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Before: Shri Amit Shukla & Shri L.P. Sahu
ORDER Per L.P. Sahu, A.M.: This is an appeal filed by the Revenue against the order passed by the CIT(A)-IX, New Delhi dated 12.08.2014 on the following grounds :
2. The brief facts of the case are that the assessee filed a return of income on 29.09.2011. The assessee is engaged in the business of software development and export services. The case was selected for scrutiny and statutory notices were served upon the assessee. In the scrutiny proceedings, the Assessing Officer noted that the assessee is claiming deduction u/s. 10A of the Act amounting to Rs.6,35,35,675/-. The assessee had two units, viz., non- STPI and STPI. The assessee is declaring loss of Rs.3,56,99,918 from non-STPI unit and claiming profit of Rs.9,92,35,593/- from STPI unit. The Assessing Officer noted that while claiming deduction u/s. 10A, the assessee failed to take into consideration the brought forward losses/depreciation. From the perusal of tax audit report, the Assessing Officer noted that the assessee has business loss/depreciation of Rs.5,90,31,797/- and amount claimed by the assessee as business losses/depreciation is Rs.6,33,65,023/-. The deduction can be given only after getting the total income, i.e., after adjusting the losses available to the assessee. In this regard, the assessee furnished reply and relied on various decisions. After considering the detailed submissions of the assessee, the AO relied on the decision of Apex Court in the case of Himatsing ka Seide Ltd. vs. CIT (Civil appeal No. 1501 of 2008). Accordingly, before giving deduction u/s. 10A, the Assessing Officer adjusted the brought forward business losses and un-absorbed depreciation of Rs.5,90,31,797/-.
3. The Assessing Officer further noted that the assessee has earned dividend of Rs.4,59,656/-, which are not part of the total income of the assessee and the assessee did not disallow any expense in relation to exempt income while computing the total taxable income. The assessee has made fresh investment of Rs.5,54,57,280/- during the year under consideration. Therefore, the Assessing Officer observed that the assessee had put in some efforts on both the counts, financially as well as human resources in deciding about the investments and in buying the investments as well as for earning exempt income. Accordingly, the Assessing Officer disallowed Rs.4,51,433/- u/s. 14A read with Rule 8D. Under Rule 8D(2)(ii), he calculated Rs.3,12,793/- and Rule 8D(2)(iii) Rs.1,38,640/-.
4. Aggrieved by the order of the Assessing Officer, the assessee appealed before the CIT(A), who after considering the detailed submissions of the assessee, allowed the appeal of the assessee in respect of issue pertaining to adjustment of brought forward business losses and un-absorbed depreciation loss of Rs.5,90,31,797/-, gave a relief of Rs.3,12,793/- with respect to disallowance made u/r 8D(2)(ii) of the IT Rules. Aggrieved, the Revenue is in appeal before the ITAT.
The ld. DR relied on the order of the Assessing Officer and submitted that the ld.CIT(A) has wrongly interpreted the provisions of section 10A . The exemption u/s. 10A should be given after calculating total income of the assessee which has not been done. The case law relied by the Assessing Officer is squarely covered in favour of the Revenue. The intention of the legislature has not been correctly appreciated by the ld. CIT(A) for introduction of section 10A. He further submitted that Rule 8D cannot be read in isolation, but it is a mechanism for inclusion of disallowance u/s. 14A. If the assessee satisfied the conditions of Rule 8D, the Assessing Officer is bound to calculate according to the Rules. The ld. CIT(A) has given relief under rule 8D(2)(ii) where the assessee has incurred interest expenditure of Rs.15,41,040/- during the year. Therefore, the disallowance made by the Assessing Officer has to be restored.
On the other hand, the ld. AR relied on the order of the ld. CIT(A) and reiterated the submissions made before him. He stated that the ld. CIT(A) has rightly calculated the deduction u/s. 10A. He also relied on the decision of Hon’ble Supreme Court in the case of CIT v. Yokogawa India Ltd. (2017) 2SCC- 1 and the decision of Tribunal in for the assessment year 2005-06.
After hearing both the sides and perusing the entire materials available on record and the orders of the authorities below, we observe that the assessee has two units – one is STPI and other non-STPI unit. The ld. CIT(A) has rightly allowed the appeal of the assessee by holding that the brought forward business loss and unabsorbed depreciation of non-eligible business unit is not allowed to be adjusted while calculating the exemption u/s. 10A. The ld. AR has also placed reliance on the judgment of Delhi Tribunal in for the assessment year 2005-06 wherein similar issue has been decided in favour of the assessee after following the decision of Hon’ble Supreme Court in the case of CIT vs. Yogokawa India Ltd. (supra) and CIT v. JP Morgan Service India Pvt. Ltd. 393 ITR 24 (SC). The relevant findings of the Tribunal read as under :
AO while computing the deduction u/s 10A of the Act concluded that the same is required to be computed after setting off brought forward losses of Rs.34,99,523/- and unabsorbed depreciation of Rs.2,05,013/-. However, this controversy has already been set at rest by Hon’ble Supreme Court in case cited as CIT vs. Yogokawa India Ltd. – 391 ITR 274 (SC) and CIT vs. JP Morgan Services India Pvt. Ltd. – 393 ITR 24 (SC). Hon’ble Supreme Court in CIT vs. Yogokawa India Ltd. (supra) decided the issue in favour of the assessee by observing that in case of 100% export oriented undertaking, deduction is to be granted by computing gross total income of eligible
undertaking under Chapter IV and not at stage of computation of total income under Chapter VI of the Act. Operative part of the judgment in CIT vs. Yogokawa India Ltd. (supra) is as under :-
“ Section 10A of the Income-tax Act, 1961as originally introduced, provided that any profits and gains derived by an assessee from an industrial undertaking to which the section applied shall not be included in the total income of the assessee. The amendment of the section by the Finance Act, 2000 with effect from April 1, 2001, specifically uses the words "deduction of profits and gains derived by an eligible unit ... from the total income of the assessee". The retention of section 10A in Chapter III of the Act after the amendment made by the Finance Act, 2000 would be merely suggestive and not determination of what is provided by the section as amended, in contrast to what was provided by the unamended section. The true and correct purport and effect of the amended section will have to be construed from the language used and not merely from the fact that it has been retained in Chapter III. The introduction of the word "deduction" in section 10A by the amendment, in the absence of any contrary material, and in view of the scope of the deductions contemplated by section 10A has to be understood as embodying a clear enunciation of the legislative decision to alter the nature of the section from one providing for exemption to one providing for deductions.
Though the difference between the two expressions "exemption" and "deduction", broadly may appear to be the same, i.e., immunity from taxation, the practical effect of it in the light of the specific provisions contained in different parts of the Act would be wholly different. The above implications, would be obvious where loss making eligible units or non-eligible assessees seek the benefit of adjustment of losses against profits made by eligible units.
Sub-section (4) of section 10A which provides for pro rata exemption, necessarily involving deduction of the profits arising out of domestic sales, is one instance off deduction provided by the amendment. Profits of an eligible unit pertaining to domestic sales would have to enter into the computation under the head "Profits and. gains from business" in Chapter IV and be denied the benefit of deduction. The provisions of sub-section (6) of section 10A, as amended by the Finance Act, 2003, granting the benefit of adjustment of losses and unabsorbed depreciation, etc., commencing from the year 2001-02 on completion of the period of tax holiday also virtually work as a deduction which has to be worked out at a future point of time, namely, after the expiry of the period of tax holiday. The absence of any reference in Chapter VI of the Act to deduction under section 10A can be understood by acknowledging that any such reference or mention would have been a repetition of what, has already been provided in section 10A. The provisions of sections 80HHC and 80HHE of the Act providing for somewhat similar deductions would be wholly irrelevant and redundant if deductions under section 10A were to be made at the stage of operation of Chapter VI of the Act. The retention of the provisions of the Act, i.e., sections 80HHC and 80HHE, despite the amendment of section 10A indicates that some additional benefit to eligible section 10A units, not contemplated by sections 80HHC and 80HHE, was intended by the Legislature. Such a benefit can only be understood by a legislative mandate to understand that the stages for working out the deductions under sections 10A and 80HHC and 80RHE are substantially different.
From a reading of the relevant provisions of section 10A, it is more than clear that the deduction contemplated therein is qua the eligible undertaking of an assessee standing on its own and without reference to the other eligible or non-eligible units or undertakings of the assessee. The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee. Circular No. 794, dated August 9, 2000 states in paragraph 15.6 that the export turnover and the total turnover for the purposes of sections 10A and 10B shall be of the undertaking located in specified zones or 100 per cent export oriented undertakings, as the case may be, and this shall not have any material relationship with the other business of the assessee outside these zones or units for the purposes of this provision. If the specific provisions of the Act (the first proviso to sub-section (1) of section 10A and sub-sections (1A) and (4) of section 10A provide that the unit that is contemplated for grant of benefit of deduction is the eligible undertaking and that is also how the contemporaneous circular of the Department understood the situation, it is logical and natural that the, deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore, immediately after the stage of determination of its profits and gains. At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in sections 70, 72 and 74 of the Act would be premature for application. The deduction under section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression "total, income of the assessee" in section 10A can be reconciled by understanding the expression
“total income of the assessee" in section 10A as "total income of the undertaking".
Therefore, though section 10A, as amended, is a provision for deduction, the stage of deduction would be 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.
Decision of the Karnataka High Court in CIT vs. Yokogawa India Ltd. [2012] 341 ITR 385 (Karn) affirmed on this point.”
So, following the law laid down by Hon’ble Supreme Court in CIT vs. Yogokawa India Ltd. (supra), deduction u/s 10A is required to be taken before setting off brought forward losses and unabsorbed depreciation. Accordingly, Grounds No.5, 5.1 & 5.2 are determined in favour of the assessee and the AO is directed to compute the deduction u/s 10A accordingly.
Respectfully following the above decision, we dismiss the appeal of the Revenue on this score.
In respect of disallowance u/s. 14A, we find that the ld. CIT(A) has done a good reasoned order observing as under :
“5.3 The reason given by AO and the submission of the appellant are considered. Since, the appellant had income which is not included in taxable income, applying the ‘real income theory’ as stipulated income the case of Maxopp Investment Ltd. & Ors. Vs. CIT (2012) 247 CTR (Del) 162, the application of Section of Section 14A is as per law. Since, the Section 14A is applicable, the AO had no option but to compute the disallowable amount under Rule 8D. In the limb ‘i’ of Rule 8D the direct interest expense for the capital borrowed and invested, income from which is exempted, is disallowed. In appellant’s case such expenditure is not available. Under limb ‘ii’ of the Rule, the indirect expenditure is disallowed on a proportionate basis. Since, the appellant has been able to establish that none of the fund borrowed is diverted towards investment in Mutual Fund
Units, the expenditure related to indirect expenses is not justifiable and hence the addition of Rs.3,12,793/- u/s 14A is deleted. However, regarding disallowance of Rs.1,38,640/- under limb iii of Rule 8D, the appellant has not been able to explain why some expenditure related to management of such investment, income from which is exempted, should not be disallowed. Since the investment has been made, some amount of follow up actions, record keepings, discussions and consultations are bound to happen which will lead to some administrative expenses. Such administrative expenses are to be computed at the rate of 5% of average investment. In the case of appellant, the AO has computed such amount at Rs. 1,38,640/- which is in accordance with the law and hence confirmed. Accordingly, ground of appeal is partly allowed. There being no contrary material on record from the side of Revenue, we do not find any justification to interfere with the findings reached by the ld. CIT(A). Accordingly, the appeal of the Revenue deserves to be dismissed.
In the result, the appeal is dismissed.
Order pronounced in the open court on 15.01.2019.