Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI A. MOHAN ALANKAMONY
आदेश / O R D E R
PER A. MOHAN ALANKAMONY, AM: These appeals by the assessee are directed against the orders passed by the Ld. Commissioner of Income Tax (Appeals)-
2 ITA Nos. 3387 to 3389/Mds/2016 & ITA No.17/Mds/2017
3, Chennai all dated 30.09.2016 in ITA No.1/2011-2/CIT(A)-3,
16/2011-12/CIT(A)-3 & 65/2015-16/CIT(A)-3 for the assessment
years 2008-09, 2009-10 & 2011-12 passed U/s.250(6)
r.w.s.143(3) of the Act. The Revenue has also filed an appeal
against the order passed by the Ld. Commissioner of Income
Tax(Appeals)-3 for the assessment year 2009-10.
Assessee’s Appeals :
(i) For the assessment year 2008-09 & 2011-12, the
assessee has raised one identical ground and the same is
briefly stated herein below for adjudication:-
“The Ld.CIT(A) has erred in deducting the brought forward
losses and carry forward depreciation from the profit of the
assessee company while arriving at the eligible profit for
deduction U/s.10B of the Act.”
(ii) For the assessment year 2009-10, the assessee has
raised one ground and the same is summarized herein
below for adjudication:-
“The Ld.CIT(A) has erred in confirming the order of the
Ld.AO who had not granted depreciation U/s.32 of the Act
with respect to the amount capitalized invoking Section
3 ITA Nos. 3387 to 3389/Mds/2016 & ITA No.17/Mds/2017
43A of the Act, with respect to the expenditure incurred
towards foreign exchange fluctuation connected to the
purchase of fixed assets.”
Revenue’s Appeal for the assessment year 2009-10:
For the assessment Year 2009-10 the Revenue has one ground in
its appeal and the same is briefly stated herein below for
adjudication.
The Ld.CIT(A) has erred in deleting the addition made by
the Ld.AO by disallowing the provision for warranty amounting to
Rs.20 lakhs.
The brief facts of the case are that the assessee is a
private limited company engaged in the business of manufacture
and export of high quality rubber hoses. For all the relevant three
assessment years assessment was made U/s.143(3) of the Act.
Assessee’s Appeal:
Assessment year 2008-09 & 2011-12:
Ground No.2(i) : Exclusion of brought forward losses and
carry forward depreciation from the profit of the assessee
4 ITA Nos. 3387 to 3389/Mds/2016 & ITA No.17/Mds/2017
company while arriving at the eligible profit for granting
deduction U/s. 10B of the Act:-
While computing the eligible profit for granting deduction
U/s.10B of the Act in the assessment year 2011-12 the Ld.AO
excluded the brought forward losses of the assessment year
2007-08 amounting to Rs.23,92,823/-. similarly in the assessment
year 2008-09 the Ld.AO excluded the brought forward losses of
assessment year 2006-07 Rs.1,70,87,776/- & assessment year
2007-08 Rs.26,10,392/-. The claim of the assessee was that the
brought forward losses and depreciation of the earlier year/s
should not be excluded from the profit of the current year while
arriving at the eligible deduction U/s10B of the Act. On appeal the
Ld.CIT(A) confirmed the order of the Ld.AO. While doing so, the
Ld.CIT(A) in his order dated 30.09.2016 for the assessment year
2011-12 observed as follows:-
“5. From the above it is evident that irrespective of their continued placement in Chapter III, sections 10A and 10B as substituted by Finance Act, 2000 provide for deduction of the profits and gains derived from the export of articles or things or computer software for a period of 10 consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such article or thing or computer software. The deduction is to be allowed from the total income of the assessee. The term ‘total income’ has been defined in section 2(45) of the IT Act and it means the total amount of
5 ITA Nos. 3387 to 3389/Mds/2016 & ITA No.17/Mds/2017 income referred to in section 5 computed in the manner laid down in the Income-tax Act.
5.1 All income for the purposes of computation of total income is to be classified under the following heads of income and computed in accordance with the provisions of Chapter IV of the Act-
• Salaries • Income from house property • Profits and gains of business and profession • Capital gains • Income from other sources
5.2 The income computed under various heads of income in accordance with the provisions of Chapter IV of the IT Act shall be aggregated in accordance with the provisions of Chapter VI of the IT Act, 1961. This means that first the income/loss from various sources i.e. eligible and ineligible units under the same head are aggregated in accordance with the provisions of Section 70 of the Act. Thereafter, the income from one ahead is aggregated with the income or loss of the other head in accordance with the provisions of section 71 of the Act. If after giving effect to the provisions of sections 70 and 71 of the Act there is any income (where there is no brought forward loss to be set off in accordance with the provisions of section 72 of the Act) and the same is eligible for deduction in accordance with the provisions of Chapter VI-A or sections 10A, 10B etc., of the Act, the same shall be allowed in computing the total income of the assessee.
5.3 If after aggregation of income in accordance with the provisions of sections 70 and 71 of the Act, the resultant amount is a loss (pertaining to assessment year 2001-02 and any subsequent year) from eligible unit it shall be eligible for carry forward and set off in accordance with the provisions of section 72 of the Act. Similarly, if there is a loss from an
6 ITA Nos. 3387 to 3389/Mds/2016 & ITA No.17/Mds/2017
ineligible unit, it shall be carried forward and may be set off against the profits of eligible unit or ineligible unit as the case may be in accordance with the provisions of section 72 of the Act.”
For the assessment year 2008-09 also the Ld.CIT(A) arrived
at the same conclusion.
5.1 At the outset, the Ld.AR submitted before us that the issue
is settled by the decision of the Hon’ble Apex Court in the case
CIT & ANR vs. Yokogawa India Ltd in the civil appeal No.8498 of
2013 vide order dated 16.12.2016, wherein it was held as follows:- “12. We have considered the submissions advanced and the provisions of Section 10A as it stood prior to the amendment made by Finance Act, 2000 with effect from 1.4.2001; the amended Section 10A thereafter and also the amendment made by Finance Act, 2003 with retrospective effect from 1.4.2001.
The retention of Section 10A in Chapter In of the Act after the amendment made by the Finance Act, 2000 would be merely suggestive and not determinative of what is provided by the Section as amended, in contrast to what was provided by the un- amended 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 as already discussed, it has to be understood that the Section embodies a clear enunciation of the legislative decision
7 ITA Nos. 3387 to 3389/Mds/2016 & ITA No.17/Mds/2017
to alter its nature from one providing for exemption to one providing for deductions.
The difference between the two expressions 'exemption' and 'deduction', though 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 cannot be more obvious than from the case of Civil Appeal Nos. 8563/2013, 8564/2013 and civil appeal arising out of SLP(C) No. 18157/2015, which have been filed by loss making eligible units and/or by non-eligible assessees seeking 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 of 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 denied the benefit of deduction. The provisions of Sub-section 6 of Section 10A, as amended by the Finance Act of 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 works as a deduction which has to be worked out at a future point of time, namely, after the expiry of period of tax holiday. The absence of any reference to deduction under Section 10A in Chapter VI of the Act can be understand 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 said provisions of the Act i.e. Section 80HHC and 80HHE, despite the amendment of Section 10A, in
8 ITA Nos. 3387 to 3389/Mds/2016 & ITA No.17/Mds/2017
our view, indicates that some additional benefits 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 Section 10A and 80HHC and 80HHE are substantially different. This is the next aspect of the case which we would now like to turn to.
From a reading of the relevant provisions of Section 10A it is more than clear to us that the deductions 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. This is also more than clear from the contemporaneous Circular No. 794 dated 9.8.2000 which 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% 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 provide [first proviso to Sections 10A(1); 10A (1A) and 10A (4)] 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 (No.794 dated 09.08.2000) understood the situation, it is only logical and natural that the stage of 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
9 ITA Nos. 3387 to 3389/Mds/2016 & ITA No.17/Mds/2017
deductions 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 has already been dealt with earlier and in the overall scenario unfolded by the provisions of Section 10A the aforesaid discord can be reconciled by understanding the expression "total income of the assessee" In Section 10A as 'total income of the undertaking' .
For the aforesaid reasons we answer the appeals and the questions arising therein, as formulated at the outset of this order, by holding that 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. All the appeals shall stand disposed of accordingly.”
5.2 The Ld.DR could not controvert to the submission of the
Ld.AR.
5.3 We have heard the rival submissions and carefully perused
the materials on record. The Hon’ble Apex Court in the case M/s.
Yokogawa India Ltd., supra has categorically held that the
provisions of Section 10A makes it clear that the eligible
undertaking of the assessee will be allowed deduction with
respect to the profit of the undertaking without reference to the
other eligible or non-eligible undertakings of the assessee.
10 ITA Nos. 3387 to 3389/Mds/2016 & ITA No.17/Mds/2017
Further it is made clear that the deduction U/s.10A would be
computed prior to 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 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 total income under Chapter VI of the Act.
It was also made clear that provisions of Section 10A of the Act
would equally be applicable to cases governed by the provisions
of Section 10B of the Act because it is pari materia with Section
10A of the Act, though governing a different situation. Therefore
respectfully following the decision of the Hon’ble Apex Court, we
hereby direct the Ld.AO to exclude the carry forward losses and
depreciation while computing the profit of the eligible unit for
claiming deduction U/s.10B of the Act. Accordingly this issue is
held in favour of the assessee for the assessment years 2008-09
& 2011-12.
Assessee’s Appeal : Assessment year 2009-10 :
Ground No.2(ii) : Depreciation on the capitalized amount with
11 ITA Nos. 3387 to 3389/Mds/2016 & ITA No.17/Mds/2017
respect to the foreign exchange fluctuation connected to the
purchase of fixed assets:-
The assessee had incurred additional expenditure of
Rs.46,37,958/- due to foreign exchange fluctuations connected to
the purchase of fixed assets. The Ld.AO by virtue of Section 43A
of the Act treated the additional expenditure incurred as capital
expenditure which was claimed by the assessee as Revenue
expenditure deductible from the profit of the assessee company.
However while doing so, the Ld.AO did not grant the benefit of
depreciation U/s.32 of the Act to the assessee on the amount
capitalized. The Ld.CIT(A) also confirmed the order of the Ld.AO.
Now the grievance of the assessee before us is that the Revenue
has not allowed the benefit of depreciation U/s.32 of the Act, when
such amount is capitalized. At the outset, we find that this issue is
not addressed by both the Ld.Revenue Authorities. Moreover
nothing is coming out from the order of the Ld.Revenue
Authorities as to whether the asset acquired by the assessee is
put to use. Needless to mention that the assessee will be entitled
for the benefit of depreciation on the amount capitalized being the
expenditure incurred towards currency fluctuation connected to
the acquisition of the asset provided all the other conditions
12 ITA Nos. 3387 to 3389/Mds/2016 & ITA No.17/Mds/2017
stipulated in the Act are complied with. Since the entire facts of
the case is not presented before us, we hereby remit this matter to
the file of Ld.AO for de-nova consideration who shall decide the
issue taking into account of our above observations.
Revenue’s Appeal: Assessment year 2009-10 :
Provision for warranty:-
It was observed by the Ld.AO that the assessee company
had claimed Rs.20 lakhs as deduction under the head ‘provision
for warranty’ during the relevant assessment year 2009-10. On
query the assessee company had replied that it had claimed only
nominal amount being less than 1% of the turn-over of Rs.28
crores as provision for warranty which may have to be incurred in
future years towards warranty provided in the current year.
Therefore following the mercantile system of accounting the
expense has to be allowed as deduction in the relevant
assessment year. However the assessee company did not furnish
any scientific basis for arriving at the figure of Rs.20 lakhs. Hence
the Ld.AO disallowed the claim of deduction of Rs.20 lakhs
claimed under the head provision for warranty because as per the
Act mere provision cannot be allowed as deduction. On appeal,
the Ld.CIT(A) relying on the decision in the cases Rotork Controls
13 ITA Nos. 3387 to 3389/Mds/2016 & ITA No.17/Mds/2017
India (P) Limited [2009] reported in 314 ITR 62 (SC), Bharat Earth
Movers v CIT [2000] reported in 245 ITR 428 (SC), and CIT v
Sony India (P) Limited [2007] reported in 160 taxman 397 (Delhi
HC) allowed the appeal of the assessee. At the outset we do not
find any merit in the order of the Ld.CIT(A) on this issue. In the
case Rotork Controls India P Ltd., relied by the Ld.CIT(A), the
Hon’ble Apex Court had held that the deduction will be allowed in
the current year only when the liability towards warranty expense
is properly ascertained on historic basis. This aspect is also made
clear in the decision of the Hon’ble Jurisdictional High Court in the
case Forbes Campbell Finance Ltd reported in 352 ITR 602.
Further the Hon’ble Jurisdictional High Court in the case
Renowned Auto Products Mfrs. Ltd reported in 354 ITR 127 has
also made it clear that provision for warranty will be allowable as
deduction only if it is computed on scientific method. Further in the
case CIT vs. Sony India Pvt. Ltd reported in 160 taxman 397, the
Hon’ble Delhi High Court has held that deduction on account of
provision for gratuity will be allowed if it is claimed based on the
past experience. However in the case of the assessee, the
assessee had simply estimated an adhoc amount of Rs.20 lakhs
as provision for warranty without any justification. The assessee
14 ITA Nos. 3387 to 3389/Mds/2016 & ITA No.17/Mds/2017 has also not relied on any statistical records maintained by it with respect to the expenses incurred towards warranty. In this situation, the claim of adhoc amount of Rs.20 lakhs towards provision for warranty is not justifiable. Therefore we hereby set aside the order of the Ld.CIT(A) on this issue and reinstate the order of the Ld.AO.
In the result, appeals of the assessee in ITA No.3387 of 2016 for the assessment year 2008-09 & ITA No.3389 of 2016 for the assessment year 2011-12 are allowed and ITA No.3388 of 2016 for the assessment year 2009-10 is partly allowed for statistical purposes as indicated herein above and the appeal of the Revenue in ITA No.17 of 2016 for the assessment year 2009- 10 is allowed in its favour.
Order pronounced on 22nd November,2017 at Chennai.
Sd/- Sd/- (एन.आर.एस. गणेशन) (ए. मोहनअलंकामणी) (N.R.S. Ganesan) (A. Mohan Alankamony) लेखासद�य/Accountant Member �याियकसद�य/Judicial Member चे�नई/Chennai, �दनांक/Dated 22nd November, 2017 RSR आदेशक���त�ल�पअ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2.��यथ�/Respondent 3. आयकरआयु�त (अपील)/CIT(A) 4. आयकरआयु�त/CIT 5. �वभागीय��त�न�ध/DR 6. गाड�फाईल/GF