2014 (4) TMI 442 - AT - Income Tax

Disallowance of set off of business loss of STP unit against Non-STP unit Held that - The CBDT circular No. 279/Misc/M-116/2012- ITJ dtd. 16. 07. 2013 has tried to remove confusion that has arisen in granting deductions u/s. 10A/10B/10AA/10BA - irrespective of their continued placement in Chapter III, section 10A and 10B as substituted by Finance Act, 2000 provide for deduction of the profits and gains derived from the export of articles or things or computer software for a period of 10 consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such article or thing or computer software - The deduction is to be allowed from the total income of the assessee the provisions of Chapter IV and Chapter VI shall also apply in computing the income for the purpose of deduction under section 10AA and 10BA of the Act subject to the conditions specified in the said sections - the Circular has clearly laid down that the loss from eligible unit would be eligible for carry forward and set off in accordance with the provisions of section 72 of the Act that loss from an ineligible unit can be carried forward and set off against the profits of eligible unit or ineligible unit in accordance with the provisions of the Act Decided in favour of Assessee. Disallowance u/s 14A of the Act r.w Rule 8D Dividend income Held that - FAA was of the view that AO had made disallowance as per the provisions of the Act, that disallowance was made as per the calculation provided by it, that reduction in addition requested by the assessee was not in conformity with the scheme of calculating disallowance - a request was made by the assessee before the FAA to reduce the addition, as the assessee was of the opinion that addition was on higher side - By stating that addition was higher side assessee had impliedly accepted the addition in principle - Non submission of any argument before the FAA also indicates the acceptance of the assessee with regard to the addition made, though it had reservation about the quantum the order of the FAA does not suffer from any legal infirmity Decided against Assessee.

Summary

Issues:
1. Disallowance of set off of Business Loss of STP Unit against Profit of Non-STP Unit.
2. Disallowance under section 14A of the Income Tax Act 1961.

Issue 1: Disallowance of set off of Business Loss of STP Unit against Profit of Non-STP Unit:

The assessee-company, involved in providing web-related services, filed its income return declaring total income. The assessment concluded with the AO disallowing the set off of Business Loss of STP Unit against the Profit of Non-STP Unit. The AO emphasized that section 10A's special provisions were to encourage business activity in free trade zones, providing a tax holiday for specific periods. The AO disallowed the adjustment of losses from the STP unit against income from the non-STP unit. The FAA upheld this decision, stating the loss could not be set off as per the provisions of the Act. The AR argued that the adjustment was permissible, citing a judgment by the jurisdictional High Court and a CBDT circular. The ITAT referred to the circular, which clarified the treatment of losses from eligible and ineligible units, allowing the carry forward and set off of losses as per section 72 of the Act. Consequently, the ITAT decided in favor of the assessee, allowing the set off of the loss from the STP unit against the profit of the Non-STP unit.

Issue 2: Disallowance under section 14A of the Income Tax Act 1961:

The AO made a disallowance under section 14A concerning the dividend income received by the assessee. The FAA upheld the disallowance, noting that the AO had followed the provisions of the Act in making the disallowance. The AR contended that no expenditure was incurred by the assessee, and the burden was on the AO to prove the nexus between the expenditure and the earning of non-taxable income. The ITAT referred to the Godrej and Boyce Mfg. Co. Ltd. case, which discussed Rule 8D as an artificial method to estimate expenditure related to exempt income. The ITAT found that the AO had followed the prescribed method under section 14A and that the assessee did not challenge this during the appellate proceedings. The ITAT concluded that the FAA's decision was legally sound, as the assessee had not provided substantial arguments against the disallowance. Therefore, the ITAT ruled against the assessee on this issue, confirming the FAA's order.

In conclusion, the ITAT partially allowed the appeal filed by the assessee, permitting the set off of the Business Loss of the STP Unit against the Profit of the Non-STP Unit but upholding the disallowance under section 14A of the Income Tax Act 1961.