2010 (1) TMI 916 - AT - Income Tax

Deductions under s. 80HHC of the IT Act, 1961 - AO disallowed the assessee its claim of deduction under s. 80HHC in view of the absence of any positive income, i.e., prior to export benefits - amendment by the Taxation Laws (Amendment) Act, 2005 with retrospective effect from 1st April, 1992, inserting the fifth proviso to s. 80HHC(3), a set off of the export benefits against the negative income, i.e., profits of the business , is permissible to the extent of 90 per cent of the sums assessable under ss. 28(iiia) to 28(iiie) of the Act, so that the condition of a positive figure of such profit for the eligibility of the claim for deduction under s. 80HHC - Held that - matter remanded back to AO for working out the assessee s income for the year in light of the amended law, i.e., qua s. 80HHC,

Summary

Issues:
1. Disallowance of deduction under section 80HHC and 80G of the Income Tax Act, 1961.
2. Interpretation of the provisions of section 80HHC regarding DEPB benefit and export commission.
3. Treatment of expenditure on the issue of bonus shares as revenue expenditure.

Issue 1: Disallowance of Deduction under Section 80HHC and 80G:
The appeal by the Revenue arose from the Commissioner of Income-tax (Appeals)-II, Kochi's order for the assessment year 2003-04. The assessee claimed deductions under sections 80HHC and 80G but the Assessing Officer disallowed the deduction under section 80HHC due to the absence of positive income before export benefits. The CIT(A) upheld the disallowance based on the turnover exceeding Rs. 10 crores and the DEPB benefit not meeting certain conditions. The assessee contended that the DEPB income should be assessed differently based on a Tribunal's decision. The Tribunal clarified that post-amendment, a set-off of export benefits against negative income is permissible. The Tribunal referred to a Special Bench decision regarding DEPB credit assessment. The Tribunal set aside the order and directed the AO to reevaluate the income in line with the amended law.

Issue 2: Interpretation of Section 80HHC Provisions:
The Tribunal analyzed the DEPB benefit assessment and export commission treatment under section 80HHC. The Tribunal noted the amendment allowing a set-off of export benefits against negative income. The Tribunal referred to a Special Bench decision regarding DEPB credit assessment. It was clarified that only the profit on the transfer of DEPB benefit would be assessable under section 28(iiid). The Tribunal set aside the order and instructed the AO to reevaluate the income in accordance with the amended law.

Issue 3: Treatment of Expenditure on Bonus Shares:
The second appeal by the assessee was related to the order for the assessment year 2004-05 concerning the deductibility of expenditure on bonus shares. The assessee's claim was not entertained by the CIT(A) due to lack of initial claim before the AO. The Tribunal observed that the expenditure was revenue in nature based on a Supreme Court decision. The Tribunal found that the claim was not made before the AO as required by law but distinguished the case from precedents. The Tribunal concluded that the matter should be sent back to the AO for fresh adjudication in compliance with the law.

In conclusion, the Tribunal partially allowed both appeals for statistical purposes, directing a reevaluation of income and expenditure in line with the legal provisions and precedents cited.