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TMI Blog2014 (12) TMI 838X X X X Extracts X X X X X X X X Extracts X X X X ..... ion must be derived from external source of any kind or that there must be disclosure of new and important matters, subsequent to original assessment - Where income liable to tax has escaped in the original assessment due to oversight and inadvertence or a mistake committed by the AO, then he has jurisdiction to reopen the assessment - the argument advanced by the assessee that initiation of reassessment proceedings us/. 147 of the Act is on a change of opinion and therefore not valid, cannot be accepted – Decided against assessee. Deduction on computation of income from business expenditure incurred on Employee stock option plan – Held that:- As decided in assessee’s case wherein it has held that the expenses on account of ESOP is allowable expenses - while passing the order u/s. 143(3) of the Act, the AO has disallowed the sum and added the same to the total income of the assessee - in the assessment order u/s.147 of the Act no addition on account of ESOP expenses was made – Decided against assessee. Re-computation of relief u/s 10B in respect of deduction u/s 35(2AB) – Held that:- When the provisions of section 10A/10B of the Act are held to be exemption provisions, the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irected to consider the claim of the assessee – Decided in favour of assessee. Denial of carry forward of unabsorbed depreciation – Eligibility for relief u/s 10B - Whether the provisions of Sec.10B of the Act are deduction provisions or exemption provisions will assume great importance - Held that:- If the provisions are considered as exemption provisions then they will not enter the computation of total income and therefore the loss of the eligible unit cannot be set off against the profits of the non-eligible unit - the issue has already been decided in Commissioner of Income-tax Versus Yokogawa India Ltd. [2011 (8) TMI 845 - Karnataka High Court] - the claim as made by the Assessee for carry forward of loss of the non-eligible unit had to be allowed without set off of profits of the 10A/10B unit – Decided in favour of assessee. - ITA Nos. 248/Bang/2010, 368/Bang/2010 369/Bang/2010 370/Bang/2010 371/Bang/2010 1206/Bang/2010 - - - Dated:- 30-4-2014 - Shri N. V. Vasudevan And Shri Jason P. Boaz,JJ. For the Petitioner : Shri O. P. Yadav, CIT-I(DR) For the Respondent : Shri H. Padamchand Khincha, C.A. ORDER Per Bench ITA 368/Bang/2010 This is an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the end of the relevant assessment year. There is therefore no merit in ground no.4 raised by the assessee. 6. Ground nos.3, 5 and 6 raised by the assessee read as follows : 3. The learned CIT (A) has erred in law and in fact by upholding the validity of the reassessment proceedings carried out by the A O under section 147 of the Act. 5. The learned CIT (A) has erred in law not appreciating the reassessment proceedings carried out by the A O were merely on account of change in opinion by the learned Assessing Officer on the same set of facts in the Appellant's case and there was no income that escaped. 6. The learned CIT (A) has erred in law and in fact in upholding the view of the A O that the matters regarding deduction under section 35(2AB) of the Act in respect of ESOP expenses and scientific research expenses pertaining to the Units claiming relief under section 10B of the Act were not examined during the course of the scrutiny assessment proceedings. 7. The facts which are relevant for adjudicating the validity of initiation of reassessment proceedings challenged in the aforesaid grounds are as follows: The assessee is a company. It is engaged in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction of expenditure relating to ESOP was disallowed and accordingly in the assessment year 2003-04 also the same should be disallowed. We may at this stage clarify that expenditure on ESOP was not allowed by the Assessing Officer in 143(3) assessment and therefore this reason recorded by the Assessing Officer for initiating proceedings u/s.147 of the Act cannot be sustained. We are thus left with one reason recorded by the Assessing Officer which is with regard to the deduction claimed by the assessee u/s.10B of the Act. 9. On grounds 3, 4 6, it was the submission of the ld. counsel for the assessee that while concluding the original assessments, the AO had gone into the question of deduction u/s. 10B of the Act and had allowed the claim of the assessee. Though there is no discussion in the order of assessment on this aspect, yet it has to be presumed that the AO has applied his mind to all the aspects of deduction u/s.10B of the Act, since the order passed was an order u/s. 143(3) of the Act. According to him, the AO has resorted to reassessment proceedings u/s. 147 of the Act by merely changing his opinion, which he had formed while concluding the assessment u/s. 143(3) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l income of the assessee. This was therefore not an item of income, which had escaped assessment and could not be the subject matter of proceedings u/s. 147 of the Act. In the order passed by the AO u/s. 147 of the Act, he has computed the total income by taking the income from business as computed in the original assessment order, which is would include total income returned + disallowance on account of Employees Stock Compensation expenses of ₹ 3,38,63,779. The order of the CIT(A) against which the present appeal is filed, is an order passed u/s. 147 of the Act dated 19.12.2008. Against the order passed u/s.143(3) of the Act wherein this sum was disallowed, an appeal before CIT(A) had been filed. Both the appeals were heard together and a common order was CIT(A). In the assessment order u/s.147 of the Act no addition on account of ESOP expenses was made. Consequently, this issue becomes academic, as far as the present order of the CIT(A) is concerned. These grounds are therefore dismissed as not arising out of the order of CITA, insofar as it relates to the order of assessment passed u/s. 147 of the Act. 13. Grounds No.13, 14, 15 16. Re-computation of relief under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO noticed that the assessee claimed deduction u/s. 10B of the Act in respect of its unit known as BCZ (hereinafter referred to as 10B unit) for which the assessee maintained separate books of account. Out of the 100% expenditure incurred on scientific research of ₹ 5,78,17,050, a sum of ₹ 28,14,064 was incurred in 10B unit. The said sum of ₹ 28,14,064 was considered in the P L account of 10B unit while arriving at the income of section 10B unit. The deduction u/s. 35(2AB) of the Act was claimed by the assessee at 150% of the expenditure. In the P L account of the section 10B unit, only 100% of ₹ 28,14,064 had been debited whereas the debit to P L account of the section 10B unit ought to have been 150% of ₹ 28,14,064 viz., ₹ 42,21,096. The profit of the 10B unit on which deduction u/s. 10B of the Act was allowed should have therefore been reduced by ₹ 14,07,032 (42,21,096 28,14,064). The deduction u/s. 10B of the Act on income of section 10B unit should accordingly stand revised as follows:- Rs. (1) Deduction allowed u/s. 10B of the Act on 90% of the adjusted profit was (90% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the weighted deduction portion of 50% of ₹ 33,85,904. 19. The CIT(Appeals) confirmed the order of the AO. In so far as computation of deduction u/s. 10B of the Act is concerned, the CIT(A) sustained the order of the AO by relying on the provisions of section 14A of the Act. In so far as expenses on ESOP is concerned, the CIT(A) upheld the order of the AO. 20. Aggrieved by the order of the CIT(A), the assessee has raised ground Nos. 13 to 16 before the Tribunal. 21. We have heard the rival submissions. In so far as ground Nos. 13 to 14 are concerned, according to the revenue, the reworking of deduction u/s. 10B of the Act is proper as the deduction u/s. 35(2AB) of the Act is allowed only when computing income u/s. 28 of the Act under the head income from business . As far as income of section 10B unit is concerned, the same has to be worked out only on commercial basis as the same does not form part of the total income under the Act. Weighted deduction u/s. 35(2AB) of the Act will not be available while determining income on commercial lines where the computation provisions under the Act will not come into play. Therefore, the deduction in excess of 100% of expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any deduction from total income . The Hon ble Court therefore concluded that the expression from the total income found in section 10A/10B of the Act has to be contextually understood as referring to total income of STP unit or 10A/10B unit . The Hon ble Court, therefore, concluded that deduction u/s. 10A of the Act has to be given before Chapter IV of the Act. The Hon ble Court also noticed in para 16 of its judgment that when section 10A of the Act was recast by the Finance Act, 2001, the Parliament was aware of the relief given in Chapter III of the Act as being one which does not form part of the total income under the Act and yet chose to retain section 10A in Chapter-III of the Act which means that the said provisions shall remain as exemption provision and not deduction provision . 24. Thus, when the provisions of section 10A/10B of the Act are held to be exemption provisions, the provisions of section 35(2AB) of the Act which are contained in Chapter IV of the Act will not be applicable. Resultantly, the weighted deduction at 150% u/s. 35(2AB) of the Act will not be allowed while computing income of section 10A/10B unit. The 10A/10B unit will get only 100% dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and / or delete any of the grounds on or before the hearing of the appeal. 30. We have already seen that the assessee was entitled to claim deduction u/s. 35(2AB) of the Act. In the A.Y. 2004-05, the assessee claimed deduction of ₹ 18,00,45,138. It comprises of revenue expenditure as well as capital expenditure, the break-up of which is as follows:- Capital Expenditure incurred in connection with the R D activity (excluding capital expenditure on construction of buildings) ₹ 7,82,25,431 Total Revenue Expenditure incurred (including expenditure incurred by the by the 100% EOU and ESOP expenses) Rs.14,43,47,594 Less: Patent Fees paid outside India ₹ 1,23,19,395 Less: Fees for sponsored research ₹ 2,32,500 Total Expenditure on the Approved R D centre ₹ 21,00,21,130 Less: Donations/payments for sponsored research programmes (shown as income in the audited financial statements) ₹ 63,81,716 Net expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entitled to weighted deduction in respect of all expenditure so incurred. The provision nowhere suggests or implies that machinery will be acquired, installed and commissioned before the expiry of the relevant previous year. He also held that the provision postulates approval of R D facility, which implies that a development facility shall be in existence which, in turn, presupposes that the assessee must have incurred expenditure in this behalf. The CIT(A) also held that if the interpretation of the AO is accepted, it creates absurdity in this provision in as much as the words which are not provided in the statute are to be read into, which is against the settled proposition of law with regard to plain and simple meaning of the provision. He also found that Rule 6(5A) and 6(7A) also provide only to the effect that, if the conditions are fulfilled, the prescribed authority shall pass an order in Form No.3CM. The prescribed authority shall submit its report in relation to the approval of in-house research and development facility in Form No.3CL to the Director-General of Income-tax (Exemptions) within sixty days of its granting its approval. According to him the provisions nowhe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the benefit of deduction under the provisions of s. 35 even if the asset is not put to use for research and development. It is a settled legal position that the provision for exemption or relief should be construed liberally and in favour of the assessee. If the section is interpreted in the manner suggested by the Revenue, the assessee would be deprived of the benefit which legislature desires to give to the assessee. From the provisions of the Circular No. 5-P (LXXVI-63) of 1967 dt. 9th Oct., 1967 also, intention of the Revenue is patent. The intention is to give benefit to the assessee who incurs expenditure on scientific research related to his business. Even the circular issued by the Department does not make use of the capital asset a condition precedent for claiming deduction under the provisions of s. 35. Both the appellate authorities have rightly considered the spirit with which s. 35 has been enacted by the legislature and the circular referred to hereinabove while allowing deduction to the assessee under the provisions of s. 35. When the legislature has not expected the assessee to put the asset to actual use, it would not be open to the Revenue to deprive the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re incurred during the previous year was discharged by the assessee by actual payment in a subsequent assessment year cannot be the basis to deny the claim of the assessee for deduction u/s. 35 of the Act. 36. In view of the aforesaid judicial pronouncements which are rendered in the context of section 35(2) of the Act, the wordings of which are in pari materia to that of section 35(2AB) of the Act, we are of the view that there is no substance in this appeal by the revenue. Accordingly the same is dismissed. ITA 369/Bang/2010 (Assessee s appeal) (AY 04-05) 37. Ground No.1 raised by the assessee is general in nature and calls for no adjudication. 38. Grounds 2 to 7 deal with the issue with regard to disallowance of expenses connected with ESOP. We have already seen that the Special Bench has considered the aforesaid issue and given directions in its order to compute the amount of expenses that has to be allowed as deduction while computing the total income. In principle, it has been held by the Special Bench that the amount has to be allowed as deduction while computing total income, but the quantum of deduction was directed to be determined in the manner set out in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are allowed for statistical purposes. Grounds 8 9 are dismissed. Ground No.10 is partly allowed for statistical purposes. 43. Ground Nos.11 12 raised by the assessee were not pressed and therefore, they are dismissed as not pressed. 44. Ground No.13 with regard to levy of interest u/s. 234C and 234D is purely consequential and the AO is directed to give consequential relief. 45. In the result, the appeal is partly allowed. ITA 371/Bang/2010 (Assessee s appeal AY 06-07) 46. This appeal is against the order dated 13.11.2009 of the CIT(Appeals), LTU, Bangalore relating to A.Y. 2006-07. 47. Grounds No.1 to 9 raised by the assessee are identical to grounds No.1 to 9 raised by the assessee in ITA No.370/Bang/2010 for the A.Y. 2005-06. For the reasons stated while deciding the said grounds in A.Y. 2005-06, it is held that ground No.1 does not call for any specific adjudication; while ground Nos. 2 to 7 are treated as allowed for statistical purposes; and ground Nos. 8 9 are dismissed. 48. Ground Nos. 10 11 raises the same issue that was raised by the assessee in ground No.10 in ITA No.370/B/2010. For the reasons stated while deciding the aforesaid ground, gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant in its return of income. 10. The learned CIT(A) has erred in law and in fact in holding the Assessing Officer s order that the loss of ₹ 1,012,203,277 sought to be carried forward represents relief under section 10B of the Act in excess of total income. 11. The learned CIT(A) has erred in fact in holding that the unabsorbed depreciation and loss proposed to be carried forward by the Appellant pertains to Units eligible for relief under section 10B of the Act. 12. The learned CIT(A) has erred in law and in fact holding that the relief under section 10B of the Act in excess of total income cannot be treated as business loss to be carried forward in accordance with the provisions of the Act. 13. The learned CIT(A) has erred in law and in fact in setting off the losses of the Appellant prior to claiming relief under section 10B of the Act and thereby disregarding the fact that provisions of the Act provide for relief under section 10B of the Act undertaking wise. 14. The learned CIT(A) has erred in law and in fact in holding that the relief under section 10B of the Act would be available only of the extent of total income, there by resulting in the loss of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f against the loss of non-10B unit by invoking the provisions of section 72 of the Act. 61. The CIT(Appeals) did not agree with the contention of the assessee and in doing so, he placed reliance on the decision of the Hon ble Karnataka High Court in the case of CIT v. Himatsingike Seide Ltd., 286 ITR 255 (Kar). In the aforesaid decision, the Hon ble High Court has taken the view that deduction u/s. 10B has to be allowed after set off of unabsorbed depreciation and unabsorbed investment allowance. The Hon ble Court took the view that the aforesaid provision was only an exemption provision. The CIT(Appeals) noticed that the aforesaid decision was followed by the ITAT Bangalore Bench in the case of Intelnet Technologies India Pvt. Ltd. v. ITO, ITA No.1021/Bang/2009 dated 12.3.2010. Similar view expressed by the Delhi Bench of the Tribunal in the case of Global Vantage Pvt. Ltd. v. DCIT, 2010 TIOL 24 ITAT (DEL) was also referred to by the CIT(A). A contrary view was expressed by the Bangalore Bench of the Tribunal in the case of KPIT Cummins Info Systems (Bangalore) Pvt. Ltd. v. ACIT, 120 TTJ 956. The CIT(A) found that in the case of Global Vantage Pvt. Ltd. (supra) decided by the D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -year in which the under-taking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee : (emphasis supplied) 64. The expression Deduction and shall be allowed from the total income of the Assessee used in the aforesaid provisions was considered by the Hon ble High Court and it held in para 13 to 15 of its judgment that the expression shall be allowed from the total income of the Assessee does not mean total income as defined u/s.2(45) of the Act but that expression means profits and gains of the STP undertaking as understood in its commercial sense or the total income of the STP unit. Thus the view expressed is that income of the STP undertaking gets quarantined and will not be allowed to be set off against loss of either another STP undertaking or a non STP undertaking. The Hon ble Court thereafter held that though the expression used in Sec.10A was Deduction but in effect it was only an exemption section. These conclusions clearly emanate from para 17 of the Hon ble Court s judgment. 65. The situation with which we are concerned in the present case is a situation where t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deserves to be dismissed and is dismissed accordingly. 67. Thus the ratio has to be confined to the facts and circumstances of the case. The aforesaid observations have to be confined to the facts of that case and as applicable to a case where brought forward losses and depreciation of the very same STP undertaking are not adjusted while arriving at the profits of the 10B unit for allowing deduction u/s.10A/10B of the Act and not in respect of brought forward losses and depreciation of other undertakings/non-10A/10B units. S. 10A/10B(6) as amended by the FA 2003 w.r.e.f. 1.4.2001 provides that depreciation and business loss of the eligible unit relating to the AY 2001-02 onwards is eligible for set-off carry forward for set-off against income post tax holiday which means that they need not be so set off as mandated in the decision of the Hon ble Karnataka High Court in the case of Himatasingike Seide Ltd. (supra). As we have already seen, in Yokogawa India Ltd. 341 ITR 385 (Kar), it was held that even after s. 10A/10B were converted into a deduction provision w.e.f 1.4.2001, the benefit of relief u/s 10A/10B is in the nature of exemption with reference to commercial p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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