2019 (3) TMI 5 - AT - Income Tax

Exemption u/s. 10A - Adjustment of brought forward business loss and unabsorbed depreciation - assessee has two units one is STPI and other non-STPI unit. - HELD THAT - CIT(A) has rightly allowed the appeal of the assessee by holding that the brought forward business loss and unabsorbed depreciation of non-eligible business unit is not allowed to be adjusted while calculating the exemption u/s. 10A - Following the law laid down in CIT vs. Yogokawa India Ltd. (2011 (8) TMI 845 - KARNATAKA HIGH COURT), deduction u/s 10A is required to be taken before setting off brought forward losses and unabsorbed depreciation. Disallowance u/s. 14A - HELD THAT - Since, the appellant has been able to establish that none of the fund borrowed is diverted towards investment in Mutual Fund Units, the expenditure related to indirect expenses is not justifiable and hence the addition u/s 14A is deleted. Regarding disallowance under limb iii of Rule 8D, the appellant has not been able to explain why some expenditure related to management of such investment, income from which is exempted, should not be disallowed. Since the investment has been made, some amount of follow up actions, record keepings, discussions and consultations are bound to happen which will lead to some administrative expenses. Such administrative expenses are to be computed at the rate of 5% of average investment. In the case of appellant, the AO has computed such which is in accordance with the law and hence confirmed. - Decided against revenue.

Issues Involved:
1. Adjustment of brought forward business losses and unabsorbed depreciation before allowing deduction under Section 10A.
2. Disallowance under Section 14A read with Rule 8D for expenses related to exempt income.

Issue-wise Detailed Analysis:

1. Adjustment of Brought Forward Business Losses and Unabsorbed Depreciation Before Allowing Deduction Under Section 10A:

The assessee filed a return of income and claimed a deduction under Section 10A of the Income Tax Act amounting to ?6,35,35,675/-. The assessee had two units: a non-STPI unit declaring a loss of ?3,56,99,918/- and an STPI unit declaring a profit of ?9,92,35,593/-. The Assessing Officer (AO) noted that the assessee failed to consider brought forward losses/depreciation before claiming the deduction under Section 10A. The AO adjusted the brought forward business losses and unabsorbed depreciation of ?5,90,31,797/- before allowing the deduction.

The CIT(A) allowed the appeal of the assessee, holding that the brought forward business loss and unabsorbed depreciation of the non-eligible business unit should not be adjusted while calculating the exemption under Section 10A. The ITAT upheld this decision, referencing the Hon’ble Supreme Court’s rulings in CIT vs. Yokogawa India Ltd. and CIT vs. JP Morgan Services India Pvt. Ltd., which clarified that the deduction under Section 10A should be computed independently for the eligible undertaking without reference to other units or undertakings of the assessee. The deduction under Section 10A is to be made while computing the gross total income of the eligible undertaking under Chapter IV, not at the stage of computation of total income under Chapter VI of the Act.

2. Disallowance Under Section 14A Read with Rule 8D for Expenses Related to Exempt Income:

The AO noted that the assessee earned dividend income of ?4,59,656/-, which is exempt from tax, and made fresh investments amounting to ?5,54,57,280/-. The AO disallowed ?4,51,433/- under Section 14A read with Rule 8D, calculating ?3,12,793/- under Rule 8D(2)(ii) and ?1,38,640/- under Rule 8D(2)(iii).

The CIT(A) provided relief of ?3,12,793/- under Rule 8D(2)(ii), stating that the assessee had established that none of the borrowed funds were diverted towards investments in mutual fund units, thus the indirect expenditure related to such investments was not justifiable. However, the CIT(A) upheld the disallowance of ?1,38,640/- under Rule 8D(2)(iii), noting that some administrative expenses related to the management of exempt income investments were inevitable.

The ITAT found no reason to interfere with the CIT(A)’s findings, agreeing that the disallowance under Section 14A was appropriately computed as per the law, and thus, the appeal of the Revenue on this ground was dismissed.

Conclusion:

The ITAT upheld the CIT(A)’s decision on both issues. The deduction under Section 10A should be computed independently for the eligible unit without adjusting brought forward losses and unabsorbed depreciation of non-eligible units. The disallowance under Section 14A read with Rule 8D was partly justified, with relief provided for indirect expenditure but upheld for administrative expenses related to exempt income investments. The appeal by the Revenue was dismissed in its entirety.

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