Tribunal Upholds Set-Off of Unabsorbed Depreciation Before Section 10B Deduction, Allows Interest Netting Off.

Assistant Commissioner of Income-tax, 5 (2), Mumbai Versus Jewellery Solutions International (P.) Ltd.

Assistant Commissioner of Income-tax, 5 (2), Mumbai Versus Jewellery Solutions International (P.) Ltd. - [2009] 28 SOT 405 (MUM.) Issues Involved:

1. Computation of exemption under section 10B without reducing unabsorbed depreciation.
2. Deduction of interest payment from interest income before reducing net interest from profit of business while computing exemption under section 10B.

Issue-wise Detailed Analysis:

1. Computation of exemption under section 10B without reducing unabsorbed depreciation:

The primary issue is whether the deduction under section 10B should be allowed prior to the set-off of unabsorbed depreciation. The assessee, a company engaged in manufacturing and exporting jewelry, argued that section 10B, being a beneficial provision, should be given effect before applying the provisions of section 32(2) which pertains to unabsorbed depreciation. The Assessing Officer (AO) disagreed, holding that unabsorbed depreciation must be set-off against current year's income before calculating the deduction under section 10B. The CIT(A) sided with the assessee, stating that section 10B should be invoked first as it falls under Chapter III, which deals with income not forming part of total income, and thus unabsorbed depreciation should not be reduced at this stage.

Upon appeal, the Tribunal analyzed the relevant sections and concluded that the profits and gains of business must be computed in accordance with sections 30 to 43D of the Income-tax Act. This includes giving effect to section 32 for depreciation. The Tribunal emphasized that brought forward depreciation should be set-off first, followed by the current year's depreciation, before computing the total income from which the deduction under section 10B is to be allowed. Consequently, the Tribunal found the AO's approach correct and set aside the CIT(A)'s order, restoring the AO's computation method.

2. Deduction of interest payment from interest income before reducing net interest from profit of business while computing exemption under section 10B:

The second issue pertains to whether interest paid to Nirav Modi should be deducted from interest income before reducing net interest from the profit of the business for computing exemption under section 10B. The AO treated the interest income as income from other sources and disallowed the netting off of interest paid. The CIT(A) found a direct nexus between the loan taken from Nirav Modi and the fixed deposit (FD) made using the loan amount, allowing the netting off of interest paid against interest income.

The Tribunal upheld the CIT(A)'s decision, noting that the factual matrix supported a direct nexus between the loan and the FD. The CIT(A) had thoroughly reviewed the bank statements and found a clear connection, which the revenue did not contest with contrary evidence. The Tribunal referenced the Special Bench decision in Lalsons Enterprises and the Delhi High Court decision in Shri Ram Honda Power Equipment, which support the netting off of interest when a direct nexus is established. Thus, the Tribunal rejected the revenue's appeal on this ground.

Conclusion:

The Tribunal allowed the revenue's appeal in part. It upheld the AO's method of computing the deduction under section 10B by first setting off unabsorbed depreciation, but it rejected the revenue's appeal regarding the netting off of interest paid against interest income, affirming the CIT(A)'s decision on this issue.