Loading judgment…
Facts
The assessee, engaged in automobile manufacturing and services, claimed a deduction under Section 10AA for its SEZ unit. The CPC and AO made adjustments, including a disallowance of Rs. 1,15,98,511/- from the Section 10AA deduction, arguing that notional finance costs (as per Ind-AS 16) added back by the assessee for computing eligible profits were not to be considered for 10AA purposes. Additionally, there was a double disallowance of Rs. 10,03,384/- initially adjusted by the CPC under Section 143(1) for payments on which TDS was not deducted, which the assessee had already voluntarily disallowed.
Held
The tribunal found that the Rs. 10,03,384/- was a double disallowance as the assessee had already accounted for it in its return, and thus directed its deletion. Regarding the Section 10AA deduction, the tribunal held that merely because a different accounting treatment (Ind-AS 16) was given in the books, it could not deprive the assessee of its statutory claim. It directed the AO to allow the full deduction of Rs. 8,54,21,181/- under Section 10AA by deleting the restricted amount of Rs. 1,15,98,511/-.
Key Issues
Whether there was a double disallowance of Rs. 10,03,384/- and if the deduction under Section 10AA could be restricted for notional expenses added back due to Ind-AS 16 compliance.
Sections Cited
253, 250, 143(1), 36(1)(va), 37, 10AA, 143(3), 144B, 40(a)(ia), Chapter VI-A
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
Before: SHRI MANISH BORAD & SHRI VINAY BHAMORE
ORDER
PER VINAY BHAMORE, JM:
This appeal filed by the assessee is directed against the order dated 26.06.2024 passed by Ld. CIT(A)/NFAC for the assessment year 2020-21.
The appellant has raised the following grounds of appeal :- “Based on the facts and circumstances of the case, the Appellant respectfully craves leave to prefer an appeal under Section 253 of the Income-tax Act, 1961 (hereinafter referred to as the Act'), against the order dated
26. June 2024 issued by the National Faceless Appeal Centre ('NFAC') (hereinafter referred to as 'Ld. NFAC'), under Section 250 of the Act on the grounds as set out herein:
1. 1. General ground 1.1 On the facts and circumstances of the case and in law, the National Faceless Assessment Centre ('Ld. AO') has erred in determining the total assessed income of INR 239,658,331 as against the returned income of INR 223,762,260 and also raising the consequential tax demand of INR 4,465,790.
2. Addition made, of INR 4,297,560 which has resulted in the same amount being disallowed twice. 2.1 On the facts and circumstances of the case and in law, the Ld. AO has erred in upholding the addition made in intimation order under section 143(1) of the Act amounting to INR 4,297,560 on account of disallowance under section 36(1)(va) and section 37 of the Act (i.e. disallowed twice) even though the Appellant had already considered the same as disallowance in its return of income.
3. Restriction of deduction under section 10AA of the Act to INR 73,822,670. 3.1 On the facts and circumstances of the case and in law, the Hon'ble NFAC has erred in not granting the deduction under section 10AA of the Act amounting INR 11,598,511. 3.2 On the facts and circumstances of the case and in law, the Hon'ble NFAC has erred in accepting the fact that disallowance under section 37 of the Act amounting INR 11,598,511 is relating to the business activity and hence, the same should be factored while computing profits and gains of business, for deriving 'total income' eligible for deduction under section 10AA of the Act. 3.3 On the facts and circumstances of the case and in law, the learned AO/NFAC has erred in not appreciating that the interest amount of INR 11,598,511 is notional in nature and on account of adjustments in consequence to IND AS provisions and therefore are excluded for the purpose of computing taxable income. The Appellant craves leave to add to, or alter, by deletion, substitution, modification or otherwise, the above grounds of appeal, at any time before or at, the time of hearing of the appeal.”
3. Facts of the case, in brief, are that the assessee is a Private Limited Company engaged in the Manufacture in Automobile, automobile parts and other related services. During the year under consideration, the assessee had set up a SEZ unit in Thoraipakkam, Chennai. The assessee had duly obtained the Letter of Approval on April 5, 2019 under which the assessee is authorized to render IT/ITES services. The assessee had filed its return of income for the year under consideration on 22 January 2021 declaring total income of Rs.22,37,62,260/- and claimed refund of Rs.2,60,420/- after payment of income tax of Rs.6,51,59,576/-. During the year under consideration, the Assessee had claimed a deduction under section 10AA of the IT Act amounting to Rs.8,54,21,181/- being 100% of the profits and gains derived from export by the SEZ unit based on the certificate from an accountant in Form 56F. The return processed by the Centralized Processing Centre, Bengaluru under section 143(1) of the Act and certain adjustment totalling to Rs.42,97,560/- was made. Accordingly, income of the assessee was assessed at Rs.22,80,59,820/-. The return was picked up for scrutiny assessment and pursuant to completion of assessment, an order under section 143(3) r.w.s. 144B was passed by the AO on 26 September 2022. In the assessment order, the AO assessed the total income of the assessee at Rs.23,96,58,331/- and raised a tax demand of Rs.44,65,790/- on the assessee after disallowance of claim under section 10AA of the Act to the extent of Rs.1,15,98,511/-. During the year under consideration, the assessee had computed the income to be assessed under the head profits and gains from business or profession of the year under consideration by disallowing the finance cost reflected in profit & loss account which includes the amounts as hereunder :- Particulars DTA Unit (INR) SEZ unit (INR) Total (INR) Interest on lease liability 29,00,521 1,05,89,090 1,34,89,611 Interest on advance 32,96,544 10,09,421 43,05,965 given to expats Total 61,97,065 1,15,98,511 1,77,95,576 4. The above disallowances are reflected in line-item no.23 in Schedule BP under the heading "Any other item or items of addition under section 28 to 440A" in the return filed for the year under consideration. Both of above expenses are on account of adjustments in consequence of compliance with Indian Accounting Standards [IND AS) provisions and are notional in nature. Since the said expenses are notional in nature, the same has been excluded for the purpose of computation of taxable income under the IT Act.
Accordingly, the assessee had computed the amount of deduction to be claimed u/s 10AA of the Act by disallowing/adding back the respective expenses to the extent pertaining to the SEZ unit to compute profits and gains derived from export business as such notional interest is emerging from the business activities of the SEZ unit and is incidental to such operations. However, the Assessing Officer had proceeded to disallow the claim of deduction under section 10AA of the Act only on the ground that the same is not covered by the CBDT's Circular No.37/2016 dated 2 November 2016.
After considering the reply of the assessee, Ld. CIT(A)/NFAC dismissed the appeal and confirmed the order passed by the Assessing Officer. It is this order against which the assessee is in appeal before this Tribunal.
Ld. AR submitted before us that the order passed by Ld. CIT(A)/NFAC is unjustified. Ld. AR submitted before us that the assessee in accordance with the Ind-AS 16 had added back notional expenses in the computation of income and claimed deduction u/s 10AA of Rs.8,54,21,181/-. Ld. AR further submitted that the Assessing Officer erred in restricting the addition u/s 10AA to Rs.7,38,22,670/- thereby reducing the deduction by Rs.1,15,98,511/-. Ld. AR further placed reliance on the judgment passed in the case of Taparia Tools Pvt. Ltd. and accordingly requested before the Bench to allow the full deduction claimed u/s 10AA of Rs.8,54,21,181/-. It was also submitted by him that there is no dispute regarding profit of Rs.8,54,21181/- of SEZ unit.
Ld. DR appearing from the side of the Revenue relied on the orders passed by the subordinate authorities and further submitted that Circular No.37/2016 relied on by the assessee is not applicable in the instant case since the circular talks about the deduction under Chapter VI-A whereas in the instant case Chapter VI-A deduction are not under dispute but the dispute is regarding deduction u/s 10AA of the IT Act. Accordingly, Ld. AR requested before the Bench to confirm the orders passed by the subordinate authorities.
We have heard Ld. Counsels from both the sides and perused the material available on record including the paper-book furnished by the assessee.
Ground no.1 is general in nature.
In Ground no.2, the assessee has challenged the action of the Assessing Officer wherein he accepted the addition made in intimation u/s 143(1) of the IT Act of Rs.42,97,560/-. However, at the time of hearing Ld. Counsel of the assessee submitted before us that out of above addition an amount of Rs.32,94,172/- pertains to disallowance with regard to delayed PF payment and assessee is not pressing this ground to the extent of Rs.32,94,172/-. Remaining amount of Rs.10,03,384/- pertains to disallowance as per section 40(a)(ia) of the IT Act. It was further submitted that the above amount of Rs.10,03,384/- was voluntarily disallowed in the return of income since it relates to payments on which TDS was not deducted. It was further submitted that the adjustment of Rs.10,03,384/- by CPC amounts to double deduction since it was already disallowed by the assessee itself. It was therefore contended that the Assessing Officer committed error in not accepting the contention of the assessee that by accepting the income determined by the CPC u/s 143(1) of the IT Act would amount to double addition and Ld. CIT(A) also erred in not considering this fact and confirmed the addition which amounts to double addition of Rs.10,03,384/-. In this regard, Ld. Counsel of the assessee draw our attention to page 104 of paper-book wherein copy of income tax return is attached and assessee has himself disallowed an amount of Rs.10,03,384/-. We find force find in the arguments of Ld. Counsel of the assessee and accordingly direct the AO to delete the addition of Rs.10,03,384/-. Accordingly, ground no.2 raised by the assessee to the extent of Rs.10,03,384/- is allowed.
In ground no.3, the assessee has challenged the action of the Assessing Officer in restricting the deduction u/s 10AA to Rs.7,38,22,670/- instead of Rs.8,54,21,181/- as claimed by the assessee. In this regard, we find that the sole grievance of the assessee is regarding restricting the deduction u/s 10AA to Rs.7,38,22,670/- thereby reducing the deduction by Rs.1,15,98,511/-. We find that the assessee has setup a SEZ unit in Thoraipakkam, Chennai and accordingly claimed deduction u/s 10AA of Rs.8,54,21,181/- which is 100% profit of SEZ unit. We further find that the assessee had debited some notional expenses of Rs.1,15,98,511/- and these notional expenses were added back in the computation of income and thereafter the deduction u/s 10AA of Rs. 8,54,21,181/- was claimed. The Assessing Officer was of the view that these notional expenses are not to be added back to the income of the assessee for the purposes of calculating the deduction u/s 10AA of the IT Act. Accordingly, the Assessing Officer reduced the deduction claimed u/s 10AA to Rs.7,38,22,670/-, thereby the deduction u/s 10AA was reduced to the extent of Rs.1,15,98,511/-. Ld. CIT(A)/NFAC also confirmed the said disallowance made by the Assessing Officer. In this regard, it was contended by the assessee before us that the books of accounts are required to be maintained by the assessee according to the Ind-AS 16 and accordingly, the above notional expenses were debited and subsequently added back to the income of SEZ unit and thereafter the deduction u/s 10AA was claimed. It was also the contention of the assessee that if the books of accounts were not prepared as per Ind-AS 16 and they were prepared on the basis of Indian Generally Accepted Accounting Principles (IGAPP) such notional expenses were not required to be debited in the profit and loss account and in such kind of situation the 100% deduction of Rs.8,54,21,181/- would be available to the assessee. It was also the contention of Ld. Counsel of the assessee that there is no dispute regarding profit of Rs.8,54,21,181/- of SEZ unit. In support of its contention, Ld. Counsel of the assessee relied on the judgement passed by the Hon’ble Supreme Court in the case of Taparia Tools Ltd. vs. JCIT (2015) 55 taxmann.com 361 (SC) wherein it has been held that