The Hindu Business Line : Tax holiday for exports

A question that has sparked off many debates but on which no definite consensus has been reached is whether the tax holiday under Sections 10A and 10B of the Income-tax Act, 1961 in respect of export profits is in the nature of an exemption or a deduction.

Exemption vs deduction

The first thought that comes to mind in the case of an exemption is that unless the assessee has opted out of the provisions in terms of sub-section (8) of Section 10A/10B (the assessees were reluctant to opt out on the apprehension that the income-tax authorities may deny the exemption for the entire tax holiday period), the loss of the Section 10A/10B unit will not be eligible for set off against other income (business or non-business) of the assessee.

On the other hand, in case of a deduction from the gross total income, the profit of a Section 10A/10B unit will be set off against the losses under business income/other heads and the tax holiday will be eligible only in respect of the balance amount — in other words, the business losses of non-eligible units / losses under other heads will not be eligible to be carried forward for set off in subsequent years.

The controversy has been addressed by the Mumbai Tribunal in the Navin Bharat Industries (90 ITD 1)(TM) and Enercon Wind Farms (21 SOT 29) cases, by the Bangalore Tribunal in the Mindtree Consulting (102 TTJ 691) and SCT Software Solutions (ITA No. 1014/ Bang/2004) cases and by the Delhi Tribunal in the Honeywell International (108 TTJ 924) case.

Out of the five judicial pronouncements indicated above, the Bangalore Tribunal in the SCT Software Solutions case has taken a position that the tax holiday under Sections 10A and 10B is akin to an exemption, whereas in the other four decisions, the Tribunal has tended to take a view that the tax holiday is in the nature of a deduction.

It is however pertinent to note at this juncture that all five cases were decided in favour of the assessee. This follows the principle laid down by the Supreme Court in the Bajaj Tempo (196 ITR 188) case and other cases that a provision for deduction, exemption or relief should be interpreted liberally, reasonably and in favour of the assessee.

Need for reconciliation

The differences between the Tribunal decisions and the controversy regarding exemption versus deduction needs to be reconciled.

A harmonious reading of Sections 10A and 10B and its placement in Chapter III — ‘Incomes which do not form part of total income’ — indicates that the tax holiday is in the nature of an exemption; however, the computation mechanism provided in Sections 10A and 10B is by way of a deduction.

The question now arises regarding the stage at which the deduction is to be granted: i) from the profits of the eligible unit; ii) from the income chargeable under the head business income; or iii) from the gross total income.

A reading of Sections 10A and 10B in the right spirit would indicate that the deduction has to be granted at stage (i), that is, from the profits of the eligible unit. The consequences of this interpretation under both scenarios, that is, profit or loss of the 10A / 10B unit is analysed in the table with the help of an example.

It is seen that the interpretation would be advantageous to an assessee in both situations, that is, profit or loss of the Section 10A / 10B unit. The interpretation is in line with the spirit of the legislature in granting a benefit under Sections 10A and 10B and would also be in harmony with the views of the Supreme Court in the Bajaj Tempo case.

Thus,, the tax holiday under Sections 10A and 10B may be viewed as an exemption, with the computation mechanism being in the nature of a deduction from the profits of the eligible unit.

(The authors are with Deloitte Haskins & Sells, Mumbai. blfeedback@thehindu.co.in)

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