Income Tax--Current Issues

Practice Update

V.K. Subramani

SET OFF OF UNABSORBED DEPRECIATION AND BUSINESS LOSS OF OTHER BUSINESS AFTER DEDUCTING INCOME UNDER SECTION 10AA

Income of a newly established unit in SEZ is eligible for tax benefit contained in section 10AA. The total tenure of such benefit is 15 years with 3 blocks of 5 years each with gradual reduction in tax benefits. The deduction or exemption covered by section 10AA is contained in Chapter III of the Income-tax Act, 1961 titled 'Incomes which do not form part of total income'. This created some controversy as to whether income covered by it is exempt income or it must form part of total income and thereafter, it is deductible like Chapter VI-A deduction. The eligible unit must have commenced its activities after 1st April, 2006 but before 31st March, 2021.

Units in SEZ are to be treated as independent units from other units of the assessee. The income of such units to the extent eligible for deduction under section 10AA, are not to be included in the total income. Any loss or depreciation of other units will not reduce the quantum of deduction under section 10AA. In other words, after claiming deduction under section 10AA, (which could be 100% or 50%), the balance would form part of gross total income and any eligible amount of unabsorbed depreciation or business loss of other unit (s) could be set off against such income. This based on the rationale of the decision in the case of CIT v. Yokogawa India Ltd (2017) 391 ITR 274 (SC) : 2016 TaxPub(DT) 5139 (SC) in the context of section 10A which was adjacent to section 10AA in the statute book.

In simple terms, the income of such units would be eligible for due benefit and would not be reduced due to the fact that the assessee has unabsorbed depreciation or business loss of some other unit which does not enjoy the benefit of section 10AA.