2012 (9) TMI 407 - HC - Income Tax

Section 10A deduction upheld where manufacturing profits not from extraordinary arrangement; trading losses not set off before Chapter VI-A

HC upheld the Tribunal's finding that the manufacturing division's high profits did not arise from an extraordinary arrangement with the foreign principal ... Abnormally high profit - extraordinary arrangement between the assessee and the German company - Held that:- The profits earned by Kandla division of the respondent-assessee is not abnormally high due to any arrangement between the respondent-assessee and its German Principal. The Tribunal correctly held that extraordinary profits cannot lead to the conclusion that this is an arrangement between the parties. This would penalize efficient functioning. Further the industrial sewing machine needles imported and traded by the Mumbai division are different from those manufactured & exported by the Kandla division, this also negatives any arrangement between the parties to show extraordinary profits in respect of its Kandla division so as to claim deduction under Section 10A - The appellant- revenue have not been able to show that the findings are perverse or arbitrary - against revenue. Computation of deduction u/s 10A without setting off of the loss from the trading unit - Held that:- As decided in CIT v. Black & Veatch Consulting Pvt. Ltd [2012 (4) TMI 450 - BOMBAY HIGH COURT] Section 10A is a provision which is in the nature of a deduction and not an exemption - the deduction under Section 10A has to be given effect to at the stage of computing the profits and gains of business - Section 80B(5) defines for the purposes of Chapter VI-A “gross total income” to mean the total income computed in accordance with the provisions of the Act, before making any deduction under the Chapter – against revenue. Issues:1. Interpretation of abnormal profits in relation to Section 10A of the Income Tax Act, 1961.2. Application of Section 10A deduction and setting off losses against profits in different divisions of a company.Issue 1:The case involved a dispute over abnormal profits declared by a company's manufacturing division in Kandla, seeking 100% deduction under Section 10A of the Income Tax Act. The Assessing Officer questioned the high profits, suspecting an extraordinary arrangement with a German company solely to boost profits. The company defended the profits, attributing them to factors like export to associated enterprises, risk-free production, and financial support from the German company. The Assessing Officer recalculated profits based on a lower gross profit ratio, leading to a reduced deduction under Section 10A. The Commissioner of Income Tax (Appeals) upheld this decision. However, the Tribunal ruled in favor of the company, stating that high profits alone do not indicate an arrangement and that the Assessing Officer failed to prove any such collusion. The Tribunal accepted the company's reasons for high profits and allowed the full deduction under Section 10A, emphasizing the efficient operation of the unit.Issue 2:Regarding the second issue of setting off losses against profits, the Tribunal held that the losses from the trading division in Mumbai should not be set off against the profits of the manufacturing division in Kandla before claiming the deduction under Section 10A. The Tribunal's decision was based on the understanding that the deduction should be based on the profits of the Kandla division alone. The Tribunal's ruling was in line with a previous court decision, providing clarity on the treatment of losses in different divisions of a company for the purpose of claiming deductions under Section 10A. The Tribunal's decision was upheld, and the appeal was dismissed on this issue.In conclusion, the High Court of Bombay dismissed the appellant's appeal, as the Tribunal's findings on both issues were considered factual and not arbitrary. The court upheld the Tribunal's decision on abnormal profits and the treatment of losses for deduction purposes, in line with the legal provisions and previous court rulings.