2020 (8) TMI 666 - AT - Income Tax

Deduction allowable u/s 10AA - adjustment of expenditure incurred on telecommunication expenses from the export turnover - HELD THAT - Taking into consideration the decision rendered in the case of CIT v. Tata Elxsi Ltd 2011 (8) TMI 782 - KARNATAKA HIGH COURT we are of the view that telecommunication charges should be excluded both from export turnover and total turnover. We are of the view that as of today, law declared by the Hon'ble High Court of Karnataka which is the jurisdictional High Court is binding on us. Order of the Hon ble Karnataka High Court has been upheld in the case of CIT v. HCL Technologies Ltd. 2018 (5) TMI 357 - SUPREME COURT - The aforesaid additional grounds by the assessee are therefore allowed. Disallowance u/s 14A - assessee submitted that disallowance u/s. 14A would go to increase profits of the business on which deduction u/s. 10AA will be allowed and prayed that AO should be directed to allow deduction u/s. 10AA on the profits of the business as enhanced by the disallowance u/s 14A - HELD THAT - We find force in the submissions of the assessee on this issue because if part of expenses claimed by the assessee against business income is considered as expenses incurred for earning tax free income and is disallowed u/s 14A, the business income stands increased by that amount and only such increased business income should be considered for computing the amount of deduction u/s 10A. AO is directed accordingly. We direct the AO to allow deduction u/s. 10AA of the Act on the profits of the business as increased by addition u/s. 14A of the Act.

Summary

Issues:
1. Deduction allowable under section 10AA of the Income-tax Act, 1961.
2. Notional addition under section 14A of the Act.
3. Penalty proceedings under section 271(1)(c) of the Act.

Issue 1: Deduction allowable under section 10AA of the Income-tax Act, 1961:
The assessee appealed against the reduction of deduction under section 10AA due to adjustments in telecommunication expenses from the export turnover. The contention was that telecommunication expenses should only be reduced if attributable to the delivery of articles outside India, not for services. The appellant argued that the expenses were for services outside India due to their offshore model. The Tribunal, considering relevant case law, allowed the appeal, directing exclusion of telecommunication charges from both export and total turnover for computing the deduction under section 10AA.

Issue 2: Notional addition under section 14A of the Act:
The AO made a notional addition under section 14A, which the assessee challenged. During the hearing, the assessee requested that the disallowance under section 14A should increase the profits eligible for deduction under section 10AA. Citing precedents, the Tribunal agreed with the assessee's argument. It directed the AO to allow deduction under section 10AA on the profits increased by the disallowance under section 14A, following the principle that only the enhanced business income should be considered for computing the deduction under section 10AA.

Issue 3: Penalty proceedings under section 271(1)(c) of the Act:
The assessee contended that penalty proceedings under section 271(1)(c) were initiated without proper satisfaction by the AO. However, the judgment did not provide detailed analysis or resolution regarding this issue, as the focus was primarily on the deduction under sections 10AA and 14A. Hence, the penalty proceedings issue was not extensively discussed in the judgment.

In conclusion, the Appellate Tribunal, in the case under consideration, allowed the appeal partially, addressing the issues related to the deduction under section 10AA and the notional addition under section 14A of the Income-tax Act, 1961. The Tribunal provided detailed analysis and cited relevant case law to support its decision in favor of the assessee on both issues. However, the discussion on penalty proceedings under section 271(1)(c) was limited, with no specific resolution provided in the judgment.