2005 (7) TMI 307 - AT - Income Tax

Deduction u/s 80HHC - whether the deduction u/s 80HHC should be allowed on export income included in gross total income or on the gross total income arrived after allowing deduction under Chapter VI-A of IT Act - HELD THAT - From the language used in s. 80AB it is clear that deduction under Chapter VI-A should be given on the amount of income of that nature as computed in accordance with the provisions of this Act before making any deduction under Chapter VI-A. We respectfully follow the decision of Hon'ble apex Court in the case of IPCA Laboratory Ltd. vs. Dy. CIT wherein it has been held that the s. 80AB has an overriding effect over all other sections given in Chapter VI-A. Therefore, whatever mentioned in s. 80-IB or 80HHC would be governed by s. 80AB. keeping in mind the ratio laid down in the case of IPCA Laboratory Ltd. vs. Dy. CIT 2004 (3) TMI 9 - SUPREME COURT , we hold that the s. 80AB has an overriding effect over all other sections given in Chapter VI-A and deduction under Chapter VI-A should be given on the amount of income of that nature as computed in accordance with the provisions of this Act before making any deduction under Chapter VI-A. Therefore, we set aside both the orders of the lower authorities and direct the AO to allow the deduction under s. 80HHC at Rs. 20,92,136 on the income included in gross total income before making any deduction under Chapter VI-A, however, the total deduction under ss. 80-IB and 80HHC should be restricted upto gross total income. Sundry expenses written off - We hold that the disallowance made by the AO in respect of telephone expenses and depreciation on telephone is reasonable as element of personal expenses can't be ruled out and we confirm the order of CIT on this issue. However, as regards disallowance of sundry debtors written off, we are in opinion that the disallowance made by the AO is not proper. The position of law in this regard is clear that if the necessary entries are made in the regular books of account regarding the writing off of the amounts, then no further requirement is necessary. The claim regarding written off has been made only after passing the necessary entries in the books of accounts, therefore, no disallowance should be made in this regard. Therefore, we set aside both the orders of the lower authorities and direct the AO to allow the sundry expenses written off. In the result, the appeal filed by the assessee is partly allowed as stated above and announced in the open Court.

Summary

Issues involved:
1. Deduction under section 80HHC.
2. Disallowance of telephone expenses, depreciation on telephone, and sundry balances written off.

Detailed Analysis:

Issue 1: Deduction under section 80HHC
The appeal was filed by the assessee against the order of the CIT(A) for the assessment year 2001-02. The primary contention was regarding the deduction claimed under section 80HHC. The assessee had claimed a deduction of Rs. 20,92,136 under section 80HHC, but the Assessing Officer (AO) allowed only Rs. 15,63,331. The dispute revolved around whether the deduction under section 80HHC should be allowed on export income included in gross total income or on the gross total income after allowing deductions under Chapter VI-A of the Income Tax Act. The Authorized Representative argued that the deduction under section 80HHC should be allowed on the export income included in the gross total income before any other deductions. The representative relied on the provisions of section 80AB, which states that deductions under Chapter VI-A should be calculated on the income before making any other deductions under the same chapter. The Authorized Representative also cited relevant court decisions to support the claim.

On the other hand, the Departmental Representative supported the AO's decision to restrict the deduction under section 80HHC based on the reduced gross total income after allowing deductions under section 80-IB. The Departmental Representative argued that the deduction under section 80HHC should not be allowed on the amount already deducted under section 80-IB. The Tribunal analyzed the provisions of sections 80AB, 80HHC, and 80-IB of the Income Tax Act. The Tribunal referred to relevant court decisions and concluded that the deduction under section 80HHC should be allowed on the gross total income before any other deductions under Chapter VI-A. The Tribunal held that section 80AB has an overriding effect over other sections in Chapter VI-A, and directed the AO to allow the deduction under section 80HHC on the income included in the gross total income before any other deductions under Chapter VI-A.

Issue 2: Disallowance of telephone expenses, depreciation on telephone, and sundry balances written off
The second issue in the appeal pertained to the disallowance of telephone expenses, depreciation on telephone, and sundry balances written off by the assessee. The AO had disallowed 10% of telephone expenses, depreciation on telephone, and Rs. 10,034 of sundry balances written off by the assessee. The Authorized Representative argued that the disallowance of telephone expenses and depreciation on telephone was unjustified as they were used for official purposes, and no evidence of personal use was provided. Regarding the sundry balances written off, the Authorized Representative contended that the necessary entries were made in the books of account, and no further evidence was required.

The Departmental Representative supported the AO's decision on the disallowances, stating that the estimation of personal use of telephone was reasonable, and the disallowance of sundry balances written off was justified due to the lack of evidence of irrecoverability. The Tribunal upheld the disallowance of telephone expenses and depreciation on telephone, citing the possibility of personal use. However, the Tribunal disagreed with the disallowance of sundry balances written off, emphasizing that if necessary entries were made in the books of account, no further evidence was necessary. Therefore, the Tribunal directed the AO to allow the sundry expenses written off amounting to Rs. 10,034.

In conclusion, the Tribunal partly allowed the appeal filed by the assessee, directing the AO to allow the deduction under section 80HHC on the gross total income before any other deductions under Chapter VI-A and to allow the sundry expenses written off of Rs. 10,034.