2017 (9) TMI 1410 - HC - Income Tax

Exemption under section 10A - contention of the Revenue that in computing the deduction u/s 10A addition made on account of the disallowance of the provident fund/ESIC payments ought to be ignored - Held that - The disallowance on the provident fund/ESIC payments has been made because of the statutory provisions section 43B in the case of the employer s contribution and section 36(v) read with section 2(24)(x) in the case of the employer s contribution which has been deemed to be the income of the assessee. The plain consequence of the disallowance and the add back that has been made by the Assessing Officer is an increase in the business profits of the assessee. The contention of the Revenue that in computing the deduction under section 10A the addition made on account of the disallowance of the provident fund/ESIC payments ought to be ignored cannot be accepted. No statutory provision to that effect having been made, the plain consequence of the disallowance made by the Assessing Officer must follow. The second question shall accordingly stand answered against the Revenue and in favour of the assessee. We do not think that an identical argument, and more or less relying on the same provisions, made before us by Mr. Pinto can be accepted. It cannot be accepted because the Tribunal s reliance on Gem Plus (2010 (6) TMI 65 - BOMBAY HIGH COURT ) is not erroneous, nor has the Tribunal misdirected itself in law. Its view, therefore, cannot be termed as vitiated by any error of law apparent on the face of record or perversity warranting our interference in further appellate jurisdiction. - Decided against revenue

Issues:
1. Challenge to the order passed by the Income Tax Appellate Tribunal
2. Disallowance of taxes paid under Section 10(10CC) for deduction under Section 10A
3. Disallowance of foreign exchange losses for deduction under Section 10A
4. Disallowance under Section 40(a)(v) and its impact on deduction under Section 10A
5. Interpretation of Division Bench judgment in Gem Plus case regarding deduction under Section 10A

Issue 1: Challenge to the order passed by the Income Tax Appellate Tribunal
The Revenue challenged the order passed by the Income Tax Appellate Tribunal, which gave effect to the directions of the Dispute Resolution Panel under Section 144C(5) of the Income Tax Act, 1961. The Tribunal's decision was based on the assessment of international transactions with an associate concern and the subsequent adjustment of the Arm's Length Price. The Tribunal's order was challenged by the Revenue on the grounds of substantial questions of law not covered by previous judgments.

Issue 2: Disallowance of taxes paid under Section 10(10CC) for deduction under Section 10A
The Assessing Officer disallowed taxes paid under Section 10(10CC) for deduction under Section 10A, leading to a disagreement between the Revenue and the assessee. The Dispute Resolution Panel directed that such expenditure in foreign exchange should be reduced from the total turnover for calculating the deduction under Section 10A, following the judgment in Gem Plus case. The Tribunal upheld the direction based on the Division Bench judgment, emphasizing the need to reduce the disallowed amount from the export turnover for calculating the deduction under Section 10A.

Issue 3: Disallowance of foreign exchange losses for deduction under Section 10A
The assessee contested the disallowance of foreign exchange losses for deduction under Section 10A. The Tribunal considered the judgment of the Hon'ble Supreme Court in Woodward Governor India case, which highlighted that foreign exchange losses are considered as expenditure under Section 37(1) even if not discharged in the same year. The Tribunal relied on the Gem Plus case to direct the Assessing Officer to allow deduction under Section 10A on the enhanced business profit due to disallowance under Section 40(a)(v).

Issue 4: Disallowance under Section 40(a)(v) and its impact on deduction under Section 10A
The Tribunal addressed the disallowance under Section 40(a)(v) and its impact on the deduction under Section 10A. It noted that the Division Bench judgment in Gem Plus case covered the issue at hand, requiring the Assessing Officer to allow deduction under Section 10A on the enhanced business profit due to the disallowance under Section 40(a)(v). The Tribunal emphasized the need to consider the enhanced profit for deduction under Section 10A, as the assessee had no other income eligible for deduction.

Issue 5: Interpretation of Division Bench judgment in Gem Plus case regarding deduction under Section 10A
The Tribunal's reliance on the Gem Plus case was upheld, rejecting the Revenue's argument against the direction to grant exemption under Section 10A. The Division Bench judgment clarified the treatment of employer's and employees' contributions towards Provident Fund/ESIC for deduction under Section 10A. The Tribunal's decision was deemed correct, as it followed the legal principles established in the Gem Plus case, and no error of law was found warranting interference.

In conclusion, the High Court dismissed the appeal, stating that the questions proposed were not substantial questions of law. The Tribunal's decision was upheld, and the appeal was deemed devoid of merits.

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