ECLERX SERVICES LTD.,MUMBAI vs. ACIT - 2(1)(2), MUMBAI

We heard the parties and perused the record. During the year under consideration, the assessee provided a sum of Rs.126.77 millions towards diminution in the value of investments made in the subsidiary companies. The assessee was having both SEZ units and non-SEZ units. The assessee charged entire amount of “provision for diminution in the value of investments” against the non-SEZ units. The reasoning given by the assessee was that these investments were made by it much prior to the commencement of SEZ units. The assessee was claiming deduction u/s 10AA of the Act against the profits arising from SEZ units.

The AO did not accept the explanations of the assessee and accordingly allocated a sum of Rs.52.28 millions to the SEZ unit. It is pertinent to note that the AO has allocated the above said amount only for the purpose of computing book profit u/s 115JB of the Act and accordingly added the above said amount to the book profit, i.e., he reduced the eligible amount of deduction u/s 10AA of the Act by Rs.52.28 millions while computing book profit. It is also pertinent to note that the AO did not make such adjustment while computing income under normal provisions of the Act, i.e., he allowed deduction u/s 10AA of the Act as claimed by the assessee while computing total income under normal provisions of the Act.

The Ld CIT(A) confirmed the order of the AO and hence the assessee has filed this appeal.

The main contention of the Ld A.R is that the expenditure debited to the Profit and Loss account towards “Provision for diminution in the value of investments” is not related to SEZ unit, since the investments were made much prior to the commencement of the SEZ unit. In the alternative, he submitted that the AO, after having accepted the amount of deduction u/s 10AA of the Act for the purpose of computing total income, cannot adopt different figure for the purpose of computing book profit u/s 115JB of the Act.

The Ld D.R, on the contrary, submitted that the expenditure claimed towards “Provision for diminution in the value of investments” is a common expenditure in view of interlacing of funds between SEZ units and non-SEZ units. Accordingly she submitted that the Ld CIT(A) was justified in confirming the order of the AO. With regard to non-making of similar adjustment for the purpose of computing total income under normal provisions of the Act, the Ld D.R submitted that this mistake of the AO requires rectification at his end.

Having heard rival contentions, we are of the view that there is merit in the contentions of the Ld A.R on the alternative plea. Since the AO has 3 Eclerx Services Limited accepted the deduction u/s 10AA of the Act computed by the assessee for the purpose of computing total income under normal provisions of the Act, in our view, the very same amount has to be excluded from Net profit for the purpose of computing book profit u/s 115JB of the Act. In this view of the matter, the adjustment made by the AO is not sustainable. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the impugned adjustment made by him for the purpose of computing book profit u/s 115JB of the Act.

In the result, the appeal of the assessee is allowed. Order has been pronounced in the Court on 1.5.2018.