2017 (9) TMI 1296 - HC - Income Tax

MAT Computation - adjustments to book profit - addition of provision for doubtful debts & advances - Held that - We notice that the issue is covered by the judgement in case of Commissioner of Income Tax vs. Vodafone Essar Gujarat Ltd. 2017 (9) TMI 51 - GUJARAT HIGH COURT as held as in the balance sheet as on 31st March 2003 of the assessee, it can be seen that the provision of bad and doubtful debts has been reduced from the gross debtors and net sundry debtors are shown as asset in the balance sheet. This amounts to actual write off and would not be hit by clause (i) of the explanation to section 115JB.Thus the provision for bad and doubtful debts cannot be termed as a provision for liability but is in the nature of diminution in the value of asset.- Decided in favour of Assessee. MAT Computation - Deduction u/s. 10B for determination of book profit under section 115JB - Held that - Ajanta Pharma (2010 (9) TMI 8 - SUPREME COURT ) was a case in which very similar issue in the context of the deduction under section 80HHC of the Act came up for consideration for reduction while computing book profit for the purpose of section 115JB of the Act. Section 80HHC of the Act also as is well known recognizes proportionately the income arising from the export turn-over for deduction. In this context the Supreme Court held that while reducing the book profit for the purpose of section 115JB of the Act, it would be the entire profit and not the proportionate profit qualified for deduction under section 80HHC which should be taken into account. The Tribunal was therefore correct in holding that the issue is covered in favour of the assessee.

Issues:
1. Transfer pricing adjustment on interest rates
2. Weighted deduction for registration of foreign trade marks and patents
3. R&D expenses allocation for deduction u/s. 80IB
4. Disallowance of expenses incurred for another entity
5. Addition of provision for doubtful debts & advances in book profit calculation u/s. 115JB
6. Consideration of deduction u/s. 10B for book profit determination

Transfer Pricing Adjustment on Interest Rates:
The first issue involved the justification of the Income Tax Appellate Tribunal (ITAT) in setting aside the findings of the Commissioner of Income Tax (Appeals) and directing the Assessing Officer (AO) to delete the transfer pricing adjustment on interest rates. The ITAT was questioned on the deletion of adjustments made on account of interest on loans to associated enterprises (AEs) and interest on 0% Optionally Fully Convertible Debentures (OFCDs). The ITAT's decisions were challenged based on the computation of arm's length price and the application of section 92C of the Income Tax Act. The High Court analyzed the facts and circumstances of the case to determine the justification of the ITAT's decisions on these transfer pricing adjustments.

Weighted Deduction for Registration of Foreign Trade Marks and Patents:
The second issue revolved around the ITAT's decision to uphold the assessee's claim for weighted deduction under section 35(2AB) of the Income Tax Act concerning expenditure for the registration of foreign trade marks and patents. The High Court examined the facts and legal provisions to assess whether the ITAT's decision was justified in allowing the weighted deduction and whether it aligned with the provisions of the Income Tax Act.

R&D Expenses Allocation for Deduction u/s. 80IB:
The third issue pertained to the reversal of the AO's decision by the ITAT regarding the allocation of Research and Development (R&D) expenses for computing profit eligible for deduction under section 80IB of the Income Tax Act, 1961. The High Court scrutinized the facts of the case and the legal framework to determine the correctness of the ITAT's decision in reversing the AO's allocation of R&D expenses for the deduction under section 80IB.

Disallowance of Expenses Incurred for Another Entity:
The fourth issue questioned whether the ITAT was correct in deleting the disallowance of expenses incurred by the assessee on behalf of another entity without appreciating the AO's findings that the assessee was not entitled to claim deduction of expenses under section 37(1) of the Income Tax Act. The High Court examined the facts of the case and the legal provisions to assess the correctness of the ITAT's decision in deleting the disallowance of expenses incurred for the other entity.

Addition of Provision for Doubtful Debts & Advances in Book Profit Calculation u/s. 115JB:
The fifth issue involved the ITAT's decision to restore the issue of the addition of provision for doubtful debts and advances in the calculation of book profit under section 115JB to be decided afresh in view of a specific case law. The High Court referred to a judgment related to the treatment of provisions for diminution in the value of assets and analyzed the legal provisions to determine the correctness of the ITAT's decision to restore the issue for fresh consideration.

Consideration of Deduction u/s. 10B for Book Profit Determination:
The sixth issue addressed whether the ITAT was correct in directing the AO to consider the deduction under section 10B for the determination of book profit, relying on a specific Supreme Court decision. The High Court analyzed the provisions of section 10B of the Income Tax Act and the relevant case law to assess the validity of the ITAT's direction to consider the deduction under section 10B for book profit determination.

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