2016 (11) TMI 725 - HC - Income Tax

Claim for deduction under Section 80 IA - whether ITAT was right in directing AO to compute the deduction u/s 80 IA by following the method in section 80 HHC (3) for working out profit/loss from trading goods? - AO came to the conclusion that the profit earned by the assessee s eligible unit was not only on account of its manufacturing activities but also from its trading activities - Held that - The assessee admittedly carries on trading as well as manufacturing and export activities. Admittedly, the manufacturing activity is an eligible activity under Section 80 IA. The assessee is, therefore, entitled to the benefit of deduction under Section 80 IA. Finding of the CIT(A) is that the AO having accepted, on the basis of the assessee s books of account, that there was a loss in respect of the trading activities while dealing with the case under Section 80 HHC could not come to a contrary conclusion while dealing with the claim under Section 80 IA. The loss in the trading activities is still a loss. We are unable to hold that this finding which is essentially one of fact is perverse or absurd The Tribunal has upheld the findings of the CIT(A) on the same basis. Having done so, the Tribunal rightly remanded the issue to the AO to recalculate the deductions under Section 80 IA.

Summary

Issues:
1. Maintainability of appeal under circular No. 21/2015
2. Calculation of deduction under Section 80 IA based on trading activities

Issue 1: Maintainability of appeal under circular No. 21/2015

The appeal was challenged on the grounds of maintainability under circular No. 21/2015, where the tax effect was less than Rs. 20 lakhs. The respondent argued that the tax effect for the circular should be determined based on the individual question admitted for appeal. However, the appellant contended that the tax effect must be determined for the entire appeal, not just individual issues. The court analyzed the circular, emphasizing that the tax effect should be based on the total income assessed against the issues intended for appeal, irrespective of the Revenue's expected success. The court concluded that the monetary limit in the circular applies to the entire appeal, allowing the appeal to proceed due to the aggregate tax effect exceeding the stipulated limit.

Issue 2: Calculation of deduction under Section 80 IA based on trading activities

The case involved a dispute regarding the deduction under Section 80 IA concerning the assessee's trading and manufacturing activities. The AO questioned the verifiability of the sale price, leading to a rejection of the claim for trading loss. The AO concluded that the profit from the eligible unit was derived from both manufacturing and trading activities, despite evidence of a loss in trading. The CIT(A) disagreed with the AO, accepting the assessee's computation of trading loss and criticizing the AO's estimation methods. The court found the CIT(A)'s decision reasonable, emphasizing that the AO's acceptance of trading loss under Section 80 HHC should also apply to Section 80 IA. The Tribunal upheld the CIT(A)'s findings and remanded the issue for recalculation of deductions under Section 80 IA. Ultimately, the appeal was dismissed on merits, affirming the Tribunal's decision.

This detailed analysis of the judgment covers the issues of maintainability of the appeal under circular No. 21/2015 and the calculation of deductions under Section 80 IA based on trading activities, providing a comprehensive understanding of the legal aspects and decisions made by the court.