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 ... Application of section 10B(7) read with section 80IA(10) - reimbursement of cost of employees to related concern - ordinary profits and effect of transactions with related parties - disallowance under section 40(a)(ia) for failure to deduct TDS - eligibility for exemption under section 10B of additions/disallowances - precedent effect of the Tribunal's own earlier orderApplication of section 10B(7) read with section 80IA(10) - reimbursement of cost of employees to related concern - ordinary profits and effect of transactions with related parties - precedent effect of the Tribunal's own earlier order - Addition made under section 10B(7) r.w.s. 80IA(10) on account of payments/reimbursements to a sister concern and consequent denial of exemption under section 10B. - HELD THAT: - The Assessing Officer treated reimbursements to the sister concern for employees as producing more than ordinary profits and disallowed exemption under section 10B by making an addition. The Tribunal applied its earlier decision in the assessee's own case for Assessment Year 2008-09, which held that to invoke section 10B(7) r.w.s. 80IA(10) the revenue must show that the assessee paid less than market value to the related concern so as to produce more than ordinary profits. There was no material or finding by the AO that the sister concern charged less than market price; the payments were reimbursements at cost. Absent any material showing under pricing or shifting of profit, the approach of proportionately treating revenue as excess profit was incorrect. Following the co ordinate Bench's earlier order, the Tribunal set aside the addition and allowed the assessee's appeal on this point. [Paras 4]Addition of Rs. 20,33,505 made under section 10B(7) r.w.s. 80IA(10) deleted; exemption under section 10B granted.Disallowance under section 40(a)(ia) for failure to deduct TDS - eligibility for exemption under section 10B of additions/disallowances - Whether the disallowance under section 40(a)(ia) (for non-deduction of TDS) should be restricted to amounts payable as on the year end and whether such disallowance is to be included in computing eligible profits for exemption under section 10B. - HELD THAT: - CIT(A) limited disallowance under section 40(a)(ia) to the amount payable as on the balance sheet date, following the Special Bench decision referenced by the assessee. The Tribunal did not examine the correctness of the disallowance itself but accepted that even if disallowance under section 40(a)(ia) stood, such addition increases the business profits and is therefore includible for computing deduction under section 10B. The Tribunal relied on the jurisdictional High Court's reasoning that an addition which enhances business profits ought to be considered in computing the deduction under export related sections unless a statute provides otherwise. Consequently, CIT(A)'s direction to grant consequential exemption under section 10B in respect of the disallowance was sustained and the revenue's challenge rendered academic. [Paras 6, 7]CIT(A)'s restriction of disallowance under section 40(a)(ia) to amounts payable as on 31.03.2009 accepted; disallowance (if sustained) to be considered for exemption under section 10B - revenue's appeal dismissed.Final Conclusion: Assessee's appeal allowed by deleting the addition under section 10B(7) r.w.s. 80IA(10); Revenue's appeal dismissed as to the treatment of the section 40(a)(ia) disallowance and its consequential eligibility for exemption under section 10B. 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.