2015 (12) TMI 1501 - AT - Income Tax

Computation of deduction under section 10B - enhanced profits by way of disallowance of an expenditure, in view of non-deduction of tax at source under section 40(a)(ia) - CIT(A) allowed the claim of the assessee - Held that - As referred by the CIT(A), there is a provision by way of proviso under section 92C(4) of the Act that in case any addition is made on account of transfer pricing adjustment, no deduction under section 10A/10AA/10B of the Act or under Chapter VIA shall be allowed in respect of such amount of income by which the total income of the assessee is enhanced. However, there is no similar provision in respect of the disallowance made under section 40(a)(ia) of the Act. In the absence of specific provision of the Act, the income enhanced after the statutory disallowance under section 40(a)(ia) of the Act is to be considered as the eligible profits of the undertaking while computing deduction under section 10B of the Act. Upholding the order of CIT(A), we dismiss the grounds of appeal raised by the Revenue. Reduction of carried forward losses while computing the profits of the eligible undertaking under section 10B - Held that - The facts arising in the present case are similar to the facts before the Tribunal in Vishay Components India Pvt. Ltd. Vs. Addl.CIT & Anr. (2015 (11) TMI 118 - ITAT PUNE ) and following the same parity of reasoning, we hold that the deduction under section 10B of the Act would be allowed to the assessee in the first instance before allowing the adjustment on account of brought forward depreciation losses, the deduction under section 10B of the Act is to be first allowed against the eligible profits and in case there are any leftover profits, then the same are to be adjusted against brought forward unabsorbed depreciation / loss as claimed by the assessee in its return of income. Accordingly, we direct the Assessing Officer to re-compute the deduction under section 10B of the Act in the hands of the assessee. - Decided in favour of assessee Addition made on account of outward freight while computing the book profits under section 115JB - Held that - We find merit in the claim of assessee with special reference to the calculation of book profits by applying provisions of section 115JB of the Act. The assessee has also filed a revised computation of eligible book profits under section 115JB of the Act, which is also placed on record. In case, the amount of unascertained liabilities of ₹ 2.65 crores is added back to the net profit shown in the Profit & Loss Account and the balance expenditure and income relatable to the deduction claimed under section 10B of the Act is added / reduced, then it cannot be held that the assessee had not added back the provision of ₹ 2.65 crores. However, in fairness, we are of the view that the matter needs to be looked at by the Assessing Officer in this regard. Accordingly, we direct the assessee to furnish the requisite calculation before the Assessing Officer, who in turn shall verify the same and compute the book profits under section 115JB of the Act in this regard, after affording reasonable opportunity of hearing to the assessee - Decided in favour of assessee for statistical purposes

Summary

Issues Involved:
1. Computation of deduction under section 10B before setting off carried forward losses.
2. Addition of provision for outward freight to book profits under section 115JB.
3. Disallowance under section 40(a)(ia) and its impact on deduction under section 10B.

Detailed Analysis:

1. Computation of Deduction under Section 10B Before Setting Off Carried Forward Losses:

The assessee argued that the deduction under section 10B should be computed before setting off any carried forward losses. The CIT(A) had upheld the AO's action of reducing carried forward losses while computing profits of the eligible undertaking under section 10B. The Tribunal referred to the decision of the Pune Bench in M/s. Vishay Components India Pvt. Ltd. Vs. Addl.CIT & Anr., which held that the deduction under section 10B should be computed before adjusting brought forward unabsorbed losses/depreciation. The Tribunal followed this reasoning and directed the AO to re-compute the deduction under section 10B accordingly.

2. Addition of Provision for Outward Freight to Book Profits under Section 115JB:

The assessee contested the addition of Rs. 2,65,57,598/- for outward freight as an unascertained liability to the book profits under section 115JB. The AO had added this provision, considering it a contingent liability. The CIT(A) upheld this addition, noting that the liability was contingent and should have been reversed when the appellant knew it was not liable for the transportation cost. However, the assessee argued that this addition amounted to double addition since it had already disallowed the provision while computing the book profits. The Tribunal found merit in the assessee's claim and directed the AO to verify the computation of book profits under section 115JB, considering the provision for outward freight.

3. Disallowance under Section 40(a)(ia) and Its Impact on Deduction under Section 10B:

The Revenue appealed against the CIT(A)'s decision to allow the deduction under section 10B on enhanced profits due to disallowance under section 40(a)(ia). The AO had argued that the disallowance should not form part of the net profit for computing eligible profit under section 10B. The CIT(A) allowed the assessee's claim, referencing the Hon'ble Bombay High Court's decision in CIT Vs. Gem Plus Jewellery India Ltd., which held that the plain consequence of disallowance is an increase in business profits, and no statutory provision prevents this from being considered for deduction under section 10B. The Tribunal upheld the CIT(A)'s decision, noting the absence of a specific provision excluding such enhanced income from eligible profits under section 10B.

Conclusion:

The Tribunal allowed the appeal of the assessee, directing the AO to re-compute the deduction under section 10B before adjusting brought forward losses and to verify the computation of book profits under section 115JB. The appeal of the Revenue was dismissed, upholding the CIT(A)'s decision to allow the deduction under section 10B on enhanced profits due to disallowance under section 40(a)(ia).