2023 (7) TMI 166 - AT - Income Tax

Deduction u/s. 10AA - assessee failed in E-filing form 56F along with return of income - CIT(A) allowed deduction - HELD THAT - Benefit of section 10AA should not be denied on account of a procedural/technical default by the assessee or his chartered accountant, if otherwise the assessee is eligible to claim deduction under the said exemption provision. In the instant case, the A.O. has denied sec 10AA benefit on account of an inadvertent error on the part of the assessee in not e-filing Form 56F along-with return of income. We are therefore of the view that there is sufficient compliance if the Form 56F has been filed during the course of assessment proceeding, since there is no material objective to be achieved by the assessee in not e-filing the same, once the same was already available with the assessee. CIT(A) has not erred in facts and in law in allowing the claim of the assessee that deduction u/s. 10AA of the Act cannot be denied simply on the ground that the assessee did not e-file form 56F along with the return of income, when the assessee furnished form 56F to the ld. Assessing Officer during the assessment proceedings when the claim of deduction u/s. 10AA of the Act was being examined by the ld. Assessing Officer. Net profit comparison of sister concern - AO held that the reasonable profit for the assessee should be restricted to 7.5% of the purpose of calculation of deduction u/s. 10AA - CIT(A) allowed the appeal of the assessee on the ground that there was no business transaction between the assessee and its sister concern - HELD THAT - We observe that firstly the assessee s case is directly covered by order of Hon ble ITAT for assessee s own for assessment year 2012-13 2013-14 2019 (7) TMI 126 - ITAT AHMEDABAD . CIT(A) has correctly observed that the assessee has not arranged its affairs in a manner so as to artificially inflate its profit with a view to claim higher deduction u/s. 10AA and further, the Department has not been able to place any material on record to show that there was any transaction between the assessee and its sister concern. We are of the considered view that ld. CIT(A) has correctly allowed the appeal of the assessee

Summary

Issues Involved:
1. Allowing deduction under section 10AA of the Income Tax Act despite the assessee's failure to file Form 56F along with the return of income.
2. Reduction in net profit of eligible business for calculation of deduction under section 10AA by comparing it with a sister concern.

Summary:

Issue 1: Allowing Deduction Under Section 10AA Despite Failure to File Form 56F

The brief facts are that the assessee did not e-file Form 56F claiming deduction under section 10AA as required by Rule 12(2) of the Income Tax Rules. The assessee argued that the non-filing was an inadvertent procedural lapse and submitted a physical copy during assessment. The Assessing Officer (AO) denied the deduction on the grounds of non-compliance with Rule 12(2). However, the CIT(A) allowed the claim, stating that filing Form 56F is directory and not mandatory, supported by various judicial decisions. The Tribunal upheld CIT(A)'s decision, emphasizing that beneficial provisions should be liberally construed, and procedural lapses should not lead to denial of deductions if the substantive conditions are met. The Tribunal cited several precedents, including the Supreme Court's judgment in Mother Superior Adoration Convent and other relevant cases, to support its stance that procedural requirements should not override the legislative intent of providing tax benefits.

Issue 2: Reduction in Net Profit for Deduction Calculation by Comparing with Sister Concern

During the assessment, the AO observed that a sister concern reported a much lower net profit compared to the assessee. The AO restricted the assessee's profit to 7.5% for deduction purposes under section 10AA, disallowing a significant portion of the claimed deduction. The CIT(A) reversed this decision, noting that there were no transactions between the assessee and its sister concern to suggest any profit inflation. The Tribunal upheld CIT(A)'s decision, stating that the AO did not provide evidence of any arrangement to inflate profits. The Tribunal also noted that the issue was covered by its own orders in the assessee's favor for previous assessment years, affirming that the deduction should not be denied on a notional basis without substantive evidence.

Conclusion:

The Tribunal dismissed the Department's appeal, affirming CIT(A)'s orders on both issues. The Tribunal concluded that procedural lapses in filing Form 56F should not lead to denial of section 10AA deductions and that profit adjustments based on comparisons with sister concerns require substantive evidence of profit inflation arrangements.