2009 (1) TMI 532 - AT - Income Tax

Export oriented undertaking - Recompute the exemption u/s 10B - reducing unabsorbed depreciation ignoring the provisions of section 32(2) - Whether deduction u/s 10B is to be allowed prior to the set-off of the depreciation allowance - AO found that the assessee-company had set-off unabsorbed depreciation relating to AY 2002-03 after calculating exemption u/s 10B for the year under consideration - assessee submitted that u/S 10B the profits and gains of the 100 per cent export oriented undertaking is to be determined which is then required to be deducted from the gross total income to arrive at the figure of the total income which is chargeable to tax u/s 10B is the deduction section which has to be given a liberal interpretation. It was also submitted that as seen from section 32(2) it pertains to the carry forward of the unabsorbed depreciation and the allowance or the part of the allowance to which effect has not been given as the case may be shall be added to the amount of the allowance for depreciation in the following previous year and deemed to be part of such allowance or if there is no such allowance for that previous year to be deemed to be the allowance for that previous year so on for the succeeding previous year. HELD THAT - Sub-section (3) of section 72 provides that no loss other than the loss referred to in the proviso to sub-section (1) of this section shall be carried forwarded under this section for more than eight assessment years immediately succeeding the assessment year for which the loss was first computed. Consequently it can be seen that after the computation of income from profits and gains of business or profession the loss of the earlier years has to be first set-off and subsequently the unabsorbed depreciation brought forward from the earlier years has to be set-off. Thereafter the current year s depreciation has to be set off. Current year s depreciation includes depreciation of the relevant assessment year as well as the deemed depreciation as provided under sub-section (2) of section 32 it is only thereafter that the income from profits and gains of business or profession are computed to be included in the total income of the assessee and thereafter deduction under section 10B of the Act is to be allowed under the computation of income from profits and gains of business or profession after adjusting the unabsorbed depreciation therefore the action of the Assessing Officer in computing the deduction u/s 10B is correct. The reference of the CIT(A) to sub-section (6) of section 10B is misplaced as the said sub-section provides for the procedure to be adopted in the year immediately following the year in which the tax holiday comes to an end. This sub-section is in no way relevant for adjudication of the issue before us. In view of the same the order of CIT(A) is set aside and that of AO is restored. Netting off of the interest - income from FD - HELD THAT - We find that the CIT(A) has squarely considered the factual matrix of the case and has held that there a direct nexus between the loan taken from Shri Nirav Modi and the FD which is made out of the funds obtained as a loan from Shri Nirav Modi. The CIT(A) considered the bank statement of the assessee as well as that of Shri Nirav Modi for coming to the conclusion that there is a direct nexus between the loan taken and the FD. The revenue has not placed any evidence to rebut this finding of fact by the CIT(A). Once the nexus is established as held by the Special Bench of the Tribunal in the case of Lalsons Enterprises v. Dy. CIT 2004 (2) TMI 294 - ITAT DELHI-E and also the decision of the Delhi High Court in the case of CIT v. Shri Ram Honda Power Equipment 2007 (1) TMI 86 - HIGH COURT DELHI the netting off of interest is allowable. In view of the same we do not see any reason to interfere with the order of CIT(A) and this ground of appeal is therefore rejected. In the result revenue appeal is partly allowed.

Summary

Issues Involved:

1. Computation of exemption under section 10B without reducing unabsorbed depreciation.
2. Deduction of interest payment from interest income before reducing net interest from profit of business while computing exemption under section 10B.

Issue-wise Detailed Analysis:

1. Computation of exemption under section 10B without reducing unabsorbed depreciation:

The primary issue is whether the deduction under section 10B should be allowed prior to the set-off of unabsorbed depreciation. The assessee, a company engaged in manufacturing and exporting jewelry, argued that section 10B, being a beneficial provision, should be given effect before applying the provisions of section 32(2) which pertains to unabsorbed depreciation. The Assessing Officer (AO) disagreed, holding that unabsorbed depreciation must be set-off against current year's income before calculating the deduction under section 10B. The CIT(A) sided with the assessee, stating that section 10B should be invoked first as it falls under Chapter III, which deals with income not forming part of total income, and thus unabsorbed depreciation should not be reduced at this stage.

Upon appeal, the Tribunal analyzed the relevant sections and concluded that the profits and gains of business must be computed in accordance with sections 30 to 43D of the Income-tax Act. This includes giving effect to section 32 for depreciation. The Tribunal emphasized that brought forward depreciation should be set-off first, followed by the current year's depreciation, before computing the total income from which the deduction under section 10B is to be allowed. Consequently, the Tribunal found the AO's approach correct and set aside the CIT(A)'s order, restoring the AO's computation method.

2. Deduction of interest payment from interest income before reducing net interest from profit of business while computing exemption under section 10B:

The second issue pertains to whether interest paid to Nirav Modi should be deducted from interest income before reducing net interest from the profit of the business for computing exemption under section 10B. The AO treated the interest income as income from other sources and disallowed the netting off of interest paid. The CIT(A) found a direct nexus between the loan taken from Nirav Modi and the fixed deposit (FD) made using the loan amount, allowing the netting off of interest paid against interest income.

The Tribunal upheld the CIT(A)'s decision, noting that the factual matrix supported a direct nexus between the loan and the FD. The CIT(A) had thoroughly reviewed the bank statements and found a clear connection, which the revenue did not contest with contrary evidence. The Tribunal referenced the Special Bench decision in Lalsons Enterprises and the Delhi High Court decision in Shri Ram Honda Power Equipment, which support the netting off of interest when a direct nexus is established. Thus, the Tribunal rejected the revenue's appeal on this ground.

Conclusion:

The Tribunal allowed the revenue's appeal in part. It upheld the AO's method of computing the deduction under section 10B by first setting off unabsorbed depreciation, but it rejected the revenue's appeal regarding the netting off of interest paid against interest income, affirming the CIT(A)'s decision on this issue.