS DECISION HAS BEEN HELD TO BE NOT IN T UNE WITH THE DECISION OF THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF HIMATSINGIKE SEIDE LTD. (SUPRA). THE CIT(A) ALSO REFERRED TO THE DECISION OF THE CHE NNAI BENCH OF THE TRIBUNAL IN THE CASE OF SWORD GLOBAL INDIA PVT. LTD. V. ITO 306 ITR 286 (AT) WHEREIN THE PROVISIONS OF SECTION 10A AND 10B HA VE BEEN HELD TO BE DEDUCTION PROVISIONS AND NOT EXEMPTION PROVISIONS. FOR ALL THE ABOVE REASONS THE CIT(APPEALS) CONFIRMED THE ORDER OF TH E ASSESSING OFFICER. ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 31 OF 36 62. AGGRIEVED BY THE ORDER OF THE CIT(APPEALS) THE ASSESSEE HAS RAISED GROUNDS NO.9 TO 14 BEFORE THE TRIBUNAL. WE HAVE HE ARD THE SUBMISSIONS OF THE LD. COUNSEL FOR THE ASSESSEE WHO REITERATED TH E SUBMISSIONS AS WERE MADE BEFORE THE CIT(APPEALS) AND FURTHER PLACED STR ONG RELIANCE ON THE DECISION OF HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF YOKOGAWA INDIA LTD. 341 ITR 385 (KAR) . THE LD. DR RELIED ON THE ORDER OF CIT(APPEALS). 63. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE RI VAL SUBMISSIONS. THE ISSUE AS TO WHETHER THE PROVISIONS OF SEC.10B OF TH E ACT ARE DEDUCTION PROVISIONS OR EXEMPTION PROVISIONS WILL ASSUME GREA T IMPORTANCE. THE REASON IS THAT IF THE PROVISIONS ARE CONSIDERED AS EXEMPTION PROVISIONS THEN THEY WILL NOT ENTER THE COMPUTATION OF TOTAL INCOME AND THEREFORE THE LOSS OF THE ELIGIBLE UNIT CANNOT BE SET OFF AGAINST THE PRO FITS OF THE NON-ELIGIBLE UNIT. THIS ISSUE HAS ALREADY BEEN SETTLED BY THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF YOKOGAWA INDIA LTD. (SUPRA) . THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF YOKOGAWA (SUPRA) HAD TO DEAL WITH TWO SUBSTANTIAL QUESTION OF LAW. THE FIRST SUBSTANTIAL QUESTION OF LAW WAS ON THE RIGHT OF SET OFF OF LOSS OF NON-ELIGIBLE UNIT AGAINST THE PROFIT OF THE ELIGIBLE UNIT ON WHICH DEDUCTION U/S.10B WAS TO BE ALLOWED. THE HONBLE C OURT IN PARA 10 TO 20 OF ITS JUDGMENT DEALT WITH THE ISSUE. THE HONBLE COURT NOTICED THAT SEC.10- A(1) OF THE ACT (WHICH IS IN PARI MATERIA WITH SEC. 10-B OF THE ACT) READ AS FOLLOWS: 10B. SPECIAL PROVISIONS IN RESPECT OF NEWLY ESTABL ISHED UNDERTAKING IN FREE TRADE ZONE ETC. -(1) SUBJECT TO THE PROVISIONS ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 32 OF 36 OF THIS SECTION A DEDUCTION OF SUCH PROFITS AND GAINS AS ARE DERIVED BY UNDERTAKING FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE FOR A PERIOD OF TEN CONSECUTIVE A SSESSMENT YEARS BEGINNING WITH THE ASSESSMENT YEAR RELEVANT T O THE PREVIOUS-YEAR IN WHICH THE UNDER-TAKING BEGINS TO M ANUFACTURE OR PRODUCE ARTICLES OR THINGS OR COMPUTER SOFTWARE AS THE CASE MAY BE SHALL BE ALLOWED FROM THE TOTAL INCOME OF THE ASSES SEE : (EMPHASIS SUPPLIED) 64. THE EXPRESSION DEDUCTION AND SHALL BE ALLOWE D FROM THE TOTAL INCOME OF THE ASSESSEE USED IN THE AFORESAID PROVI SIONS WAS CONSIDERED BY THE HONBLE HIGH COURT AND IT HELD IN PARA 13 TO 15 OF ITS JUDGMENT THAT THE EXPRESSION SHALL BE ALLOWED FROM THE TOTAL IN COME OF THE ASSESSEE DOES NOT MEAN TOTAL INCOME AS DEFINED U/S.2(45) OF THE ACT BUT THAT EXPRESSION MEANS PROFITS AND GAINS OF THE STP UNDE RTAKING AS UNDERSTOOD IN ITS COMMERCIAL SENSE OR THE TOTAL INCOME OF THE STP UNIT. THUS THE VIEW EXPRESSED IS THAT INCOME OF THE STP UNDERTAKING GET S QUARANTINED AND WILL NOT BE ALLOWED TO BE SET OFF AGAINST LOSS OF EITHER ANOTHER STP UNDERTAKING OR A NON STP UNDERTAKING. THE HONBLE COURT THEREA FTER HELD THAT THOUGH THE EXPRESSION USED IN SEC.10A WAS DEDUCTION BUT IN EFFECT IT WAS ONLY AN EXEMPTION SECTION. THESE CONCLUSIONS CLEARLY EMANA TE FROM PARA 17 OF THE HONBLE COURTS JUDGMENT. 65. THE SITUATION WITH WHICH WE ARE CONCERNED IN TH E PRESENT CASE IS A SITUATION WHERE THERE IS POSITIVE INCOME OF THE ELI GIBLE UNIT THEN THE SAME SHOULD BE ALLOWED DEDUCTION U/S.10B OF THE ACT WITH OUT SETTING OF THE LOSS OF NON-ELIGIBLE UNIT. THE HONBLE KARNATAKA HIGH COUR T IN THE CASE OF ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 33 OF 36 YOKOGAWA (SUPRA) WAS CONCERNED WITH SIMILAR SITUATION AS SET OUT AB OVE. IN VIEW OF THE AFORESAID DECISION OF THE HONBLE KA RNATAKA HIGH COURT WE ARE OF THE VIEW THAT THE CLAIM AS MADE BY THE ASSES SEE FOR CARRY FORWARD OF LOSS OF THE NON-ELIGIBLE UNIT HAD TO BE ALLOWED WIT HOUT SET OFF OF PROFITS OF THE 10A/10B UNIT. WE HOLD ACCORDINGLY AND ALLOW THE RE LEVANT GROUNDS OF APPEAL OF THE ASSESSEE. 66. WE MAY ALSO OBSERVE THAT THE HONBLE KARNATAKA HIGH COURTS DECISION IN THE CASE OF HIMATASINGIKE SEIDE ( SUPRA ) HAS HELD THAT UNABSORBED DEPRECIATION (AND BUSINESS LOSS) OF SAME (S. 10A/10B) UNIT BROUGHT FORWARD FROM EARLIER YEARS HAVE TO BE SET O FF AGAINST THE PROFITS BEFORE COMPUTING EXEMPT PROFITS. THE ASSESSEE IN T HAT CASE SET UP A 100% EOU IN AY 1988-89. FOR WANT OF PROFITS IT DID NOT C LAIM BENEFITS U/S 10B IN AYS 1988-89 TO 1990-91. FROM AY 1992-93 IT CLAIMED THE SAID BENEFITS FOR A CONNECTIVE PERIOD OF 5 YEARS. IN AY 1994-95 THE ASSESSEE COMPUTED THE PROFITS OF THE EOU WITHOUT ADJUSTING THE BROUGHT FO RWARD UNABSORBED DEPRECIATION OF AY 1988-89. IT CLAIMED THAT AS S. 1 0B CONFERRED EXEMPTION FOR THE PROFITS OF THE EOU THE SAID BROUGHT FORWAR D DEPRECIATION COULD NOT BE SET-OFF FROM THE PROFITS OF THE EOU BUT WAS AVAI LABLE TO BE SET-OFF AGAINST INCOME FROM OTHER SOURCES. IT WAS ALSO CLAIMED THAT THE PROFITS HAD TO BE COMPUTED ON A COMMERCIAL BASIS. THE AO ACCEPTED T HE CLAIM THOUGH THE CIT REVISED HIS ORDER U/S 263 AND DIRECTED THAT THE EXEMPTION BE COMPUTED AFTER SET-OFF. ON APPEAL BY THE ASSESSEE THE TRIBU NAL REVERSED THE ORDER OF THE CIT. ON APPEAL BY THE DEPARTMENT THE HIGH COUR T IN CIT VS. ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 34 OF 36 HIMATASINGIKE SEIDE LTD. 286 ITR 255 (KAR) REVERSED THE ORDER OF THE TRIBUNAL AND HELD THAT THE BROUGHT FORWARD DEPR ECIATION HAD TO BE ADJUSTED AGAINST THE PROFITS OF THE EOU BEFORE COMP UTING THE EXEMPTION ALLOWABLE U/S 10B. IN CIVIL APPEAL NO.1501 OF 200 8 DATED 19.9.2013 AGAINST THE AFORESAID DECISION OF THE HONBLE KARNA TAKA HIGH COURT THE HONBLE SUPREME COURT OBSERVED AS FOLLOWS WHILE DIS MISSING THE APPEAL:- HAVING PERUSED THE RECORDS AND IN VIEW OF THE FACT S AND CIRCUMSTANCES OF THE CASE WE ARE OF OPINION THAT T HE CIVIL APPEAL BEING DEVOID OF ANY MERIT DESERVES TO BE DISMISSED AND IS DISMISSED ACCORDINGLY. 67. THUS THE RATIO HAS TO BE CONFINED TO THE FACTS AND CIRCUMSTANCES OF THE CASE. THE AFORESAID OBSERVATIONS HAVE TO BE CO NFINED TO THE FACTS OF THAT CASE AND AS APPLICABLE TO A CASE WHERE BROUGHT FORWARD LOSSES AND DEPRECIATION OF THE VERY SAME STP UNDERTAKING ARE N OT ADJUSTED WHILE ARRIVING AT THE PROFITS OF THE 10B UNIT FOR ALLOWIN G DEDUCTION U/S.10A/10B OF THE ACT AND NOT IN RESPECT OF BROUGHT FORWARD LOSSE S AND DEPRECIATION OF OTHER UNDERTAKINGS/NON-10A/10B UNITS. S. 10A/10B(6 ) AS AMENDED BY THE FA 2003 W.R.E.F. 1.4.2001 PROVIDES THAT DEPRECIATIO N AND BUSINESS LOSS OF THE ELIGIBLE UNIT RELATING TO THE AY 2001-02 & ONWA RDS IS ELIGIBLE FOR SET-OFF & CARRY FORWARD FOR SET-OFF AGAINST INCOME POST TAX H OLIDAY WHICH MEANS THAT THEY NEED NOT BE SO SET OFF AS MANDATED IN THE DECI SION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF HIMATASINGIKE SEIDE LTD. ( SUPRA ). AS WE HAVE ALREADY SEEN IN YOKOGAWA INDIA LTD. 341 ITR 385 ( KAR ) IT WAS ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 35 OF 36 HELD THAT EVEN AFTER S. 10A/10B WERE CONVERTED INTO A DEDUCTION PROVISION W.E.F 1.4.2001 THE BENEFIT OF RELIEF U/S 10A/10B I S IN THE NATURE OF EXEMPTION WITH REFERENCE TO COMMERCIAL PROFITS AND THAT AS THE INCOME OF THE S. 10A UNIT HAS TO BE EXCLUDED AT SOURCE ITS ELF BEFORE ARRIVING AT THE GROSS TOTAL INCOME THE QUESTION OF SETTING OFF THE LOSS OF THE CURRENT YEARS OR THE BROUGHT FORWARD BUSINESS LOSS (AND UNABSORBE D DEPRECIATION) AGAINST THE S. 10A PROFITS DOES NOT ARISE. THEREFO RE THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF HIMATASINGIKE SEIDE ( SUPRA ) WILL NOT APPLY TO THE FACTS OF THE PRESENT CASE. 68. GR.NO.15 RAISED BY THE ASSESSEE WITH REGARD TO CHARGING OF INTEREST U/S.234-D OF THE ACT IS PURELY CONSEQUENTLY AND TH E AO IS DIRECTED TO GIVE CONSEQUENTIAL RELIEF TO THE ASSESSEE. 69. IN THE RESULT ITA NO.248/BANG/2010 BY THE REV ENUE IS DISMISSED WHILE THE OTHER APPEALS BY THE ASSESSEE ARE PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 30 TH DAY OF APRIL 2014. SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVA N ) ACCOUNTANT MEMBER JUDICIAL MEMBE R BANGALORE DATED THE 30 TH APRIL 2014. /D S/ ITA NOS.248 368 TO 371 & 1206/BANG/2010 PAGE 36 OF 36 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ITAT BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT BANGALORE.