2018 (10) TMI 1821 - AT - Income Tax

Tribunal upholds CIT(A)'s decision on set-off, disallowance under sections 10AA, 14A, and 115JB.

DCIT, Cir. (1) (1) (1) Ambawadi Ahmedabad Versus M/s. Ausom Enterprise Ltd.

The Tribunal rejected the Revenue's appeal regarding the deletion of disallowances under section 10AA and upheld the CIT(A)'s decision on set-off of ... Deduction u/s 10AA - CIT(A) recorded a finding that interest income disclosed by the assessee is to be treated as business income, because it has nexus with the export activities of the assessee and accordingly allowed appeals of the assessee - HELD THAT:- We are of the view that the ld.CIT(A) has rightly considered the judgment relied upon by the assessee, and has rightly held that interest income earned by the assessee on FDRs. for obtaining LC is the business income of the undertaking which is to be taken into consideration while calculating deduction under section 10AA of the Act. It appears that the ld.CIT(A) has mentioned a wrong amount for the Asstt.Year 2013-14. The deduction claimed by the assessee was at ₹ 3,80,14,434/- whereas in the ground, the Revenue has made a mention of the amount agitated in the Asstt.Year 2012-13. Nevertheless, in principle, we are holding that interest income earned by the assessee is to be assessed as business income of the undertaking eligible for claim of deduction under section 10AA of the Act. Thus, the is ground of appeal is rejected in all three years. Whether brought forward loss and unabsorbed depreciation is to be set off before calculating deduction admissible under section 10AA of the Act or not? - HELD THAT:- As decided in INDUSA INFOTECH SERVICES (P.) LTD. [2013 (9) TMI 1150 - GUJARAT HIGH COURT] decided this question in favour of the assessee i.e. upholding allowance of deduction under section 10A before set off of any balance unabsorbed loss and depreciation of noneligible business units of the assessee. Somewhat similar issue has been considered by the Hon’ble Supreme Court in the case of Yokogawa India Ltd. [2016 (12) TMI 881 - SUPREME COURT] as held that for the purpose of calculation of deduction under section 10AA it has to be computed prior to set off of these unabsorbed deprecation, brought forward loss of other units. Disallowance u/s 14A to be added back in the book profit for the purpose of section 115JB - HELD THAT:- We have adjudicated this issue in the case of Gujarat Fluorochemicals Ltd. [2018 (8) TMI 857 - ITAT AHMEDABAD] we hold that even if some addition has been confirmed under section 14A, then also it could not be adjusted in the book profit for the purpose of section 115JB. Disallowance made out of claim under section 10AA should not be adjusted in the book profit for the purpose of section 115JB - CIT(A) has deleted this adjustment on the ground that the disallowance itself has been deleted - HELD THAT:- We do not find any error in the order of the ld.CIT(A), because we have already deleted disallowance made under section 10AA. Once there is no amount available for disallowance, no question arises for making adjustment in the book profit. This ground of appeal is rejected in both the years. Disallowability of certain expenditure with the aid of section 14A r.w.s 8D relatable to earning of tax free income - HELD THAT:- In recent judgment, Hon’ble Supreme Court has upheld the disallowance of expenditure relatable to tax free income even if such income is incidental income. In this regard, we would like to make reference to the decision of Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs. DCIT [2018 (3) TMI 805 - SUPREME COURT] . In view of this latest decision of Hon’ble Supreme Court, view taken by the ld.CIT(A) on the strength of ITAT order is not sustainable. However, considering the meager tax free income it is not justifiable to disallow the expenditure more than the tax free income. We can make reference to the decision in the case of Correctch Energy P.Ltd. [2014 (3) TMI 856 - GUJARAT HIGH COURT] and Cheminvest Ltd. Vs. CIT [2015 (9) TMI 238 - DELHI HIGH COURT] - we would like to observe that if we estimate adhoc disallowance for expenditure ought to be incurred for earning tax free income, such estimated expenses are to be worked out ₹ 10,000/-; ₹ 20,000/-; ₹ 30,000/- in the Asstt.Years 2011-12, 2012-13 and 2013-14 respectively, qua dividend income of ₹ 1,02,050/-, ₹ 2,53,000/- and ₹ 3,05,265/ Issues Involved:1. Deletion of disallowances under section 10AA of the Income Tax Act.2. Set-off of brought forward loss and unabsorbed depreciation before calculating deduction under section 10AA.3. Addition of disallowance under section 14A to book profit for section 115JB.4. Disallowance of certain expenditure under section 14A related to earning tax-free income.Detailed Analysis:1. Deletion of Disallowances Under Section 10AA:The Revenue's grievance was that the CIT(A) erred in deleting disallowances of Rs. 7,43,24,689/-, Rs. 4,06,52,387/-, and Rs. 4,06,52,387/- made by the AO out of the claim of deduction under section 10AA for the assessment years 2011-12, 2012-13, and 2013-14 respectively. The AO argued that interest income included by the assessee in business profits could not be considered as profit derived from the undertaking. The CIT(A) held that the interest income had a nexus with the export activities and should be treated as business income eligible for deduction under section 10AA. The Tribunal upheld the CIT(A)'s decision, referencing similar cases and judgments, including the Karnataka High Court's decision in Motorola India Electronics P. Ltd. v. CIT, which supported the view that interest income from business activities should be considered as business income for deduction purposes under section 10AA.2. Set-off of Brought Forward Loss and Unabsorbed Depreciation:The issue was whether brought forward loss and unabsorbed depreciation should be set off before calculating deductions under section 10AA. The CIT(A) ruled in favor of the assessee, supported by the Gujarat High Court's decision in Indusa Infotech Services P. Ltd. and the Supreme Court's decision in Yokogawa India Ltd. The Supreme Court clarified that deductions under section 10AA should be computed before setting off any brought forward losses or unabsorbed depreciation, emphasizing that the benefit of deduction is granted to the individual undertaking independently of other units.3. Addition of Disallowance Under Section 14A to Book Profit for Section 115JB:The issue was whether disallowance under section 14A should be added back to the book profit for the purpose of section 115JB. The Tribunal referenced its previous decision in Gujarat Fluorochemicals Ltd. v. DCIT, which aligned with the Special Bench's ruling in Vireet Investment P. Ltd. The Tribunal concluded that even if disallowance under section 14A is confirmed, it should not be adjusted in the book profit for section 115JB purposes, following the precedent set by the Gujarat High Court in Alembic Ltd. and the Bombay High Court in Bengal Finance & Investments P. Ltd.4. Disallowance of Certain Expenditure Under Section 14A Related to Earning Tax-Free Income:The AO disallowed certain expenditures related to earning tax-free income under section 14A read with Rule 8D. The CIT(A) deleted these disallowances, considering the dividend income incidental to the business. However, the Tribunal, referencing the Supreme Court's decision in Maxopp Investment Ltd. v. DCIT, held that disallowance of expenditure related to tax-free income is justified. The Tribunal adjusted the disallowances to reasonable amounts considering the meager tax-free income, setting them at Rs. 10,000/-, Rs. 20,000/-, and Rs. 30,000/- for the respective assessment years.Conclusion:The Tribunal rejected the Revenue's appeal regarding the deletion of disallowances under section 10AA and upheld the CIT(A)'s decision on set-off of brought forward loss and unabsorbed depreciation. It also ruled that disallowance under section 14A should not be added to book profit for section 115JB purposes and adjusted the disallowance of certain expenditures related to earning tax-free income to reasonable amounts. The appeals of the Revenue were partly allowed.