TMI Blog2017 (6) TMI 1155X X X X Extracts X X X X X X X X Extracts X X X X ..... e disallowance accordingly without resorting to Rule 8D of the Rules in these facts and circumstances of the case. W also find lot of force in the arguments advanced by the Ld. AR that in any case, investments yielding taxable income need to be excluded while computing disallowance under Rule 8D of the Rules. However, this finding becomes infructous in view of our earlier directions given herein above. Disallowance u/s. 14A in the computation u/s. 115JB - Held that:- While computing the “Book Profit” of the company under the provisions of section 115JB of the Act; any disallowance made under the normal provisions of the Act also cannot be given effect to for arriving at the “Book Profit” for the purpose of Section 115JB of the Act. Thus we direct the Ld. AO not to make any disallowance u/s. 14A of the Act while computing book profits u/s. 115JB of the Act. Whether disallowance made u/s. 14A of was only on account of disallowance of business expenses of the assessee and thereby correspondingly would only increase the business profit of the assessee which would in turn consequently increase in the claim of deduction u/s. 10A ? - Held that:- The assessee was entitled to exempti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment was framed by the Ld. AO u/s. 143(3) of the Act computing the total income under normal provisions as well as u/s. 115JB of the Act after making certain additions thereon. One such addition made was with regard to the exclusion of expenditure in the form of salary, wages and allowances, travelling expenses and import payment for goods and services from export turnover for the purpose of computing deduction u/s. 10A of the Act. The reason for making this exclusion was in view of the fact that the Ld. AO had treated such expenditure as expenditure incurred towards technical services outside India. 4. This action of the Ld. AO was upheld by the Ld. CIT(A). However, the Ld. CIT(A) granted relief to the assessee on the ground that whatever is excluded from export turnover need to be excluded from total turnover also. Aggrieved, the assessee is in appeal before us on the following grounds: 4.1 That the Ld. AO has erred in excluding payments made for imports of goods and services, from the export turnover. 4.2 That the Ld. AO had erred in excluding foreign travel related costs incurred in foreign currency from the export turnover, when the same has not been included in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. AR. We find that the first dispute of this issue is squarely covered by the decision of this Tribunal in assessee's own case (Supra) wherein it was held: 7. The case as put forth by Dr.Anita Sumanth, the Id.Advocate, is that the assessee is engaged in the business of 'software development' and not in providing 'technical services' as has been alleged by the Department. This contention of the Id.AR is found supported by the STPI approved (for assessment year 2002-03) annexed at page 97 of the assessee's paper book. The Statement of Work (page 95 of paper book), Invoice at page 97 of the paper book, etc. are such pieces of evidence which support her contention that the assessee-company is engaged in the development of software. To crown this fact, the evidence in the form of Transfer Pricing Order for assessment year 2002-03 dated 14.12.2005, in which the assessee-company has been treated as doing 'software development' cannot be ignored. Therefore, the exclusion of these expenses from export turnover is. not correct. The decision of ITAT Chennai Special Bench in the case of Zylog Systems 135 TT) 129, inter alia, supports her contention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed representative for Adventnet Development Centre (India), one of the interveners submitted that the definition of 'export turnover' in clause (iii) of Explanation 2 below section 10B was not based on the concept of Net inflow of foreign exchange as sought to be made out in the order of the Chennai Bench of the Tribunal in California Software Co. Ltd. 's case (supra) because the condition that the assessee should have used foreign currency is applicable only to the expenses incurred by it in providing the technical services outside India and is not applicable to the expenses incurred in freight, telecom charges or insurance attributable to the delivery of the go outside India. We have gone through the order especially in Para 22.3 and 23. In para 22.3 the Tribunal has 0bserved that the effect of the judgment of the Supreme Court in the case of K. Ravindranathan Nair (supra) is that what is deducted from the 'export turnover' (the numerator in the formula) need not necessarily be deducted from the total' turnover ( the denominator in the formula). It appears to us, with respect, that this may not be an accurate description of the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Tribunal, as already noticed, has held that the objective of the definition of 'export turnover' in section 10B was to apply the principle of netting by comparing the inflow and outflow of foreign exchange from or into the country. We have already held that this could not have been the objective. The order of the Chennai Bench, to the extent it holds so, with respect, cannot be approved. However, in the same paragraph (para 23) the Bench has also held that what was never part of tile turnover in the first instance cannot be excluded therefrom. We have already held that impliedly at least the Bench seems to have held that the receipts by way of freight, telecom charges or insurance attributable to the delivery of the computer software outside India or expenses incurred in foreign exchange in connection with the provision of the technical services outside India cannot be included in the total turnover. We have also, inter alia, adopted a similar line of reasoning in the sense that mere reimbursement or recovery of such expenses can in no sense be considered to have an element of turnover. To the extent our view accords with the view taken by the Chennai Bench in parag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance under the 3rd limb of Rule 8D(2) and made disallowance of ₹ 2,43,50,989/-. The Ld. AO arrived at the average value of investment of ₹ 2,43,50,989/- and applied 1% thereon for the purpose of making this disallowance. The Ld. AO disallowed the said amount of ₹ 2,43,50,989/- for the computation of book profits u/s. 115JB of the Act. The Ld CIT(A) upheld the action of the Ld. AO by stating that definitely some amount of expenditure in the form of manpower cost and infrastructure facilities would have to be used by the assessee for the purpose of making this investment which had yielded dividend income and accordingly there was nothing wrong in Ld. AO invoking Rule 8D2(iii) of the Income Tax Rules. 12. Aggrieved, the assessee is in the appeal before us on the following grounds: 12.1 The Ld. CIT(A) has erred in sustaining the disallowance of ₹ 2,43,50,989/- u/s. 14A of the Act r.w.r. 8D of the Income Tax Rules,1962 ( the Rules ) 12.2 The Ld. CIT(A) has erred in invoking the provisions of section 14A without appreciating the fact that the Appellant does not have borrowed funds. 12.3 The Ld. CIT(A) ought to have restricted the disallowance t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule 8D(1) of the Rules and accordingly no disallowance under Rule 8D(2) would operate in the facts and circumstances of the case. With regard to the issue of disallowance u/s. 14A while computing the book profits u/s. 115JB of the Act, the Ld. AR argued that the same does not fall in the list of additions contemplated in the explanation to section 115JB of the Act and accordingly argued that the book profits cannot be disturbed thereon. In support of this, he placed reliance on the decision of this Tribunal in the assessee's own case in ITA No. 2277/Mds/2014 for the assessment year 2008-09 and M.P. No. 152/Mds/2015 for the assessment year 2008-09 vide order dated 19.02.2016. He also placed reliance on the decision of this Tribunal in the case of Beach Mineral Company (P) Ltd Vs. ACIT (2015) 64 Taxmann.com 218(Chennai Tribunal) dated 06.08.2015 in support of this contention. 14. In response to this, the Ld. DR brought the attention of this bench to the findings of the Ld. AO, wherein he had duly recorded his satisfaction with regard to the accounts of the assessee and accordingly assailed the arguments of the Ld. AR on the issue relating to satisfaction as fallacious. With re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or ₹ 3,11,34,630/- and also the disallowance of expenditure under the normal provisions of the Act. 8.1.1 The Ld. Assessing Officer while computing the tax as per provisions of section 115JB of the Act made additions to the book profit with respect to the disallowance made U/s. 14A of the Act read with Rules-8D of the Income Tax Rules. On appeal, the Ld. CIT (A) citing the provisions of clause (f) of Explanation-1 to Section-115JB, confirmed the order of the Ld. Assessing Officer. The relevant portion of the order of the Ld. CIT (A) is reproduced herein below for reference:- 10.2 I have gone through the facts and circumstances of the case. The Assessing Officer has taxed the income U/s. 115JB since the tax on book profits is more than the tax under normal computation. While doing so, she made disallowance of the amount relatable to exempt income on the basis of the amount worked out U/s. 14A r.w.Rule 8D under normal computation. The provisions of clause (f) of Explanation-1 to s.115JB makes it abundantly clear that the amount of expenditure 'relatable to' any exempt income, other than s.10(3 8), is liable to be added back to the amount of net profit as shown in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer, while computing the book profits of a company under section 115J of the Income-tax Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer, thereafter, has the limited power of making increases and reductions as provided for in the Explanation to section 115J The Assessing Officer does not have the jurisdiction to go behind the net profits shown in the profit and loss account except to the extent provided in the Explanation. The use of the words in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act in section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the Assessing Officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinised and certified by statutory audi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... V s M/s. Gem Plus Jewellery India Ltd 330 ITR 175, wherein it was held that the assessee was entitled to exemption u/s. 10A with reference to addition or disallowance of various payments, as the plain consequence of the disallowance and add back made by the Assessing Officer is an increase in the business profits of the assessee and the same to be considered for the purpose of computation of deduction u/s. 10A of the Act. Adopting the similar principles, we are inclined to direct the Assessing Officer to consider the disallowance u/s. 14A r.w.Rule 8D as part of business profit so as to compute deduction u/s. 10A of the Act. In the result, the assessee appeal is partly allowed. Respectfully following the same, we allow the ground No. 12 of the assessee. 20. DISALLOWANCE OF FRINGE BENEFIT TAX U/S. 115JB OF THE ACT :- The next issue to be decided in this appeal is as to whether the Ld. CIT(A) was justified in upholding the action of the Ld. AO in disallowing the fringe benefit tax for the purpose of computing book profits u/s. 115JB of the Act. The Ld. AR placed reliance on the circular issued by CBDT vide Circular No 8/2005 dated 29.08.2005 by referring to question ..... X X X X Extracts X X X X X X X X Extracts X X X X
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