THE COMMISSIONER OF INCOME TAX vs. M/S. GOKALDAS IMAGES PVT.LTD

4 section 115JB despite the explicit provisions of Clause (i) of Explanation (1) to section 115JB? (iv) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in deletion of portion of common expenses allocated even when assessing authority has rightly observed the expenses incurred are to be apportioned among all the units in the ratio of their respective turnovers? (v) Whether on the facts and in the circumstances of the case, the Tribunal erred in giving relief to assessee in respect of set of EOU profits against non EOU losses and brought forward depreciation by following the decision of this Hon'ble Court in the case of M/s. Yokogawa without appreciating that the fact that deduction has to be allowed from the total income of the assessee and as per section 2(45) of the I.T. Act the total income should be computed from various sources after set off of losses from one source against income from other sources

5 under the same head of income in terms of section 709(1) and the order of the Hon'ble Court has been challenged before Apex Court by Revenue? 2. The factual background, in which the aforesaid questions of law arise for our consideration need mention. The assessee is a company engaged in manufacture and export of readymade garments. The assessee filed the return of income for the Assessment Year 2008-09 on 27.09.2009. The Assessing Officer by an order dated 08.12.2011 inter alia held that the assessee advanced certain monies to its sister concern without charging interest on the same. It was further held that aforesaid monies have been advanced out of borrowed funds and interest should have been charged on the same. Accordingly interest to the tune of Rs.6,10,75,200/- was charged. The Assessing Officer also made an addition in respect of claim under Section 115JB of the Act and deleted portion of common expenses which were allocated. The set off of profits of

6 export oriented units against non export oriented unit's losses and brought forward unabsorbed depreciation was also not allowed. 3. The assessee thereupon filed an appeal before the Commissioner of Income Tax (Appeals) who by an order dated 25.02.2013 inter alia held that advance of Rs.53.77 Crores given to M/s Hinduja Relators Pvt. Ltd. is only out of commercial expediency and can be considered as advance for business purpose. It was further held that there was neither any commercial expediency nor any business transaction with M/s Hinduja Investments Pvt. Ltd. For giving an interest free advance of Rs.7 Crores. It was further held that expenses incurred towards legal and professional fees, rates and taxes, insurance, managerial remuneration and miscellaneous expenses can be allocated in respect of claim of set off of profits earned by export oriented units against the losses of non export oriented units. It was held that there is no exemption

7 granted to a non dividend company in this regard and therefore, the assessee is liable to tax on book profit in accordance with the provisions of Section 115JB of the Act. The Assessing Officer was directed to quantify if there are any losses to be carried forward after giving effect to the order passed by the Commissioner of Income Tax (Appeals). Accordingly, the appeal was partly allowed. 4. The revenue as well as the assessee approached the Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short) by filing the appeals against the order passed by the Commissioner of Income Tax (Appeals). The assessee also filed a cross objection against the order passed by the Commissioner of Income Tax (Appeals). Both the appeals as well as the cross objections was decided by the tribunal by a common order dated 26.09.2014 and partly allowed the appeals preferred by the revenue as well as the assessee and dismissed the cross objection

8 preferred by the assessee. In the aforesaid factual background, this appeal has been filed. 5. Learned counsel for the revenue submitted that the advance made by the assessee to the subsidiary company was not for business purpose and no element of commercial expediency was involved. Therefore, the same was not allowable as deduction. It is urged that advance of Rs.7 Crores made by the assessee to the subsidiary company is neither for business purpose nor any commercial expediency was involved and even if the advance was made for commercial expediency, the advance being made for setting up of business, the same constitutes capital expenditure and could not have been treated as revenue expenditure. It is pointed out that there is neither any material nor any submission made on behalf of the assessee that advance of Rs.7 Crores was made during the earlier Assessment Year. It is contended that the tribunal ought to have appreciated that addition to the

9 book profit has been made in terms of Clause (f) to Explanation to Section 115JB of the Act. It is also contended that the tribunal without any basis has allowed the allocation of expenses between export oriented units and non export oriented units and it ought to have been appreciated that the Assessing Officer has rightly allocated expenses on turnover basis. It is also submitted that assessee had not maintained separate books of accounts. It ought to have been appreciated by the tribunal that adjustment and set off is governed by Section 70 of the Act and the issue was covered in favour of the revenue in view of the judgment of this court. In support of aforesaid submissions, reliance has been placed on decisions of Supreme Court in 'S.A.BUILDERS LTD. VS. COMMISSIONER OF INCOME-TAX (APPEALS), CHANDIGARH', (2007) 158 TAXMAN 74 (SC) 'COMMISSIONER OF INCOME-TAX VS. YOKOGAWA INDIA LTD', (2017) 77 TAXMANN.COM 41 (SC) and

10 M/S KARLE INTERNATIONAL PRVIATE LTD. VS. THE ASSISTANT COMMISSIONER OF INCOME-TAX', I.T.A.NO.377/2017 DECIDED ON 07.09.2020. 6. On the other hand, learned counsel for the assessee submitted that amount of Rs.7 Crores was alone advanced by the assessee to M/s Hinduja Investments Pvt. Ltd. For acquisition / identification and liaison towards exploring possibility of expanding in textile apparel park. Therefore, the amount was advanced as a matter of commercial and business expediency and therefore, the first substantial question of law in fact does not arise for consideration as the same is a finding of fact. It is also submitted that disallowance computed under Section 14A of the Act pertains to computation of income under normal provisions of the Act and the same cannot be read into Section 115JB of the Act pertaining computation of book profits for levy of Minimum Alternate Tax (MAT). It is also pointed out that there is no express provision in

11 clause (f) of Explanation 1 to Section 115JB of the Act. It is also urged that common expenses incurred by the assessee exclusively pertain to non export unit and do not require allocation across all units. It is further submitted that no substantial questions of law arises for consideration in this appeal. In support of aforesaid submissions, reliance has been placed on decisions in S.A.BUILDERS LTD. supra and 'COMMISSIONER OF INCOME-TAX VS. SRIDEVI ENTERPRISES, 192 ITR 165. 7. We have considered the submissions made by learned counsel for the parties and have perused the record. The assessee paid a sum of Rs.29.17 Crores on account of business transactions in relation to exports to USA. Before the Commissioner of Income Tax (Appeals), the assessee had furnished the complete details, which were forwarded to the Assessing Officer who did not make any comments in his remand report. It is pertinent to mention here that the aforesaid

12 amount pertains to export transactions to avail export benefits and the assessee had an understanding with Hinduja Relators Pvt. Ltd. in this regard. Similarly, an amount of Rs.24.6 Crores was advanced to Hinduja Relators Pvt. Ltd. For improvement of a new building which was being constructed for the assessee under the lease agreement. The Assessing Officer did not comment anything in this regard in the remand report. The Commissioner of Income Tax (Appeals), therefore, held that the aforesaid amount was advanced by the assessee for business purpose as well as commercial expediency. The aforesaid finding of fact has been affirmed by the tribunal. The aforesaid concurrent findings of fact neither suffer from any infirmity nor can be termed as perverse. Therefore, the first substantial question of law is answered against the revenue and in favour of the assessee. 8. The Commissioner of Income Tax (Appeals) held that an advance of Rs.7 Crores was given to

13 Hinduja Investments Pvt. Ltd. for acquiring the land for textile Special Economic Zone (SEZ). However, the assessee neither acquired the land nor set up any SEZ. Therefore, the Commissioner of Income Tax (Appeals) held that there was neither any commercial expediency nor any business transaction for giving an interest free advance of Rs.7 Crores. However, the tribunal has reversed the aforesaid finding on the ground that the aforesaid sum is opening balance on 01.04.2007 and revenue having accepted the loan advanced for the purpose of business in past assessment could not seek to decline the claim as not related to business. However, the tribunal itself has recorded a finding that the assessee has not led any evidence in this regard. The relevant extract of the order passed by the tribunal reads as under:

As far as the aforesaid sum is concerned, it was claimed by the assessee that the sum in question was given to HIPL

14 for the purpose of acquiring and identifying land for setting up textile apparel park. As we have already seen, the assessee has not let in any evidence in this regard. It is however seen from page 8 of the paper book that the aforesaid sum is the opening balance as on 01.04.2007. 9. Thus, from perusal of the aforesaid extracted portion of the order of the tribunal, it is evident that the assessee has not let in any evidence to establish the fact that the amount was either advanced for business purpose or for commercial expediency and it was not the case of the assessee itself that the amount was advanced in previous year. The Commissioner of Income Tax (Appeals) has recorded a finding that the assessee has neither acquired the land nor has set up any SEZ. Therefore, in the fact situation of the case, we deem it appropriate to remit the matter for re consideration to the tribunal afresh. Accordingly, the second substantial question of law is answered.

15 10. The Commissioner of Income Tax (Appeals) has held that as per Section 115JB of the Act, the assessee being a company is liable to tax on book profits in accordance with the aforesaid provision and there is no exemption granted to the non dividend company in this regard. However, the tribunal by placing reliance on decision of the Supreme Court in APOLLO TYRES, 255 ITR 273 (SC) has held that Assessing Officer while determining book profits under Section 115JB of the Act cannot tamper with the profits as per profit and loss account prepared in accordance with the Companies Act except in the manner provided in Explanation 1 to Section 115JB of the Act. Thus, it has been held that the additions made by the Assessing Officer while determining the book profits under Section 115JB of the Act cannot be sustained. Any disallowance computed under Section 14A of the Act pertain to computation of income under normal provisions of the Act and cannot be read into the provisions of Section

16 115JB of the Act pertaining to computation of book profits by levy of Minimum Alternate Tax (MAT) and there is no express provision in clause (f) of Explanation 1 to Section 115JB of the Act to that extent. For the aforementioned reasons, the third substantial question of law is answered against the revenue and in favour of the assessee. 11. The Commissioner of Income Tax (Appeals) has held that an amount of Rs.4,71,29,795/- is related to the employees employed in non export oriented units and the assessee had separately debited salaries and wages in respect of export oriented units in the communication which was forwarded to the Assessing Officer. However, the Assessing Officer has not mentioned anything contrary in his remand report, therefore, the Commissioner of Income Tax (Appeals) has permitted the allocation of the expenses incurred by the assessee viz., legal and professional fees, rates and taxes, insurance, managerial remuneration and

17 miscellaneous expenses. The Income Tax Appellate Tribunal has held that the expenses related exclusively to non export oriented units and has affirmed the finding recorded by the Commissioner of Income Tax (Appeals). For the aforementioned reasons, the fourth substantial question of law is also answered against the revenue and in favour of the assessee. 12. Admittedly, the decision rendered by this court in case of YOKOGAWA has been upheld by the Supreme Court from perusal of para 29 of the order passed by the tribunal, it is evident that the revenue has not disputed that the ratio laid down in YOKOGAWA supra is applicable to the facts of the present case. It is pertinent to mention that the decision of this court in M/S KARLE INTERNATIONAL PVT. LTD. Supra is not applicable to facts of the case as in the aforesaid case, the assessee had not claimed any deduction under Section 10B of the Act. For the aforementioned reasons,

18 the fifth substantial question of law is also answered against the revenue and in favour of the assessee. In view of preceding analysis, the order passed by the tribunal insofar as it pertains to finding recorded by it that an amount of Rs.7 Crores advanced by the assessee to M/s Hinduja Investments Pvt. Ltd., for business purposes and commercial expediency is hereby quashed and the matter is remitted to the tribunal to decide the aforesaid issue afresh in accordance with law. In the result, the appeal is disposed of. Sd/- JUDGE Sd/- JUDGE ss