2008 (2) TMI 899 - AT - Income Tax

Summary

Issues Involved:
1. Depreciation on units not claimed by the assessee.
2. Deduction of 90% of certain receipts from business profits under section 80HHC.
3. Restriction of deduction under sections 80HH, 80-I, and 80-IA.
4. Deduction under sections 80HHC and 80-IA while computing income under section 115JA.
5. Disallowance of corporate dividend tax under section 115JA.
6. Addition of provision for depreciation for earlier years under section 115JA.
7. Exclusion of excise duty and sales tax from total turnover for section 80HHC.
8. Disallowance of payments made to employees under VRS.
9. Addition of notional interest on interest-free advances.

Issue-wise Detailed Analysis:

1. Depreciation on Units Not Claimed by the Assessee:
The assessee objected to the CIT(A)'s allowance of depreciation on three units (Pondicherry I, Pondicherry II, and Calcutta) despite not claiming it. The Tribunal upheld the CIT(A)'s decision based on the jurisdictional High Court's ruling in Scoop Industries (Pvt). Ltd. vs. ITO, which mandates granting depreciation before special deductions, irrespective of the claim by the assessee. The appeal on this ground was dismissed.

2. Deduction of 90% of Certain Receipts from Business Profits under Section 80HHC:
The assessee challenged the deduction of 90% of various receipts from business profits. The Tribunal referred to the Bombay High Court's judgment in CIT vs. Bangalore Clothing Co., clarifying that only operational business income from export turnover is included in business profits, excluding non-operational income. The Tribunal directed the AO to re-examine the issue considering specific principles, including the exclusion of net income not assessable under section 28, treating independent income as non-operational, and excluding sales tax and excise duty from total turnover. The appeal was allowed for statistical purposes.

3. Restriction of Deduction under Sections 80HH, 80-I, and 80-IA:
The assessee contested the restriction of deductions to Rs. 2,61,43,688/- against the claimed Rs. 8,61,99,493/-. The Tribunal upheld the CIT(A)'s decision based on the Special Bench ruling in Vahid Paper Converters vs. ITO, which mandates considering depreciation for accurate profit determination. The appeal was dismissed.

4. Deduction under Sections 80HHC and 80-IA while Computing Income under Section 115JA:
The assessee argued for deductions under sections 80HHC and 80-IA in computing income under section 115JA. The Tribunal, referencing the Special Bench decision in DCIT vs. Syncome Formulations (I) Ltd., ruled that deductions should be based on adjusted book profits, not regular business profits. The appeal was allowed.

5. Disallowance of Corporate Dividend Tax under Section 115JA:
The assessee claimed a deduction for corporate dividend tax while computing income under section 115JA. The Tribunal, aligning with the decision in ACIT vs. Balarampur Chini Mills Ltd., allowed the deduction, rejecting the revenue's argument that corporate dividend tax is part of income tax. The appeal was allowed.

6. Addition of Provision for Depreciation for Earlier Years under Section 115JA:
The AO added back provision for depreciation for earlier years to the book profit. The Tribunal, following the Supreme Court's decision in Apollo Tyres Ltd. vs. CIT, ruled that such provisions should be disregarded for computing taxable income under section 115JA. The appeal was allowed.

7. Exclusion of Excise Duty and Sales Tax from Total Turnover for Section 80HHC:
The revenue objected to the exclusion of excise duty and sales tax from total turnover. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's ruling in CIT vs. Lakshmi Machine Works, which excludes such duties from total turnover for section 80HHC computation. The appeal was dismissed.

8. Disallowance of Payments Made to Employees under VRS:
The revenue challenged the allowance of VRS payments as revenue expenditure. The Tribunal upheld the CIT(A)'s decision, supported by the Bombay High Court in CIT vs. Bhor Industries Ltd., and Supreme Court rulings, recognizing VRS payments as allowable business expenditure. The appeal was dismissed.

9. Addition of Notional Interest on Interest-Free Advances:
The revenue contested the deletion of notional interest on interest-free advances. The Tribunal upheld the CIT(A)'s decision, consistent with prior Tribunal rulings in the assessee's case for earlier years, recognizing the advances as necessary for statutory and administrative expenses. The appeal was dismissed.

Conclusion:
The Tribunal allowed the assessee's appeals on issues related to section 115JA deductions and provision for depreciation, while dismissing appeals on depreciation claims, restriction of deductions under sections 80HH, 80-I, and 80-IA, and VRS payments. The revenue's appeals on excise duty, sales tax exclusion, and notional interest were dismissed. The AO was directed to re-examine certain issues under section 80HHC.