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Income Tax Appellate Tribunal, BANGALORE BENCHES : “C”, BANGALORE
Before: SHRI N.V.VASUDEVAN & SHRI B.R.BASKARAN
PER SHRI N.V.VASUDEVAN, VICE PRESIDENT :
ITA No.2249(B)/2019 is an appeal by the assessee and ITA No.2361(B)/2019 is an appeal by the revenue. Both these appeals are directed against the order dated 09-08-2019 of the CIT(A), Bengaluru relating to assessment years 2007-08. 2. The facts and circumstance under which the present appeals arise for consideration are that the assessee is a company engaged in rendering
ITA Nos.2249 & 2361(Bang/2019 2 software development services. An order of assessment u/s 143(3) of the Income Tax Act, 1961 (Act) was passed by the AO on 30-12-2010. The AO initiated proceedings u/s 154 of the IT Act by a notice dated 29-12-2014 proposing to amend the order of assessment dated 30-12-2010. One of the amendments proposed in the aforesaid notice u/s 154 of the Act was reduction of claim of deduction u/s 35D of the Act which was allowed by the AO in an order dated 27-01-2015. The AO reduced the claim of deduction u/s 35D of the Act by observing as follows; “ Wrong claim of deduction u/s 35D On verification of the assessment records, it is revealed that assessee has, claimed a sum of Rs.12,38,00,555/- u/s 35D as deduction from business profit & the same was allowed in assessment order. As per the provision of the IT Act, 1961, the assessee has option to calculate the maximum expenses as a percentage of either cost of the project or capital employed in the business of the company. Since the assessee company has shown the cost of acquisition under the investment schedule & not as fixed assets the definition cot of project is not applicable. The maximum expenditure available for deduction u/s 35D work out to Rs.58,64,364/-being 5% of the capital employed (share value of GDRs of Rs.11,72,87,280/-) Out of this eligible deduction for the said assessment year is spread over a period of 5 years mounts to Rs.11,72,873/- assessee can claim only 5% of investments in GDRs @ face value without including share premium. Therefore, as against assessee’s claim of Rs.12,32,53,034/- allowed in assessment Rs.11,72,873/- has to be allowed. The excess deduction allowed u/s 35D is Rs.12,20,80,161/- (Rs.12,32,53,034/- Rs.11,72,873 = Rs.12,20,80,161) The excess claimed & allowed is hereby withdrawn”. 4. Aggrieved by the action of the AO in reducing the claim of deduction u/s 35D of the Act, the assessee preferred an appeal before the CIT(A) wherein assessee contended that the issue that was sought to be agitated by the AO in the proceedings u/s 154 of the Act was debatable and therefore, the AO ought not to have exercised his powers u/s 154 of the Act. Without prejudice to the aforesaid submissions, the assessee submitted that while allowing deduction at the rate of 5% on capital employed, the AO omitted to consider foreign currency convertible bonds (FCCBs) as also forming part of capital employed and he only took share value of GDRs of Rs.11,72,87,280/-
ITA Nos.2249 & 2361(Bang/2019 3 ignoring the FCCB of the value of Rs.78,07,500,000/-. The assessee submitted, if the FCCB is also considered as part of capital employed then deduction the assessee would get is Rs.39,62,39,365/- as against deduction allowed by the AO at Rs.58,64,364/- u/s 35D of the Act. The assessee pointed out that the Tribunal in assessee’s own case in ITA No.689(B)/2014 for assessment year 2008-09 has taken a view that FCCBs are in the nature of debentures and hence are eligible to be included a part of capital employed in the business of the Assessee for allowing deduction u/s 35D of the Act. The assessee also contended that if the deduction u/s 35D of the Act is reduced then it will result in profit of the assessee being assessed at a higher sum then what was declared by the assessee in the return of income on which the Assessee was entitled to deduction u/s 10A of the Act. In other words, it was submitted that any disallowance u/s 35D of the Act would go to increase the profit of the business of the assessee and deduction u/s.10A of the Act had to be allowed on such enhanced profits. This grievance was projected as ground no.6 by the assessee before the CIT(A).
The CIT(A) in the impugned order while upholding the action of the AO in invoking jurisdiction u/s 154 of the Act directed the AO to compute deduction u/s 35D of the Act by treating the FCCB as forming part of the capital employed in the business for allowing the deduction u/s 35D of the Act. The claim of the assessee was partly accepted by the CIT(A). The CIT(A) did not render any specific adjudication on Gr.No.6 raised by the Assessee before him viz., any disallowance u/s 35D of the Act would go to increase the profit of the business of the assessee and deduction u/s.10A of the Act had to be allowed on such enhanced profits.
Aggrieved by the order of the CIT(A) in directing the AO to compute the capital employed by treating the FCCB also as part of the capital employed. The revenue has filed appeal before the Tribunal.
ITA Nos.2249 & 2361(Bang/2019 4 7. Aggrieved by the order of CIT(A) in not adjudicating ground no.6 raised before the CIT(A) by the assessee and not given the relief thereon, the assessee is in appeal before the Tribunal. Though, in the assessee’s appeal there were several grounds, but at the time of hearing the ld.counsel for the assessee prayed for adjudicating only one issue i.e..non-granting of relief on ground no.6 raised before the CIT(A) by the assessee.
We have heard the rival submissions. As far as the appeal of the revenue is concerned, we are of the view that there is no merit in the aforesaid appeal, because the Tribunal in assessee’s own case for assessment year 2008-09, 2009-10 and 2010-11 has taken a view that for the purpose of computing the capital employed for allowing deduction u/s 35D of the Act, the FCCBs should also be taken into consideration. For the sake of ready reference, we give below the order of Co-ordinate Bench in IT(TP)A No.223(B)/2014 for assessment year 2009-10, wherein it was held as under;
"15. As far as claim u/s. 35D is concerned, this issue was raised by the assessee in ground No.10. This is not the first year of claim and original claim was made during AY 2007-08, in which assessee acquired two companies and .has raised capital to through GDR and FCCBs. Assessee has incurred expenditure of Rs.61, as deduction u/s. 35D. Subsequently, assessee received a refund of Rs.3,83,74,819 with respect to the aforesaid expenses and accordingly assessee reduced the claim u/s. 35D from AY 2008-09 onwards. As in earlier years, the AO restricted the claim to an amount of Rs.11,72,873 and disallowed the balance claim of Rs.11,24,86,458 mainly on interpreting the term 'capital employed in the business of the company'. 15.1. It was submitted that this issue had been examined in assessee's own case in ITA No.689/Bang/2014 for AY 2008-09 and the Tribunal directed that FCCBs are in the nature of debentures and hence are eligible to be calculated as part of 'capital employed in the business of the company' for allowing deduction 35D of the Act. Even though ITAT did not agree on the other issue of excluding securities premium and assessee is in appeal before the Hon'ble Karnataka High Court, the assessee submitted that the eligible amount based on the ITAT order in this regard as under- Amount Particulars l (in 1NR) N 1. GDR Face Value (as already allowed by AO) 1117,287,280 o 2. FCCBs (As per Tribunal's order at para 35 and 36) 7,807,500,000 . 3. Capital Employed 7,924,787,280 . 4. 5% of capital employed 396,239,365
ITA Nos.2249 & 2361(Bang/2019 5 1 1/5Th of 5% of capital employed (claim allowable consequent 5. 79,247,872 to Tribunal's order) * As against the claim of lNR 1,172,873 computed by the Id. AO. We direct the AO to examine the above and allow relief as in earlier years, since claim is arising in earlier years. Thus this, this ground is considered as allowed”.
The grievance projected by the Revenue in its appeal is that the decision of the Tribunal has not been accepted by the Revenue and a further appeal to the Hon’ble High Court is being preferred. We are of the view that the fact that the revenue has preferred appeal against the order of Tribunal is ground no ground not to follow the decision in assessee’s own case, especially when the decision of the Tribunal has not been so far reversed by any higher forum. Accordingly, we find no merit in the appeal by the revenue and the same is dismissed.
As far as the appeal by the assessee is concerned the admitted position is that the disallowance of deduction u/s 35D of the Act would go to increase profit of the business on which deduction u/s 10A of the Act was to be allowed to the assessee. In such circumstances, we are of the view that the assessee’s claim for deduction to be allowed u/s 10A of the Act on such enhanced profits ought not have been accepted by the CIT(A) on identical facts, this Tribunal has in the case of M/s Eka Software Solutions Pvt.Ltd., Vs DCIT in ITA No.2114(B)/2019 vide order dated 17-01-2020 has taken the following view. Though, it was in the context of 40(a)(i) of the Act the same would be equally applicable to disallowance of deduction u/s 35D as well.
“6. We have heard the rival submissions. It is noticed from the order of CIT(Appeals) that in assessee's own case for AY 2010-11, the Tribunal has held that disallowance of business service-marketing charges will go to increase the profits of the business which is eligible for deduction u/s. 10AA of the Act and that deduction u/s. 10AA of the Act should be allowed on such enhanced profit consequent to disallowance u/s. 40(a)(i) of the Act. In this regard, we find that two High Courts viz., Hon'ble Bombay High Court in the case of CIT v. Gem Plus Jewellery India Ltd. (2010) 194 Taxman 192 (Born) and Hon'ble Gujarat High Court in the case of ITO vs.
ITA Nos.2249 & 2361(Bang/2019 6 Kewal Construction, 354 ITR 13 (Gui) have taken the view that when disallowance u/s. 40(a)(ia) of the Act goes to enhance the profits that are eligible for deduction under Chapter VIA of the Act, the deduction under Chapter VIA should be allowed on such increased profit. This position has also been now confirmed by the CBDT in its Circular No.37/2016 dated 02.11.2016 wherein the Board has observed as follows:- 3. In view of the above, the Board has accepted the settled position that the disallowances made under sections 32, 40(a)(ia), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business and that deduction under Chapter VI-A is admissible on the profits so enhanced by the disallowance”.
In view of the aforesaid decision of the Tribunal and the CBDT Circular No.37/2020, the grievance projected by the assessee in ground no.2.3 is accepted and the other grounds are dismissed as not pressed.
In the result, the appeal by the revenue is dismissed while the appeal of the assessee is partly allowed.
Order pronounced in the open court on 5th February, 2020.
Sd/- Sd/- (B.R.BASKARAN) (N.V.VASUDEVAN) ACCOUNTANT MEMBER VICE PRESIDENT Dated: 05-02-2020 *am
ITA Nos.2249 & 2361(Bang/2019 7
Copy of the Order forwarded to: 1.Appellant; 2.Respondent; 3.CIT; 4.CIT(A); 5. DR 6. ITO (TDS) 7.Guard File By Order Asst.Registrar