2014 (7) TMI 798 - AT - Income Tax

ITAT Mumbai: Assessee wins appeal on income tax additions; disallowance eligible for exemption.

The Appellate Tribunal ITAT Mumbai ruled in favor of the assessee, setting aside the additions made under section 10B(7) r.w.s. 80IA(10) to the total ... Deduction u/s 10B(7) r.w. section 80IA(10) – reimbursement of cost of employees of PCEPL which were hired by assessee (PEPL) for doing the work - shown as professional fee given to sister concern - Held that:- For applying the provisions of section 10B(7) r.w.s 80IA(10), AO has first to show that cost of hiring employees by the assessee had resulted into more than ordinary profit - This could happen only if the assessee had paid less than the market value to the sister concern on account of hired employees - There is no material on record to show that sister concern had hired the employees at less than market price because only in that case it could be said that the assessee had paid less than the market price - The decision in Pyramid Entek P. Ltd Versus Assistant CIT RG 3. Thane [2014 (7) TMI 751 - ITAT MUMBAI] followed - the AO has not given any finding that by hiring the employees/professionals from the sister concern the assessee had paid less than market price resulting in shifting of profit from its non-eligible unit to eligible unit u/s 10B – Decided against Revenue. Restriction of disallowance u/s 40(a)(ia) of the Act – TDS not deducted on professional charges paid to sister concern – Held that:- Following the decision in CIT vs. Gem Plus Jewellery India Ltd. [2010 (6) TMI 65 - BOMBAY HIGH COURT] - the deduction u/s 10B is allowed in respect of disallowance made u/s 40(a)(ia) – thus, there was no illegality in the order of CIT(A) – Decided against Revenue. Issues:1. Addition under section 10B(7) r.w.s. 80IA(10) to the total income of assessee.2. Disallowance under section 40(a)(ia) of the Income Tax Act.Issue 1: Addition under section 10B(7) r.w.s. 80IA(10) to the total income of assessee:The Appellate Tribunal ITAT Mumbai addressed the issue of whether the assessee, an export-oriented unit seeking exemption u/s.10B, should have an addition of Rs. 20,33,505/- made by the Assessing Officer on account of provisions of section 10B(7) r.w.s. 80IA(10) to its total income. The AO disallowed the benefit of Section 10B due to transactions with a group concern, resulting in more than ordinary profits. However, the Tribunal, in a previous case for the assessment year 2008-09, ruled in favor of the assessee. The Tribunal emphasized that the AO must demonstrate that the assessee paid less than the market value to the sister concern for hiring employees to conclude that more than ordinary profits were earned. In the absence of such evidence, the addition made was deemed incorrect, and the Tribunal decided in favor of the assessee.Issue 2: Disallowance under section 40(a)(ia) of the Income Tax Act:The Revenue appealed against the CIT(A)'s decision to restrict the disallowance under section 40(a)(ia) to the amount payable as of 31.03.2009. The AO disallowed a sum under section 40(a)(ia) as TDS was not deducted on professional charges paid to a sister concern. The CIT(A) accepted the assessee's contention that no profit element existed in the payments and directed disallowance only to the extent of the amount payable as of the specified date. The CIT(A) also held that the disallowance made under section 40(a)(ia) was eligible for exemption u/s. 10B. The Tribunal, while not delving into the correctness of the disallowance under section 40(a)(ia), noted that even if the amount was to be disallowed, it would increase the eligible profits of the assessee under section 10B. Citing a decision of the Hon'ble Jurisdictional High Court, the Tribunal upheld the CIT(A)'s decision to grant exemption under section 10B for the disallowance sustained under section 40(a)(ia). As a result, the assessee's appeal was allowed, and the revenue's appeal was dismissed.In conclusion, the Appellate Tribunal ITAT Mumbai ruled in favor of the assessee on both issues, setting aside the additions made under section 10B(7) r.w.s. 80IA(10) and allowing the disallowance under section 40(a)(ia) to be eligible for exemption under section 10B.