Income Tax Officer, ... v. Sahasra Electronics ...

Shamim Yahya, A.M:— This appeal by the revenue is directed against the orders of the ld. CIT(A) dated 5.3.2009 pertaining to, assessment year 2005-2006.

2. The first issue raised reads as under:—

“On the facts and in the circumstances of the case Ld. CIT(A) erred in law and on facts in deleting the addition of Rs. 15,91,821/- made by the Assessing Officer on account of value of free of cost material”

2.1 On this case the AO noted that assessee company has reduced from their Export Sales, a sum of Rs. 15,91,821/- on account of value of raw material supplied by customers on free of cost basis. Upon making enquiry in this regard the AO noted that vide letter dated 25.8.2008, the AR has submitted copies of a few bills raised by them in respect of Export Sales made. On perusal of these bills invoice no. 10, 14, 32, 82, 86, 88, 100, 101, 105, 109, 113) it is apparent that the items received Free of Cost by the assessee company have been subsequently reduced from the Invoice value and thereafter the balance is the Net Receivable Value. Hence he added Rs. 15,91,821/- to net profit.

2.2 Upon assessee's appeal ld. CIT(A) noted that AO had duly examined the invoices and from the invoices he noticed that items of free of cost basis were reduced from the invoices value and the balance thereafter is the net realizable value. Ld. CIT(A) further noted that assessee has been accounting for material received on free of cost basis only by reducing it from the gross value of goods sold as per invoices, even in earlier years and assessments were completed for A.Y 2003-2004 and A.Y 2004-2005 under section 143(3) without any such additions. Hence, the ld. CIT(A) deleted the addition.

2.3 Against this order the Revenue is in appeal before us.

2.4 We have heard both the counsels and perused the records. We find that AO has not appreciated the system of accounting of the assessee. Though AO has duly noted that assessee received certain raw materials on free of cost from the customers and when the invoices is made the value of item received free of cost basis is reduced therefrom. There is no in-comprehensible item in this regard when the system of accounting has been accepted by the Revenue in earlier assessment years. Under the circumstances, we do not see any reason to interfere in the order of the ld. CIT(A). Accordingly, we affirm the same.

3. The next issue raised pertains to deletion of Rs. 60,910/- on account of interest on bank overdraft account and supposed expenses to earn interest income.

3.1 On this issue the AO noted as under:—

“The assessee company has earned interest income of Rs. 1,58,366/-. Howeveragainst this sum, the assessee has claimed the following deductions:

Rs. 50,082/- as interest on bank over draft.

Rs. 10,828/- being expenses claimed @10% of interest income. However Rs. 50,082/- interest on bank over draft has also been debited to the profit and loss account under Finance Charges. Further, the assessee company could not provide any basis for claiming the 10% deduction on account of supposed expenses.

Therefore, a sum of Rs. 60,910/- is being added back to the net profit.”

3.2 Upon assessee's appeal ld. CIT(A) accepted the submissions of the assessee and held as under:—

“a) That Rs. 10,820/- was treated by the assessee as expenses incurred for earning net interest income i.e; Rs. 1,58,365/- reflected as Interest Income in the Schedule 8 of its Balance Sheet as at 31.3.2005, as reduced by Rs. 50,082/- reflected as Bank interest on OD in Schedule 12 of its Balance Sheet as at 31.3.2005 and, hence, was added back to the Net Profit as per Profit and Loss account to work out its business income.

b) It reduced the net interest (1,58,365 - 50,082) i.e; Rs. 1,08,283/- from the Profit as per Profit and Loss account to assessee it as income from other sources and treated Rs. 10,828/- as attributable expenditure in earning that income.

c) When the assessee reduced Rs. 1,08,283/- from the Profit as per Profit and Loss account to assessee it as Interest income, it actually disallowed Rs. 50,082/- on account of interest on and reduced it by Rs. 1,58,365/- to assessee Rs. 1,08,283/- as income from other sources.

6.4 In other words, when the AO disallowed Rs. 60,910/- on account of interest on bank OD and related expenditure of Rs. 10,828/- claimed, he actually did what the assessee had done in its computation of income but when he was to work out the business income, he should have reduced only Rs. 1,08,283/- from the profit and loss account to arrive at business income and should have assessed only Rs. 1,08,283/- as interest income under other sources.

6.5 Therefore, since interest on OD of Rs. 50,082/- was a business expenses, it should not have been disallowed in working out the business income. If he had not disallowed Rs. 50,082/-, it would have been right for him to have decreased business income by Rs. 1,58,365/- and assessee Rs. 1,58,365/- as income from other sources, which he had done.

In view of the above discussion, disallowance of Rs. 50,082/- incurred as interest on OD in computing business income was not in order and is deleted.”

3.3 As regards the disallowance of Rs. 10082/-, ld. CIT(A) held as under:—

“In view of the above discussion, disallowance of Rs. 10,082/- made by the assessee to work out its business income and its setting off against interest income, was in order and addition of Rs. 10,082/- made by the AO is to be deleted.

Further, if the disallowance by the assessee of Rs. 10,082/- from business income was considered as not correctly done (which has been so held by the AO) then he should have refrained from adding back Rs. 10,082/- as part of Rs. 60,910/- disallowed alongwith interest on OD of Rs. 50,082/-.”

3.4 We have heard both the counsels and perused the records. We find on these issues ld. CIT(A) has verbatim reproduced assessee's submission in his order. In the submission assessee has also alleged that it was a mistake of understanding of facts by the AO. In our considered opinion the matter should go back to the AO to consider it afresh in light of the material available with him on record and fresh submission being made by the assessee. Accordingly, we remit this issue to the files of the AO to decide the same afresh. Needless to add that the assessee should be given adequate opportunity of being heard.

4. The last issue raised is that ld. CIT(A) erred in directing to re-compute the profits eligible for deduction under section 10A of the Income Tax Act.

4.1 On this issue AO noted that assessee has claimed exemption under section 10A as per Form 56F amounting to Rs. 2,10,16,417/-Hence, though AO had made the some recomputation in the net profit, he restricted the claim under section 10A, as per Form 56F.

4.2 Before the ld. CIT(A) the assessee appealed that the action of AO in not reworking the profit eligible under section 10A of the Act equal to 100% profits from eligible business as worked out by him but restricting the deduction to Rs. 2,10,16,417/- as claimed by the assessee on the basis of profits from eligible business in Form 56F certified by the Auditors. Ld. CIT(A) referred to the provision of section 10A and directed the AO to allow 100% of exemption from eligible business on the basis of business income on the eligible business.

4.3 We have heard both the counsels and perused the records. Both the counsels fairly agreed that it is a settled proposition that when the assessee is claiming exemption under section 10A and assessee's profit from eligible business by the AO is recomputed the deduction under section 10A is also to be allowed on the recomputed profit under section 10A. Hence, we do not find any infirmity or illegality in the order of the ld. CIT(A) in this regard. Accordingly, we confirm the same.

5. In the result, the revenue's appeal is partly allowed for statistical purposes.