2016 (8) TMI 226 - HC - Income Tax

Calculation of deduction under Section 80IA - forfeiture of advance - income derived from from the running of eligible industrial undertaking - Held that - Advances were taken from the customers and on receipt of advance deposit, the assessee company commences manufacturing of such specific equipments for which expenditure in excess of the advance deposit received has to be incurred by the assessee company. In case, when the customer fails to take the delivery due to his inability to pay the balance price of equipment manufactured, the assessee company has already incurred huge expenditure for manufacturing such equipments which cannot be sold to any other customer for the reasons that the same has been manufactured as per specific requirement of the customer who has placed order. The assessee had to incur loss in this regard. If the expenses are not allowed, it will be contrary to well settled principles. He must get the deduction from the expenses for which he has received the advance. Further, the decisions which have been relied upon by learned advocate for the revenue will not apply in the facts of the present case since the amount which has been received by the assesse is for the same unit of which they have commenced manufacturing. Having heard learned advocates for the revenue and the question posed for consideration for us reproduced hereinabove and considering the decisions cited, the question which is raised in the present appeal is required to be answered in favour of the assessee.

Summary

Issues Involved:
1. Deduction under Section 80IA for forfeiture of advance.
2. Calculation of deduction under Section 80IA considering net interest.

Issue-wise Detailed Analysis:

1. Deduction under Section 80IA for Forfeiture of Advance:
The primary issue is whether the Income Tax Appellate Tribunal (ITAT) was correct in law and on facts in allowing a deduction under Section 80IA for an amount of ?46,18,021/- which was towards forfeiture of advance. The assessee had claimed this deduction, but the Assessing Officer disallowed it, and the CIT(A) confirmed the disallowance. The ITAT, however, directed the Assessing Officer to allow the deduction. The revenue contended that the forfeiture of the advance was for breach of contract and could not be considered as derived from the running of the eligible industrial undertaking. They relied on the Supreme Court's decision in Liberty India vs. Commissioner of Income Tax, which emphasized that tax incentives under Section 80IA/80IB are linked to the generation of operational profits and not merely to the ownership of the business. The revenue also cited the case of Commissioner of Income Tax vs. Jackson Engineers Ltd., where it was held that such forfeited amounts should be treated as business income but not derived from the eligible business for Section 80IA benefits. The High Court, however, upheld the ITAT's decision, noting that the forfeited advance was directly related to the specific equipment manufactured by the assessee, which incurred significant expenditure. The court concluded that denying the deduction would contradict well-settled principles, as the forfeited amount was indeed linked to the manufacturing activities of the eligible unit.

2. Calculation of Deduction under Section 80IA Considering Net Interest:
The second issue concerns whether the ITAT was correct in holding that only the net interest should be excluded while calculating the deduction under Section 80IA. The revenue's position was already concluded by the Gujarat High Court's decision in Commissioner of Income Tax vs. Nirma Ltd., which followed the Supreme Court's ruling in ACG Associated Capsules Pvt. Ltd. vs. CIT. The Supreme Court had established that for deductions under Section 80HHC, only the net interest (gross interest minus expenses incurred to earn such interest) should be excluded, not the gross interest. This principle was extended to Sections 80I and 80HH, emphasizing that the logic of excluding net profits applies uniformly across different sections providing profit-linked incentives. The High Court observed that the rationale behind excluding net profits rather than gross profits is consistent across various sections of the Income Tax Act, including Section 80IA. Consequently, the court found no reason to contest this issue further, as it was already settled by higher judicial authorities.

Conclusion:
The High Court, after considering the arguments and relevant judicial precedents, answered both questions in favor of the assessee. The court confirmed the ITAT's judgment, allowing the deduction under Section 80IA for the forfeited advance and holding that only the net interest should be excluded while calculating the deduction. The appeal by the revenue was dismissed, and the ITAT's order was upheld.