2024 (11) TMI 1295 - AT - Income Tax

SEZ unit profits must be computed before setting off brought forward losses under Section 10AA deduction

Media. Net Software Services India P. Ltd., Versus DCIT-10 (2 (2) Mumbai

ITAT Mumbai allowed the assessee's appeal on multiple grounds. For Section 10AA deduction, the tribunal held that SEZ unit profits should be computed ... Deduction u/s 10AA - assessee has derived the profit of SEZ unit before depreciation and depreciation of that assessee unit - claim of the assessee is that for the purpose of claim of deduction u/s 10AA the business losses of the earlier year should not be reduced from the eligible profit - HELD THAT:- We find that now the honourable Supreme Court has decided this issue in case of Yokogawa India Ltd [2016 (12) TMI 881 - SUPREME COURT] wherein it has been held that the deduction u/s 10 A of the act is provision for deduction and the sale of deduction would be while computing the gross total income of the eligible undertaking and chapter IV of the act and not at the stage of computation of total income under chapter VI of the act. As in case of black & Veatch consulting private limited [2012 (4) TMI 450 - BOMBAY HIGH COURT] has also held that deduction u/s 10 A in respect of eligible unit has to be allowed before setting off of brought forward depreciation and losses of non eligible units. Same is the view expressed in case of Techno Tarp and Polymers Private Limited [2015 (12) TMI 909 - BOMBAY HIGH COURT] Appeal of the assessee is allowed. Disallowance on delayed payment of tax deducted at source u/s 37 - HELD THAT:- We find that this amount of expenditure is incurred by the assessee being interest on late payment of tax deduction at source. We find that interest on late payment of tax deduction at source by the assessee is not shown before the lower authorities that how it has been incurred wholly and exclusively for the purposes of the business of the assessee. In fact, such interest is in infraction of the law of the provisions of the income tax act when tax deducted at source required to be deposited after collecting from third parties to the credit of Central Government is deposited late. It is penal in nature. In the case of CIT v. Chennai Properties & Investment Ltd. [1998 (4) TMI 89 - MADRAS HIGH COURT] declared that the assessee's payment of interest u/s 201(1A) does not qualify as a business expense and cannot be seen as a compensatory payment. The payment of interest on late deposits of TDS assessed under Section 201(1A) is not an expense solely and exclusively expended for business purposes; hence it is not deductible u/s 37(1). Even if the deduction and remittance of TDS to the government are essential components of business operations, the assessee is nonetheless liable for this interest amount. This suggests that the assessee does not have the right to spend the money on the government's behalf. The character of the interest payment is determined by the sort of tax utilised to pay it. The several decisions of the coordinate benches cited before the learned CIT – A does not hold water in view of the decision of the honourable Madras High Court specifically saying that such interest does not qualify as deductible expenditure. Computation of setting off of the business loss of the correct some - HELD THAT:- Claim of the assessee is that the business loss claimed by the assessee in its return of income should be allowed whereas the claim of the AO is that as per the past record only the claim of business loss is available. As the amount of claim of the business loss is dependent on the adjudication process of the appeal of the assessee for earlier years, we restore this issue back to the file of the learned assessing officer to determine the available set off of brought forward business losses and then grant it to the assessee in accordance with the law. Ground number 4 is allowed with above direction. Expenditure incurred on leasehold improvements - nature of expenditure - HELD THAT:- This ground of appeal is in consequence to the assessment and appellate proceedings arising out of the assessment year 2013 – 14 and not this impugned assessment year. In that year the claim of the assessee is that assessee has incurred total leasehold improvements expenditure out of which assessee considered as revenue expenditure spent on fixtures and the balance sum is capital expenditure. The learned assessing officer for that assessment year has considered the whole of the sum is capital expenditure and allowed depreciation at the rate of 5%. As this issue pertained to that year, the appeal of which pending before the learned CIT – A. Therefore, the learned assessing officer is directed to consider the claim of the assessee if it is already decided in favour of the assessee by the appellate authority in accordance with the law. Accordingly ground number 5 of the appeal of the assessee is allowed with above direction. Issues Involved:1. Confirmation of additions to the returned income.2. Denial of deduction under Section 10AA of the Income Tax Act, 1961.3. Disallowance of interest on delayed payment of TDS under Section 37 of the Act.4. Restriction on the set-off of business loss.5. Non-grant of consequential depreciation on leasehold improvements.Issue-wise Detailed Analysis:1. Confirmation of Additions to the Returned Income:The assessee contested the appellate order confirming the additions made by the Assessing Officer (AO) amounting to INR 3,82,04,3944 to the returned income. The tribunal noted that no specific arguments were advanced in relation to this ground, and consequently, it was dismissed as being general in nature.2. Denial of Deduction under Section 10AA:The assessee claimed a deduction under Section 10AA amounting to INR 9,033,777. The AO disallowed this deduction on the basis that the brought forward business loss of INR 15,956,392 should have been set off against the profits before computing the deduction. The appellate authority upheld this view, citing decisions from the Karnataka and Kerala High Courts, which emphasized that business profits should be computed after setting off unabsorbed depreciation. However, the tribunal referenced the Supreme Court's decision in CIT vs. Yokogawa India Ltd., which clarified that the deduction under Section 10A (similar to 10AA) should be computed before setting off brought forward losses. Therefore, the tribunal allowed the deduction under Section 10AA as claimed by the assessee.3. Disallowance of Interest on Delayed Payment of TDS:The assessee incurred interest of INR 1,63,711 on the delayed payment of TDS. The AO disallowed this interest under Section 37, considering it to be penal in nature. The tribunal upheld this disallowance, referencing the Madras High Court's decision in CIT v. Chennai Properties & Investment Ltd., which held that such interest does not qualify as a business expense and is not deductible under Section 37(1). The tribunal concluded that this interest is not incurred wholly and exclusively for business purposes, thus dismissing this ground of appeal.4. Restriction on the Set-off of Business Loss:The assessee claimed a set-off of business losses amounting to INR 44,963,298, but the AO restricted it to INR 15,956,392 based on past records. The tribunal restored this issue to the AO for verification of the available set-off of brought forward business losses, directing the AO to determine the correct amount in accordance with the law. This ground was allowed with the aforementioned direction.5. Non-grant of Consequential Depreciation on Leasehold Improvements:The assessee argued that the expenditure on leasehold improvements during AY 2013-14 should be treated as revenue expenditure and not capital in nature. The AO had treated the entire expenditure as capital, allowing depreciation at 5%. The tribunal noted that this issue pertains to AY 2013-14 and directed the AO to consider the claim if it is decided in favor of the assessee by the appellate authority. This ground was allowed with the given direction.In conclusion, the appeal of the assessee was partly allowed for statistical purposes, with specific directions provided for certain grounds. The order was pronounced in the open court on 08/10/2024.