The order of the Bench was delivered by
B. R. Baskaran, Accountant Member-The appeal filed by the Revenue is directed against the order dated 12.7.2011 passed by the ld. CIT(A)-20, Mumbai and it relates to the assessment year 2007-08.
2. In the grounds of appeal and additional grounds of appeal filed, the revenue is aggrieved by the decision of ld. CIT(A) in respect of following issues:-
a) Restricting the disallowance made u/s 14 of the Income Tax Act, 1961 (the Act) to Rs. 3,33,187/- as against the disallowance of Rs. 83,14,059/-;
b) Allowing set off of Loss pertaining to the unit eligible for deduction u/s 10B, even though it was rejected by the AO.
c) While computing Book profit u/s 115JB of the Act, restricting the disallowance made u/s 14A of the Act to Rs. 3,33,187/- as against disallowance of Rs. 83,14,059/-;
d) While computing Book profit u/s 115JB of the Act, allowing the deduction u/s 10B of the Act to the tune of Rs. 3,49,38,911/-, even though the Certificate given in Form 56G shows the deduction u/s 10B of the Act at NIL amount and
e) Directing the AO to allow set off of loss brought forward from assessment year 2006-07, even though the AO has computed positive income u/s 143(3) of the Act.
3. The facts relating to the case are stated in brief. The Assessee company is engaged in the business of manufacturing intermediates of Active Pharma Ingredient (API). The AO computed the total income under regular provisions of the Act by making various disallowances. In the similar manner, the AO also computed the book profit u/s 115JB by altering/rejecting various claims made by the assessee. In the appellate proceedings, the ld. CIT(A) granted relief to the assessee and in respect of the same, the Revenue has filed this appeal before us.
4 The first and third issue pertains to disallowance made u/s 14A of the Act while computing income under regular provisions of the Act and while computing Book Profit under sec. 115JB of the Act. The Assessee had disclosed tax free dividend income of Rs. 10.34 lakhs in the profit and loss account. The Assessee had also made disallowance of Rs. 13,554/- as per the provisions of section 14A of the Act. However, the AO took the view that the provisions of Rule 8D of the Income tax Rules are applicable to the year consideration. Since the disallowance made by the assessee u/s 14A of the Act was not according to Rule 8D of the IT Rules, the AO computed the disallowance in terms of Rule 8D at Rs. 83,14,059/- and accordingly adopted the same while computing total income. While computing the book profit u/s 115JB also, the AO added the amount of Rs. 83,14,059/- to the Net profit.
5. In the appellate proceedings, the ld. CIT(A) held that Rule 8D of the Rules cannot be applied for assessment year 2007-08 in view of the decision of the Hon’ble jurisdictional High Court in the case of Godrej & Boyce Mfg Co Ltd Vs DCIT (2010) 328 ITR 81 (Bom), wherein the Hon’ble jurisdictional High Court has held that the provisions of Rule 8D is applicable from assessment year 2008-09 onwards only. However, the Hon’ble jurisdictional High Court had also held that the disallowance to be made u/s 14A of the Act is required to be computed in a reasonable manner. Accordingly, the Ld CIT(A) determined the amount of disallowance to be made u/s 14A of the Act to Rs. 3,46,741/-. Since the Assessee had already disallowed a sum of Rs. 13,554/-, the ld. CIT(A) sustained the disallowance to the extent of Rs. 3,33,187/-. The Ld CIT(A) also held that the above said amount of Rs. 3,46,741/- should be added while computing book profit u/s 115JB of the Act. The revenue is aggrieved by the said decisions.
6. We have heard the rival contentions on these issues and carefully perused the record. The assessment year under consideration is assessment year 2007- 08. Hence, in view of the decision of the Hon’ble jurisdictional High Court in the case of Godrej & Boyce Mfg Co Ltd (supra), Rule 8D of the Rules cannot be applied for the instant year. However, the Hon’ble jurisdictional High Court has held in the above stated case that the disallowance of reasonable amount is required to be made under the provisions of section 14A of the Act. For the sake of convenience, we extract below the observations made by Ld CIT(A) in this regard:-
"3.3. I have perused the assessment order and written submissions of the appellant. It is a fact that Rule 8D cannot be applied for A.Y.2007-08 in view of the decision of Hon'ble Jurisdictional High Court in case of Godrej Boyce Ltd. However, the Hon’ble High Court has given sanction to the Revenue Authorities to compute disallowance on a reasonable basis. The appellant's working of Rs. 13,554/- as disallowance does not appear to be reasonable. For earning a dividend income certain amount of human resources is deployed and so it would be fair to attribute 2% of the expenditure in salary, wages and bonus to be that which can be attributed for managing the investments and the corresponding dividend income. This comes to Rs. 3,38,679/-. Further, though the dividend is credited to the Bank directly, but certain portion of bank charges can be attributed for rendering this service. Thus, 5% of bank charges can be linked to earning of dividend income and the same comes to Rs. 8,062/-. Rest of the expenditure debited to the Profit & Loss Account do not have any proximate or immediate nexus for earning of income not chargeable to tax and so they are not being touched. To sum up, the total disallowance comes to Rs. 3,46,741/-. Since the appellant has already offered Rs. 13,554/-, hence the net disallowance which can be considered to be on scientific and reasonable basis would be Rs. 3,33,187/- The appellant gets partial relief on this ground."
7. Before us, the ld. DR supported the order of AO, wherein the AO has followed Rule 8D for computing the disallowance. On the contrary, the ld A.R supported the order passed by Ld CIT(A). We have already noticed that the provisions of Rule 8D is not applicable to the year under consideration. However, the revenue did not place any other material before us to show that the amount of disallowance computed by the Ld CIT(A) was not reasonable. In the absence of any material, which might have compelled us to intervene with the computation made by ld. CIT(A), we are inclined to confirm the order of ld. CIT(A) on this issue.
8. Now we shall turn to the issue relating to the disallowance to be made u/s 14A of the Act while computing the book profit u/s 115JB of the Act. Since the disallowance of Rs. 83.14 lakhs made by the AO u/s 14A of the Act was reduced to Rs. 3,46,741/- by the ld. CIT(A), the first appellate authority held that the amount to be added to the net profit towards the disallowance made u/s 14A of the Act for computing the book profit u/s 115JB of the Act should also be restricted to the amount determined by him. Since, we have upheld the amount of disallowance computed by the ld. CIT(A), we are of the view that the first appellate authority is justified in directing the AO to adopt the same figure for computing the book profit u/s 115JB of the Act. Accordingly, we uphold the order of ld. CIT(A) on this issue.
9. The next issue pertains to the decision of the AO in not allowing carry forward off of the loss of the unit, which is eligible for deduction u/s 10B of the Act. (hereinafter "10B Unit"). The AO computed the loss incurred by 10B unit Rs. 3,49,38,911/-. However, while computing total income, the AO held that the above said loss is not allowed to be carried forward as the same pertains to exempted income. In the appellate proceedings, the ld. CIT(A) took the view that the deduction provided u/s 10B of the Act does not fall under the category of ‘exemption’, since the relevant section uses the word "deduction" only. Accordingly, the Ld CIT(A) reversed the order of AO and held that the loss should be allowed to be carried forward. The revenue is aggrieved by the said decision.
10. We have heard both the parties on this issue. As stated earlier, the AO has recorded in the computation portion of the assessment order that the loss pertaining to 10B unit is not allowed to be carried forward as the same pertains to exempted income. On the contrary, the ld. CIT(A) has, after examining the provisions of section 10B, noted that the provisions of section 10B uses the expression "deduction" for five times and hence the deduction claimed u/s 10B should be construed as a deduction only and not as exemption. Accordingly, the ld. CIT(A) has reversed the decision of the AO and allowed the said loss to be carried forward.
11. We notice that the provisions relating to set off of loss and also carry forward of loss are provided in the Act in sections 70 to 75 of the Act. In some cases, the bar or restriction, if any, is provided in the same section itself or in some other relevant section. We notice that the assessing officer has not drawn support of any of the provisions of the Act or any other authority in support of his decision. We notice that the Ld CIT(A) has allowed the relief by holding that the deduction provided u/s 10B falls in the category of "deduction" and not under the category of "exemption". In effect, the ld CIT(A) has also not drawn support of any of the provisions of the Act or any authority in support his decision. In our view, the approach adopted by Ld CIT(A) is not correct. It is a well settled proposition that the provisions of the Act should be construed strictly. Hence, in our view, it is the duty of the AO to record the basis of his decision. Since the assessing officer has not cited relevant provision or any authority to support his decision and since the Ld CIT(A) has also failed on this aspect, we are of the view that this issue requires fresh examination at the end of the assessing officer. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore the same to the file of the assessing officer with the direction to examine the issue afresh after affording necessary opportunity of being heard and take appropriate decision in accordance with the law.
12. The next issue is regarding deduction claimed u/s 10B of the Act while computing the book profit u/s 115JB. For the purpose of claiming deduction u/s 10B of the Act under regular provisions of the Act, the Assessee is required to furnish report in Form No.56G obtained from a Chartered Accountant in accordance with Rule 16E of the Rules. In the said certificate, the Chartered Accountant had reported the amount of deduction u/s 10B at (-) Rs. 4,32,52,965/-, meaning thereby, the Assessee was not entitled for deduction/s 10B. In the profit and loss account, the assessee had shown an amount of Rs. 5.82 crores as the profit generated from the 10B unit. Hence, while computing Book Profit u/s 115JB of the Act, the assessee deducted the above said amount u/s 10B of the Act. However, the AO took view that the assessee is not eligible to claim deduction u/s 10B while computing Book Profit, since the amount of deduction was shown at NIL figure in Form No.56G and further the assessee became ineligible to claim the said deduction from the total income computed under regular provisions of the Act. In effect, the view of the AO appears to be that the assessee should become eligible for deduction u/s 10B under regular provisions of the Act and then only, he could claim deduction under the said section while computing the Book Profit u/s 115JB. However the ld. CIT(A), by following the decision rendered by the Hon’ble Supreme Court in the case of Ajanta Pharma Ltd V/s CIT (327 ITR 305) (SC) and also the decision rendered by the ITAT in the cases of DCIT Vs. Rocksy Investments Pvt Ltd (24 SOT 227)and Mosebear India Ltd Vs. DCIT (17 SOT 510), held that the assessee is eligible to claim of deduction u/s 10B while computing Book Profit u/s 115JB of the Act. Revenue is aggrieved by the said decision.
13. We have heard the parties on this issue. It is true that the Form No.56G submitted by the Assessee shows that the Assessee is not eligible for deduction u/s 10B of the Act. However, it has been held in many decisions that the computation of book profit u/s 115JB is altogether a separate exercise. It is now well established that section 115JB is a separate code by itself and the book profit has to be computed as per the methodology provided in that section. For that purpose, the profit and loss account is required to be prepared as per part II and Part III of Schedule VI of the Companies Act. The Delhi Bench of the Tribunal in the case of Moserbear India Ltd V/s DCIT (supra) has held that, while computing the profit u/s 115JB, the reference is to be made only to profit and loss account prepared in accordance with Companies Act, 1956. It was further held that while computing Book Profit under section 115JB of the Act, the amount to be reduced is income, which is eligible for exemption u/s 10B, as computed on the basis of Book Profit as per Parts II and III of Schedule VI of the Companies Act and not on the basis of provisions of the Act. The said view was also followed in the case of DCIT V/s Rocksy Investment Pvt Ltd (supra), wherein it was held that the amount of income which can be reduced by AO for computing the book profit under Clause (ii) of Explanation to section 115JB(2) of the Act will be amount which is credited to Profit and Loss Account and not amount of income which is claimed by Assessee or determined by AO while assessing the income under regular provisions of Act. Thus, we notice that the decision rendered by the ld. CIT(A) is in accordance with the view taken by the Tribunal in the above cited cases. In the instant case, there appears to be no dispute on the fact that the amount of Rs. 5.82 crores claimed by the assessee was related to the 10B unit. Hence, we do not find any reason to interfere with the conclusion arrived at by ld. CIT(A) on this issue.
14. The last issue pertains to the set off of brought forward loss pertaining to the assessment year 2006-07. For the year under consideration, the Assessee filed its return of income declaring total income of Rs. 68.69 lakhs. Subsequently, it filed a revised return of income, wherein it claimed set off of business loss of Rs. 68.69 lakhs relating to the preceding year and accordingly declared total income at NIL. The AO noticed that the income of the assessee for AY 2006-07 was determined at a positive figure of Rs. 1.33 crores in the assessment order passed u/s 143(3) of the Act. Accordingly, the AO took the view that the Assessee did not have any brought forward loss eligible to be set off against the current years’ income and accordingly disallowed the said claim. The ld. CIT(A), however, directed the AO to allow the loss finally computed for assessment year 2006-07 while computing the total income for the current year. The revenue has challenged the said decision on the ground that the income assessed as per assessment order was at Rs. 1.33 crores and hence there was no question of allowing set off of any brought forward losses.
15. We notice that the ld. CIT(A) has given a direction to allow set off of losses finally computed for AY 2006-07. Both the parties did not furnish the details relating to appeal, if any, filed by the assessee and the result there of. Even though the AO has determined the total income of the assessee at Rs. 1.33 crores, yet it may change depending upon the orders, if any, passed by Ld CIT(A) or any other higher appellate authorities. Hence, the direction given by the first appellate authority should be read in the above discussed scenario. Accordingly, if there is no loss to be carried forwarded in AY 2006-07, then the question of allowing set off of brought forward loss will not arise for the current year. All would depend upon the subsequent appellate orders, if any. Hence, this issue needs to be considered by the AO on the basis of facts available on record. Hence, we are of the view that the order passed by the ld. CIT(A) on this issue does not call for any interference.
16. In the result, the appeal filed by the revenue is treated as partly allowed for statistical purposes.
The order pronounced in the open court on 8th Aug, 2014.