TMI Blog2020 (6) TMI 526X X X X Extracts X X X X X X X X Extracts X X X X ..... ring company limited [ 1996 (2) TMI 8 - SUPREME COURT] relates to period prior to insertion of section 35DD of the Act, wherein the expenses related to amalgamation were allowed to the assessee as incurred wholly and exclusively for the purpose of the business of the assessee.. In the said case the issue was of whether the legal and professional expenses incurred in relation to the amalgamation were revenue or capital in nature. The ratio of the said decision cannot be applicable over the facts of the instant case in view of the specific provision of section 35DD of the Act introduced. As far plea of rule of consistency is concerned, we may like to refer to the decision of the Hon ble Supreme Court in the case of Distributors (Baroda) P. Ltd. Vs. Union Of India Ors. [ 1985 (7) TMI 1 - SUPREME COURT] where it is observed if any wrong has been committed, same should not be perpetuated. We reject the contention of the assessee to allow the deduction under section 35DD of the Act, following rule of the consistency. - Decided against assessee Disallowance u/s 14A - disallowance towards indirect interest expenditure and towards administrative expenses - AO has expressed di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the export turnover and the local turnover - HELD THAT:- As relying on assessee's own case [ 2019 (3) TMI 378 - ITAT DELHI] wherein held deduction u/s 1OA was to be allowed at the source itself. - Decided against revenue Nature of expenditure - revenue or capital expenditure - One-time lease rental charges paid by the assessee to Greater Noida Industrial Development Authorities (GNIDA) for taking plot of land on lease for development of IT Park for a period of 90 years - HELD THAT:- Expenditure incurred by the assessee is not capital expenditure. The expenditure was to be incurred on year to year basis for the period of lease of 90 years. The lesser gave the assessee two option. The first option was to pay on year to year basis and claim the same as revenue expenditure. The second option was provided by the lessor was to pay a composite amount for the period of lease as onetime payment. The lessor provided some benefit for making onetime payment. The assessee has chosen the second option and paid the entire lease rent of 90 years as composite onetime payment. Thus liability of 90 years has been paid in one year only. Liability of lease rent relatable to year under c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee and the Revenue in ITA No. 5524/Del/2013 and ITA No. 5491/Del/2013 for assessment year 2007-08 are reproduced as under: Grounds of appeal of the assessee: 1. That the Commissioner of Income-Tax (Appeals) erred on facts and in law in upholding disallowance of ₹ 44,00,739/-, claimed under section 35DD of the Income Tax Act, 1961 ( the Act ) in respect of 1/5* of demerger expenses incurred by the appellant. 1. That the Commissioner of Income-Tax (Appeals) erred on facts and in law in holding that in terms of section 35DD of the Act, demerger expenses are allowable only in the hands of the demerged company and not in the hands of the resultant company. 1.2 That the Commissioner of Income-Tax (Appeals) failed to appreciate that the claim of appellant was sustainable in law inasmuch as the appellant had fulfilled all the conditions for claiming deduction under section 35DD of the Act. 2. That the Commissioner of Income-Tax (Appeals) erred on facts and in law in sustaining disallowance to the extent of ₹ 82,05,031/- under section 14A of the Act, comprising of ₹ 37,33,490/- towards indirect interest expenditure incurred in relation t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot appreciating the fact that all the different units of the assessee company are not operating in isolation as alleged by the assessee, but as different branches of the same tree. 1.1 On the facts in the circumstances of the case and in law, the Id.CIT(A) has erred in not appreciating the fact that the assessee is maintaining single books of accounts for all units i.e. those which are covered for deduction, as well as those which are not covered for deduction. It is only for the purpose of computing deduction u/s 10B that the assessee has tried to allocate the expenses between these units and compute their profits. 1.2 On the facts in the circumstances of the case and in law, the Id.CIT(A) has erred by holding that independent books of accounts are not required to be maintained under the provisions of section 10B of the I T Act, since the language of form 56G starts with I/we have examined the accounts and records which makes it clear that the assessee has to maintain separate books of accounts. The annexure A of Form 56G also requires the details of total profit of the business etc. keeping in view of the aforesaid facts, it is clear that the assessee was re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come on 30/10/2007 declaring total income of ₹1,03,47,201/- after claiming deduction of ₹ 106,43,88,624/- under section 10B of Income-tax Act, 1961 (in short the Act ). The case was selected for the scrutiny assessment and notice under section 143(2) of the Act was issued and complied with. The scrutiny assessment u/s 143(3) of the Act was completed on 30/12/2010 after making certain additions/disallowances. On further appeal, the Ld. CIT(A) partly allowed the appeal of the assessee. Aggrieved with the finding of the Ld. CIT(A), both assessee and the Revenue are in appeal before the Tribunal raising respective grounds reproduced above. ITA No.5524/Del/2013 (Assessee s Appeal) 4. The ground Nos. 1 to 1.2 of the appeal of the assessee relate to disallowance of ₹44,00,739/-, which was claimed by the assessee as deduction under section 35DD of the Act. 4.1 The facts qua the issue in dispute are that the M/s. NIIT Ltd. was demerged pursuant to a scheme of demerger approved by the Hon ble High Court of Delhi with effect from 01/04/2003. As a result of that demerger, the units of NIIT Ltd. not eligible for deduction under section 10B of the Act were veste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T vs Bombay Dyeing and Manufacturing Company Ltd., reported in 219 ITR 521, which was rendered prior to the insertion of section 35DD of the Act. The Ld. Counsel also submitted that the CBDT Circular No. 779 dated 14/09/1999 has explained the scope and legislative intent behind insertion of the aforesaid provision. According to him, in the said circular also nowhere the resultant company has been debarred from claiming such expenditure under section 35DD of the Act. The learned counsel submitted that the Assessing Officer/CIT(A) has failed to appreciate that the word assessee refers to either or both the companies i.e. the demerged company/resultant company, being Indian companies who incur any expenditure in relation to such merger/demerger. According to him, the expression assessees has not been used by the legislature due to the fact that in the event of the merger, the amalgamating company gets automatically dissolved and loses its independent identity and both the amalgamated and, amalgamating companies never exist together post the merger, so as to claim 1/5th of the deduction of the demerger/merger expenses. The uses of the word assesseees would have resulted in amb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar in which the amalgamation or demerger takes place. (2) No deduction shall be allowed in respect of the expenditure mentioned in sub-section (1) under any other provision of this Act. 4.6 In the above section the deduction has been allowed to the assessee for expenditure incurred wholly and exclusively for demerger of an undertaking. Since demerger of the undertaking(s) in the instant case has taken place from the parent company M/s NIIT Ltd, the word assessee here refers to M/s NIIT Ltd. and not the target company M/s NIIT Technologies Ltd. i.e. the Assessee, with whom the undertakings of M/s NIIT Ltd. got merged. In our opinion the language of the section is clear and there is no ambiguity, as who is entitled to claim the said deduction. In case of demerger, where the undertaking(s) which get demerged, may result in new entity and in said circumstances, the resultant company cannot incur expenditure before its birth. It is the parent entity, who initiates demerger of the undertaking(s) and incur expenditure for legal and professional expenses in relation to such demerger. The resultant company, come into existence as a result of demerger only, the word assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t does not compel your Lordships to follow the wrong path until you fall over the edge of the cliff. Here we find that there are overriding considerations which compel us to reconsider and review the decision in Cloth Traders' case (supra). In the first place, the decision in Cloth Traders' case (supra) was rendered by this Court on 4th May, 1979, and immediately thereafter, within a few months, Parliament introduced s. 80AA with retrospective effect from 1st April, 1968, with a view to overriding the interpretation placed on s. 80M in Cloth Traders' case (supra). The decision in Cloth Traders' case (supra) did not, therefore, hold the field for a period of more than a few months and it could not be said that any assessee was misled into acting to its detriment on the basis of that decision. There was no decision of this Court in regard to the interpretation of sub- s. (1) of s. 80M prior to the decision in Cloth Traders' case (supra) and there was therefore no authoritative pronouncement of this Court on this question of interpretation on which an assessee could claim to rely for making its fiscal arrangements. The only decision in regard to the interpret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in Cloth Traders' case is erroneous must be overturned. 4.8 In view of the above decision of the Hon ble Supreme Court, we reject the contention of the learned Counsel of the assessee to allow the deduction under section 35DD of the Act, following rule of the consistency. 4.9 In view of the above discussion, we uphold the finding of the Ld. CIT(A) on the issue in dispute. Accordingly, the grounds No. 1 to 1.2 of the appeal of the assessee are dismissed. 5. The ground Nos. 2 to 2.4 of the assessee relates to disallowance of ₹ 82,05,031/- under section 14A of the Act, which include disallowance of ₹ 37,33,490/- towards indirect interest expenditure and ₹ 44,71,541/- towards administrative expenses. 5.1 The facts qua the issue in dispute that during the year under consideration, the assessee shown investment in mutual funds at ₹ 144,42,73,807/- and received dividend income amounting to ₹1,66,74,318/- in respect of the units held in various mutual funds, which was claimed as exempt under section 10(33)/10(34) of the Act. In the return of income filed, the assessee did not make suo motu disallowance under section 14A of Act for expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) found that working provided by the assessee in the said letter was adhoc without any basis for adopting 20% of the expenses for disallowance and accordingly, he rejected the working provided by the assessee. The Ld. CIT(A) also rejected the computation of the Assessing Officer on the ground that the Assessing Officer considered the average of the entire investment including the investment made in foreign subsidiary companies. The ld. CIT(A) computed the disallowance related to interest expenditure at ₹ 37,33,490/- after excluding the interest incurred on vehicle loans etc. observing as under: 8.6.5 The exempt dividend income are earned from mutual fund investments which had gone up from ₹ 20.30 crores to ₹ 83.59 crores during the year. The secured loans are for vehicle loan and non-convertible debentures only. Unsecured loans borrowed were repaid during the year. The interest expenditures are incurred on vehicle loan (interest ₹ 13,05,415/-), borrowing repaid during the year (interest ₹ 6,82,740/-) and non-convertible debentures (interest ₹ 1,77,19,178/-). Vehicle loan being for specific purpose for vehicles, therefore, its interest is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st expenditures (₹ 6.82 lakhs) on such borrowing needs to be considered for disallowance as indirect interest expenditure incurred during the relevant previous year in relation to the exempt income. Keeping in view of the above, indirect interest expenditure on account of debenture incurred during the previous year in relation to the exempt income is worked out on proportionate and reasonable basis as under: A: Proportionate interest expenditure on account of debenture (65% of ₹ 1 77 crores) + 6,82,740/- = ₹ 1,15,17,465/- + 6,82,740/- = 122,00,205/- B: Average value of investment (excluding investment foreign companies) income from which doe s not or shall not form part of the total income = (133,55,97,392 + C: Average total assets = ₹ 292,23,98,024/- Therefore, the indirect interest expenditure incurred during the previous year in relation to income which does not or shall not form part of the total income is = A x B/C = 122,00,205 x 89,43,08,292 / 292,23,98,024 - ₹ 37,33,490/- 5.3 With regards to administrative expenses and management expenses, the learned CIT(A) sustained the disallowance of ₹44,71,541 at the rate of 0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses u/s 14A, 0.5% of average value of investments, income from which does not or shall not form part of the total income as provided in Rule 8D appears to be a very reasonable basis. In view of the above 0.5% of ₹ 89.43,08,292/- [133,55,97,392 + 45,30,19,192/2 excluding the investments in foreign subsidiary companies] = 44,71,541/-, calls for disallowance u/s 14A on account of administrative and management expenses. Therefore, the total disallowance u/s 14A on account of financial, administrative and management expenses works out to ₹ 82,05,031/- (44,71,541 + 37,33,490). Considering the above the disallowance made by the AO u/s 14A is reduced from ₹ 1,79,17,211 /- to ₹ 82,05,031/-. 5.4 Before us, the Counsel of the assessee referred to various decision of the Hon ble courts and submitted that for making disallowance under section 14A of the Act till assessment year 2007-08, the Assessing Officer must satisfy following: (a) there must be some actual expenditure incurred (b) such expenditure must be incurred in relation to earning exempt income, which means that there must be some nexus between the actual expenditure and actual exempt income a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t had, during the year under consideration, claimed the following expenditure (refer page no. 592 of PB Vol-2): Particulars Amount (Rs.) Personnel 116.83 crores Development and Bought out 10.34 crores Administration, Finance and Others 44.19 crores Marketing 3.06 crores Depreciation and Amortization 21.78 crores Re (a): Personnel Expenses With regard to personnel expenses, it is respectfully submitted that no separate manpower has been employed/ engaged to look after the investment in shares of domestic subsidiaries/ mutual funds, income wherefrom is received directly in the banks. Further, the assessing officer has not been, it is submitted, able to point out any specific expenditure incurred in relation to exempt income. Re (b): Development and bought expenses As regards development and bought out expenses, kind attention is invited to Note- 15 of the audited annual accounts for the relevant assessment year 2007-08(re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be relatable to exempt income. Every year is an independent year and in the present case, as held by us there is nothing on record brought out by the AO that the assessee has actually incurred any cost or expenditure in relation to the exempt income, therefore, no disallowance on account of interest, management or administrative cost can be made by the AO. Therefore, the learned CIT(A) has rightly allowed the appeal of the assessee in relation to deleting the addition of ₹ 7.05 crores being the proportionate disallowance on account of interest expenses. Therefore, the learned CIT(A) is not justified in retaining disallowance even of ₹ 8.10 lacs out of ₹ 2.26 crores disallowed by the AO. The AO is directed to allow the claim of the assessee accordingly. Thus, all the grounds of the Revenue are dismissed and solitary ground of the assessee in cross- objection is allowed Re (d): Marketing With regard to marketing expenses, it is respectfully submitted that no advertising and publicity expenses were incurred in relation to exempt income earned from investment as the business of the appellant is to provide software services and solutions systems inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epresentative (DR) relied on the order of the Ld. CIT(A) and submitted at Ld. CIT(A) has not strictly followed the Rule 8D of the Rules and he has sustained the disallowance for the interest and administrative expenses for exempt income following a reasonable method. Further, the Ld DR submitted that the Assessing Officer was not satisfied with the claim of assessee of no expenses incurred and accordingly not being satisfied, he computed the disallowance under section 14A of the Act and thus the contention of the learned Counsel of the assessee of no dissatisfaction of claim of assessee was recorded, was not correct. The ld DR supported computation of disallowance of interest expenditure and administrative expenses made by the Ld. CIT(A). 5.12 We have heard the rival submission of the parties and perused the relevant material on record. In the instant case, the Assessing Officer has expressed dissatisfaction on the claim of the assessee that no expenses were incurred for earning the exempt income, which is evident from following paragraph of the assessment order: 5.2. No income, whether exempt or not, can be earned without making some expenditure. Often times such expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis carried out by the AO as indeed the three important steps indicated by him in the order, shows that all these elements were present in his mind, that he did not expressly record his dissatisfaction in these circumstances, would not per se justify this Court in concluding that he was not satisfied or did not record cogent reasons for his dissatisfaction to reject the AO s conclusion. To insist that the AO should pay such lip service regardless of the substantial compliance with the provisions would, in fact, destroy the mandate of Section 14A. 5.14 In view of above decision of the Hon ble Delhi High Court, in case of Indiabull Financial Services Ltd. (supra), we reject the contention of the assessee that no dissatisfaction was recorded by the Assessing Officer while invoking section 14A of the Act for computing disallowance towards earning the exempt income. 5.15 The second contention of the assessee is that no disallowance should be made for interest expenditure in view of sufficient own funds available with the assessee. The details of position of the funds of the assessee as on 31/03/2006 and 31/03/2007 filed by the assessee in paper-book is reproduced as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were deposited in the overdraft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT(A) and Tribunal 5.17 When we apply the ratio of the decision of the Hon ble Bombay High Court in the case of Relance utilities and power ltd (supra) over the facts of the instant case, we find that the instant case also there are sufficient interest-free funds in the form of share capital and reserves available to explain the investment in mutual funds. In view of no interest expenditure relatable to investment in assets yie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of TRF Ltd Vs CIT 323 ITR 397 and decision of the Hon ble Delhi High Court in the case of CIT Vs Autometers Ltd 292 ITR 345 (Delhi) held that once the debt has been written off in the books of accounts of the assessee as irrecoverable, the claim of bad debt is allowable and it is not necessary for the assessee to establish that the debt, in fact has become irrecoverable. However, the Ld. CIT(A) asked the assessee to establish that the debt under dispute was appearing in the balance Sheet as on 31/03/2006. In absence of any documentary evidence filed by the assessee, the Ld. CIT(A) confirmed the disallowance observing as under: 8.7.4 From the above it is clear that while it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable and the bed debt claimed by the assessee would be allowable in the year in which the debt was written off as irrecoverable in the books of accounts, however, the bad debts must be shown as good debts in the books during the previous year. The appellant in the course of appellate proceedings placed on record the year-wise details as to when the bad debts claimed were offered to tax. However, the appellant fai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heard. The Ground Nos. 3 to 3.2 of the appeal of the assessee are accordingly allowed for statistical purposes. ITA No. 5491/Del/2013 (Revenue s Appeal) 7. Now we take up the appeal of the Revenue having ITA No. 5491/Del/2013. The Ground Nos. 1 to 1.5 and 2 of the appeal of the Revenue relate to disallowance of deduction under 10B of the Act by the Assessing Officer, which has been deleted by the Ld. CIT(A). 7.1 The facts qua the issue in dispute are that the assessee claimed deduction under section 10B of the Act in respect of profit derived from its 100% export-oriented undertaking/units, namely, NTL Salt Lake, Kolkata (Unit-II), (₹ 8,16,72,880/-); NTL Banerghatta Road, Bangalore (₹ 5,23,90,061/-) and NTL Athena, New Delhi (₹ 93,03,25,683/-), totaling to ₹ 106,43,88,624/-. In respect of these units, deduction under section 10B of the Act was claimed in assessment year 2006-07 also which was disallowed by the Assessing Officer, however same was allowed by the Ld. CIT(A). The Assessing Officer observed that the different units of the assessee company are not operating in isolation but they are operating as different branch of the same tree. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... / losses suffered in other eligible/ ineligible business owned by the assessee. Hon ble Karnataka High Court in the CIT v. Yokogawa India Ltd. 314 ITR 385/ 246 CTR 226 while dealing with the issue of deduction u/s 10A of the Act, observed that the relief under this section is with reference to the STP undertakings and not to the assessee. It was held that the phrase total income used in sec 10A(1) is to be understood as the total income of the STP unit. Special Bench of the Tribunal in the case of Scientific Atlanta India Technology Pvt. Ltd. 38 SOT 252 observed that assessee may have more than one undertaking and in such a case, one has to consider the profits and gains of that particular undertaking which qualify for deduction under s. 10A. It was held that in computing deduction under s. 10A, we have to ascertain the total income as per the provisions of the Act in respect of that undertaking and the amount so determined is to be reduced from the total income. Therefore, it is a settled issue that the deduction u/s 10A/10B of the Act has to allowed with reference to the profits of the eligible undertaking and not with reference to the appellant s business as a whole. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the respective Business Groups/ Service Groups/ EOU s based on the area occupied. The annual report of the company also specifies the ERP system of accounts maintained by the company. The deduction has been claimed by the appellant in respect of each of the three EOUs on the basis of the prescribed Audit Report in Form No. 56G. The facts and circumstances are identical in AY 2007-08 as in AY 2006-07, and AO had also recomputed the deduction u/s 10B on the basis of recomputation of deduction adopted in AY 2006-07. Therefore, in view of the above factual and legal position, and following the decision of Id. CIT(A)-32 of AY 2006-07 it is held that profits arising from each of the eligible undertaking have be to allowed as deduction under section 10B of the Act separately as certified by the Audit Report in Form 56G. Accordingly, the issue is decided in favour of the assessee. 7.3 On the issue of adjustment of brought forward loses unabsorbed depreciation of earlier years also, the Ld. CIT(A), following the finding of his predecessor in assessment year 2006- 07, decided the issue in favour of the assessee. 7.4 Before us, learned DR relied on the Assessing Officer and submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e opportunity to the appellant to adduce the entire evidences. (iv) That the evidence being- produced are critical and material for adjudication of the grounds raised in appeal. 2.4.1 The AO, on the other hand, has vehemently opposed admission of the additional evidence on the ground that the appellant was given due opportunities during the assessment proceedings. However, no specific observations giving dates and details of such opportunities has been made by the AO in his remand report. Further, the AO has not controverted the appellant's contention that no specific show cause notice was issued to the appellant to demonstrate as to how the various export oriented units operating during the year were having independent and separate existence and why they should not be treated as a single business unit. Therefore, I am of the view that specific opportunity was not granted to the appellant for clarifying the issue as to why all the units of the appellant company may not be considered as one unit for the purpose of deduction u/s 108 of the Act. The documents that the appellant seeks to admit at this level are mainly documents relating to Customs Licenses issued to each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,293 ITR 53, 941TD 79 etc. In view of the guidance available in the afore-cited judicial pronouncements, 1 hold that the additional evidence as mentioned in para 2.3 above are admissible u/r 46A and are taken on record. 2.4.2 Having decided the question of admission of additional evidence, now the substantive issues are to be decided. The same are discussed in the following paragraphs. 2.4.3 The first substantive issue is whether the appellant was correct in claiming deduction under section 108 of the Act with reference to separate and independent profits of each of the eligible units as against the action of the assessing officer in computing such deduction with reference to business profits of the appellant company as a whole. The AO had observed that all the units were in fact expansion of the same business as they were engaged in, the same line of business as the company and no separate books of accounts have been maintained for these units. He had also raised doubts about the allocation of expenses to these units to 'arrive at the conclusion that deduction could not be calculated in respect of the units separately and therefore he calculated the deduction u/s 108 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the CIT(A) : 2.4 In view 'of the above provisions of s10B, any profits and gains which are derived by an assessee from a 100 per cent export-oriented undertaking shall not be included in the total income of the assessee, if the conditions in sub-s. (2) of this section are fulfilled. Looking to these conditions as mentioned in sub-s.(2) of this section, it is not seen that separate books of accounts are the requirement of claiming deduction from the total income of any assessee relating to the profits and gains derived by that assessee from a 100 per cent export-oriented undertaking ................ ... This Koregaon unit is fulfilling all the conditions as per sub-s. (2) of s..10B of the Act and therefore, it. is entitled for that exemption .. This ground 'Of appeals is allowed. Reference, in this regard has also been made to the following decisions of the Court / Tribunal where it has been held that there is no requirement to maintain separate books of accounts as a necessary precondition for claiming the benefit of relief under sections 1OA/10B of the Act:- CIT V. Fusion Software Engg. (P.) Ltd.: ITA No. 952 and 953 of 2006 (Kar HC) JCIT v Ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this appeal is as to the stage of allowance of deduction under section 10B of the Act. The Assessing Officer has taken the view that the deduction u/s 10B was allowable after deducting unabsorbed brought forward depreciation from the profits of business of the appellant company. He has placed reliance mainly on the judgment of the Hon. Karnataka High Court in the case of CIT vs. Himmatsingike Seide Ltd. 286 ITR 255 for the above proposition. The case of the appellant is that deduction is allowable from profits of the eligible business as computed under the head business income . As a necessary corollary, such profits are the individual profits of the eligible units computed before setting off of brought forward unabsorbed losses depreciation, if any, of non-eligible undertakings, required to be set off, subsequently at the stage of computing gross total income, under Chapter VI of the Act. According to the appellant, on one hand, the facts of the case of CIT vs. Himmatsingike Seide Ltd. 286 ITR 255 are clearly distinguishable from the facts of the instant case and on the other, the. aforesaid issue is squarely covered by the decision of the-Special Bench of the' Tribunal i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dertaking was claimed as exempt from tax. The assessee, by doing so was able to set off the unabsorbed depreciation of the Export Oriented Undertaking against the taxable profits from other sources , which had the effect of reducing the taxable income to nil. The Hon High Court, after analyzing the entire scheme held that the unabsorbed depreciation of the Export Oriented Undertaking had to be adjusted against the eligible profits before allowing exemption/deduction under section 108 of the Act. The Hon. Court observed that by claiming set off of unabsorbed depreciation of the eligible undertaking against income from other sources , the assessee had virtually taken exemption from payment of tax even in respect of other business income, which was clearly not permissible. Applied to the present case, it is immediately discernible that the facts of the present case are totally opposite of the facts of the cited case. There is no brought forward unabsorbed depreciation in respect of the 100% EOUs in the present case. In the present case, it is noticed that the question of set off of unabsorbed deprecation brought forward from earlier year(s) prior to claiming deduction under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profession itself and not from the gross total income . 25. Having held that the claim under section 10A is only deduction and the same is not subjected to section 80AB of Chapter VI-A, now, let us consider whether the deduction so to be given under section 10A is undertaking specific or otherwise. 26. It can be noticed from the language of section 10A(1) that a deduction of such profits and gains that as are derived by an undertaking 'qualifies under section 10A is to be given from the total income. Interestingly, the Legislature has mentioned the profits and gains as are derived by an undertaking. It means that. the assessee may have more than one undertaking and in such a case, one has to consider the profits and gains of that particular undertaking which qualifies for deduction under section 10A. According to section 10A(4), the deduction is to be computed in the same proportion which bears to the profits of the undertaking, the same proportion as the export turnover bears to the total turnover. It may be noticed that again the words used are Profits and gains of business of the undertaking . In any case, this is not the total profits of the business o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the source itself or after deduction of unabsorbed brought forward depreciation, in favour of the assessee. The Hon. Court while upholding the contention of the assessee that deduction u/s 1OAwas to be allowed at the source itself observed as under: 12. A literal reading of the above provision requires deduction from the total income. There can be deduction in computing the 'tote! income. However, there cannot be deduction from the total income which is the final result of the computation process. The language adopted in section 1O-A is different from the one adopted in section 80 -A. Section 10 -A provides for deduction from the total income. In the scheme of the Act, while- various deductions are allowed in computing the total income once the total income is computed, no further adjustments to the total income is envisaged. The scheme of the Act provides for deductions in computing the total income but no mechanism for any deduction from the total income already computed is provided under the Act. Once the total income is computed, the next step is determination of the tax by applying applicable rates on the total income ........ . . 14. The phrase total income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... main in Chapter lII. It is titled as which do not form part of the total income . It mC1y be noted that when section 10-Awas recast by the Finance Act, 2001 the Parliament was aware of the character of relief given in chapter III. Chapter 111 deals with incomes which do not form part of total income. If the Parliament intended that the relief under section 10-A should be by way of deduction in the normal course of computation of total income, it could have placed the same in Chapter- Vl(A) which houses the section like 80-HHC 80-IA.etc. The Parliament was aware of the various restriction and limiting provisions like section 8OA and section 80AB which Was in Chapter VI-A which do not appear in Chapter-III. The fact that even after its recast the relief has be-en retained in Chapter 11/ indicates that the intention of Parliament is to regard it as an exemption and not a deduction. The Act of the Parliament in consciously retaining the section in Chapter 11/ indicates its intention that the nature of relief continues to be an exemption. The Parliament despite being conversant with the implications of this Chapter has consciously chosen to retain section 10A in Chapter III. 17. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g deduction under section 10A, 10AA, 10B or 10BA in respect of some specific business . Item 7 of schedule 1 is to eliminate such income from computation of profits and loss and no separate declaration under section 10A(8) or 10B(8) if any is required to be made. 29. After making all such computations the assessee would be entitled to the benefit of set off or carry forward of loss as provided under section 72 of the Act. This is the benefit which is given to the assessee under the Act irrespective of the nature of business which he is carrying on. The said benefit is available even to undertakings under section 10B of the Act. The expression deduction of such profits and gains as derived by an undertaking shall be allowed from the total income of the assessee , has to be understood in the context with which the said provision is inserted in Chapter III of the Act. Sub-section (4) of section 10A clarified this position. It provides that the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such article or thing or co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t appreciating the fact raised through Remand Report that inspite of number of opportunities provided to the assessee, the additional evidences were filed only during the appellate proceedings. 4. Whether on the facts and circumstances of the case, the Ld. CIT(A) s stand that independent books of account are not required to be maintained under the provisions of section 10B of the IT Act, is not correct since the language of Form 56G starts with I/We have examined the accounts and records which makes it clear that the assessee has to maintain separate books of accounts. The Annexure A to Form 56G also requires the details of total profit of the business etc. In view of the aforesaid facts, it is clear that the assessee was required to maintain separate books of accounts. 5. Whether on the facts in the circumstances of the cas, the Ld. CIT(A) has erred not appreciating the fact that the assessee by claiming depreciation contrary to section 32 has virtually taken exemption from payment of tax even for other business as well as non business incomes, which should not be allowed. 6. Whether on the facts in the circumstances of the case, the Ld. CIT(A) has erred ig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) of the Act. 9.3 On further appeal, the Ld. CIT(A) held that the expenditure incurred is not in the capital field, therefore following the judicial precedent on the issue , allowed the claim of the assessee 9.4 The learned Departmental Representative relied on the order of the Assessing Officer and submitted that lease rentals has been paid for the periods of 90 years, and this expenditure being of enduring nature, the Assessing Officer was justified in treating the expenditure as capital expenditure. 9.5 The learned counsel of the assessee, on the other hand, relied on the order of the Ld. CIT(A) and the judicial precedents relied upon by him. The Ld. Counsel also relied on the decision of the Hon ble, Karnataka High Court in the case of CIT Vs HMT, 203 ITR 820 where the premium of ₹ 12,09,200/- paid by the assessee to acquire land on lease for 95 years was held as revenue expenses because the annual rent was only one rupee and the premium paid was nothing but advance rent . The landed Counsel of the assessee also relied on the decision of the Hon ble madras High Court in the case of CIT Vs Gemini Arts (P) Ltd 254 ITR 201 . 9.6 We have heard the rival submiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no advantage in the capital field as there is no acquisition of any capital asset inasmuch the plot of land is not under the ownership of the appellant and remains the property of Greater Noida Industrial Development Authority. It is submitted that payment of commuted lease rentals did not result in creation of a capital asset having enduring benefit in the capital field. The amount in question was essentially revenue expenditure allowable deduction. 8.5.3 Hon ble Supreme Court in the case of Empire Jute Co. v CIT: 124 ITR 1, held that the test of enduring benefit is not certain or conclusive test in determining whether the expenditure is capital or revenue in nature and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. The Supreme Court further laid down that what is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee s trading operations or enabling the management and conduct of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a commercial sense, the expenditure appears to be revenue expenditure. 8.5.6 The above decisions of Apex Court are squarely applicable in the case of the appellant. In the case of the appellant, also it did not acquire title / ownership of any capital asset. The plot of land on which construction would be carried on by the appellant under the lease deed of 99 years, would remain the property of Greater Noida Industrial Development Authority at all times. In lieu of incurring the expenditure, the appellant would be entitled to enjoy the property as a tenant under long term lease. Such an advantage even though, enduring in nature, could not be regarded as in the capital field as the expenditure only facilitates the carrying out of business more efficiently and profitably by making available suitable premises for the business of the appellant. The expenditure on account of commuted lease rentals paid by the appellant company has been incurred in respect of premises used wholly and exclusively for the purposes of the business of the company; and the same represents commuted payment in lieu of regular lease rental and hence is in the nature of revenue expenditure. In view of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of ₹ 77,98,042/- has been incurred wholly and exclusively for the purposes of the business for the year under consideration. Accordingly, we allow 1/90th of ₹ 77,98,042/- as revenue expenditure in the year and balance be characterized as advance rent in the financial statement as on 31.03.2007. Accordingly, the Ground Nos. 3 4 of the appeal of the Revenue are partly allowed. 10. Now, we take up the appeal of the assessee and Revenue for assessment year 2008-09 bearing ITA No. 5525/Del/2013 5492/Del/2013 respectively. 11. The grounds raised by the assesssee and the Revenue in their respective appeals are reproduced as under: Grounds of appeal of the assessee: 1. That the Commissioner of Income-Tax (Appeals) erred on facts and in law in upholding disallowance of ₹ 44,00,739/-, claimed under section 35DD of the Income Tax Act, 1961 ( the Act ) in respect of 1/5th of demerger expense incurred by the appellant. 1.1 That the Commissioner of Income-Tax (Appeals) erred on facts and in law in holding that in terms of Section 35DD of the Act, demerger expenses are allowable only in the hands of the demerged company and not in the hands o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all units i.e. those which are covered for deduction, as well as those which are not covered for deduction. It is only for the purpose of computing deduction u/s 10B that the assessee has tried to allocate the expenses between these units and compute their profits. 1.2 On the facts in the circumstances of the case and in law, the Id.CIT(A) has erred by holding that independent books of accounts are not required to be maintained under the provisions of section 10B of the I T Act, since the language of form 56G starts with I/we have examined the accounts and records which makes it clear that the assessee has to maintain separate books of accounts. The annexure A of Form 56G also requires the details of total profit of the business etc. keeping in view of the aforesaid facts, it is clear that the assessee was required to maintain separate books of accounts. 1.3 On the facts in the circumstances of the case and in law, the Id. CIT(A) has erred in not considering the whole provisions laid down by the Board in Para 2(v) of the circular 1/2013 dated 17.01.2013, where in it is specifically mentioned that the AO, if requires can call for the separate books of accounts o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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