2024 (12) TMI 1675 - AT - Income Tax

Leasehold improvement remanded; 10AA deduction sustained, no profit inflation or set-off of unabsorbed depreciation allowed

ITAT partly allowed the assessee's appeal. On the issue of leasehold improvement expenditure, the Tribunal admitted additional evidence (final exit order ... Nature of expenses - disallowance of expenses claimed for leasehold improvements treating the same as capital expenditure - HELD THAT:-Assessee furnished copy of final exit order regarding leaving of the leasehold premises on which the impugned improvement expenditure was incurred. It was fairly admitted by assessee that this document was not produced before Ld. CIT(A) and accordingly, it was requested before the Bench to admit the same as an additional evidence. Final exit order is related to impugned addition and accordingly the same is admitted for consideration. Since the above relevant additional evidences is relied on by the assessee, we deem it proper to set-aside the order of Ld. CIT(A) on this specific ground i.e. addition on account of disallowance of expenditure being capital in nature. Disallowance u/s 10AA - We find that the decision in the case Calsoft Pvt. Ltd. [2014 (4) TMI 1336 - ITAT PUNE] wherein deletion of similar addition was approved by the Tribunal as held in the case of CIT & Another Vs. H.P. Global Soft Ltd. [2012 (4) TMI 397 - KARNATAKA HIGH COURT] wherein, it was found that the profit margin as revealed by the assessee is a reasonable profit in comparison to other similar units. The Assessing Officer having failed to show that is it a course of business, so arranged as to result in inflated profit provisions of section 10I(9) could not be to reduce the deduction under the provisions of section 10A. We also found in the case of ITO Vs. Novel Consumer Products (P) Ltd. [2005 (7) TMI 572 - ITAT MUMBAI] wherein held that in the absence of any efforts by the Assessing Officer to ascertain the exact profit rate from comparable case, sub-section of section 80IA, has not justified. We are not inclined to interfere with the finding of CIT(A) who has deleted the addition which has been made by the Assessing Officer on the ground that profit shown from eligible unit is more than normal. Computation of deduction u/s 10AA without setting off of brought forward unabsorbed depreciation - As decided in the case of CIT vs. Yokogawa India Ltd.. [2016 (12) TMI 881 - SUPREME COURT] and KPIT Cummins Infosystems Ltd. [2015 (11) TMI 1522 - ITAT PUNE] and therefore, it was held by Ld. CIT(A) that deduction u/s 10AA is to be computed without setting off of brought forward unabsorbed deprecation - The order passed by Ld. CIT(A) wherein he directed the AO to compute deduction u/s 10AA without setting off of brought forward unabsorbed depreciation is hereby confirmed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether expenditure incurred on leasehold improvements was capital or revenue in nature, and the propriety of admitting additional evidence and remanding the matter for fresh adjudication. 1.2 Whether deduction under section 10AA could be curtailed by invoking section 10AA(9) read with section 80-IA(10) on the ground that the assessee earned 'more than ordinary profits', and what preconditions must be satisfied to invoke those provisions. 1.3 Whether, for the relevant assessment year, deduction under section 10AA was to be computed before or after setting off brought forward unabsorbed depreciation. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Character of leasehold improvement expenditure; admission of additional evidence and remand Interpretation and reasoning 2.1 The dispute concerned disallowance of expenses claimed as revenue on account of leasehold improvements, which the lower authorities had treated as capital in nature, inter alia relying on the fact that the assessee was presumed to be continuing in the original leased premises and on Explanation 1 to section 32. 2.2 Before the Tribunal, the assessee produced, for the first time, a 'final exit order' issued by the competent authority evidencing that the original leasehold premises had been vacated and that no dues remained outstanding. It was admitted that this evidence had not been produced before the lower authorities and a request was made to admit it as additional evidence. 2.3 The Tribunal found that the final exit order directly related to, and had a bearing on, the core factual premise on which the disallowance had been sustained, namely, the alleged enduring benefit derived from the improvements in the same premises. Considering its direct relevance to the impugned addition, the Tribunal admitted the document as additional evidence. 2.4 As the newly admitted evidence went to the root of the factual matrix and had not been examined by the first appellate authority, the Tribunal considered it appropriate not to adjudicate the merits of the capital vs. revenue nature of the expenditure at this stage. Conclusions 2.5 The additional evidence in the nature of the final exit order was admitted. 2.6 The finding of the first appellate authority treating the leasehold improvement expenditure as capital in nature was set aside on this limited issue. 2.7 The matter was remanded to the first appellate authority for fresh adjudication of the allowability and nature of the leasehold improvement expenditure, in accordance with law and facts, after granting reasonable opportunity to the assessee to file all necessary documents and evidences. Issue 2: Curtailment of deduction under section 10AA by invoking section 10AA(9) read with section 80-IA(10) Legal framework as discussed 2.8 The Tribunal noted that section 10AA(9) incorporates the mechanism of section 80-IA(10), which permits the Assessing Officer to re-compute profits of an eligible business where: (i) there exists a close connection between the assessee and any other person; and (ii) the course of business is 'so arranged' that the business transacted produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business. 2.9 It was emphasized, as recorded from the first appellate authority, that for invoking section 80-IA(10), the Assessing Officer must establish, on the basis of material and evidence, that there exists an 'arrangement' in the course of business resulting in more than ordinary profits. Mere existence of higher profit margin, without more, is not sufficient. Interpretation and reasoning 2.10 The lower authority had held that the assessee's operating margin was significantly higher than that of comparables and, on that basis alone, inferred existence of an arrangement and recomputed profits by applying the arithmetic mean of the comparables' margins. 2.11 The first appellate authority held that, though close connection between the assessee and its associated enterprise was undisputed, the statutory precondition that the course of business must be 'so arranged' to yield more than ordinary profits had not been objectively demonstrated by the Assessing Officer. No material or evidence of any such specific arrangement was brought on record. 2.12 The first appellate authority relied on prior decisions which held that the Assessing Officer must establish, with cogent reasoning and evidence, that the business transactions were structured in a manner to inflate profits of the eligible unit, and that mere higher profitability is inadequate to trigger section 80-IA(10). 2.13 On facts, the first appellate authority examined the service agreement between the assessee and its associated enterprise, evidencing remuneration on a cost-plus 15% mark-up model. It was noted that the apparent high profit level indicator (PLI) in the relevant year was primarily due to the treatment of foreign exchange gain as operational revenue. 2.14 By applying the guidance in the safe harbour rules (rule 10TA) as a benchmark, the first appellate authority found that, once foreign exchange gains were treated consistently, the assessee's PLI was approximately 15.81% as against comparables' mean margin of 14.81%, and therefore not 'extraordinary' or beyond ordinary profits. 2.15 The Tribunal noted that a jurisdictional decision had already approved deletion of similar disallowance where the Assessing Officer had failed to establish that the business was 'so arranged' as to artificially inflate profits, even where profit margins were comparatively higher. Conclusions 2.16 The conditions for invoking section 10AA(9) read with section 80-IA(10) were held not to be satisfied, as the Assessing Officer neither demonstrated any specific arrangement in the course of business nor showed that the profits were more than ordinary in the legally relevant sense. 2.17 The recomputation of profits and consequent reduction of deduction under section 10AA were held to be unsustainable. 2.18 The deletion of the disallowance of deduction under section 10AA was affirmed, and the Revenue's grounds challenging such deletion were dismissed. Issue 3: Set-off of brought forward unabsorbed depreciation before computing deduction under section 10AA Legal framework as discussed 2.19 The Tribunal recorded the position that, post-amendment, the relevant exemption provision operates in the nature of a deduction; however, as per the binding judicial view applicable to the assessment year in question, the stage of such deduction is while computing the profits of the eligible undertaking under the head 'Profits and gains of business or profession' (Chapter IV), and not at the later stage of computing total income under Chapter VI. 2.20 It was further noted that section 10AA was subsequently amended by insertion of an Explanation with effect from a specified later assessment year to alter the mechanics of computation; however, that amendment had been judicially held to apply prospectively from that later assessment year. Interpretation and reasoning 2.21 The controversy was whether brought forward unabsorbed depreciation had to be set off against the profits of the eligible undertaking before computing deduction under section 10AA for the assessment year under consideration. 2.22 The first appellate authority held that, in view of the then-prevailing binding judicial interpretation, deduction under section 10AA was to be computed on the profits of the eligible undertaking prior to the set-off of brought forward unabsorbed depreciation, since the deduction fell to be allowed at the stage of computing the profits of the eligible business under Chapter IV. 2.23 The first appellate authority further observed that the legislative amendment to section 10AA, designed to change the computation mechanism, was effective only from a subsequent assessment year and could not be applied retrospectively to the assessment year in appeal. Conclusions 2.24 For the assessment year in question, deduction under section 10AA was held to be computable without first setting off brought forward unabsorbed depreciation against the eligible profits. 2.25 The direction to compute deduction under section 10AA without setting off brought forward unabsorbed depreciation was upheld, and the Revenue's ground on this issue was dismissed.