Calcutta High Court Upholds Constitutional Validity Of Explanation to Section 10AA(1) Inserted By Finance Act 2017

The Calcutta High Court has upheld the constitutional validity of the explanation to Section 10AA(1) of the Income Tax Act inserted by the Finance Act 2017.

The bench of Justice Md. Nizamuddin has observed that the principle of legitimate expectation is not applicable to the case of the petitioner, and the explanation after Subsection (1) of Section 10AA of the Income Tax Act, 1961, inserted by amendment with prospective effect from April 1, 2018, applicable in respect of the assessment year 2018–19 and subsequent years, is constitutional, a valid piece of legislation, not arbitrary, discriminatory, and not violative of Articles 14, 19, and 265 of the Constitution of India.

Section 10AA of the Income Tax Act states that 100% of export profit is eligible for the deduction for the first five years. 50% of export profit is eligible for the deduction for the next five years. An amount not exceeding 50% of export profit is eligible for the deduction for the next five years.

The petitioner, IFGL Exports Ltd., was incorporated on September 7, 2007, established its unit in May 2012 at Kandla Special Economic Zone, Gujarat, for the manufacture of specialized refractories, and commenced operations in May 2012. IFGL Exports allegedly became eligible for claiming exemption under Section 10AA of the Income Tax Act, 1961, from the Assessment Year 2013–14 onwards.

On April 1, 2018, an explanation was inserted after Section 10AA(1) of the Income Tax Act, 1961, by the Finance Act, 2017, with effect from the aforesaid date prospectively.

The petitioner challenged Explanation to Section 10AA (1) of the Income Tax Act, 1961, inserted by the Finance Act, 2017, inserted with prospective effect, as unconstitutional and allegedly violative of Articles 14, 19(1)(g), and 265 of the Constitution of India.

The petitioner contended that the Supreme Court of India in the case of CIT and Anr. vs. Yokogawa India Ltd. held that exemption under Section 10AA of the Income Tax Act, 1961, can be claimed from the total income of the unit or undertaking, immediately after the stage of determination of its profits and gains, without first doing inter-unit profit or loss adjustments and setting off of brought forward losses, and the exemption would be allowed while computing the gross total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of the total income under Chapter VI.

The petitioner urged that the explanation inserted in Section 10AA(1) of the Income Tax Act, 1961, allows the exemption under the section to be claimed from the total income computed in accordance with the provisions of the Income Tax Act, 1961, and such total income of the petitioner be computed before giving effect to the provisions of Section 10AA, i.e., after doing inter-unit profit and loss adjustments and thereafter setting off the brought-forward losses of the petitioner. According to the explanation, the decision of the Supreme Court of India in the case of Yokogawa stands nullified. Thus, from the Assessment Year 2018–19 onwards, by reason of the explanation, the petitioner company stands deprived of the exemption or entire exemption that was available to it under Section 10AA of the Income Tax Act, 1961, prior to the insertion of the explanation since it incurred losses from its ineligible unit and brought forward losses to be adjusted with the total income of the unit or undertaking before the exemption under Section 10AA of the Income Tax Act, 1961.

The department contended that legitimate expectations cannot hinder the power of a public authority in its policy-making role, which forms the basis of the law-making functions of the legislature. The legislature has to take into consideration diverse factors, concerns, and interests before making any policy decision or legislation. Sections 10A and 10AA are not in pari materia, and thus it cannot be said that the decision in Yokogawa was in any manner applicable to this instant case, and thus there was no need for the legislature to insert the aforesaid explanation to circumvent the decision in Yokogawa.

The court held that the plea of legitimate expectation is not valid against the amendment to Section 10AA(1), as Section 10AA was meant to incentivize new industries and not facilitate tax concessions for existing industries.

Counsel For Appellant: J.P. Khaitan

Counsel For Respondent: Vipul Kunalia

Case Title: IFGL Refractories Ltd. & Anr. Versus Union of India & Ors.

Case No.: WPO 544 of 2019

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