2012 (11) TMI 46 - AT - Income Tax

Disallowance u/s 14A of the Act alleged that assessee has not been able to prove correctness of the claim that no expenditure was incurred in connection with the income which does not form part of the total income under the Act Held that - Even in the post Rule 8D period, the Assessing Officer has to satisfy first of all the correctness of the claim of the assessee in respect of the expenditure incurred which does not form part of the total income under the Act, once he is satisfied on an objective and for cogent reasons that the amount of such expenditure as claimed by assessee is not correct then only he is required to determine the amount of expenditure on the basis of a reasonableness and acceptable method or apportionment - Matter remanded to Assessing Officer Regarding claim of set off of losses incurred in the eligible unit under section 10B with the positive income of the other non-eligible units Held that - There is no provision in section 10B by which a prohibition has been introduced by the Legislature in setting off of a loss which is sustained from one source falling under the head of profits and gains of business against income from any other source under the same head - unabsorbed depreciation can be carried forward to a subsequent year does not militate against the entitlement of the assessee to set-off a loss which is sustained by an eligible unit against the income arising from other units under the same head of profits and gains of business or profession - Legislature not having introduced a statutory prohibition, there is no reason to deprive the assessee of the normal entitlement which would flow out of the provisions of section 70 - export oriented unit has incurred the loss and the assessee has adjusted this loss against that profit from other business - appeal of the assessee is allowed.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Set off of losses incurred by a unit eligible for deduction under Section 10B against profits of non-eligible units.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act, 1961:

Ground nos.1 to 3 are related to the disallowances sustained by the CIT (A) made u/s 14A as per Rule 8D of Income-tax Rules, 1962 of Rs.1,57,474/-.

The assessee argued that the disallowance under Section 14A read with Rule 8D was excessive, as the exempt income was only Rs.26,766/-. The assessee relied on the decision of the Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. vs. CIT, which states that the Assessing Officer must first ascertain the correctness of the claim of the assessee regarding expenditure incurred in relation to exempt income. If the Assessing Officer is satisfied that the claim is incorrect, only then should the expenditure be determined based on a reasonable method of apportionment.

The learned DR supported the orders of the authorities below. The Tribunal noted that the assessee had debited interest and finance expenses amounting to Rs.36,90,86,333/- and claimed they were attributable to normal business income, not investments. However, this was not substantiated with documentary evidence. The Tribunal found it proper to restore the issue to the Assessing Officer for a fresh decision, considering the decision of the Hon'ble Delhi High Court in Maxopp Investments Ltd. Thus, Ground Nos.1 to 3 related to disallowance u/s 14A of the Act were allowed for statistical purposes.

2. Set off of losses incurred by a unit eligible for deduction under Section 10B against profits of non-eligible units:

Ground Nos.4 to 6 are related to the claim of set off of losses incurred in the eligible unit under section 10B with the positive income of the other non-eligible units.

The assessee had seven units, with the unit at Chopanki eligible for deduction u/s 10B and the unit at Silvasa eligible for deduction u/s 80IB. The Chopanki unit incurred a loss of Rs.2,00,29,769/-, which the assessee set off against the income from other units. The Assessing Officer disallowed this claim, and the CIT (A) confirmed the disallowance, holding that the provisions of Section 10B do not allow the set off of losses of eligible units against the income of non-eligible units.

The Tribunal noted that the CIT (A) relied on the provisions of sub-sections 4 to 8 of Section 10B, particularly clause (ii) of sub-section (6), which provides for the carry forward and set off of losses pertaining to 100% export-oriented units. The CIT (A) held that allowing the set off of such losses against other business income would render these provisions redundant and lead to unintended consequences, such as reducing taxable income in the year of loss and claiming full deduction of profits in subsequent years without considering past losses.

The assessee argued that this issue was covered by the decisions of ITAT, Delhi Bench in Honeywell International (India) P. Ltd. vs. DCIT, Mumbai High Court in Hindustan Unilever Ltd. vs. DCIT, and the Hon'ble Bombay High Court in CIT vs. Galaxy Surfactants Ltd. The Tribunal found that the decision of the Hon'ble Bombay High Court in CIT vs. Galaxy Surfactants Ltd. was applicable, which allowed the set off of losses of an eligible unit against the income of other units under the same head of profits and gains of business or profession. The Tribunal noted that there is no statutory prohibition in Section 10B against such set off, and the normal entitlement under Section 70 should be allowed.

Therefore, the Tribunal allowed the assessee's appeal on this issue, following the decision of the Hon'ble Bombay High Court in CIT vs. Galaxy Surfactants Ltd.

Conclusion:

In the result, the appeal of the assessee is allowed.

(Order pronounced in open court on this 18.5.2012.)