2015 (2) TMI 940 - AT - Income Tax

Tribunal upholds CIT(A) on Section 80IB, 115JB deductions, reverses on exempt income.

The Deputy Commissioner of Income Tax Central Circle-2(2), Bangalore Versus M/s. Sobha Developers

The Tribunal upheld the CIT(A)'s decisions on the deletion of the reduction from Section 80IB deduction and the exclusion of the share of profits from a ... Deduction u/s. 80IB(10) denied - According to the AO, development of the land is carried out by the sister company and not by the assessee - CIT(A) directed the AO to allow deduction u/s. 80IB(10) on a sum of ₹ 1,15,18,769 - Held that:- The entire profit earned by a developer was part and parcel of the over all profits derived from the housing project. We are, therefore, of the considered view that the exclusion of the profit on the sale of land on a sole ground that the assessee had shown the profits separately and the same would not relate to the assessee was misconceived and, thus, exclusion of the profit on sale of land was rather unjustified. - Decided in favour of assessee. Deduction allowed u/s. 80IB(10) of the Act by the CIT(A) viz., a sum of ₹ 3,50,92,256 - AO was of the view that assessee allocated COH expenses in such a way that less COH is shown in projects eligible for deduction u/s. 80IB(10) and more expenses are shown in the projects not eligible for deduction u/s. 80IB(10) of the Act. This, according to the AO, would reduce the total income in respect of profits of the assessee derived from projects which are not eligible for deduction u/s. 80IB(10) - Held that:- We are of the view that the order of CIT(Appeals) does not call for any interference. As rightly observed by him, in para 4.10 of the order of assessment, the AO has given no basis for allocating COH at 4% as against 3.27% adopted by the assessee. The AO’s conclusion is that allocation of COH at 3.27% is very low compared to the turnover of assessee. He has also given no basis for adopting 4%. As rightly observed by the CIT(Appeals), the AO has proceeded on surmises that assessee was increasing the profits of 80IB(10) units and decreasing the profits of non-80IB units to gain tax advantage. There is no basis whatsoever for this assumption of the AO. There is no dispute also that allocation of COH based on turnover will result in distortion of profits of 80IB(10) units and non-80IB(10) units. - Decided in favour of assessee. Computation of book profits u/s. 115JB - whether amount of expenditure relatable to any income to which section 10 applies, should be added to the profit as per the P&L account? - Held that:- In the issue of reducing/excluding the share of profits from the profit as per the P&L account, in view of clause (ii) to Expanation (1) to section 115JB(2) of the Act, viz., the amount of income to which any of the provisions of section 10, we are of the opinion that the contentions put forth by the assessee that it is not fair to deny the Assessee a relief purely on technicalities, when otherwise, the Assessee was entitled to the same.are acceptable. In this regard, we are also of the view that decision rendered by the Bangalore Bench of the Tribunal n the case of Sri Lakhan Singh v. ACIT, [2013 (2) TMI 319 - ITAT BANGALORE] referred to by the ld. counsel for the assessee clearly supports the stand taken by the assessee. - Decided in favour of assessee. Whether Sec. 14A of the Act read with Rule 8D of the rules can be imported into the provisions of clause (f) to Explanation (1) to section 115JB? - Held that:- There is no difference between the expression 'expenditure relatable' and the expression 'expenditure incurred by the Assessee in relation to'. Both the expressions mean that whatever expenditure are incurred to earn income which does not form part of the total income under the Act, both direct and indirect expenditure, have to be disallowed. There is no basis for the argument u/s. 115JB of the Act, it is only direct expenses that are contemplated as capable of being added to the profits as per P&L account under clause (f) to Expln.1 below Sec.115JB(2) of the Act. The quantum of expenditure disallowed by the AO by invoking the provisions of Sec.14A of the Act while computing total income under the normal provisions of the Act has not been challenged by the Assessee and the said disallowance has been accepted by the Assessee. In such circumstances, we do not see any reason why the same disallowance cannot be adopted while arriving at the book profits u/s.115JB (2) of the Act read with Explanation 1(f) thereto. In our view the CIT(A) has fallen into an error in coming to a conclusion contrary. - Decided in favour of revenue. Issues Involved:1. Deletion of reduction from Section 80IB deduction.2. Allocation of Common Overhead Expenses (COH) to projects eligible and non-eligible for Section 80IB deduction.3. Inclusion of expenditure related to exempt income in book profits under Section 115JB.4. Exclusion of share of profits from a partnership firm in book profits under Section 115JB.Detailed Analysis:Issue 1: Deletion of Reduction from Section 80IB DeductionThe revenue challenged the deletion of Rs. 5,06,11,025 from the Section 80IB deduction by the CIT(A). This amount included Rs. 1,55,18,769 and Rs. 3,50,92,256. The AO denied the deduction for Rs. 1,55,18,769, arguing that the profit from the sale and development of land in the 'Sobha Daffodil' project was not derived from the development of the housing project but from the sister company, STP. The CIT(A) found that the Tribunal had previously ruled in favor of the assessee for the A.Y. 2005-06, allowing such profits to be eligible for the Section 80IB deduction. The Tribunal upheld the CIT(A)'s order, dismissing the revenue's grievance.Issue 2: Allocation of Common Overhead Expenses (COH)The AO believed the assessee allocated COH expenses to minimize the expenses shown for projects eligible for the Section 80IB deduction and maximize them for non-eligible projects. The AO reallocated COH at 4% instead of the 3.27% used by the assessee, resulting in a reduction of Rs. 3,50,92,256 in profits for Section 80IB projects. The CIT(A) found the AO's basis for the 4% allocation arbitrary and unsupported by specific instances of improper allocation, directing the deletion of the addition. The Tribunal agreed with the CIT(A), finding no basis for the AO's assumption and dismissing the revenue's ground.Issue 3: Inclusion of Expenditure Related to Exempt Income in Book Profits under Section 115JBThe AO added Rs. 24,64,632, an expenditure related to exempt income under Sections 10(35) and 10(2A), to the book profits under Section 115JB. The CIT(A) ruled that Section 14A and Rule 8D, which deal with disallowance of expenditure related to exempt income, do not apply to the computation of book profits under Section 115JB. The Tribunal, however, found that the provisions of Section 14A and Rule 8D could be used to determine the expenditure related to exempt income for the purpose of Section 115JB, reversing the CIT(A)'s order and restoring the AO's decision.Issue 4: Exclusion of Share of Profits from a Partnership Firm in Book Profits under Section 115JBThe AO refused to exclude Rs. 6,63,79,683, the share of profits from a partnership firm, from the book profits under Section 115JB, citing the Supreme Court's decision in Goetze (India) Ltd. v. CIT, which restricts the AO from entertaining claims not made in a revised return. The CIT(A) held that appellate authorities could entertain such claims and directed the exclusion of the share of profits from the book profits. The Tribunal upheld the CIT(A)'s decision, agreeing that the share of profits, exempt under Section 10(2A), should be excluded from the book profits.Conclusion:The Tribunal upheld the CIT(A)'s decisions on the deletion of the reduction from Section 80IB deduction and the exclusion of the share of profits from a partnership firm in book profits under Section 115JB. However, it reversed the CIT(A)'s decision on the inclusion of expenditure related to exempt income in book profits under Section 115JB, restoring the AO's order. The appeal of the revenue was partly allowed.