2012 (6) TMI 61 - AT - Income Tax

Cascading effect of dis-allowance u/s 43B and 40(a)(ia) on deduction u/s 10B - Held that - It is the well established fact recomputed profits shall be considered for the purpose of computation of deduction u/s 10B. If the assessing Officer recomputes the profit from eligible business by disallowing certain expenditure and liability u/s 40(a) (ia) and 43B such recomputed profit shall be considered for the purpose of deduction u/s 10B - Decided in favor of assessee. Dis-allowance u/s 40(a)(ia) - Held that - It is the well established position of law that section 40(a)(ia) has no application where the amount incurred and paid without deduction of TDS. It is applicable only when provision is made in the books of accounts and shown as payable without being deducting TDS. In present case all the payments are being paid and none of the payments are shown as payable and hence dis-allowances made u/s 40(a)(ia) is deleted - Decided in favor of assessee. Dis-allowance of expenditure towards export business - rejection of books of account ignoring report of special auditor reporting that there was no discrepancies in the books of accounts maintained - Held that - When Assessing officer himself got the accounts audited from special auditors u/s 142(2A) then he cannot ignore the audit report submitted by the special auditors. If the special auditor points out any discrepancies with regard to allocation of expenditure and correctness of books of accounts then it is open to the assessing officer to reject the books of accounts and resort to estimation. Therefore the AO is not correct in re-allocating the common expenditure on the basis of ratio of export turnover to total turnover by rejecting the books of accounts. Dis-allowance of unpaid liability u/s 43B - assessee contended that service tax and provision for leave encashment which is future liability are not covered within the meaning of any tax or duty u/s 43B - Held that - Section 43B covers any sum payable by way of tax duty cess or fee by whatever name called under any law for the time being in force. Therefore service tax liability is covered u/s 43B and non -payment of same within the stipulated time attracts dis-allowances. Similarly Leave encashment is allowed as deduction on payment basis. Therefore dis-allowance of provision for leave encashment is upheld - Decided against the assessee. Expenditure incurred for increase in authorized capital - capital or revenue expenditure - Held that - Amount incurred for increase in authorized capital is in the nature of capital expenditure - Decided against the assessee.

Issues Involved:
1. Disallowances under Section 43B and 40(a)(ia) and their impact on Section 10B exemption.
2. Disallowance of statutory liabilities under Section 43B.
3. Disallowance of expenses under Section 40(a)(ia).
4. Disallowance of conveyance expenses, interest, and depreciation.
5. Disallowance of common expenditure from export profits.
6. Disallowance of service tax and provision for leave encashment.
7. Disallowance of depreciation on plant and machinery.
8. Disallowance of expenses related to the increase in authorized share capital.

Detailed Analysis:

1. Disallowances under Section 43B and 40(a)(ia) and their impact on Section 10B exemption:
The assessee argued that disallowances under Sections 43B and 40(a)(ia) should increase the exemption under Section 10B, citing the ITAT Hyderabad decision in Planet Online Pvt. Ltd. The Tribunal agreed, stating that recomputed profits, after considering disallowances, should be used for Section 10B deductions. The Tribunal directed the Assessing Officer (AO) to recompute the deduction accordingly.

2. Disallowance of statutory liabilities under Section 43B:
The AO disallowed Rs. 2,01,586 under Section 43B for non-remittance of statutory liabilities, including professional tax, other statutory liabilities, and service tax. The Tribunal noted that the assessee did not press this ground, leading to its dismissal.

3. Disallowance of expenses under Section 40(a)(ia):
The AO disallowed various amounts under Section 40(a)(ia) for non-deduction or delayed remittance of TDS. The Tribunal referred to the Special Bench decision in M/s. Merilyn Shipping & Transports, which held that Section 40(a)(ia) applies only to amounts payable as of 31st March and not to amounts already paid. Since the expenses were paid during the year, the Tribunal deleted the disallowances.

4. Disallowance of conveyance expenses, interest, and depreciation:
The Tribunal dismissed this ground as it was not pressed by the assessee.

5. Disallowance of common expenditure from export profits:
The AO disallowed Rs. 1,11,73,133 from export profits, arguing improper allocation of common expenses between export and domestic business. The Tribunal noted that the assessee maintained separate books for export and domestic business, which were audited by special auditors without discrepancies. The Tribunal held that the AO was incorrect in reallocating expenses and directed the AO to allow the expenditure and recompute the deduction under Section 10B.

6. Disallowance of service tax and provision for leave encashment:
The AO disallowed service tax and provision for leave encashment under Section 43B. The Tribunal upheld the disallowance of service tax, stating that it falls under Section 43B. Similarly, the Tribunal upheld the disallowance of provision for leave encashment, as it is allowed only on a payment basis and not as a provision.

7. Disallowance of depreciation on plant and machinery:
The Tribunal dismissed this ground as it was not pressed by the assessee.

8. Disallowance of expenses related to the increase in authorized share capital:
The AO disallowed Rs. 11,94,471 incurred for increasing authorized share capital, treating it as capital expenditure. The Tribunal upheld the disallowance, citing the Supreme Court's judgment in Brooke Bond India Ltd. v. CIT, which held that such expenses are capital in nature.

Conclusion:
The appeals were partly allowed, with specific directions to the AO to recompute deductions and allowances based on the Tribunal's findings.

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