2021 (2) TMI 112 - HC - Income Tax

Entitled to deduction u/s 35(2AB) - expenses eligible for deduction under the said provisions pertained to unit entitled for deduction under Section 10B of the Act - HELD THAT - ITAT relied upon case of this Court in YOKOGAWA INDIA LTD 2011 (8) TMI 845 - KARNATAKA HIGH COURT held that Section 10B of the Act is in the nature of the exemption provision and therefore, the Assessing Officer was right in reducing the profits of the units eligible for deduction under Section 10B to the extent of additional 50% deduction available under Section 35(2AB) - subsequently the decision of this Court in YOKOGAWA INDIA LTD insofar as it pertains to nature of provision of Section 10B of the Act is concerned, was reversed by the Supreme Court in CIT VS. YOKOGAWA 2016 (12) TMI 881 - SUPREME COURT and it was held that Section 10B of the Act is in the nature of deduction provision. It is also pertinent to mention here that Section 10B is a provision which deals with deduction of income whereas Section 35(2AB) deals with deduction on expenditure. The restriction contained in sub-Section (6) of Section 10B of the Act operate only upto 1st day of April 2001. Therefore, the restrictions contained in sub-Section (6) of Section 10B of the Act have no application to the obtaining factual matrix of the case as the Assessment Year is subsequent to 1st April 2001. It is also noteworthy that the bar contained in Section 35(2AB)(2) does not apply to the fact situation of the case as the same provides that no deduction shall be allowed in respect of expenditure mentioned in clause(1) under any provisions of the Act. As stated supra, the deduction under Section 10B of the Act is on the income and not on the expenditure. Disallowance u/s 14A - whether assessee has not determined the expenditure incurred in relation to exempt income and Assessing Authority has rightly held that even though there is no dividend income from the investment? - HELD THAT - Supreme Court in 'CIT VS. WALFORT SHARE AND STOCK BROKERS (P). LTD', 2010 (7) TMI 15 - SUPREME COURT has held that mandate of Section 14A is clear and the same is aimed to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time, avail of the tax incentive by way of exemption of exempt income without making apportionment of expenses incurred in relation to exempt income. In the instant case, no exempt income has accrued to the assessee, therefore, the provisions of Section 14A of the Act are not attracted.

Summary

Issues:
1. Interpretation of deduction provisions under Section 35(2AB) and Section 10B of the Income Tax Act, 1961.
2. Applicability of Section 14A of the Act to the appellant's case.

Analysis:

Issue 1: Interpretation of Deduction Provisions
The appellant, a company engaged in biotechnological products, claimed deductions under Section 10B and Section 35(2AB) of the Act for the Assessment Year 2004-05. The Assessing Officer disallowed the deduction under Section 35(2AB) since the appellant had already claimed deduction under Section 10B. The Commissioner of Income Tax (Appeals) and the Tribunal upheld this decision. The appellant argued that Section 10B and Section 35(2AB) are independent provisions, with Section 10B providing income-based deduction for the undertaking and Section 35(2AB) providing expenditure-based deduction at the entity level. The appellant highlighted the Supreme Court's decision that Section 10B is a deduction provision. The appellant also pointed out the amendment in Section 10B by the Finance Act, 2003, removing restrictions on other tax concessions for eligible units after April 1, 2001. The appellant contended that Section 14A does not apply as it pertains to exempt incomes, which the appellant did not have.

Issue 2: Applicability of Section 14A
The revenue argued that the appellant is not entitled to double deduction under Sections 37 and 35(2AB) due to Section 35(2) of the Act. The revenue claimed that all deductions are deemed to have been claimed under Section 10A(6) of the Act. The revenue emphasized that profits of a unit must be computed on a stand-alone basis without reference to other units. The Division Bench referred to the decision in CIT Vs. YOKOGAWA LTD., which held that Section 10B is a deduction provision, not an exemption provision. The court noted that the restriction in Section 10B(6) applies only until April 1, 2001, and Section 35(2AB)(2) does not apply to the case as it deals with expenditure, unlike Section 10B, which deals with income. The court also cited the Supreme Court's ruling on Section 14A, stating it aims to prevent claiming expenses related to exempt income against taxable income, which is not applicable in the appellant's case.

In conclusion, the court ruled in favor of the appellant, quashing the tribunal's decision that the appellant was not entitled to claim deduction under Section 35(2AB) for expenses related to units eligible for deduction under Section 10B. The appeal was disposed of in favor of the appellant.