2017 (10) TMI 1542 - AT - Income Tax

Disallowance of deduction u/s 10A - deduction in the first year of the undertaking stands undisturbed or not withdrawn - no provision for withdrawal of special deduction for the subsequent years for breach of certain conditions - HELD THAT - Once having accepted the claim of assessee, the Revenue cannot question assessee s eligibility for claiming such deduction in subsequent assessment years. In Paul Brothers 1992 (10) TMI 5 - BOMBAY HIGH COURT has observed that there is no provision for withdrawal of special deduction for the subsequent years for breach of certain conditions. Unless the relief granted for the initial assessment year is withdrawn, the ITO could not have withheld the relief for the subsequent years. Thus, in view of the fact that the assessee s claim of deduction u/s. 10A was never questioned by the Revenue in initial assessment year, the Assessing Officer cannot raise question over assessee s eligibility for claiming deduction in any of the subsequent assessment years. DR has also accepted the fact that in assessment year 2004-05, assessee s claim of deduction u/s. 10A was allowed by Assessing Officer in scrutiny assessment proceedings. Thus, ground No. 1 raised in appeal by the assessee is allowed. Disallowance of provision for bad debts - authorities below have disallowed assessee s claim primarily for the reason that the assessee has failed to establish that the provision was created in respect of either of the units - HELD THAT - Assessee referring to separate Profit and Loss accounts for STPI and non-STPI units has pointed that provision for bad debts has been separately created for STPI and non-STPI units - while computing total income in the computation of income, the assessee has added back provisions for bad debts in respect of both STPI and non-STPI units. A separate calculation has been given for STPI unit wherein provision for bad debts in respect of STPI unit ₹ 22,56,208/- has been added back. We do not find any reason to disallow the claim of assessee. The assessee has added back the provision in the computation of income which was created earlier. Thus, the assessee has not claimed the same while computing total taxable income - Decided in favour of assessee. Allocation of expenditure amongst STPI and non-STPI units - HELD THAT - It is an undisputed fact that in earlier assessment years the Department has not questioned the manner of allocation of expenditure between STPI and non-STPI units. Even in the subsequent assessment years the allocation of expenditure by assessee has not been disturbed, though the assessee is consistently following same method of allocation. Thus, in the light of facts of the case, we find no merit in the findings of CIT (A) in sustaining the addition. Accordingly, the same is deleted - Decided in favour of assessee. Computing the manner of deduction u/s. 10A before setting off of losses of non-eligible unit - HELD THAT - In view of law laid down in Yokogawa India Ltd 2016 (12) TMI 881 - SUPREME COURT it is unambiguously clear that deduction u/s. 10A has to be computed before allowing set off of losses of non-STPI unit. - Decided in favour of assessee. Charging of interest u/s. 234B is consequential and mandatory,

Issues Involved:
1. Disallowance of deduction under section 10A
2. Deduction under section 10A in respect of disallowance of provision for bad debts
3. Allocation of expenditure among STPI and Non-STPI units on turnover basis
4. Deduction under section 10A before setting off losses of non-eligible units
5. Interest under section 234B of the Act

Detailed Analysis:

1. Disallowance of Deduction under Section 10A:
The primary issue concerns the eligibility of the assessee to claim deduction under section 10A of the Income Tax Act, 1961. The assessee, engaged in software development, received STPI approval on 30-03-2000 and claimed deduction under section 10A for the first time in the assessment year 2001-02. The Assessing Officer (AO) rejected the claim on the grounds that the assessee started production in 1991-92, and thus the 10-year tax holiday expired in assessment year 2000-01. The Tribunal found that the assessee's claim of deduction under section 10A was accepted by the Revenue in the initial year and subsequent years. Citing the Bombay High Court ruling in Commissioner of Income Tax Vs. Paul Brothers, the Tribunal held that the AO cannot question the validity of the deduction if it was not questioned in the initial year. Therefore, the Tribunal allowed the assessee's claim for deduction under section 10A.

2. Deduction under Section 10A in Respect of Disallowance of Provision for Bad Debts:
The assessee created provisions for bad and doubtful debts but added them back while computing taxable profit, thus not claiming any deduction. The authorities below disallowed the provision for bad debts, doubting whether it was created for the STPI unit. The Tribunal observed that the assessee had added back the provision in the computation of income and had not claimed it while computing total taxable income. Therefore, the Tribunal allowed the assessee's claim, finding no reason to disallow the provision for bad debts.

3. Allocation of Expenditure Among STPI and Non-STPI Units on Turnover Basis:
The AO allocated expenditure between STPI and non-STPI units on a turnover basis, suspecting the transfer of expenses to non-STPI units. The assessee maintained separate accounts for both units. The Tribunal noted that the Revenue had not questioned the allocation method in earlier or subsequent assessment years. The Tribunal found no merit in the Revenue's suspicion and deleted the addition, allowing the assessee's method of allocation.

4. Deduction under Section 10A Before Setting Off Losses of Non-Eligible Units:
The Tribunal referred to the Supreme Court's ruling in Commissioner of Income Tax & Anr. Vs. Yokogawa India Ltd., which clarified that deductions under section 10A should be computed independently for eligible units before setting off losses of non-eligible units. Therefore, the Tribunal held that the deduction under section 10A should be computed before setting off losses of the non-STPI unit, allowing the assessee's appeal on this ground.

5. Interest under Section 234B of the Act:
The assessee challenged the charging of interest under section 234B. The Tribunal noted that charging interest under section 234B is consequential and mandatory. Hence, the Tribunal dismissed the assessee's appeal on this ground.

Conclusion:
The Tribunal allowed the appeal of the assessee on most grounds, including the eligibility for deduction under section 10A, the treatment of bad debts, and the allocation of expenditure. However, it upheld the mandatory nature of interest under section 234B, dismissing the appeal on this ground. The appeal was thus partly allowed.

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