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Facts
The assessee filed its return of income which was processed u/s 143(1). Subsequently, the return was selected for scrutiny, and during the assessment u/s 143(3), the Assessing Officer made a disallowance of deduction u/s 10A. The CIT(A) deleted this disallowance, which led to the Revenue filing an appeal before the Tribunal.
Held
The Tribunal held that the CIT(A) was justified in deleting the disallowance of deduction u/s 10A, following established precedents and judicial pronouncements in the assessee's own case. For the issue of allocation of common expenses, the Tribunal directed the AO to reconsider the matter.
Key Issues
Whether the CIT(A) erred in deleting the disallowance of deduction u/s 10A by relying on previous precedents and whether the AO properly allocated common expenses.
Sections Cited
10A, 143(1), 143(3)
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Income Tax Appellate Tribunal, MUMBAI BENCH “E” MUMBAI
Before: SHRI OM PRAKASH KANT & SHRI ANIKESH BANERJEE
This appeal by the assessee is directed against order dated 07.01.2025 passed by the Ld. Commissioner of Income-tax (Appeals) – [in short ‘the Ld. CIT(A)’] for assessment year 2011-12, raising following grounds:
“(i) Whether on the facts and circumstance of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of the deduction under section 10A of the Income Tax Act amounting to Rs.9,68,89,011/, without appreciating the fact that an SLP on identical issue for the Assessment Year 2005-06, is pending adjudication before the Hon'ble Supreme Court?" (ii) "Whether on the facts and circumstance of the case and in law, the Ld. CIT(A) erred in ignoring the judicial hierarchy and failing to await the decision of the higher court on an identical issue, pending adjudication (SLP) for the Assessment Year 2005-06?" (iii) “Whether the Ld.CIT(A) erred in not appreciating on the facts and circumstances of the case, that the Assessing Officer has to adopt a turnover - based allocation method for the impugned common expenses based on a reasonable and rational approach in the absence of a valid basis of allocation by the assessee?" (iv) "Whether the Ld. CIT(A), in not examining the facts on record sufficiently to arrive at a proper, complete and satisfactory allocation method for the impugned common expenses has not failed to adequately and properly exercise the assessment authority conferred on him which is coterminous with that of the Assessing Officer?"”
Briefly stated facts of the case are that the assessee filed its return of income electronically 29.11.2011 declaring its total income at Rs. 84,75,02,437/-, which was processed u/s 143 ( 1) of the Income Tax Act,1961) (in short ‘the Act’). Thereafter, the return of income was selected for scrutiny assessment and statutory notices under the Act were issued and complied with. In the assessment completed u/s 143(3) of the Act on 19.05.2015, the Assessing Officer made disallowance u/s 10A of the Act amounting to Rs. 9,68,89,011/- and also made other additions .On further appeal, the Ld. CIT(A) deleted the disallowance for deduction u/s 10A of the Act following the decision of the Income-tax Appellate Tribunal ( in short the ‘Tribunal’) in the case of the assessee for A.Y. 2005-06. Further Ld. CIT(A) noted that in the A.Y. 2005-06 the Hon’ble Bombay High Court has also upheld the order of the Tribunal. The Ld. CIT(A) accordingly deleted the addition. Aggrieved the Revenue is in the appeal before us by way of raising grounds as reproduced as above.
Despite notifying none appeared on behalf of the assessee nor any adjournment application was filed and therefore the appeal was heard ex-parte qua the assessee, after hearing argument of the Ld. Departmental Representative (DR) and material available on record. Having heard the learned Departmental representative and upon perusal of the material available on record, we proceed to adjudicate the issues raised in the present appeal as under:
Insofar as ground Nos. (i) and (ii), pertaining to the 4. disallowance of deduction under Section 10A of the Income Tax Act, 1961, are concerned, we find that the learned CIT(A) has deleted the said disallowances by following the binding precedents of the Income Tax Appellate Tribunal (ITAT) as well as the judgment of the Hon’ble Bombay High Court rendered in the assessee’s own case for the Assessment Year (A.Y.) 2005-06. The ld CIT(A) has further noted that identical issues have been decided in favour of the assessee by the Tribunal in its orders for A.Ys. 2008-09, 2009-10, and 2010-11. The findings recorded by the learned CIT(A), which comprehensively refer to the factual matrix as well as the judicial pronouncements applicable to the issue, are extracted below for ready reference:
5.3 I have carefully gone through the relevant and material facts on record as brought out in the assessment order and submission made during the appellate proceedings. It is found that in A.Y. 2005-06, the AO disallowed the deduction claimed u/s. 10A by M/s. Hinduja Ventures Limited (HVL) a demerged company of the appellant which transferred IT/ITES division to the appellant company and CIT(A) upheld the action of AO by sustaining the said disallowance. However, the Hon'ble ITAT, 'K' Bench, Mumbai vide order dated 21.01.2015 directed the AO to allow the appellant's claim of deduction u/s. 10A of the Act in respect of Unit II & III. 5.4 Further, for A.Y. 2011-12, the AO in the assessment order dated 19.03.2015, taking the con…… view and considering the findings of Ld.AO in the appellant’s case for A.Y. 2005-06, denied the deduction u/s. 10A citing that the said order of Hon'ble ITAT dated 21.01.2015 for A.Y. 2005-06 had been received recently and the time to file appeal with Hon'ble Bombay High Court had not expired. However, the Hon'ble Bombay High Court, vide appeal no. 63 of 2016 and order dated 26.07.2017 for A.Y. 2005- 06, held that the Tribunal had not committed any error while passing the order and dismissed the appeal filed by the revenue. Relevant portion of the said order is reproduced hereunder: "10 The Assessing Officer in his remand report has held that both Unit II and Unit III duly fulfill all the conditions laid down in Section 10A(2) of the Act. The remand report of the out following facts: Both units were set up with fresh investments, the assessee purchased new plant and machinery for these units and it was not the case that these units were formed by splitting or reconstructing existing business. As such this condition is fully satisfied. Separate books of accounts have been maintained by each units. The employees employed in each of the units were fresh set of employees and were not transferred from existing business. The nature of activity of both the units is totally different not only vis-a-vis each other but also vis-a-vis the activity carried on by the first unit.
The customers of each unit are completely different unrelated and both units have new and independent sources of income. While Unit-1 is engaged in the business of software development, Unit-2 is engaged in non- TURT voice BPO business (Insurance claim processing) and Unit 3 engaged in voice BPO (Call Center). While Unit-1 earns revenue predominantly from within India, Units 2 and 3 earn revenues wholly from exports outside India. 11 The Assessing Officer in his remand report has specifically observed that both units were set up with fresh investments. The assessee purchased plant and machinery for these units and it was not the case that these units were formed by splitting or reconstructing existing business. It was also contended that separate books of accounts were maintained. The employees of each of the units were fresh set of employees and were not transferred from existing business. The nature of activity of both units is totally different, not only vis-a-vis each other, but also vis- a-vis the activity carried on by the first unit. It was also observed by the Assessing Officer in its remand report that customers of each unit are completely different and unrelated and both the units have new and independent sources of income. OF JUS While Unit I is engaged in the business of software development, Unit II is engaged in non-voice BPO business (Insurance claim processing) and Unit III is engaged in voice BPO (Call center). While Unit I earns revenue predominantly from within India, Unit II and Unit III earn revenue wholly from exports outside India. 12 In light of aforesaid facts, it would be clear that the Unit II and Unit III cannot be said to be formed by reconstruction nor can be said to be an expansion of earlier same business. Though the permission was sought by way of an expansion, the facts on record categorically and succinctly establish that the business of Unit II and Unit III were independent, distinct and separate and are not related with each other or even with Unit I. 13 The Tribunal also considered the letter from Director, STPI, issued to the Assessing Officer dated 10th December 2008, the letter of the Director, STPI, intimating formation of Unit II so also another letter to Director, STPI, seeking permission for bonding facility for Unit II and approval from Director, STPI for R Unit II, the letter to the Director, STPI, intimating formation of Unit III, letter to Director, STPI, seeking permission for bonding facility for Unit III and approval from Director, STPI for Unit III. After considering all the documentary evidence and the remand report of the Assessing Officer, the Tribunal agreed with the remand report of the Assessing Officer and held that the assessee would be entitled for benefit of Section 10A of the Act. 14 The assessee has relied on the judgment of Patni Computer Systems Ltd. referred to supra which has been upheld by this court. In the said judgment also, the Tribunal had held that permission was sought by Patni Computers Systems Ltd. for expansion and benefit under Section 10A was accorded. The said order is upheld by this court in appeal 15 In case of Textile Machinery Corporation Ltd. referred to supra, the Apex Court was considering the provisions of Section 15(C) of the Act as it stood then, dealing with similar provisions. The Apex Court in the said case observed that the true test is not R whether the new industrial undertaking connotes expansion of the existing business of the assessee but whether it is Call the same a new and identifiable undertaking, separate and distinct from the existing business. No particular decision in one case can lay down an inexorable test to determine whether a given case comes under Section 15C or not. 16 Considering the aforesaid conspectus, the Tribunal has not committed any error while passing the impugned order. 17 The plausible finding of fact has been arrived at after appreciating the documents on record and remand report of the Assessing Officer. 18 In light of above, no substantial question of law arise. The appeal is dismissed. No costs." 5.5 In addition to the above, identical issue has also been decided in favour of the appellant own's case by Hon'ble ITAT for A.Y.s 2008-09, 2009-10 and 2010-11. In view of the facts and circumstances of the case, as discussed in the preceding paragraphs and relying on the aforesaid judicial pronouncements in the appellant's own case for various A.Y.s on the identical issue, the AO is directed to allow the claim of deduction made by the appellant u/s. 10A. Accordingly, ground no.1 raised by the appellant is allowed.”
4.1 From the above, it is evident that the findings of fact, including the Assessing Officer’s own remand report, clearly establish that Unit II and Unit III were independent undertakings, set up with fresh capital investment, distinct manpower, and separate books of accounts, and were engaged in export-oriented activities distinct from Unit I. These facts were duly accepted by the ITAT and later affirmed by the Hon’ble High Court. The Tribunal’s conclusions, are based on detailed documentary evidence and in consonance with the binding judgment of the Hon’ble Supreme Court in Textile Machinery Corporation Ltd.(supra) and the High Court’s decision in Patni Computer Systems Ltd.(supra). Accordingly, following the above binding judicial precedents in the assessee’s own case, the CIT(A) was justified in directing the Assessing Officer to allow the assessee’s claim for deduction under Section 10A. We see no infirmity in the said finding, and therefore, the disallowance has rightly been deleted.
With respect to ground Nos. (iii) and (iv), relating to the allocation of common expenses, it is observed that the learned CIT(A) has followed the decision of the Tribunal in the assessee’s own case for A.Ys. 2008-09 and 2010-11. The CIT(A) has noted that the basis of allocation adopted by the Assessing Officer was neither substantiated with cogent reasoning nor supported by any material record, and that the allocation methodology of the assessee was rejected summarily. The relevant findings of the CIT(A), reproduced hereinbelow, reflect a reasoned approach: “6.2 I have considered the relevant and material facts on record as brought out in the assessment order and submission made during the appellate proceedings. It is found from the assessment order that AO has not provided any convincing reason for not accepting the basis of allocation of common expenses adopted by the appellant and rejected the same by merely stating that the appellant had not properly allocated administrative and other overhead expenses and re-allocated the expenses on the basis of percentage of turnover of unit III. 6.3 Further, it is noticed that there are judgements of ITAT, 'K', Bench, Mumbai on the identical issue in the appellant's own case for A.Y. 2008-09 having appeal no. dated 05.06.2013 and for A.Y. 2010-11 having appeal no. dated 13.04.2016 wherein the AO has been directed to reconsider the matter and the appellant shall be given an opportunity of being heard and if the appellant has already allocated the expenditure the same has to be added back to the profits of the units and then only the reallocation process should begin. 6.4 In view of the facts and circumstances of the case and relying on the aforesaid judgement of ITAT in the appellant's own case for A.Y. 2008-09 & 2010-11, the AO is directed to follow the directions as given by the Tribunal on the said issue for A.Y. 2008-09 & 2010-11. Accordingly, the ground of appeal no 2 raised by the appellant is partly allowed.”
5.1 We find that the CIT(A) has correctly applied the binding directions issued by the Tribunal in earlier years, whereby the Assessing Officer was directed to re-examine the matter after affording an opportunity of hearing to the assessee and ensuring that any expenditure already allocated is appropriately adjusted.
This approach ensures consistency, fairness, and adherence to the principles of natural justice.
5.2 In view of the above findings and in the absence of any distinguishing facts or contrary legal position brought to our notice, we are unable to find any error or legal infirmity in the impugned order passed by the learned CIT(A). The order is in conformity with binding precedents and settled principles of law. Accordingly, the grounds raised by the Revenue are devoid of merit and are hereby dismissed.
In the result, the appeal of the Revenue is dismissed Order pronounced in the open Court on 30/06/2025.