2025 (8) TMI 1593 - AT - Income Tax

Ruling: 10% depreciation for electrical fittings; forex loss on actuals; s.40(a)(i) cured by timely TDS; s.10B at Chapter IV

ITAT CHENNAI - AT upheld CIT(A) findings: depreciation on electrical fittings allowed at 10% (not 15%); AO's addition for forex loss allocation deleted ... Depreciation on electrical fittings - @ 10% OR 15% - addition of the differential depreciation in the computation of taxable - CIT(A) has upheld the allowance of depreciation on electrical fittings @ 10% as against 15% claimed by the assessee - HELD THAT:- As relying on Hon’ble Jurisdictional High Court in assessee’s own case [2017 (1) TMI 1859 - MADRAS HIGH COURT] held electrical installations, wiring for lighting, installation of call bell indicators/buzzers/door locks, etc., would qualify as furniture and fittings entitled to depreciation at the rate of 10%. Quantification of the claim of deduction u/s.10B - Allocation of loss suffered from foreign exchange fluctuation among all the units on the basis of turnover - We agree with the argument of Ld. AR that there is no question of estimating by allocating the forex loss on the basis of turnover, if the same are identifiable and claimed on the basis of actuals. Therefore, we reverse the finding of Ld CIT(A) and the addition made on this account is deleted. Claim of expenses u/s. 40(a)(i) for not remitting the TDS deducted within the stipulated time as per Section 201 of the Act - CIT(A) relying on the various case laws has held that after the amendment in Section 40(a)(i) of the Act, no disallowance under this section is to be made, if the assessee has deposited TDS even in the case of non-resident payee before due date of filing of return of income. CIT(A) relying the case laws has held that the section is curative in nature and therefore, is applicable retrospectively. We find no infirmity in the order of Ld. CIT(A) and therefore, affirm the same. In light of above, this ground of appeal is dismissed. Allocation of R & D expenses in quantifying the deduction u/s 10B - CIT(A) has deleted the addition holding that the assessee has apportioned the common head office expenses among three categories R & D units, EOU units and DTAA units, but the A.O has apportioned the R & D expenses also among the aforesaid three units - AR has argued that R & D expenditure in R & D division relates to scientific research for development of new product and is not linked to the current commercial operation, hence expenditure cannot be allocated to EOUs. It has been noted that the assessee has booked R & D expenses relating to the EOU unit 1 and EOU unit 2 for claiming deduction u/s 10B. AO has allocated R & D expenditure of R & D division by making general observation that assessee could not substantiate by clinching evidence to show that R & D expenditure is no way related to the EOUs ignoring the fact that assessee has booked R & D expenditure relatable to the EOUs in computing the profit for section 10B. Set off of carried forward business loss for the purpose of quantifying deduction u/s. 10B - AO has set off the brought forward loss before giving deduction u/s 10B on the ground that Section 10B of the Act is only a deduction section and not exemption section - HELD THAT:- A.O in the assessment order has noted that the assessee has a carried forward loss from AY 2010-11 and the same should be set off from the current year income before allowing deduction u/s. 10B of the Act. The issue whether set off of business loss is to be allowed before allowing deduction/exemption u/s. 10B of the Act has been settled in the case of CIT vs. Yokagava India Ltd. [2016 (12) TMI 881 - SUPREME COURT] by holding that through section 10A is a provision for deduction, the stage of deduction could be while computing the gross total income of the eligible undertaking under Chapter IV of the Act and not at the stage of computation of total income under chapter VI of the Act. Therefore, we uphold the order of Ld. CIT(A) accordingly. ISSUES PRESENTED AND CONSIDERED 1. Whether electrical installations/electrical fittings qualify as 'plant and machinery' (eligible for depreciation @15%) or as 'furniture and fittings' (depreciable @10%). 2. Whether a foreign exchange (forex) loss that is directly attributable to specific vertical units must be allocated to those units on actuals for the purpose of computing deduction under section 10B, or may be re-allocated among units on the basis of turnover. 3. Whether payments to a non-resident made after the statutory date for deposit of tax deducted at source (TDS) but before the due date for filing return may be disallowed under section 40(a)(i), having regard to (a) DTAA non-discrimination obligations and (b) subsequent legislative amendment construed as curative/retrospective. 4. Whether R&D expenditure incurred at company (corporate/R&D division) level, not resulting in identifiable assets attributable to specific units, must be apportioned to eligible units for computing deduction under section 10B, or may be excluded from apportionment where not linked to current commercial operations. 5. Whether brought-forward business losses must be set off against profits of an eligible unit before computing deduction under section 10B (i.e., stage/sequence of set-off versus section 10B deduction). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Classification of electrical fittings for depreciation Legal framework: Depreciation rates depend on classification of assets as 'plant and machinery' versus 'furniture and fittings' under the relevant tax law; different schedules/notifications prescribe rates (15% v. 10%). Precedent treatment: The Tribunal applied binding precedent of the Jurisdictional High Court in the assessee's earlier proceedings, which followed established authority concluding electrical installations, wiring for lighting and similar works fall within 'furniture and fittings' and attract lower depreciation. Interpretation and reasoning: The Tribunal accepted the High Court's conclusion on the nature of electrical installations and applied it to the facts of these assessment years. The assessee conceded the issue was covered against it by that decision, although it argued factual differences; Tribunal found no basis to distinguish. Ratio vs. Obiter: The treatment is ratio - the High Court's classification is followed as binding precedent for the factual/legal question of asset characterization. Conclusion: Depreciation @10% upheld; claim for 15% dismissed. Issue 2 - Allocation of forex loss between corporate and unit levels for section 10B computation Legal framework: Deduction under section 10B requires computation of profits of eligible export units; expenses attributable to those units must be appropriately identified/allocated. General accounting principle: directly identifiable expenses should be charged to the unit to which they relate rather than apportioned by an arbitrary formula. Precedent treatment: Tribunal considered prior findings and lower authorities' reliance on the assessee's allocation practice at corporate level (turnover ratio) but examined whether the specific forex loss items were directly attributable to individual verticals. Interpretation and reasoning: The Tribunal distinguished corporate-level hedging/loan-related forex losses from unit-level transactional forex losses. Where specific forex losses are directly identifiable to a vertical (sales, purchases, imports etc.), those losses should be allocated on actuals. Re-allocation by AO/CIT(A) using turnover ratio was impermissible for losses that the assessee had substantiated as directly attributable. The mere fact that other corporate forex losses were allocated by turnover did not justify reallocating unit-identifiable losses by turnover. Ratio vs. Obiter: The direction that identifiable unit-specific forex losses must be allocated on actuals is ratio for the specific question of expense allocation in computing section 10B deduction; the observation that corporate hedging losses can be apportioned by turnover when not directly attributable is explanatory. Conclusion: Addition/disallowance based on turnover re-allocation of the Rs. 11.38 crore unit-identifiable forex loss deleted; losses identifiable to units to be accepted on actuals for section 10B computation. Issue 3 - Disallowance under section 40(a)(i) for late remittance of TDS to non-resident payee Legal framework: Section 40(a)(i) provides disallowance where tax is deducted but not paid to the Government within time prescribed under section 201; interplay with DTAA (non-discrimination clause) and post-facto legislative amendments which extend the date for deposit in certain cases (e.g., parity with residents where tax paid before return filing) is relevant. Precedent treatment: The CIT(A) relied on DTAA Article (non-discrimination) and subsequent amendments (Finance Act) to hold that where TDS was deposited before the due date for filing the return, disallowance should not be made - construing the amendment as curative/retrospective and supported by case law cited. Interpretation and reasoning: The Tribunal accepted the CIT(A)'s reasoning: (a) DTAA non-discrimination required treating the payment to the non-resident similarly to payments to residents for the timing of TDS deposit, and (b) the legislative amendment (which allows deposit up to return filing date to avoid disallowance) is curative and applicable retrospectively in light of prior judicial decisions. Assessee had deposited TDS before return filing; therefore disallowance under section 40(a)(i) not warranted. Ratio vs. Obiter: The holding that deposit of TDS by return-filing due date precludes disallowance under section 40(a)(i) (in light of DTAA/non-discrimination and subsequent amendment construed retrospectively) is the ratio for these facts. Conclusion: Disallowance under section 40(a)(i) in respect of the sales-promotion payment to the foreign payee deleted; CIT(A)'s order affirmed. Issue 4 - Allocation of R&D expenses for section 10B computation Legal framework: Section 10B deduction is available to eligible units; common/corporate overheads and R&D expenditures must be apportioned to eligible units only if they are attributable. The principle is that only expenses pertaining to the eligible unit should reduce its eligible profits. Precedent treatment: Tribunal and CIT(A) relied on jurisdictional High Court and Tribunal precedents which permit non-allocation where R&D expenses are not linked to current commercial activity of the eligible units and are incurred for broader/scientific research not resulting in attributable assets. Interpretation and reasoning: The assessee maintained separate books and had booked R&D costs relatable to the eligible units. The A.O.'s blanket apportionment of R&D expenses by turnover ignored the assessee's factual accounting and documentary allocation. Where R&D expenditure relates to development of new products and is not linked to current commercial operations of EOUs, and where the assessee has accounted to segregate such costs, the expenses need not be apportioned to the EOUs merely on basis of turnover. Ratio vs. Obiter: The conclusion that non-allocated, non-attributable R&D expenses need not be apportioned to eligible units for section 10B is ratio for allocation disputes; reliance on precedent is determinative. Conclusion: AO's re-allocation of R&D expenditure to EOUs by turnover set aside; CIT(A)'s deletion of the addition affirmed. Issue 5 - Set-off of brought-forward losses prior to computing section 10B deduction Legal framework: Section 10B operates as a deduction in computing the profits of eligible units; the sequence of computations (whether carried-forward losses are to be set off before applying section 10B) implicates principles of chapter/sequence of computation under the Income-tax Act. Supreme Court authority (Yokogawa) addresses stage of deduction and interplay with Chapter VI computations. Precedent treatment: The Tribunal applied Supreme Court authority holding that though section 10A/10B are provisions for deduction, the statutory scheme contemplates the deduction being applied at the stage of computing profits of the eligible undertaking (Chapter IV) rather than as an operation after set-offs under Chapter VI; the Court held the relevant deductions are to be worked out in sequence envisaged by the statute. Interpretation and reasoning: Relying on the Apex Court's reasoning, the Tribunal held that section 10B deduction is to be given at the stage contemplated by the section (i.e., in computing the eligible unit's profits) and not after setting off brought-forward business losses under general set-off provisions; hence brought-forward losses should not be set off so as to nullify the benefit of section 10B at the stage claimed by Revenue. Ratio vs. Obiter: The acceptance and application of Yokogawa as binding precedent is ratio and determinative of the sequencing issue. Conclusion: Brought-forward business losses are not to be set off in a manner that defeats the statutory deduction under section 10B; CIT(A)'s allowance confirmed and appeal partly allowed for the relevant assessment year. Overall Disposition (as applied to the issues above) Tribunal applied binding precedent where applicable (depreciation classification and sequence of set-offs), reversed re-allocations premised on turnover where expenses or losses were directly attributable to units (forex and R&D items), and upheld the deletion of disallowance under section 40(a)(i) where TDS was deposited by the return-filing due date in light of DTAA and retrospective legislative effect arguments. Consequent appeals were partly allowed for the assessee and dismissed for Revenue in the matters considered.