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Discovery of `innovation'
June, 09th 2007

In tax cases `innovation' is rarely mentioned. However, innovative strategies of taxpayers, if forbidden by law, have penal consequences upon detection or discovery. Words and expressions in the statute book have great significance and they prompt the practitioners to experiment in innovative tax-planning strategies; at times such experiments could be effective or useful.

Innovative interpretation

In a recent case innovative arguments were made for deduction under Section 10A without any reduction towards losses from other business activity of the taxpayer. In Assistant CIT vs Yokogawa India Ltd (13 SOT 470), the assessee had one profit-making unit eligible for exemption under Section 10A and incurred losses in two other units.

The assessee did not adjust the losses against income from the unit covered by Section 10A and in the process had those losses carried forward for future years. The assessing officer (AO) set off the losses from another division against income from the unit which is eligible for benefits under Section 10A and, accordingly, reduced the load of loss to be carried forward to future years.

The argument of the assessee was that Section 10A contained in Chapter III of the I-T Act is meant for dealing with `incomes which do not form part of total income' of the taxpayer. Hence, the income from a unit located in an FTZ or SEZ would not be included in computing the total income of the taxpayer.

The tribunal held that Section 10A is not part of Section 29 and that the latter provides for computing the income from business or profession by applying Sections 30 to 43 D of the Act. The argument of the taxpayer's counsel, being innovative in interpreting Section 10A vis--vis Section 29, helped the assessee in getting a favourable decision.


In CIT vs R.P.G. Telecoms Ltd (160 Taxman 365) the assessee claimed deduction under Section 80-I in respect of its income from tele-cables without adjusting loss from lease business. The AO adjusted the loss against income from business and only on the net income the deduction under Section 80-I was allowed. Surprisingly, the impact of Section 80-AB was not considered by the appellate commissioner and by the tribunal.

Incomes under various heads after set-off of losses would form part of the gross total income of the taxpayer. Section 80 AB restricts that deduction under chapter VI-A to the extent of income which is included in the gross total income.

When the matter reached the High Court it was held that the impact of Section 80 AB was not referred to the tribunal, both by the taxpayer and the Department. The court expressed its displeasure in the matter and advised the Department to take necessary care and caution in this respect. This apparent omission was discovered only in the third appellate forum the High Court.

In General Glass Co (P) Ltd vs Dy. CIT (14 SOT 32), the meaning of `deemed transfer' for computing capital gains was highlighted by making reference to Section 53 A of the Transfer of Property Act. In this case, the vendor and vendee entered into an agreement but later the vendee refused to perform his part of the obligations under the contract.

The tribunal held that when the vendee had not adhered to terms of the contract he cannot seek redress under Section 53 A of the Transfer of Property Act and, consequently, the vendor cannot be taxed on `deemed transfer' basis.

V. K. Subramani
(The author is an Erode-based chartered accountant.)

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