2019 (11) TMI 147 - AT - Income Tax

Tribunal affirms CIT(A) decisions on foreign gains, staff salaries, & book profits under Section 115JB

ACIT-4 (1), Indore Versus M/s. Yash Technologies Pvt. Ltd

The Tribunal upheld the Ld. CIT(A)'s decisions regarding the treatment of foreign currency gains, attribution of staff salaries, and calculation of book ... Exemption u/s 10AA - Gain from foreign currency - treating gain from foreign exchange fluctuation as income from other sources - HELD THAT:- We find that there is no dispute to this fact that the alleged amount is the net of gain/loss of the foreign currency received during the year from the revenue operations carried out by the assessee in the Special Economic Zone units running at Hyderabad and Pune. Therefore the issue is squarely covered by the judgment in the case of Sutlej Cotton Mills Ltd [1978 (9) TMI 1 - SUPREME COURT] and the CIT(A) has rightly deleted the addition treating the amount as part of relief eligible for exemption u/s 10AA. Even otherwise the assessee is required to pay tax on the book profit u/s 115JB of the Act and the alleged amount has already been added in the book profit and thus subjected to tax. This fact has also been highlighted in the finding of Ld. CIT(A). We therefore in the facts and circumstances of the case and respectfully following the judgment of Hon’ble Supreme Court, find no reason to interfere in the finding of Ld. CIT(A). Accordingly Ground No.1 of the revenue stands dismissed. Attribution of salary of staff to the SEZ units - Disallowance of salary expenditure wrongly claimed by the assessee as part of Non SEZ units - HELD THAT:- The correct fact is that out of the 8 employees mentioned by the Ld. A.O, salary of 5 employees already stands debited to the SEZ units and the exemption has been claimed on the profits arrived after deducting the expenses of salary of the 5 employees to whom the total amount was paid. Further the Ld. A.O has made the impugned disallowance without bringing any detail on record so as to prove that the alleged salary was payable in the non SEZ units. The assessee’s books of accounts are duly audited and it has bifurcated the salary expenses correctly under non SEZ units and SEZ units. In the case of the assessee for the determination of ALP in specified domestic transactions reference could have been made to the TPO but certainly the Ld. A.O has no power to make such disallowance. As per the provision of Section 92BA of the Act for the year under appeal the domestic pricing transfer provisions could apply if the aggregate of such transactions entered into by the assessee in the previous year exceeds a sum of ₹ 5 crores. But in the instant case the specified domestic pricing figure is ₹ 3,46,13,572/- which is less than ₹ 5 crores hence the provision of Section 92BA of the Act does not apply. A.O adopted wrong facts treating the salary debited to SEZ units at ₹ 2,12,90,094/- as salary debited to non SEZ units which makes the very basis of alleged disallowance incorrect. CIT(A) has rightly appreciated the facts and deleted the proportionate disallowance of salary expenditure of ₹ 2,07,68,143/-. We thus find no infirmity in the finding of CIT(A). Ground No. 2 & 3 of the revenue’s appeal stands dismissed. Calculation of book profit u/s 115JB - HELD THAT:- It is an established proposition that for computing the book profit u/s 115JB of the Act limited scope is available with A.O to just refer to explanation No.1 of Section 115JB of the Act and make the adjustments of items mentioned therein if not made by the assessee. In the instant case A.O seems to have acted beyond the provisions laid down in Section 115JB and has made the adjustment to the book profits computed as per Companies Act, of the items not appearing in the explanation 1 of Section 115JB. A.O grossly erred in making the additions to the book profits without properly applying the provisions of section 115JB of the Act. Thus no addition of the alleged amounts ought to have been made to the book profits for the purpose of computing tax liability u/s 115JB of the Act. No interference is thus called for in the finding of Ld. CIT(A). Issues Involved:1. Deletion of addition of gain from foreign currency fluctuation.2. Deletion of proportionate addition on account of attribution of staff salary to SEZ units.3. Opportunity to AO to examine new evidence during appellate proceedings.4. Calculation of book profit for tax liability under Section 115JB.Issue-wise Detailed Analysis:1. Deletion of Addition of Gain from Foreign Currency Fluctuation:The revenue challenged the deletion of an addition of Rs. 1,52,82,274/- by the Ld. CIT(A), which was treated as 'income from other sources' by the AO and not eligible for exemption under Section 10AA. The Ld. CIT(A) held that the gain was part of business receipts and thus eligible for exemption. The Tribunal upheld this view, referencing the Supreme Court's judgment in Sutlej Cotton Mills Ltd vs. CIT, which established that gains from foreign currency fluctuations, if arising from business operations, are considered business income. The Tribunal found that the gain was indeed from business operations in SEZ units and had already been included in the book profit, thus dismissing the revenue's ground.2. Deletion of Proportionate Addition on Account of Attribution of Staff Salary to SEZ Units:The revenue appealed against the deletion of a proportionate addition of Rs. 2,07,68,143/- attributed to staff salaries for SEZ units. The AO had reallocated salaries of senior management to SEZ units based on turnover proportions. The Ld. CIT(A) found that the AO had incorrectly attributed salaries, as the salaries of five out of eight employees were already debited to SEZ units. The Tribunal confirmed that the AO's findings were factually incorrect and that the AO overstepped his authority by not referring the matter to the Transfer Pricing Officer (TPO) as required for specified domestic transactions. The Tribunal upheld the deletion of the addition.3. Opportunity to AO to Examine New Evidence During Appellate Proceedings:The revenue claimed that the AO was not given an opportunity to examine new evidence submitted by the assessee during the appellate proceedings. The Tribunal did not find merit in this claim since the CIT(A) had already verified the records and found the AO's findings factually incorrect. Thus, this ground was dismissed.4. Calculation of Book Profit for Tax Liability Under Section 115JB:The revenue contested the Ld. CIT(A)'s decision to delete additions made to the book profit for tax liability under Section 115JB. The AO had added the same amounts disallowed under normal provisions to the book profit. The Tribunal noted that adjustments to book profits under Section 115JB are limited to specific items listed in the explanation to the section. The Tribunal referenced multiple judgments, including Apollo Tyres Ltd. vs. CIT, which clarified that the AO cannot make adjustments beyond those specified in the explanation. Consequently, the Tribunal upheld the Ld. CIT(A)'s deletion of these additions, finding no error in the calculation of book profit by the assessee.Conclusion:The Tribunal dismissed the revenue's appeal on all grounds, affirming the Ld. CIT(A)'s decisions regarding the treatment of foreign currency gains, attribution of staff salaries, and calculation of book profits under Section 115JB. The order was pronounced in the open court on 31.10.2019.