2014 (1) TMI 909 - AT - Income Tax

Deduction u/s 10B of the Act Proper allocation of commission and salary expenses not made Held that - Only Amritsar unit is eligible for deduction u/s.10B having manufacturing facilities - The Mumbai unit is only engaged in trading and hence is not eligible for deduction - Insofar as the allocation of commission and salary between the two units is concerned, the Assessing Officer has adopted a very reasonable manner in such bifurcation in the ratio of turnover of the two units - no exception can be found to the view taken by the learned CIT(A) in upholding the allocation of commission and salary between the two units in the ratio of their respective turnovers the order upheld. Deduction in respect of export incentive u/s 10B of the Act Held that - The decision in Maral Overseas Ltd. vs. Addl. CIT 2012 (4) TMI 345 - ITAT INDORE - the export incentives form part of profits of the business of the eligible undertaking and hence cannot be excluded from the eligible profit for the purpose of computing deduction u/s.10B order set aside. Denial of Deduction in respect of Interest income u/s 10B of the Act - So long as a particular item of income falls under the head profit and gains of business or profession , the same qualifies for consideration under this section If the item of income falls under any other head including Income from other sources , the same goes out of the ambit of the eligible profits for the purpose of deduction u/s 10B - The correct nature of the amount of interest is not emanating from the material on record - order set aside and the matter remitted back to the AO for fresh adjudication Relying upon ACG Associated Capsules Pvt. Ltd. VS. CIT 2012 (2) TMI 101 - SUPREME COURT OF INDIA - netting of interest is relevant in the context of Explanation (baa) below section 80HHC(4C) defining the expression profits of the business - It has no application under sec. 10B, which is differently worded and has no definition of the expression profits of the business similar to that of section 80HHC Decided partly in favour of Assessee. Penalty u/s 271(1)(c) of the Act Reduction in amount of deduction u/s 10B of the Act Held that - The foundation for the imposition of penalty is the reduction in the amount of deduction u/s.10B - The amount of such deduction is backed by audit report in form no. 56G as per the requirements of sub-section (5) of section 10B - Once the assessee makes a claim on the basis of an opinion expressed by an expert, there can be no question of imposition of any penalty on the mere fact that the amount of deduction was reduced by the Assessing Officer - There can never be any doubt on the bona-fide of the assessee in claiming the deduction based on the audit report given by the auditor - the CIT(A) was justified in deleting the penalty u/s. 271(1)(c) Decided against Revenue.

Summary

Issues involved:
1. Deduction u/s 10B for manufacturing unit vs. trading unit.
2. Allocation of commission and salary between units.
3. Denial of deduction for export incentive.
4. Denial of deduction for interest income.

Issue 1: Deduction u/s 10B for manufacturing unit vs. trading unit:
The case involved appeals for A.Y. 2006-07 and 2007-08 concerning deduction u/s 10B. The Assessing Officer found that the assessee had not properly allocated Commission and Salary expenses between the Amritsar manufacturing unit and the Mumbai trading unit. The AO apportioned the expenses based on the turnover ratio of the units, reducing the profits of the manufacturing unit. The CIT(A) upheld this allocation. The Tribunal agreed that only the manufacturing unit was eligible for deduction u/s 10B, supporting the AO's allocation method based on turnover ratio. The judgment upheld the CIT(A) decision on this issue.

Issue 2: Denial of deduction for export incentive:
The AO denied deduction u/s 10B for export incentive, but the Special Bench decision in Maral Overseas Ltd. vs. Addl. CIT clarified that export incentives are part of eligible profits. The Tribunal set aside the AO's decision on this issue, aligning with the Special Bench's interpretation.

Issue 3: Denial of deduction for interest income:
Regarding the denial of deduction for interest income, the AO did not discuss the nature of the income, simply reducing it from the eligible profit without justification. The Tribunal emphasized that income must qualify as 'profit and gains of business' to be considered for deduction u/s 10B. Since the nature of the interest income was unclear, the Tribunal set aside the decision and directed the AO to determine the nature of the income and its eligibility for deduction under section 10B.

Separate Judgment:
In a related appeal for A.Y. 2006-07, the Revenue challenged the deletion of penalty imposed under section 271(1)(c) for the reduction in the deduction u/s 10B. The CIT(A) deleted the penalty, considering the claim backed by an audit report. The Tribunal upheld the CIT(A)'s decision, stating that penalty cannot be imposed when the claim is supported by a professional opinion. The appeal of the Revenue was dismissed.

Conclusion:
The Tribunal's consolidated order addressed issues related to deduction u/s 10B, allocation of expenses, treatment of export incentives, and interest income eligibility. The judgments clarified the criteria for deduction eligibility, allocation methods, and the importance of supporting claims with professional opinions. The decisions provided clarity on interpreting tax laws and ensuring fair treatment for taxpayers based on legal provisions and precedents.