Income Tax Appellate Tribunal - Chennai
Scientific Publishing Services Pvt. ... vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
"A" BENCH, CHENNAI
BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND
SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER
ITA No.1520/Mds/2010
Asst. Years : 2003-04
The Asst. Commissioner of M/s. Scientific Publishing Services
Income Tax, Company Pvt. Ltd., No.6&7, VII Street,
Circle-VI(I), CHENNAI. v. Dr. Radhakrishnan Salai, Mylapore,
CHENNAI - 600 004.
PAN : AAACS6707R.
(Appellant) (Respondent)
Appellant by : Mr. Shaji P. Jacob, Addl.CIT
Respondent by : Mr. R. Vijayaraghavan, Advocate
Date of hearing : 05 Mar 2013
Date of Pronouncement : 08 Mar 2013
O R D E R
PER CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER :
This is an appeal filed by the Department against the order of Commissioner of Income Tax (Appeals)-V, Chennai, dated 24.6.2010 for the Asst. Year 2003-04. The first issue in the grounds of appeal of the Revenue is that the Commissioner of Income Tax 2 ITA 1520/Mds/10 (Appeals) erred in restricting the disallowance of expenses of Bangalore Unit to .27.12 lakhs against .40.68 lakhs disallowed by the Assessing Officer.
2. The brief facts of the case are that the assessee is a company engaged in the business of export of software. The Assessing Officer, while completing the assessment, disallowed expenses of .42.54 lakhs incurred by Bangalore Unit on the ground that the assessee shifted its operations to Chennai since 1996-97 and the assessee reported only interest income in respect of Bangalore Unit and, therefore, no business expenses can be allowed for Bangalore Unit. On appeal, the Commissioner of Income Tax (Appeals) agreed to some extent with the Assessing Officer that the entire expenditure for Bangalore Unit cannot be allowed as expenditure incurred for business. However, the Commissioner of Income Tax (Appeals) restricted the expenditure to 1/3rd of .40,68,382/-, being .13,56,127/- as the allowable expenditure for Bangalore Unit. The Department is in appeal before us. 3
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3. The Departmental Representative submits that the Commissioner of Income Tax (Appeals) is not justified in allowing the said expenditure since there is no business income from Bangalore Unit and the assessee has shifted its operations to Chennai long back and what was earned by the assessee was only interest income and such interest was assessed under the head 'other sources'. The Departmental Representative submits that there is no rationale in allowing the expenditure of Bangalore Unit at 1/3rd by the Commissioner of Income Tax (Appeals).
4. The Counsel for the Assessee submits that the Managing Director is stationed in Bangalore and operating the business. The Counsel submits that salaries to Accountant, Security etc., were incurred at Bangalore unit apart from salaries, courier charges, Telephone, FAX etc., were also incurred to run the Unit. Rent was paid for Bangalore Office and, therefore, it cannot be said that the assessee is not carrying on any business from Bangalore Unit. He submits that the expenditure incurred by the assessee in Bangalore 4 ITA 1520/Mds/10 Unit is only for the purpose of its business and should be allowed as deduction.
5. We have heard both sides. Perused the materials on record and the orders of authorities below. The Commissioner of Income Tax (Appeals) considered the facts and circumstances of the assessee and held that 1/3rd of expenses can be said to have been incurred by the assessee at Bangalore Unit for the purpose of its business and, therefore, allowable as business expenditure. While holding so, he observed as under :-
"6.11 While analyzing the purchase of vehicles by the appellant company, it is noted that a Benz Car bearing No.KA 03 MB 0342 and Honda City bearing No.KA 03 MB 738 have been purchased on 30.0.2001 and 09.07.2002. Further, analysis of 'Other Expenses' as per Schedule 13, it is seen that expenses were incurred to the tune of .4,51,243/- and .6,45,586/- on Rates & Taxes and Finance Charges respectively.
6.12 Considering the above facts I am inclined to agree with the decision taken by the learned A.O. for not allowing the expenditure of the Bangalore Unit. 5
ITA 1520/Mds/10 However, I am not fully agreeing with the total rejection of the expenditure.
6.13 Accordingly, I am of the opinion that the expenses claimed for Bangalore Unit did not commensurate with the income earned b the appellant company. In respect of Bangalore Unit, the appellant has incurred a total Expenditure of .40,68,382/- against the income of .14,71,023/- as per the P&L A/c. Thereby incurred a loss of .25,97,359/-. The income of .14,71,023/- includes Interest received on deposits to the tune of .8,96,929/- and Other Income (Exchange Fluctuation) of .1,83,706/-. This shows that the expenditure was not incurred wholly for the purpose of business as per Section 37 of the IT Act as held by the learned A.O. in Para 4 (Page 8) of the Assessment Order. With these findings, I hold the view that out of the Expenditure of .40,68,382/- pertaining to Bangalore Unit, allowance of 1/3rd being .13,56,127/- can be made. Balance expenditure of .27,12,255/- is disallowed.
Consequently, Bangalore Unit Income to be adopted is .1,14,896/- (Income pertaining to Bangalore Unit :
.14,71,023/-) minus 1/3rd of Expenditure being .13,56,127/-). Accordingly, the Assessing Officer is 6 ITA 1520/Mds/10 directed to adopt the income of .1,14,896/- for Bangalore Unit and recomputed the taxability."
6. On going through the order of the Commissioner of Income Tax (Appeals) we find that the assessee incurred expenses not only for business but also other than for business purposes. The Commissioner of Income Tax (Appeals), however, restricted 1/3rd of expenses pertaining to Bangalore Unit as allowable business expenditure. In the circumstances, we see no valid reason to interfere with the order of Commissioner of Income Tax (Appeals).
The grounds raised by the Department on this issue are rejected.
7. The next issue in the grounds of appeal is that the Commissioner of Income Tax (Appeals) erred in allowing deduction under sec.10B of the Act before set off of brought forward loss.
8. The Departmental Representative placed reliance on the decision of Karnataka High Court in the case of CIT v. PATSPIN India Ltd. (245 CTR 97) and submits that in view of the said decision the 7 ITA 1520/Mds/10 Commissioner of Income Tax (Appeals) is not correct in law in allowing the claim of the assessee.
9. The Counsel for the Assessee places reliance on the decision of Karnataka High Court in the case of CIT v. Yokogawa India Ltd. (341 ITR 384) and submits that this issue is squarely covered by this decision.
10. We have heard both sides. Perused the materials on record and the orders of authorities below. The Assessing Officer, while completing the assessment allowed deduction under sec.10B of the Act to the assessee after setting off of brought forward losses. On appeal, the Commissioner of Income Tax (Appeals), following the decision of Chennai Special Bench of the Tribunal in the case of Scientific Atlantic India Technology Pvt. Ltd. v. ACIT (129 TTJ 273) directed the Assessing Officer to allow deduction under sec.10B of the Act before setting off of brought forward loss and unabsorbed depreciation of earlier years. We have gone through the order of Hon'ble Karnataka High Court in the case of CIT v. Yokogawada 8 ITA 1520/Mds/10 India Ltd. (supra) and find that this issue has been decided in favour of the assessee holding as under :-
"31. As the income of 10A unit has to be excluded at source itself before arriving at the gross total Income, the loss of non 10A unit cannot be set off against the income of 10A unit under s. 72. The loss incurred by the assessee under the head profits and gains of business or profession has to be set off against the profits and gains if any, of any business or profession carried on by such assessee. Therefore, as the profits and gains under s. 10A are not to be included in the income of the assessee at all, the question of setting off the loss of the assessee of any profits and gains of business against such profits and gains of the undertaking would not arise. Similarly, as per s. 72(2), unabsorbed business loss is to be first set off and thereafter unabsorbed depreciation treated as current year's depreciation under s. 32(2) is to be set off. As deduction under s. 10A has to be excluded from the total income of the assessee, the question of unabsorbed business loss being set off against such profits and gains of the undertaking would not arise. In that view of the matter, the approach of the assessing authority was quite contrary to the aforesaid statutory provisions and the CIT(A) as well as the Tribunal were fully justified in setting aside the said assessment order and granting the benefit of s. 10A to the assessee. Hence, the main substantial question of law is answered in favour of the assessees and against the Revenue."
11. The Hon'ble Bombay High Court after considering the decision of the Special Bench of Chennai ITAT in the case of Scientific Atlantic India Technology Pvt. Ltd. v. ACIT(supra) decided this issue in the case of CIT vs. Black & Veatch Consulting Pvt. Ltd. in Income Tax 9 ITA 1520/Mds/10 Appeal Lodging No. 1237 of 2011 dated 09.04.2012, wherein their Lordships held as under:-
"1. This appeal by the Revenue under Section 260A of the Income Tax Act, 1961 arises from a decision of the Income Tax Appellate Tribunal dated 20 April 2011. The Assessment Year to which the appeal relates is AY 2006-07. The following question of law has been raised by the Revenue:
"(A) Whether on the facts and circumstances of the case and law, the ITAT was correct in holding that the brought forward unabsorbed depreciation and losses of the unit the Income which is not eligible for deduction under Section 10A of the Act cannot be set off against the current profit of the eligible unit for computing the deduction under Section 10A of the IT Act."
2. The Assessing Officer, during the course of the order of assessment under Section 143(3) observed as follows:
"Under the scheme of the Act, the profits of the unit eligible for deduction under Section 10A of the Act, would form part of the income computed under the head 'Profits and gains of business and profession'. However, in order the same does not suffer tax, deduction will have to be made in respect thereof while computing the income under the head 'Profits and gains of business and profession'. In other words, the deduction in respect of the profits eligible under Section 10A of the Act is required to be made at the stage of computing the income under the head 'Profits and gains of business or profession' ."
Nonetheless, while computing the total income of the assessee the Assessing Officer took the net profit as per the profit and loss account and after, inter alia, making certain disallowances and allowances, arrived at the total business income at `.86.07 lakhs. A set off was effected of the brought forward business loss of AY 2003-04 and AY 2004-05 upon which the Assessing Officer came to the conclusion that there was nil income which would qualify for deduction under Section 10 ITA 1520/Mds/10 10A. The CIT (A) held that the Assessing Officer was justified in adjusting the brought forward losses of earlier years before arriving at the gross total income, for allowing a deduction under Section 10B. In appeal, the Tribunal has relied upon a decision of its Special Bench in the case of Scientific Atlanta Vs. ACIT1 in which it has been emphasised that the provision contained in Section 10A is not an exemption but a deduction under Chapter III. Following that decision, the Tribunal held that the deduction under Section 10A in respect of the allowable unit under Section 10A has to be allowed before setting off brought forwarded losses of a non 10A unit.
3. Section 10A is a provision which is in the nature of a deduction and not an exemption. This was emphasised in a judgment of a Division Bench of this Court while construing the provisions of Section 10B in Hindustan Unilever Ltd V s. Deputy Commissioner of Income Tax2• The submission of the Revenue placed its reliance on the literal reading of Section 10A under which a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive Assessment Years is to be allowed from the total income of the assessee. The deduction under Section 10A, in our view, has to be given effect to at the stage of computing the profits and gains of business. This is anterior to the application of the provisions of Section 72 which deals with the carry forward and set off of business losses. A distinction has been made by the Legislature while incorporating the provisions of Chapter VI-A. Section 80A(1) stipulates that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of the Chapter, the deductions specified in Sections 80C to 80U. Section 80B(5) defines for the purposes of Chapter VI-A "gross total income" to mean the total income computed in accordance with the provisions of the Act, before making any deduction under the Chapter. What the Revenue in essence seeks to attain is to telescope the provisions of Chapter VI - A in the context of the deduction which is allowable under Section 10A, which would not be permissible unless a specific statutory provision to that effect were to be made. In the absence thereof, such an approach cannot be accepted. In the circumstances, the decision of the Tribunal would have to be affirmed since it is plain and evident that the deduction under Section 10A has to be given at the stage when the profits and gains of business are computed in the first instance. So construed, the appeal by the Revenue would not give rise to any substantial question of law and shall accordingly stand dismissed. There shall be no order as to costs". 11
ITA 1520/Mds/10
12. Therefore, as could be seen from the above decisions, the issue in appeal is decided in favour of the assessee by the Hon'ble Karnataka High Court in the case of CIT & Anr. Vs. Yokogawa India Ltd. & Ors. (supra) and the Hon'ble Bombay High Court in the case of CIT vs. Black & Veatch Consulting Pvt. Ltd. (supra). Divergent views were expressed by the Hon'ble Kerala High Court, Hon'ble Karnataka High Court and Hon'ble Bombay High Court. In view of Hon'ble Apex Court's decision in the case of Vegetable Products Ltd. (supra), we are inclined to follow the decisions of Hon'ble Bombay High Court in the case of CIT vs. Black & Veatch Consulting Pvt. Ltd. (supra) and the decision of Hon'ble Karnataka High Court in the case of CIT & Anr. Vs. Yokogawa India Ltd. & Ors. (supra), which are in favour of the assessee and accept the contention of the assessee that the deduction under section 10A is to be allowed before the set off of brought forward losses. Therefore, we confirm the order of the Commissioner of Income Tax (Appeals) on this issue and reject the grounds of appeal of the Revenue.
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13. In the result, the appeal of the Revenue is dismissed.
14. Order pronounced on Friday, the 8th day of March 2013, at Chennai.
Sd/- sd/-
( N.S. SAINI ) (CHALLA NAGENDRA PRASAD)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Chennai,
Dated : 08th March 2013.
Jls.
Copy to:-
(1) Appellant
(2) Respondent
(3) CIT-(A),
(4) C.I.T.,
(5) D.R. (6) Guard file