2013 (11) TMI 1365 - AT - Income Tax

Allowance of Lease rent paid Sale and Lease back transaction - Revenue contended that the series of transactions were entered into between the group concerns with a view to avoid tax liability of the group as a whole - Held that - Bank of Madura who purchased windmill 500 KW is not part of the assessee group - Secondly, it is not for the Income-tax authorities to determine as to in what manner the assessee should have conducted his business affairs. It is not in dispute that the transactions were given effect to by the parties - There is considerable force in the contention of the assessee that while on the one hand the assessee s claim of deduction of lease rentals has been disallowed, the income earned by the assessee on sale of power to Andhra Pradesh Government has been assessed without demur Lease rent allowable as deduction Decided against the Revenue. Allowance of unabsorbed depreciation of earlier years Applicability of provision of section 32(2) of the Income Tax Act Held that - Assessee s unabsorbed depreciation for the assessment year 2001-02 and 2002-03 and current year s depreciation, as held by the CIT (A) are more than the capital gains and dividend being brought to tax separately by AO. In these circumstances both on facts as well as on law, assessee s contentions are allowable Decided against the Revenue. Claim of deduction u/s 80HHC, while computing the book profits under section 115JB Held that - Following the decision in the case of Ajanta Pharma Ltd vs. CIT 2010 (9) TMI 8 - SUPREME COURT , deduction u/s 80HHC is allowed for computation of book profit Decided against the Revenue. Taking of turnover of the taxable division only on standalone basis for computation of deduction u/s 80HHC - assessee company had several division viz. Textile Division, Lease and Hire Purchase Division; Power Generation Division, Foreign Exchange Division & Financial and Other Services Division. These activities were distinct and separate from each other - Assessee had maintained separate books of account in respect of each division and separate P & L A/s. and separate balance sheet were prepared in respect of each division Held that - Assessing Officer had simply adopted the figures appearing in the consolidated account and ignored the separate accounts of Textile Division - In the case of an assessee carrying on more than one business it was only the business of which export was a part was required to be taken into consideration and not other business which had nothing to do with the export business Decided against the Revenue.

Summary

Issues Involved:
1. Deletion of addition against disallowance of lease rental paid on windmill.
2. Granting set off of unabsorbed depreciation against income from capital gain and dividend income.
3. Allowing deduction under section 80HHC while computing book profit under section 115JB.
4. Recomputing deduction under section 80HHC on a "standalone" basis for the taxable division.

Issue-wise Detailed Analysis:

1. Deletion of Addition Against Disallowance of Lease Rental Paid on Windmill:
The Revenue contested the deletion of an addition of Rs.23,31,963 related to lease rental paid on a 250 KW windmill. The AO had treated the transaction as a sale and leaseback, disallowing the lease rent. The CIT (A) deleted the addition based on past ITAT decisions in the assessee's favor for similar transactions. The ITAT upheld the CIT (A)'s decision, stating that the transactions were genuine and the lease rent should be allowed as a deduction. The ITAT noted that the assessee's ownership was substituted, and the windmill was operated as a lessee, emphasizing that tax authorities should not dictate business affairs.

2. Granting Set Off of Unabsorbed Depreciation Against Income from Capital Gain and Dividend Income:
The AO did not allow the set-off of unabsorbed depreciation against short-term capital gain and dividend income. The CIT (A) allowed the set-off, referencing section 32(2) of the Act and various judicial precedents, including Supreme Court rulings, which established that unabsorbed depreciation merges with current year depreciation and can be set off against income from other heads. The ITAT upheld the CIT (A)'s decision, noting that the assessee had sufficient unabsorbed depreciation to cover the taxable income and cited favorable judgments from the Special Bench and the Gujarat High Court.

3. Allowing Deduction Under Section 80HHC While Computing Book Profit Under Section 115JB:
The AO disallowed the deduction under section 80HHC for computing book profits under section 115JB, arguing that it was not allowed in regular computation. The CIT (A) allowed the deduction based on the Kerala High Court's decision in Commissioner Of Income-Tax vs. G.T.N. Textiles Ltd. and ITAT decisions. The ITAT confirmed this, referencing the Special Bench decision in Syncome Formulations (I) Ltd and the Supreme Court's approval in Ajanta Pharma Ltd vs. CIT, which supported the assessee's claim.

4. Recomputing Deduction Under Section 80HHC on a "Standalone" Basis for the Taxable Division:
The AO computed the deduction under section 80HHC by aggregating all business turnovers, while the CIT (A) directed a recomputation based on the textile division's standalone turnover and profits. The ITAT upheld the CIT (A)'s approach, referencing consistent ITAT decisions in the assessee's favor, which supported computing deductions based on individual business divisions. The ITAT noted that the assessee maintained separate accounts for each division, and the textile division's standalone computation was appropriate.

Conclusion:
The ITAT dismissed the Revenue's appeal, upholding the CIT (A)'s decisions on all grounds, confirming the deletion of lease rental disallowance, allowing the set-off of unabsorbed depreciation, permitting the section 80HHC deduction in computing book profits, and supporting the standalone basis for section 80HHC deduction computation.