2015 (6) TMI 1193 - AT - Income Tax

Appeal partially allowed: Loss rejection upheld, transfer disallowed, profit reduced, deductions re-computed

The tribunal partially allowed the appeal, upholding the rejection of Gross loss for the Nashik Unit due to lack of convincing explanations, disagreeing ... Rejection of Gross loss declared by the assessee - Rejection of Gross Profit declared by the assessee for its Nashik Unit and instead estimating the same at 10% of the sales - HELD THAT:- We notice that the assessee has failed to furnish convincing explanations with regard to the Gross loss declared by it. Even though, it is claimed that the Gross loss has occurred due to higher interest and depreciation, yet the CIT(A) noticed that the assessee has followed identical method of accounting in the immediately preceding year and declared profit. In the absence of any convincing reason for occurring of Gross loss, we are of the view that the Ld CIT(A) was justified in confirming the rejection of Gross loss declared by the assessee. AO has estimated the Gross Profit @ 10% of the Gross sales. We notice that the AO has compared the Gross profit rate declared in the Pune unit and accordingly determined the rate of GP at 10%. The Ld CIT(A) also confirmed the same. Before us, though the assessee contended that it was not correct to estimate the Gross profit, yet no material was placed before us in order to compel us to disturb the estimate made by the AO. Accordingly, we confirm the order of Ld CIT(A) on this issue. Computation of deduction u/s 10B in respect of Pune Unit and also the disallowance of loss declared by the Nashik Unit - HELD THAT:- In the instant case, has assessed the interest income under the head Income from other sources. On the contrary, the coordinate bench of Mumbai Tribunal, in the case of Larsen & Toubro Infotech Ltd [2012 (9) TMI 292 - ITAT MUMBAI] has expressed the view that the other income having no direct nexus with export of articles or things are not eligible for deduction u/s 10A of the Act. Accordingly, we confirm the reduction of profit eligible for deduction u/s 10B of the Act by the amount of interest income. Rejection of deduction u/s 10-B of the Act relating to sub-contract works - AO the reduced the deduction u/s 10B of the Act to the extent of profit attributable to subcontracting works - HELD THAT:- A perusal of the provisions of sec. 10B(1) would show that the deduction prescribed therein is allowed to profits and gains as are derived by a hundred per cent export-oriented undertaking from export of articles or things or computer software i.e., section 10B nowhere provides anything about the mode of manufacture. Accordingly, we are of the view that the assessing officer was not right in holding that the assessee was not eligible for deduction u/s 10B of the Act in respect of profit attributable to sub-contract works. Accordingly, the Ld CIT(A) was not justified in confirming the same. Accordingly, we set aside the order of Ld CIT(A) as well as the AO on this issue. Disallowance made u/s 14A - HELD THAT:- No requirement of making any disallowance out of interest expenditure. However, since the year under consideration is AY 2007-08 to which the provisions of Rule 8D are not applicable as per the decision of Godrej & Boyce manufacturing Co. [2010 (8) TMI 77 - BOMBAY HIGH COURT] , the disallowance u/s 14A is required to be computed in a reasonable manner. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to examine this issue afresh and after hearing the assessee, take appropriate decision in accordance with the law. Loss incurred in Nashik unit should not be set off against the Pune unit for computing deduction u/s 10B of the Act in respect of Pune unit - HELD THAT:- We notice that the co-ordinate bench of ITAT in the case of Larsen & Toubro Infotech Ltd [2012 (9) TMI 292 - ITAT MUMBAI] has taken the view that the deduction u/s 10B is allowable each undertaking wise and hence the loss incurred in one eligible unit should not be set off against the income from other eligible unit. We direct the AO to compute the deduction u/s 10B accordingly. Issues:1. Rejection of Gross Profit declared by the assessee for its Nashik Unit.2. Computation of deduction u/s 10B of the Act in respect of Pune Unit and disallowance of loss declared by the Nashik Unit.3. Reduction of interest income from the profit of Pune unit for computing deduction u/s 10B of the Act.4. Rejection of deduction u/s 10-B of the Act relating to sub-contract works.5. Disallowance made u/s 14A of the Act.Issue 1 - Rejection of Gross Profit for Nashik Unit:The AO rejected the Gross loss declared by the assessee for its Nashik Unit and estimated the Gross profit at 10% of sales. Both the AO and Ld CIT(A) confirmed this decision. The tribunal found that the assessee failed to provide convincing explanations for the Gross loss. Despite claims of higher interest and depreciation causing the loss, the tribunal noted that the assessee had previously declared a profit using the same accounting method. Thus, the rejection of the Gross loss was upheld.Issue 2 - Computation of Deduction u/s 10B:The AO reduced the net loss of Nashik Unit and transferred it to the Pune Unit, along with deducting interest income not derived from exports. The tribunal disagreed with the AO's reasoning, finding no evidence that sub-contract charges were below market rates. Additionally, the AO's classification of Nashik Unit as non-10B was deemed incorrect. The tribunal set aside the Ld CIT(A)'s order and directed the AO not to transfer the Nashik Unit's loss to Pune Unit.Issue 3 - Reduction of Interest Income for Deduction u/s 10B:The tribunal upheld the reduction of profit eligible for deduction u/s 10B by the amount of interest income, citing Supreme Court decisions. The tribunal distinguished a Kolkata Tribunal case as the interest income was assessed under a different category. It confirmed the reduction of profit for deduction purposes.Issue 4 - Rejection of Deduction for Sub-contract Works:The AO disallowed deduction for profit attributable to sub-contract works, stating the assessee should undertake manufacturing directly. The tribunal disagreed, citing Sec. 10B(1) which doesn't specify the mode of manufacture for eligibility. It set aside the orders of the AO and Ld CIT(A) on this issue.Issue 5 - Disallowance u/s 14A of the Act:The Ld CIT(A) enhanced the assessment for disallowance under Rule 8D, but the tribunal noted that Rule 8D wasn't applicable for AY 2007-08. Referring to a High Court decision, the tribunal directed the AO to compute the disallowance under reasonable grounds, setting aside the Ld CIT(A)'s order.In conclusion, the tribunal partially allowed the appeal, addressing each issue raised by the assessee in detail and providing legal reasoning for its decisions.