2017 (11) TMI 1933 - AT - Income Tax

Denial of claim of deduction u/s 10AA - assessee has earned excess profits from the units eligible for deduction u/s 10AA by invoking the provisions of Sec.80IA(10) - HELD THAT - AO shall have to examine the fulfillment of the 3 conditions namely close connection arrangement and more than ordinary profits in the course of business while examining assessee s claim of deduction u/s 10AA of the Act and satisfaction of all the aforesaid 3 conditions are mandatory before invocation of Sec.80IB(10) of the Act. In the present case the close connection between the assessee and its A.Es is an undisputed fact. However no material has been brought on record to indicate that the course of business was so arranged so as to inflate the profit so as to indicate the inflation of profits with the intention of abusing tax concessions u/s 10AA of the Act. We further find that AO has proceeded on the basis of presumptions to conclude that there is inflation of profits. As relying on COGNIZANT TECHNOLOGY SOLUTIONS INDIA PVT. LTD. 2017 (10) TMI 1554 - ITAT PUNE after relying on M/S HONEYWELL AUTOMATION INDIA LIMITED 2015 (3) TMI 494 - ITAT PUNE held AO was not justified in working out the excess profit on the basis of presumptions and reducing the claim of deduction of assessee u/s 10AA of the Act. We therefore set aside the action of the AO. Thus the ground of the assessee is allowed and the Revenue is dismissed. Deduction u/s 10AA allowed before setting off brought forward losses and unabsorbed depreciation and the deduction u/s 10AA should be granted from the profits for the year of the eligible unit of the assessee - We find that identical issue of the setting off of brought forward of losses and unabsorbed depreciation was before the Co-ordinate Bench of the Tribunal in assessee s own case in A.Y. 2007-08 2016 (5) TMI 107 - ITAT PUNE . In view of the aforesaid facts and for the same reasoning and relying on the aforesaid decisions of Co-ordinate Bench of the Tribunal we are of the view that the deduction u/s 10AA has to be computed in the hands of the assessee before adjusting the brought forward losses and unabsorbed depreciation. Thus the ground of the assessee is allowed. Levy of interest u/s 234A and 234B - This ground being consequential in nature requires no adjudication

Summary

Issues Involved:
1. Excess profit adjustment under section 10AA(9) read with section 80IA(10) of the Income Tax Act.
2. Set off and carry forward of unabsorbed depreciation.
3. Levy of interest under sections 234A and 234B of the Income Tax Act.

Detailed Analysis:

1. Excess Profit Adjustment under Section 10AA(9) Read with Section 80IA(10):
The primary issue revolves around the applicability of provisions under section 10AA(9) read with section 80IA(10) of the Income Tax Act. The Assessing Officer (AO) noticed that the assessee had shown a profit margin of 30.94% compared to the 15.75% profit margin of comparable companies. The AO attributed the higher profit margins to close business connections between the assessee and its Associated Enterprises (AEs), suggesting an arrangement to inflate profits to claim higher deductions under section 10AA. The AO disallowed ?20,20,88,694/- of the claimed deduction. The Commissioner of Income-Tax (Appeals) [CIT(A)] upheld the AO's view but adjusted the Arms Length Margin to 20% instead of 15.75%, granting partial relief to the assessee.

The Tribunal, however, found that the AO's conclusions were based on presumptions without concrete evidence of an arrangement to inflate profits. The Tribunal noted that merely earning high profits does not automatically imply an arrangement to abuse tax incentives. The Tribunal relied on precedents, including the cases of Honeywell Automation India Limited and Cognizant Technology Solutions India Pvt. Ltd., to conclude that the AO did not substantiate the claim of excessive billing with adequate evidence. Consequently, the Tribunal set aside the AO's action, allowing the assessee's appeal and dismissing the Revenue's appeal.

2. Set Off and Carry Forward of Unabsorbed Depreciation:
The second issue pertains to whether the deduction under section 10AA should be allowed before setting off brought forward unabsorbed depreciation. The assessee contended that the deduction should be granted at the source level from the profit of the eligible unit. The Tribunal referred to its decision in the assessee's own case for A.Y. 2007-08, which held that the deduction under section 10AA should be computed before adjusting brought forward losses and unabsorbed depreciation. The Tribunal reiterated that the deduction under section 10AA should be allowed against the eligible profits first, and any remaining profits should then be adjusted against brought forward losses and unabsorbed depreciation. This position was supported by various judicial precedents, including the decision in the case of Vishay Components India Pvt. Ltd.

3. Levy of Interest under Sections 234A and 234B:
The third issue involves the levy of interest under sections 234A and 234B for late filing of the return of income and incorrect computation of interest. The Tribunal did not provide a detailed analysis on this issue, noting it as consequential in nature and thus requiring no adjudication.

Conclusion:
The Tribunal allowed the assessee's appeal on the grounds of excess profit adjustment and set off and carry forward of unabsorbed depreciation while dismissing the Revenue's appeal. The levy of interest under sections 234A and 234B was deemed consequential and not adjudicated separately. The decision emphasized the necessity of concrete evidence to substantiate claims of profit inflation and upheld the principle that deductions under section 10AA should be computed before adjusting brought forward losses and unabsorbed depreciation.