ITAT decision on deductions: 80IB, 80IC, 80HHC upheld, direct nexus required, DDT disallowed under 115JB

The ACIT, Circle- 2, Udaipur Versus M/s. Secure Meters Ltd.

The ACIT, Circle- 2, Udaipur Versus M/s. Secure Meters Ltd. - TMI Issues Involved:
1. Deletion of apportionment of R&D expenditure and depreciation for deduction u/s 80IB and 80IC.
2. Allowing netting of interest income for deduction u/s 80IB/80IC.
3. Allowing deduction u/s 80IB/80IC on various other incomes.
4. Deleting disallowance of deduction u/s 80IB/80IC on trading profit.
5. Allowing netting of interest income for deduction u/s 80HHC.
6. Allowing deduction u/s 80HHC on other incomes.
7. Allowing deduction on account of dividend distribution tax while calculating book profit u/s 115JB.

Summary:

1. Deletion of Apportionment of R&D Expenditure and Depreciation for Deduction u/s 80IB and 80IC:
The AO restricted the claim of deduction u/s 80IB and 80IC by apportioning R&D expenditure and depreciation on head office assets between the units. The ld. CIT(A) found that the AO's reliance on the jurisdictional High Court decision was reversed by the Hon'ble Supreme Court, thus deleting the disallowance. The ITAT upheld the CIT(A)'s decision, confirming that the assets were not used by other units and the apportionment was not justified.

2. Allowing Netting of Interest Income for Deduction u/s 80IB/80IC:
The AO excluded other income, including interest, from the eligible profits for deduction u/s 80IB/80IC. The ld. CIT(A) allowed netting of interest income against interest paid, directing the AO to work out the actual disallowance. The ITAT confirmed this decision, emphasizing the principle of netting when there is a nexus between interest income and expenditure.

3. Allowing Deduction u/s 80IB/80IC on Various Other Incomes:
The AO excluded other incomes such as exchange rate fluctuation, scrap sales, liquidated damages, etc., from eligible profits. The ld. CIT(A) allowed these incomes as part of business profits, not income from other sources. The ITAT upheld this decision, agreeing that these incomes were directly related to the business activities of the units.

4. Deleting Disallowance of Deduction u/s 80IB/80IC on Trading Profit:
The AO disallowed deduction on trading profit, treating it as not derived from the industrial undertaking. The ld. CIT(A) allowed the deduction, noting that the trading activities were necessary to fulfill customer orders and were closely connected to the manufacturing business. The ITAT confirmed this decision, recognizing the direct nexus between trading activities and the business of the industrial undertaking.

5. Allowing Netting of Interest Income for Deduction u/s 80HHC:
The AO excluded 90% of interest income from profits for deduction u/s 80HHC. The ld. CIT(A) allowed netting of interest income against interest paid. The ITAT upheld this decision, reiterating the principle of netting when there is a direct nexus between interest income and expenditure.

6. Allowing Deduction u/s 80HHC on Other Incomes:
The AO excluded 90% of other incomes from profits for deduction u/s 80HHC. The ld. CIT(A) allowed these incomes as part of business profits, not income from other sources. The ITAT confirmed this decision, agreeing that these incomes were directly related to the business activities of the units.

7. Allowing Deduction on Account of Dividend Distribution Tax While Calculating Book Profit u/s 115JB:
The AO disallowed the reduction of dividend distribution tax and deferred tax liability from book profit u/s 115JB. The ld. CIT(A) allowed the reduction. The ITAT reversed the CIT(A)'s decision, holding that the amendment to the provision was prospective and the AO was justified in disallowing the reduction.

Conclusion:
The ITAT upheld the CIT(A)'s decisions on most issues, confirming the allowance of various deductions and netting principles, while reversing the decision on the deduction of dividend distribution tax while calculating book profit u/s 115JB.