"Court Clarifies Deduction Eligibility Under Sections 10B (of Income Tax Act, 1961) and 35(2AB)"

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Case Name:

Biocon Limited Vs. Deputy Commissioner of Income Tax and Anr (High Court of Karnataka)

ITA No. 416 of 2014

Date: 12th January 2021

Key Takeaways:

• Independent Deductions: The court confirmed that deductions under Section 10B (of Income Tax Act, 1961) (income-based) and Section 35(2AB) (of Income Tax Act, 1961) (expenditure-based) are independent and can be claimed simultaneously.
• Clarification on Section 10B (of Income Tax Act, 1961): The court reiterated that Section 10B (of Income Tax Act, 1961) is a deduction provision, not an exemption, aligning with the Supreme Court’s decision in CIT Vs. Yokogawa India Limited.
• Impact on Tax Computation: This decision impacts how companies compute their taxable income, particularly those involved in export-oriented and research-intensive industries.

Issue

Can Biocon Limited claim deductions under both Section 10B (of Income Tax Act, 1961) and Section 35(2AB) (of Income Tax Act, 1961) for the same expenses?

Facts

Biocon Limited, a biotechnology company, filed its income tax return for the Assessment Year 2004-05, claiming deductions under both Section 10B (of Income Tax Act, 1961) and Section 35(2AB) (of Income Tax Act, 1961). The Assessing Officer disallowed the deduction under Section 35(2AB) (of Income Tax Act, 1961), arguing that it was not permissible alongside Section 10B (of Income Tax Act, 1961). This decision was upheld by the Commissioner of Income Tax (Appeals) and the Tribunal, prompting Biocon to appeal to the High Court.

Arguments

• Biocon’s Argument: Biocon argued that Sections 10B and 35(2AB) are independent provisions, allowing for separate deductions. They cited the Supreme Court’s decision in CIT Vs. Yokogawa India Limited, which clarified that Section 10B (of Income Tax Act, 1961) is a deduction provision.
• Revenue’s Argument: The revenue contended that allowing deductions under both sections would result in a double deduction, which is not the intention of the legislature.

Key Legal Precedents

• CIT Vs. Yokogawa India Limited: The Supreme Court held that Section 10B (of Income Tax Act, 1961) is a deduction provision, not an exemption, which was pivotal in Biocon’s argument.
• CIT Vs. Walfort Share and Stock Brokers: This case was referenced regarding the application of Section 14A (of Income Tax Act, 1961), which was deemed not applicable as Biocon had no exempt income.

Judgement

The court ruled in favor of Biocon, allowing the deductions under both Section 10B (of Income Tax Act, 1961) and Section 35(2AB) (of Income Tax Act, 1961). The court emphasized that these sections are independent and can be claimed simultaneously. The decision of the Tribunal was quashed, and the appeal was disposed of in favor of Biocon.

FAQs

Q1: What does this decision mean for Biocon?

A1: Biocon can claim deductions under both Section 10B (of Income Tax Act, 1961) and Section 35(2AB) (of Income Tax Act, 1961), reducing their taxable income for the relevant assessment year.

Q2: How does this affect other companies?

A2: This sets a precedent for other companies in similar situations, particularly those in export-oriented and research-intensive sectors, to claim deductions under both sections.

Q3: Why was Section 14A (of Income Tax Act, 1961) not applicable?

A3: Section 14A (of Income Tax Act, 1961) pertains to expenses related to exempt income. Since Biocon had no exempt income, this section was not applicable.

This appeal under Section 260-A (of Income Tax Act, 1961), 1961 (hereinafter referred to as ‘the Act’, for short) has been filed by the assessee. The subject matter of the appeal pertains to the Assessment Year 2004-05.

The appeal was admitted by a Bench of this Court vide order dated 01.12.2014 on the following substantial questions of law:

"1. The Tribunal was right in holding that the appellant was not entitled to deduction under Section 35(2AB) (of Income Tax Act, 1961) to the extent the expenses eligible for deduction under the said provisions pertained to unit entitled for deduction under Section 10B (of Income Tax Act, 1961)?

2. The Tribunal was right in holding that Section 14A (of Income Tax Act, 1961) was applicable to the appellant although it had no exempt income?"

2. Facts leading to filing of this appeal briefly

stated are that the assessee is a company engaged in

the manufacture and sale of biotechnological products in

Pharmaceutical and enzyme sectors through

fermentation based technology. The assessee filed its

return of income for the Assessment Year 2004-05

declaring a total income of Rs.50,65,18,080/- after

claiming various deductions which included deduction

under Section 10B (of Income Tax Act, 1961) as well as under Section 35(2AB) (of Income Tax Act, 1961) of

the Act. The Assessing Officer, by an order dated

29.12.2006, inter alia held that since the assessee has

claimed deduction under Section 10B (of Income Tax Act, 1961),

therefore, it is not entitled to claim deduction under

Section 35(2AB) (of Income Tax Act, 1961). The aforesaid order was

affirmed by the Commissioner of Income Tax (Appeals)

by an order dated 13.11.2009. Thereupon, the assessee

filed an appeal before the Tribunal. The Tribunal, by an

order dated 30.04.2014, affirmed the order passed by

the Commissioner of Income Tax (Appeals) as well as

the Assessing Officer. In the aforesaid factual

background, the assessee has approached this Court.

3. Learned counsel for the assessee submitted that

Section 10A (of Income Tax Act, 1961) as well as Section 10B (of Income Tax Act, 1961) are not

exemption provisions but are deduction provisions and

the deduction have to be given effect to at the stage of

computation of profits and gains of business or

profession under Chapter IV-D of the Act. It is further

submitted that the Tribunal has relied on the decision of

this Court in 'CIT Vs. YOKOGAWA INDIA LIMITED'

(2012) 21 TAXMANN.COM 154 (KAR). However, the

aforesaid decision was reversed on the issue of the

nature of provision namely Section 10A (of Income Tax Act, 1961) and Section 10B (of Income Tax Act, 1961)

of the Act, by the Supreme Court in 'CIT Vs.

YOKOGAWA INDIA LIMITED (2017) 77

TAXMANN.COM 41 (SC) and it was held that Section

10A and Section 10B (of Income Tax Act, 1961) are the provisions with

regard to deduction. In this connection, our attention

was invited to paragraph 18 of the judgment. It is also

submitted that deduction under Section 10B (of Income Tax Act, 1961) is

qua the undertaking and is given in respect of the profits

of business of the undertaking whereas deduction under

Section 35(2AB) (of Income Tax Act, 1961) is given effect to a later

stage while computing the total income of the assessee

at the entity level. Therefore, the deductions granted

under Section 10B (of Income Tax Act, 1961) as well as Section 35(2AB) (of Income Tax Act, 1961)

are independent and the deduction under Section

35(2AB) of the Act is an expenditure based deduction

whereas deduction under Section 10B (of Income Tax Act, 1961) is an

income based deduction and are independent provisions.

4. Our attention has also been invited to sub-

Section (6) of Section 10B (of Income Tax Act, 1961) as amended by Finance Act,

2003 with effect from 01.04.2001 which provides that

after 01.04.2001, the units are entitled to deduction

under Section 10B (of Income Tax Act, 1961) are to be treated on par

with other units and will also be entitled to deductions

available under the Act under Sections 32 (of Income Tax Act, 1961), 35, etc. It is

also urged that prior to amendment of sub-Section (6)

of Section 10B (of Income Tax Act, 1961) by the Finance Act, 2003, the intention

was to curtail the other tax concessions under the Act to

the eligible units which is evident from the Circular

No.794 dated 09.08.2000. It is also submitted that in

order to eliminate the restrictions contained in sub-

Section (6) of Section 10B (of Income Tax Act, 1961), the aforesaid provision was

amended by Finance Act, 2003, by which, phrase

"ending before the 1st day of April, 2001" was inserted

which means that after 01.04.2001, the restrictions on

other tax concessions or deductions are not been in

existence. In this connection, our attention has been

drawn to the Circular No.7 of 2003 dated 05.09.2003. It

is also contended that Section 10B (of Income Tax Act, 1961) is a code in

itself and deduction under the said provision will have to

be computed in accordance with the formula prescribed

in sub-Section (4) on commercial profits and therefore,

reducing profits on a notional basis, attributing some

profits to the expenses eligible for weighted reduction

under Section 35(2AB) (of Income Tax Act, 1961), amounts to tinkering with the

formula. It is also urged that the Tribunal grossly erred

in relying on Section 14A (of Income Tax Act, 1961) to uphold the

disallowance. It is further submitted that Section 14A (of Income Tax Act, 1961)

applies only to exempt incomes and since Section 10B (of Income Tax Act, 1961) of

the Act is not an exemption provision as has been held

by the Supreme Court in CIT Vs. YOKOGAWA

LIMITED, supra, the aforesaid provision does not apply

to the fact situation of the case. In support of aforesaid

submission, reliance has been placed on the decisions in

'KARLE INTERNATIONAL PRIVATE LTD. Vs. ACIT'

dated 07.09.2020 in ITA No.377/2012, 'VIJAY

INDUSTRIES Vs. CIT' (2019) 103 TAXMANN.COM

454, 'REDINGTON (INDIA) LTD. Vs. ACIT' [(2017)

77 TAXMANN.COM 257 (MAD)], 'CHEMINVEST LTD.

Vs. CIT' [(2015) 61 TAXMANN.COM 118 (DEL)]

AND 'PCIT Vs. GVK PROJECT AND TECHNICAL

SERVICES LTD.' (2019) 106 TAXMANN.COM 181

(SC).

5. On the other hand, learned counsel for the

revenue submitted that the assessee is not entitled to

deduction of expenditure both under Sections 37 (of Income Tax Act, 1961) and

35(2AB) specifically in view of Section 35(2) (of Income Tax Act, 1961).

It is also submitted that it is never the intention of the

legislature nor there is any provision in the Act which

confers the benefit of double deduction to the extent of

250%. It is also submitted that restriction imposed

under Section 35(2) (of Income Tax Act, 1961) equally applies to the

expenditure for computing deduction under Section 10B (of Income Tax Act, 1961)

of the Act and the Supreme Court in paragraph 11 of the

decision in CIT Vs. YOKOGAWA, supra, has held that

deduction under Section 35 (of Income Tax Act, 1961) is deemed to have been

claimed which includes deduction under Section 35(2AB) (of Income Tax Act, 1961)

of the Act. It is also submitted that deduction under

Section 10B (of Income Tax Act, 1961) is arrived at after allowing the deduction

and undertaking is eligible for deduction under Section

35(2AB) and the same is being claimed and therefore,

once again assessee is not entitled to claim deduction

for 100% expenditure and all deductions are deemed to

have been claimed in view of Section 10A(6) (of Income Tax Act, 1961).

It is also urged that profits of a unit have to be

computed on stand alone basis without reference to

other eligible or non-eligible units or undertaking of the

assessee. In this connection, our attention has been

invited to paragraph 16 of the decision of the Supreme

Court in YOKOGAWA INDIA LTD., supra.

6. We have considered the submissions made on

both sides and have perused the record. Before

proceeding further, it is apposite to take note of the

relevant extract of Section 10B (of Income Tax Act, 1961) and Section 35(2AB) (of Income Tax Act, 1961) of

the Act, which reads as under:

"10B. Special provisions in respect of

newly established hundred per cent export-

oriented undertakings

(1) Subject to the provisions of this

section, a deduction of such profits and gains

as are derived by a hundred per cent export-

oriented undertaking from the export of

articles or things or computer software for a

period of ten consecutive assessment years

beginning with the assessment year relevant

to the previous year in which the

undertaking begins to manufacture or

produce articles or things or computer

software, as the case may be, shall be

allowed from the total income of the

assessee.

35(2AB)(1) Where a company engaged

in the business of bio-technology or in any

business of manufacture or production of

any article or thing, not being an article or

thing specified in the list of the Eleventh

Schedule incurs any expenditure on scientific

research (not being expenditure in the

nature of cost of any land or building) on in-

house research and development facility as

approved by the prescribed authority, then,

there shall be allowed a deduction of a sum

equal to one and one-half times of the

expenditure so incurred.

(2) No deduction shall be allowed in

respect of the expenditure mentioned in

clause (1) under any other provision of this

Act.

7. A Division Bench of this Court in CIT Vs.

YOKOGAWA LTD., supra held that Section 10B (of Income Tax Act, 1961) of the

Act is in the nature of an exemption provision. It is

pertinent to mention here that the Tribunal by placing

reliance on decision of this Court in YOKOGAWA INDIA

LTD., supra, held that Section 10B (of Income Tax Act, 1961) is in the

nature of the exemption provision and therefore, the

Assessing Officer was right in reducing the profits of the

units eligible for deduction under Section 10B (of Income Tax Act, 1961) to the

extent of additional 50% deduction available under

Section 35(2AB) (of Income Tax Act, 1961). However, it is pertinent to

mention here that subsequently the decision of this

Court in YOKOGAWA INDIA LTD., supra insofar as it

pertains to nature of provision of Section 10B (of Income Tax Act, 1961)

is concerned, was reversed by the Supreme Court in CIT

VS. YOKOGAWA, supra and it was held that Section

10B of the Act is in the nature of deduction provision. It

is also pertinent to mention here that Section 10B (of Income Tax Act, 1961) is a

provision which deals with deduction of income whereas

Section 35(2AB) (of Income Tax Act, 1961) deals with deduction on expenditure.

8. It is also relevant here to mention that the

restriction contained in sub-Section (6) of Section 10B (of Income Tax Act, 1961) of

the Act operate only upto 1st day of April 2001.

Therefore, the restrictions contained in sub-Section (6)

of Section 10B (of Income Tax Act, 1961) have no application to the

obtaining factual matrix of the case as the Assessment

Year is subsequent to 1st April 2001. It is also

noteworthy that the bar contained in Section 35(2AB)(2) (of Income Tax Act, 1961)

does not apply to the fact situation of the case as the

same provides that no deduction shall be allowed in

respect of expenditure mentioned in clause(1) under any

provisions of the Act. As stated supra, the deduction

under Section 10B (of Income Tax Act, 1961) is on the income and not

on the expenditure. The Supreme Court in 'CIT VS.

WALFORT SHARE AND STOCK BROKERS (P). LTD',

(2010) 326 ITR 1 has held that mandate of Section

14A is clear and the same is aimed to curb the practice

to claim deduction of expenses incurred in relation to

exempt income against taxable income and at the same

time, avail of the tax incentive by way of exemption of

exempt income without making apportionment of

expenses incurred in relation to exempt income. In the

instant case, no exempt income has accrued to the

assessee, therefore, the provisions of Section 14A (of Income Tax Act, 1961) of the

Act are not attracted.

In view of preceding analysis, the substantial

question of law framed in this appeal are answered in

favour of the assessee and against the revenue. In the

result, the impugned order dated 30.04.2014 passed by

the tribunal insofar as it pertains to the finding that the

assessee is not entitled to claim deduction under Section

35(2AB) of the Act to the extent expenses eligible for

deduction under the said provision in relation to units

entitled to deduction under Section 10B (of Income Tax Act, 1961) is

hereby quashed. In the result, the appeal is disposed of.

Sd/-

JUDGE

Sd/-

JUDGE