Section 80-IA of the Income-Tax Act that grants a 30 per cent deduction from profits of eligible industrial undertakings did not in terms require for the assessment year 1997-98 that an assessee must first set off his losses and then claim the deduction. In the event, it was open for the assessee to reverse the order if it suited him.

In Dinosaur Steels Ltd vs Joint Commissioner of Income-Tax , the appellant had earned a profit of Rs 34.92 lakh from the new undertaking and claimed a deduction of Rs 10.48 lakh being 30 per cent of the profits.

From the remaining Rs 24.44 lakh, he set off the brought-forward loss of Rs 21.13 lakh and declared a taxable income of Rs 3.31 lakh. Had it set off the loss first and then claim 30 per cent deduction, it would have had to declare a greater taxable income and pay more tax.

It preferred the first course citing the Madhya Pradesh High Court verdict in K.N. Oil Industries case which held the field for the given assessment year.

Not for later years

For subsequent assessment years however, this latitude is no longer available as the Supreme Court has ruled in the Kotagiri Industrial Cooperative Tea Factory Ltd case that loss must be set off first and then tax holiday claimed.

The Supreme Court pointed out that the tax authorities could not have invoked the summary remedy of rectification of mistake under Section 154 when the so-called mistake while making assessment was after all not apparent from records.

The tax authorities contended that the mistake in assessment of allowing tax holiday first before considering losses was a mistake apparent from records in the light of the Supreme Court verdict in the Kotagiri case.

The apex court did not agree and said that its judgment in the Kotagiri case was rendered post assessment year 1997-98.

(The author is a New Delhi-based chartered accountant.)

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