2019 (10) TMI 1195 - HC - Income Tax

Prior period expenses adjustment against the prior period income - ITAT took the view that once the assessee offers prior period income, then the expenditure incurred under the different heads should be given set off against that income and only the net income should be added - HELD THAT - ITAT committed no error in holding that once the prior period income is held to be taxable, the prior period expenditure also should be allowed to be set off and the assessee is not obliged in law to indicate any direct or indirect nexus between the prior period income and prior period expenditure. TDS u/s 195 - non -deduction of TDS while remitting such payments to the non- residents - HELD THAT - Where the payment is in the nature of reimbursement, there is no element of income involved, and therefore, no tax is required to be deducted at source. Having regard to the settled position, the assessee was not liable to deduct the tax at source on such payments and hence, the ITAT committed no error in answering the second question as proposed by the Revenue in favour of the assessee. Eligible profit for deduction u/s 10B - unrealized export turnover is to be excluded from the export turnover but refrained from excluding the same from the total turnover - HELD THAT - The aforesaid issue is now settled by the decisions of CIT vs. HCL Technologies Ltd 2018 (5) TMI 357 - SUPREME COURT while computing deduction under Section 10A if the export turnover in numerator is arrived at after excluding certain expenses, the said expenses should also be excluded from the total turnover in denominator. Benefit of exemption as contemplated u/s 10B - HELD THAT - Dividend income, profit on sale of fixed assets, profit on sale of investments, excess provision return back, duty drawback and interest income could be said to have direct nexus with the income of the business of the undertaking. Although it may not partake the character of profit and gain from the sale of article, yet it could be termed as an income derived from the consideration realized by the export articles. In view of the definition of income from profits and gains incorporated in sub section (4), the Tribunal committed no error in granting the benefit of exemption, as contemplated under Section 10B.

Issues Involved:

1. Prior period expenditure and prior period income.
2. Disallowance made under Section 40(a)(i) of the Act.
3. Section 10(B) deduction in respect of the turnover for which the sales proceeds were not realized.
4. The other income as being eligible for deduction under Section 10(B) of the Act.

Issue-wise Detailed Analysis:

1. Prior Period Expenditure and Prior Period Income:

The Assessing Officer (AO) held that prior period expenses were not allowable as they did not pertain to the current year, while prior period income was taxable. The AO made an addition of ?46,50,648/- for prior period income and denied the set-off of prior period expenses against such income. The CIT(A) confirmed the addition, stating there was no correlation between prior period income and expenses. However, the ITAT held that once the assessee offers prior period income, the expenditure incurred under different heads should be given set-off against that income, and only the net income should be added. The High Court agreed with the ITAT, emphasizing that once prior period income is held taxable, prior period expenditure should also be allowed to be set off.

2. Disallowance Made Under Section 40(a)(i) of the Act:

The AO disallowed ?1,12,01,869/- under Section 40(a)(i) due to non-deduction of TDS under Section 195 while remitting payments to non-residents, relying on the Karnataka High Court decision in Samsung Electronics. The ITAT noted that the Supreme Court had reversed this decision in GE India Technology, holding that TDS is only required if the payment is chargeable to tax under the Act. The ITAT found no material indicating the recipient was taxable in India and held that reimbursement of expenses did not involve any income element, thus no TDS was required. The High Court upheld the ITAT’s decision, confirming that the assessee was not liable to deduct tax at source on such payments.

3. Section 10(B) Deduction in Respect of the Turnover for Which the Sales Proceeds Were Not Realized:

The AO excluded unrealized export turnover from the export turnover but not from the total turnover, which was confirmed by the CIT(A). The ITAT held that if an item does not fall in the export turnover, it must be excluded from the total turnover for computing deduction under Section 10B. The High Court cited the Supreme Court decision in CIT vs. HCL Technologies Ltd, which held that excluding certain expenses from export turnover but not from total turnover would lead to an illogical result. The High Court concluded that the ITAT’s approach was correct and excluded unrealized export turnover from the total turnover.

4. The Other Income as Being Eligible for Deduction Under Section 10(B) of the Act:

The AO excluded other income such as dividend income, profit on sale of fixed assets, and interest income from the computation of deduction under Section 10B, citing the Supreme Court decision in Liberty India. The CIT(A) confirmed this exclusion. The ITAT, however, followed the decision in Sonic Technology Pvt Ltd and Maral Overseas Ltd, holding such incomes as eligible for deduction under Section 10B. The High Court noted that Section 10B(4) provides a specific formula for computing profits derived from export and does not require a direct nexus between income and the business of the undertaking. The High Court held that such incomes could be said to have a direct nexus with the income of the business of the undertaking, thus eligible for deduction under Section 10B.

Conclusion:

The High Court dismissed the Tax Appeal, upholding the ITAT’s decisions on all the issues, thereby allowing the set-off of prior period expenses against prior period income, confirming no TDS requirement on certain payments, excluding unrealized export turnover from total turnover, and including other incomes for deduction under Section 10B.

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