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AMICUS AI
Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • Appellant by: Shri P. Murali Mohana Rao
  • Respondent by: Shri M.S Rao
Judges
  • Chandra Poojari, A.M
  • Asha Vijayaraghavan, J.M
Acts
  • u/s 40(a)(ia) and liabilities u/s 43B of the Income-tax Act, 1961.4.
  • provisions of section 40(a)(ia) of the Income-tax Act, 1961,
  • section 29 income referred to in section 28
  • section 142(2A) of the Income-tax Act, 1961
  • u/s 143(1) of the Income-tax Act, 1961
  • provisions of section 40(a)(ia)
  • INCOME TAX ACT
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • Appellant by: Shri P. Murali Mohana Rao
  • Respondent by: Shri M.S Rao
Judges
  • Chandra Poojari, A.M
  • Asha Vijayaraghavan, J.M
Acts
  • u/s 40(a)(ia) and liabilities u/s 43B of the Income-tax Act, 1961.4.
  • provisions of section 40(a)(ia) of the Income-tax Act, 1961,
  • section 29 income referred to in section 28
  • section 142(2A) of the Income-tax Act, 1961
  • u/s 143(1) of the Income-tax Act, 1961
  • provisions of section 40(a)(ia)
  • INCOME TAX ACT
See more information ...
Smart Summary

Structured Summary of the Tribunal's Order (Assessee Appeals for A.Y. 2006-07 & 2007-08)

Factual and Procedural Background

The two appeals by the assessee challenge different orders of the Commissioner of Income Tax (Appeals) II, Hyderabad dated 10.10.2011 and 28.10.2011 for assessment years 2006-07 (ITA No. 2188/Hyd/2011) and 2007-08 (ITA No. 2189/Hyd/2011). The appeals were clubbed and heard together because they involve common issues.

Brief factual outline (as stated in the opinion):

  • The assessee is a public limited company and a 100% Export Oriented Unit (EOU) which filed returns declaring income for the respective assessment years.
  • For A.Y. 2006-07: The Assessing Officer completed assessment under section 143(3) and computed taxable income after disallowing various expenditures and statutory liabilities under sections 40(a)(ia) and 43B, arriving at a taxable income of Rs. 2,20,17,601/-. The Assessing Officer ordered a special audit under section 142(2A) and a special audit report was produced.
  • For A.Y. 2007-08: The return was filed and processed under section 143(1) and later assessed under section 143(3). The Assessing Officer disallowed various expenditures (including disallowances under sections 40(a)(ia) and 43B), and disallowed allocation of common expenditure to export profit, resulting in a taxable income of Rs. 4,42,47,791/-. A special audit was also carried out in the earlier year (referred to in these proceedings).
  • The principal contested matters include disallowances under sections 43B and 40(a)(ia), the effect of such disallowances on deduction under section 10B (exemption for export profits), disallowances relating to common expenditure allocation between export and domestic turnover, and assorted other disallowances (service tax, leave encashment provisions, capitalization for increase in authorized capital, depreciation, etc.).

Legal Issues Presented

  1. Whether disallowances made under section 43B and section 40(a)(ia) should be considered when computing profits for the purpose of deduction under section 10B (i.e., whether deduction under section 10B is to be computed on profits after taking such disallowances into account).
  2. Whether specific disallowances made under section 43B (statutory liabilities) and section 40(a)(ia) (TDS-related disallowances) are justified in the facts of the case (including where payments were actually made during the year or where liabilities are alleged to be old/unclaimed balances).
  3. Whether common/external expenditures allocated between export and domestic business can be disallowed from export profit where the assessee maintains separate books for export/domestic business and a special audit did not find discrepancies.
  4. Whether service tax and provision for leave encashment are covered by section 43B and whether leave encashment provisions are allowable as deduction.
  5. Whether expenses incurred in connection with increase in authorized capital (including filing fees, stamp duty, etc.) are revenue in nature (allowable) or capital in nature (not allowable).

Arguments of the Parties

Appellant's (Assessee / Authorized Representative) Arguments

  • Any disallowances under sections 43B and 40(a)(ia) will increase the profits that are exempt under section 10B and therefore will not adversely affect the assessee; the deduction under section 10B should be computed on profits after taking such disallowances into account. The assessee relied on the ITAT Hyderabad decision in DCIT v. Planet Online Pvt. Ltd. (ITA No. 1016/H/07).
  • Statutory liabilities disallowed under section 43B (aggregating Rs. 2,01,586/- in one year) were old and unclaimed balances and should not have been disallowed.
  • Certain alleged TDS shortfalls (section 40(a)(ia) disallowances) related to amounts that were either paid during the year or were due to computation at higher rates; actual tax payable was lower and the disallowance was not justified.
  • The assessee maintained separate books of accounts for domestic and 100% EOU/export business, allocated expenses on an accepted and consistent basis year-on-year, and the special audit ordered under section 142(2A) did not point out discrepancies; therefore, the Assessing Officer should not have re-allocated common expenditure to export profit on mere estimation.
  • Expenditure incurred in connection with increase in authorized capital was treated as revenue expenditure by the assessee and claimed as allowable (section 35D was invoked by the assessee in arguments), supported by accounting treatment.
  • Provision made for leave encashment was a bona fide provision on accrual accounting and should be considered (assessee disputed the disallowance).

Respondent's (Departmental Representative) Arguments

  • The Assessing Officer's allocations (re-allocating common expenditure to export profit in proportion to export turnover) were justified because certain apportionments towards export were disproportionately low when compared to total turnover; the AO's approach should be sustained.
  • Service tax is a statutory liability and falls within the scope of section 43B (tax, duty, cess or fee under any law) and therefore non-payment within the specified time attracts disallowance under section 43B.
  • The assessee had earlier agreed to certain additions during assessment proceedings and, by that consent, lost the right to contest those particular additions (argument that consent during assessment bars appeal against those additions was made and a precedent was cited).
  • Provision for leave encashment was not allowable as a deduction under the provisions of the Income-tax Act and was contrary to accounting standards; hence the disallowance should be upheld.
  • Expenditure incurred in connection with raising share capital/increase in authorized capital is capital in nature and not allowable as revenue deduction; cited Supreme Court and other precedent (Brooke Bond India Ltd and Vazir Sultan Tobacco Co. Ltd.) to support capital nature of such expenses.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
DCIT v. Planet Online Pvt. Ltd., ITA No. 1016/Hyd/07 (ITAT Hyderabad) The profit of the undertaking must be computed in accordance with sections 30 to 43D (as per sections 28–29) and disallowances under section 43B are to be taken into account when computing exemption under section 10B. The Tribunal applied this principle to hold that exemption under section 10B must be computed on profits determined after taking into account disallowances under section 43B, and therefore directed the AO to recompute deduction under section 10B after considering such disallowances.
ITO v. M/s. Sahasra Electronics Private Limited (Delhi Tribunal, 2010-TIOL-89-ITAT-DEL) When profit from eligible business is recomputed by the AO, deduction under section 10A/10B is to be allowed on the recomputed profit. Referenced by the Tribunal to support the proposition that recomputed profit (after disallowances) should be the basis for deduction under section 10B.
Gold Co. Ltd. v. Commissioner Of Income-Tax (Central), Calcutta (as cited) Even if a disallowance is sustained, it increases the business profits which are exempt under section 10A and the exemption is allowable with reference to such enhanced income (as per Bombay High Court's position in Gemplus Jewellery India Ltd.). Used to support the assessee's contention that disallowances which increase exempt business profits do not reduce the benefit under section 10A/10B; cited in the chain of authorities supporting recomputation on enhanced income.
Commissioner Of Income-Tax v. Gem Plus Jewellery India Ltd. [(2010) 233-CTR(Bom)-24 : 42-DTR-73] (Bombay High Court) Exemption under section 10A is to be allowed with reference to the enhanced income where disallowance (e.g., under section 43B) increases business profits; the add-back consequent to statutory disallowance results in higher business profits and exemption is computed accordingly. The Tribunal relied on this High Court decision as a supporting precedent to direct recomputation of section 10B deduction after taking into account disallowances under section 43B.
Merilyn Shipping & Transports v. Addl. CIT [2012] 136 ITD 23 / 20 taxmann.com 244 (Visakhapatnam) (Special Bench) Section 40(a)(ia) applies only to amounts of expenditure which are shown as payable as on 31st March of the year (i.e., amounts outstanding), and cannot be invoked to disallow expenditures which had been actually incurred and paid during the previous year without deduction of TDS. The Tribunal applied the special bench ratio to hold that disallowances under section 40(a)(ia) do not apply where amounts were actually paid during the year; accordingly, disallowances under section 40(a)(ia) were deleted in the factual matrix where payments were made.
Brooke Bond India Ltd v. CIT [1997] 225 ITR 798 / 91 Taxman 26 (Supreme Court) Expenditure incurred for increase in authorized capital is capital expenditure and not allowable as revenue deduction. The Tribunal relied on Brooke Bond to hold that amounts incurred for increase in authorized capital are capital in nature; accordingly the assessing officer's disallowance of such expenditure was upheld.
Vazir Sultan Tobacco Co. Ltd. v. CIT [1988] 174 ITR 689 / 41 Taxman 7 (AP) Support for the proposition that certain expenditures connected with raising capital are capital in nature (used to decide the nature of expenses relating to increase in authorized capital). Relied upon alongside Brooke Bond to sustain the assessing officer's disallowance of expenses incurred for increase in authorized capital as capital expenditure.
Tribunal reference to Sri D. Rajaram (HUF) in ITA No. 718/Hyd (as cited by DR) Principle (as invoked by DR): where assessee consented to additions during assessment proceedings, the assessee may have lost the right to appeal against those additions. The DR relied on this authority to argue that the assessee, having consented to disallowances during assessment, could not later challenge them on appeal. The Tribunal recorded the DR's submission but decided relevant issues on their merits in the order.

Court's Reasoning and Analysis

The Tribunal's reasoning follows the submissions, the assessment records, the special audit report (where applicable), statutory provisions, and cited precedents. The court's step-by-step analysis (limited strictly to the content of the opinion) is summarized below.

  1. On computation of deduction under section 10B in light of disallowances under sections 43B and 40(a)(ia):
    • The Tribunal noted established law that profits for the purpose of section 10B are to be computed after taking into account the provisions of sections 30 to 43D (and therefore after disallowances under section 43B). The assessee's reliance on Planet Online and other authorities was noted.
    • The Tribunal directed the Assessing Officer to consider the additions/disallowances made under sections 40(a)(ia) and 43B while calculating deduction under section 10B and to recompute the deduction accordingly. The Tribunal thus allowed the grounds of the assessee on this point (paras 10–11 and para 32 for the second appeal).
  2. On disallowances under section 43B (statutory liabilities):
    • For A.Y. 2006-07, the ground relating to disallowance of Rs. 2,01,586/- under section 43B was not pressed by the assessee and was dismissed as not pressed (para 12).
    • For A.Y. 2007-08, the Tribunal considered whether service tax falls within section 43B and concluded that section 43B's language ("any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force") covers service tax; non-payment within the stipulated time thus attracts disallowance. Consequently, the Tribunal upheld disallowance of unpaid statutory liabilities under section 43B in that context (para 38).
  3. On disallowances under section 40(a)(ia) (TDS-related):
    • For A.Y. 2006-07 (ITA 2188): The Tribunal accepted the assessee's argument and the special bench precedent in Merilyn Shipping that section 40(a)(ia) applies only to amounts shown as payable as on 31st March (i.e., outstanding amounts), and does not apply to amounts that were actually incurred and paid during the previous year without deduction of TDS. The Tribunal therefore held that where payments were actually made in the year, section 40(a)(ia) would not apply and deleted the disallowances under this provision (paras 14–15, 28).
    • For A.Y. 2007-08 (ITA 2189): The Tribunal records the issue was considered in para 14 of the order (i.e., the Merilyn ratio). However, the order contains the statement at para 34: "Following the same ratio, this issue is decided in favour of the Revenue and against the assessee." The text, as presented, records that the Tribunal reached the decision stated in para 34 (the literal wording is reproduced here from the opinion). The Tribunal then notes in para 59 that the issue was dealt with in para 14 and decided accordingly (the opinion's text must be followed as written).
  4. On allocation of common expenditure between export and domestic business (disallowance of amounts from export profit):
    • The Tribunal placed weight on the fact that the assessee, a 100% EOU, maintained separate books for export and domestic business and that the Assessing Officer had himself ordered a special audit under section 142(2A). The special auditors (M/s Ratnam Dhaveji & Co.) submitted a report pointing out no discrepancies in the books of accounts regarding allocation of common expenditure.
    • The Tribunal found it improper for the Assessing Officer to ignore the special audit report and to reject the books of account without any findings of discrepancy simply to estimate allocations on the basis of conjecture. The Tribunal held the Assessing Officer should have accepted the special audit report and not resorted to estimation in the absence of any contradictory findings by the special auditor.
    • Accordingly, the Tribunal directed the Assessing Officer to allow the expenditure as maintained in the books and to recompute the deduction under section 10B (paras 20, 21, 33–34).
  5. On service tax and provision for leave encashment:
    • The Tribunal accepted the DR's position that service tax is a statutory liability covered by the phrase used in section 43B and therefore non-payment within the time limit attracts disallowance under section 43B (para 38).
    • Regarding provision for leave encashment (Rs. 7,24,955/- for A.Y. 2007-08), the Tribunal held that leave encashment is allowable on payment basis; a mere provision in books is not allowable as deduction under the Income Tax Act and is contrary to accounting standards. No judgments in favor of the assessee were cited; the Tribunal therefore upheld the disallowance (para 39).
  6. On expenditure relating to increase in authorized capital (capitalization):
    • The Tribunal accepted the Department's submissions citing Brooke Bond India Ltd. (Supreme Court) and Vazir Sultan Tobacco Co. Ltd., holding that expenditure incurred for increase in authorized capital is capital in nature. The AO's disallowance of Rs. 11,94,471/- was therefore sustained (paras 41–43, 68).

Holding and Implications

Core Ruling: APPEALS PARTLY ALLOWED (as stated in the order: "In the result, appeals of the assessee are partly allowed.").

Direct consequences and specific directions to the Assessing Officer (as recorded in the opinion):

  • The Assessing Officer is directed to consider disallowances made under sections 40(a)(ia) and 43B while calculating deduction under section 10B and to recompute the deduction accordingly (paras 11, 32).
  • For A.Y. 2006-07, disallowances under section 40(a)(ia) relating to amounts that were actually paid during the year without deduction of TDS were deleted, applying the Merilyn special bench ratio (paras 14–15, 28).
  • The Assessing Officer was directed to accept the books of account and the findings of the special auditor regarding allocation of common expenditure between export and domestic business, and to allow the expenditure for computing export profit/deduction under section 10B (paras 20, 21, 33–34).
  • Disallowances of unpaid statutory liabilities under section 43B (including service tax) where not paid within the stipulated time were upheld in the facts of the second appeal (para 38).
  • Provision for leave encashment created in books (accrual) was disallowed (para 39).
  • Expenditure incurred for increase in authorized capital was held to be capital in nature and disallowance was sustained (paras 41–43).

Broader implications (as reflected in the opinion):

  • The Tribunal applied and followed existing precedents (including decisions of ITAT special bench and High Court/Supreme Court authorities) rather than laying down any new legal principle. The decision requires Assessing Officers to recompute benefits under section 10B on the basis of profits determined after statutory disallowances under the relevant provisions, and it cautions against rejecting books of account in the absence of demonstrable discrepancies, especially where a special audit (ordered by the AO) accepts the books.
  • No new precedent was created by the Tribunal; the order applies established ratios to the facts of the two appeals and gives specific directions for recomputation and acceptance/rejection of particular disallowances as described above.

Note: This summary reproduces and synthesizes the statements and directions as they appear in the Tribunal's opinion. No facts or interpretations beyond what is explicitly contained in the provided opinion have been added.

Show full summary ...

    M/S. Bartronics India Ltd. Hyderabad v. Asst. Commissioner Of Income-Tax, Circle-1(3) Hyderabad .

    Chandra Poojari, Accountant Member - The above two appeals by the assessee are directed against different orders of the CIT(A)-II, Hyderabad dated 10.10.2011 and 28.10.2011 for assessment years 2006-07 and 2007-08. Since common issues are involved, the same are clubbed together, heard together and are being disposed of by this common order for the sake of convenience.

    I.T.A. No. 2188/Hyd/2011

    2. The assessee has raised the following precise grounds of appeal.

    1. The learned CIT(A) erred while sustaining the disallowances made u/s. 43B and 40(a)(ia) ignoring the fact that any disallowances made will increase the exemption u/s. 10B and will have no impact for the disallowance made.

    2. The Assessee has placed the reliance on the decision of the ITAT, Hyderabad in the case of Planet Online P. Ltd vide ITA No. 1016/H/07 in support of its claim.

    3. The learned CIT(A) has erred while sustaining the disallowance made u/s. 43B aggregating 2,01,586/-rejecting the plea of the Assessee that these statutory liabilities are old and unclaimed balances which is not correct and not justified.

    4. The learned CIT(A) has erred while sustaining the disallowances made u/s. 40(a)(ia) of Rs. 9,24,853/-, Rs. 6,93,777/-, Rs. 13,88,511/- which is not correct and not justified. Hence, the disallowances may please be deleted.

    5. The learned CIT(A) has erred while sustaining the disallowance of conveyance expenses of Rs. 2,20,000/-, disallowance of Interest of Rs. 3,27,501/- and disallowance of depreciation of Rs. 1,70,770/- which is not correct and not justified. Hence, the disallowances may please be deleted.

    6. The Assessing Officer has erred while disallowing a sum of Rs. 1,11,73,133/- from the Export Profit claimed by the Assessee Company on the contention that common expenditure relating to the export and domestic business are not deducted from export profit and the same has been confirmed by the learned CIT, Appeals which is not correct and not justified.

    7. The Assessee Company has already submitted the lower authorities that it is maintaining separate set of books of accounts for the turnover relating to Domestic as well as 100% EOU of the company. It has properly allocated the expenses as per the accepted method of accounting and the same practice is being followed by the company year by year, adhering to the principles of consistent accounting practices.

    8. The learned Commissioner of Income Tax (Appeals) erred in confirming the Order of the Assessing Officer wherein the above sum of Rs. 1,11,73,133/- has been disallowed from the Export Turnover claimed by the Assessee Company which is not correct and not justified. Hence, the disallowance may please be deleted.

    3. The brief facts of the case are that the assessee is Public Limited Company filed its return of income for the assessment year under consideration declaring total income of Rs. 31,71,911/-. The Assessing Officer completed the assessment u/s 143(3) and computed the taxable income at Rs. 2,20,17,601/- after disallowing certain expenditure u/s 40(a)(ia) and liabilities u/s 43B of the Income-tax Act, 1961.

    4. Ground No 1 & 2 regarding disallowances u/s 43B and 40(a) (ia) and cascading effect on deduction u/s 10B. The Assessing Officer has disallowed the amount of Rs. 2,01,586/-towards disallowance u/s. 43B, Rs. 9,24,853/- towards disallowance u/s. 40(a)(ia), Rs. 6,93,777/- towards disallowance u/s. 40(a)(ia), Rs. 13,88,511/- towards disallowance u/s 40(a)(ia), Rs. 2,20,000/- towards disallowance of repayment of car loans, Rs. 3,27,501/- towards disallowance of capitalized expenditure and Rs. 1,70,770/- towards disallowance of depreciation and arrived at amount of Rs. 2,20,17,601/-. The Assessee company was directed to get accounts audited under section 142(2A) of the Income-tax Act, 1961 for the A.Y. 2006-2007. The Report of the Special audit has also been submitted and the certain amounts have been disallowed.

    5. The Assessing Officer has disallowed u/s. 43B a sum of Rs. 18,666/- towards professional tax, Rs. 10,554/- towards Other Statutory Liabilities and Rs. 1,72,366/- towards non-remittance of service tax within the time i.e., before 31st December 2006 aggregating Rs. 2,01,586/- u/s. 43B. The Assessee has already submitted the Assessing Officer that the statutory liabilities are old and unclaimed balances and requested not to disallow the expenses. However, the Assessing Officer has not considered the same and disallowed a sum of Rs. 2,01,586 u/s. 43B.

    6. The Assessing Officer has also disallowed a sum of Rs. 9,24,853 u/s. 40(a)(ia) on the contention that TDS amount payable to the extent of Rs. 18,867/- has not been remitted to the Government Account which is not correct, not justified and bad in law. The AR submitted that the assessee had computed the TDS at higher rates than the actual applicable rate which resulted in higher TDS payable and this was rectified subsequently and actual tax payable was only RS. 84,502/-. However, the Assessing Officer has not considered the same and disallowed a sum of Rs. 9,24,853/- u/s. 40(a)(ia) which is not correct, not justified and bad in law. Hence, the addition may please be deleted.

    7. The learned AR submitted that the Assessing Officer disallowed a sum of Rs. 6,93,777/- u/s. 40(a)(ia) on the contention that TDS amount payable has not been remitted to the Government Account within the stipulated time. It is submitted that the delay in remittance of TDS deducted in the January, 2006 and February, 2006 happened by oversight and requested not to disallow the same u/s. 40(a)(ia).

    8. The Assessing Officer has also disallowed an amount of Rs. 13,88,511 u/s. 40(a)(ia) on the contention that no TDS has been deducted on the payments made to the following parties:

    9. The AR of the assessee submitted that any disallowances made will increase the exemption u/s 10B and will have no impact on the disallowance made. The assessee relied on the decision of ITAT Hyderabad A bench in respect of Dy. CIT v. Planet Online (P.) Ltd [IT Appeal No. 1016/H/2007, Dated 29-8-2008], wherein the Bench held as follows:

    "Profits and gains of business is defined in section 28 and as per section 29 income referred to in section 28 shall be computed in accordance with the provisions of section 30 to 43D. From the above provisions in the statute, it thus clear that the profit of the undertaking in the case of the appellant has to be computed in accordance with the provisions of the section 30 to 43D., i.e., including the provisions of section 43B of the Act. In view of the above legal provisions in my considered view, exemption under section 10B has to be computed on the profits determined after taking into account the disallowances to be made under section 43B of the Act."

    10. We have heard the rival submissions and perused the materials on record. It is the well established fact that as per the provisions of section 10B recomputed profits shall be considered for the purpose of computation of deduction u/s 10B. In view of various Tribunals & High Courts have held that disallowances of expenditure should be computed for the purpose of deduction u/s 10B accordingly if the assessing Officer recomputes the profit from eligible business by disallowing certain expenditure and liability u/s 40(a)(ia) and 43B, such recomputed profit shall be considered for the purpose of deduction u/s 43B. The assessee has placed his reliance on the following judgments which support the claim of the assessee:

    (a) The decision of this Tribunal in the case of DCIT v. Planet Online Pvt. Ltd. in ITA No. 1016/Hyd/07 where it has been held: "Profits and gains of business is defined in section 28 and as per section 29 income referred to in section 28 shall be computed in accordance with the provisions of section 30 to 43D. From the above provisions in the statute, it thus clear that the profit of the undertaking in the case of the appellant has to be computed in accordance with the provisions of the section 30 to 43D., i.e., including the provisions of section 43B of the Act. In view of the above legal provisions in my considered view, exemption under section 10B has to be computed on the profits determined after taking into account the disallowances to be made under section 43B of the Act."

    (b) The Delhi Tribunal in the case of ITO v. M/s. Sahasra Electronics Private Limited (2010-TIOL-89-ITAT-DEL) held 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.

    (c) Delhi Tribunal in the case of Gold Co. Ltd. v. Commissioner Of Income-Tax (Central), Calcutta. officer 2010-TIOL-652-ITAT- MUM) held that even if the disallowance is sustained, it will only go to increase the business profits of the assessee which is exempt under section 10A as per the decision of the Hon'ble Bombay High Court in the case of Gemplus Jewellery India Ltd and allowed the assessee's appeal.

    (d) Hon'ble Bombay High Court in the case of Commissioner Of Income-Tax v. Gem Plus Jewellery India Ltd. [(2010) 233-CTR(Bom)-24 : 42-DTR-73] held that exemption under section 10A - profits and gains derived from exports - Addition on account of disallowance of employer's and employees' contribution towards PF/ESIC -Disallowance of the PF/ESIC payments has been made because of the statutory provisions i.e. Sec. 43B in the case of the employer's contribution and Sec. 36(1)(v) r.w.s. 2(24)(x) in the case of the employees' contribution which have been deemed to be the income of the assessee - plain consequence of the disallowance and the add back that has been made by the AO is an increase in the business profits of the assessee -Exemption under section lOA is allowable with reference to such enhanced income.

    11. In view of the above discussion, the assessing officer is directed to consider the additions made above while calculating deduction u/s 10B. Accordingly the AO is directed to recompute the deduction after taking into account disallowances made above. Accordingly these grounds of the assessee are allowed.

    12. Ground No. 3 regarding disallowances of Rs. 2,01,586/-being statutory liabilities u/s 43B is not pressed before us and hence dismissed for not pressed.

    13. Ground No. 4 is regarding disallowances u/s 40(a)(ia).

    14. We have heard both the parties and perused the materials on record. The assessing officer disallowed Rs. 9,24,853/- We have heard both the parties and perused the materials on record. Admittedly the assessee has not deducted tax at sources on payments made which attracts TDS provisions. The assessing officer has disallowed the expenditure u/s 40(a)(ia) and added to income. Now the assessee arguments before us being that the provisions of section 40(a)(ia) attracts those amounts shown as payable and it does not applicable to the amounts already incurred and paid. It is the well established position of law that various Tribunals and courts held that, section 40(a)(ia) has no application where the amount incurred and paid without deduction of TDS. It is applicable only when provision is made in the books of accounts and shown as payable without being deducting TDS. The matter has been already covered by special bench decision in the case of Merilyn Shipping & Transports v. Addl. CIT [2012] 136 ITD 23 / 20 taxmann.com 244 (visakha), wherein it was held that the provisions of section 40(a)(ia) of the Income-tax Act, 1961, are applicable only to the amount of expenditure which are payable as on the date 31st March of every year and it cannot be invoked to disallow which had been actually paid during the previous year, without deduction of TDS.

    15. In view of the above decision and based on the ratio of above cases we are of the opinion that, disallowances u/s 40(a)(ia) would not have any application on expenditure incurred and paid during the year itself without deduction of TDS. In the present case all the payments are being paid and none of the payments are shown as payable and hence disallowances made u/s 40(a)(ia) is deleted. Accordingly the ground of the assessee is allowed.

    16. Ground No. 5 -Not pressed before us hence dismissed as not pressed.

    17. Ground No 6 to 8 -Regarding disallowances of Rs. 1,11,73,133/- from export profit.

    18. The AR of the assessee submitted that the Assessing Officer has disallowed a sum of Rs. 1,11,73,133/- towards common expenditure incurred towards export business on the ground that the assessee has not deducted common expenditure towards export business. The assessee submits that, it has maintained separate books of accounts for domestic and export business. It has properly allocated the expenses as per the accepted method of accounting and the same is being followed year by year adhering the consistent principles of accounting. The assessee further submitted that, the assessing officer himself get the accounts audited u/s 142(2A) from special auditors and obtained the special audit report. The special auditors audited the books of accounts and submitted their report and the audit report did not point out any discrepancies of whatsoever in the matter under consideration.

    19. On the other hand the DR relied on the CIT (A) order and submitted that, in respect of some expenditure the amount of expenditure apportioned towards export profit are too low as compared to the total turnover and export turnover. The assessee has recorded export and domestic turnover and also certain expenditure separately but has not considered all the expenditure relating to export. The assessee has recorded too low expenditure for export turnover when compared to domestic turnover. He also stated that no method of accounting can allow such improper allocation of expenses and therefore common expenditure outlined in the assessment order to be allocated in the ratio of export turnover to total turnover.

    20. We have heard the rival submissions and perused the materials on record. The assessee is 100% EOU has made export and domestic sales during the year under consideration. The assessee has maintained separate books of accounts for 100% EOU and Domestic business and recorded all the corresponding expenditure. During the course of assessment, the assessing officer has ordered for special audit of books of accounts u/s 142(2A) and entrusted the work to M/s Ratnam Dhaveji & Co., Chartered Accountants. The special auditors have submitted their audit report on 21/05/2009. The special auditors appointed for the purpose have submitted their report pointing out no discrepancies in the books of accounts. The assessing officer who ordered for special audit to find out the correctness of the books of accounts as regards allocation of common expenditure for export and domestic business, has ignored the special audit report and complete the assessment on the basis his own estimation. The assessing officer is not correct by ignoring the special audit report when he himself ordered for special audit. The assessing officer should have accepted the audit report and completed the assessment based on the findings of special audit. The matter would have different if the special auditor finds discrepancies in the books. When the special auditor reported that there was no discrepancies in the books of accounts maintained by the assessee the Assessing Officer should have accepted the books of accounts. The assessing officer has in turn rejected the assessee books of accounts and resorted to estimation on purely surmises, suspicious and conjecture manner without any evidence with him to suspect the books of accounts. Books of accounts can be rejected and estimation can be made only when the assessing officer finds out any mistakes in the books of accounts maintained by the assessee. When there are no mistakes in the books of accounts and books of accounts are in verifiable manner, the assessing officer cannot reject the books of accounts and resort to best judgment assessment. More over in the instant case the assessing officer himself got the accounts audited from special auditors u/s 142(2A) cannot ignore the audit report submitted by the special auditors. If the special auditor points out any discrepancies with regard to allocation of expenditure and correctness of books of accounts, then it is open to the assessing officer to reject the books of accounts and resort to estimation. In the present case, he cannot do so as he himself referred the case for special audit and obtained the audit report from special auditors without pointing out any discrepancies in the books of accounts. Therefore the AO is not correct in re-allocating the common expenditure on the basis of ratio of export turnover to total turnover by rejecting the books of accounts.

    21. In view of the above, we are of the opinion that the assessing officer is not correct in disallowing the common expenditure from the export profit. We direct the assessing officer to allow the expenditure and recompute the deduction u/s 10B as claimed by the assessee. Accordingly we allow the ground of the assessee.

    ITA NO. 2189/Hyd/2011

    22. This appeal directed against the order of CIT(A) dated 28.10.2011 The assessee has raised the following grounds of appeal.

    1. The learned CIT(A) erred while sustaining the disallowances made u/s. 43B and 40(a)(ia) ignoring the fact that any disallowances made will increase the exemption u/s. 10B and will have no impact for the disallowance made.

    2. The Assessee has placed the reliance on the decision of the Hon'ble ITAT, Hyderabad in the case of Planet Online P Ltd vide ITA No. 1016/H/07 in support of its claim.

    3. The learned CIT(A) has erred while sustaining the disallowance made u/s. 43B aggregating 2,01,586/- rejecting the plea of the assessee that these statutory liabilities are old and unclaimed balances which is not correct and not justified.

    4. The learned CIT(A) has erred while sustaining the disallowances made u/s. 40(a)(ia) of Rs. 9,00,000/-, Rs. 10,72,000/- which is not correct and not justified.

    5. The learned CIT(A) erred while sustaining the above disallowances ignoring the fact that the said section applies only in respect of amount outstanding but not in respect of expenditure already paid.

    6. The learned CIT(A) has erred while sustaining the disallowance of service tax of Rs. 11,051/- and disallowance towards provision for leave encashment of Rs. 7,24,955/- ignoring the fact that service tax and leave encashment are not covered u/s. 43B which is not correct and not justified.

    7. The learned CIT(A) has erred while sustaining the disallowance of depreciation on plant & machinery of Rs. 1,45,155/- which is not correct and not justified.

    8. The learned CIT(A) has erred while sustaining the disallowance of Rs. 11,94,471/- on the ground that the whole amount should be capitalized which is not correct and not justified. The deduction u/s. 35D may be allowed towards the expenditure incurred by the Assessee.

    9. The Assessing Officer has erred while disallowing a sum of Rs. 2,08,94,401/- from the Export Profit claimed by the Assessee Company on the contention that common expenditure relating to the export and domestic business are not deducted from export profit and the same has been confirmed by the CIT(A) which is not correct and not justified.

    10. The Assessee Company has already submitted the lower authorities that it is maintaining separate set of books of accounts for the turnover relating to Domestic as well as 100% EOU of the company. It has properly allocated the expenses as per the accepted method of accounting and the same practice is being followed by the company year by year, adhering to the principles of consistent accounting practices.

    11. The learned CIT(A) erred in confirming the Order of the Assessing Officer wherein the above sum of Rs. 2,08,94,401/- has been disallowed from the Export Turnover claimed by the Assessee Company which is not correct and not justified. Hence, the disallowance may please be deleted.

    23. The brief facts of the case are that the assessee is a Public Limited Company filed its return of income for the A.Y. 2007-08 declaring total income of Rs. 1,72,,88,329/-. The assessing officer completed the assessment u/s 143(3) and computed the taxable income of Rs. 4,42,47,791/- after disallowing common expenditure allocated to export turnover, certain expenditure u/s 40(a)(ia) and liabilities u/s 43B.

    24. The assessee company filed its return of income for the A.Y. 2007-2008 on 31/10/2007 declaring Total income of Rs 1,72,88,329/-. The said return was processed u/s 143(1) of the Income-tax Act, 1961 on 19/03/2009. Later the assessment was completed u/s. 143(3) of the Act.

    25. The assessing officer noticed that TDS of Rs 201960/- which was deducted on 24/01/2007 (Rs 100980) and 28/02/2007 (Rs 100980) in respect of the rent paid to ETS Technology Solutions Pvt. Ltd aggregating to Rs 900000 on 5.5.2007, the said TDS amount was not remitted within the prescribed due date to the Govt. Accordingly, the corresponding rent of Rs 9,00,000 is added to the income returned.

    26. The assessing officer disallowed a sum of Rs 7,24,955/-being provision for leave encashment. The assessee had furnished all the details relating to leave encashment but without considering the explanation given by assessee, assessing officer disallowed expenditure of Rs 7,24,955. Further the assessing officer disallowed a sum of 1,45,155/- being the depreciation of various plants and machineries.

    27. The assessing officer disallowed expenditure of Rs 10,72,000 which consists of payment towards stall for Exhibition to M/s. Infocom Exposition & conventions Rs 216000 & 162000 respectively, custodian charges paid to CDSL amounting 30,000, processing fee paid to National Informatic Centre Rs 2,25,000, fees paid to L.R. Swami & Co towards trademark registration amounting Rs 24,000, audit fees to Yaji Associates Rs 75000, certification & consulting charges paid to Iris Smart cards amounting Rs 340000 on the ground that no TDS was deducted and disallowed expenditure of Rs 10,72,000 under provisions of section 40(a)(ia) of the IT. Act.

    28. The assessing officer disallowed expenditure of Rs 18,36,252/- which consists of Central Sales Tax AIDC amounting to Rs 3,31,383, Central Sales Tax- Retail amounting to Rs 9,881 , Value Added Tax-others amounting Rs 14,70,099, Value Added Tax-Retail amounting to Rs 9,490, Value Added Tax RFID amounting to Rs 4,348 and Service Tax RFID amounting to Rs 11,051 on the ground that statutory liabilities are not paid under the provisions of section 43B of the LT. Act .

    29. The assessing officer made disallowance of Rs 11,94,471 relating to filing fee to RoC for increase in Share Capital of Rs 6,50,000, payments made to Arun Shourie in connection with purchase of stamp duty towards increase in share capital (Rs. 1,95,000), legal advice charges and other expenses amounting to Rs 50,561 and Rs 2,98,910 respectively on the ground that expenditure incurred for raising share capital amounts to capital expenditure without considering explanation offered by assessee.

    30. The assessing officer made disallowance of Rs 2,08,94,401 relating to the expenditure incurred for 100% EOU on the ground that no proper separate books of accounts are not maintained without considering the books produced by the assessee before assessing officer.

    31. Ground Nos. 1 & 2 regarding disallowances u/s 43B and 40(a)(ia) and cascading effect on deduction u/s 10B.

    32. Identical issue was dealt with by us in Para Nos. 10 and 11 of this order. In view of our decision in Para No. 10 and 11 the assessing officer is directed to consider the additions made above while calculating deduction u/s 10B. Accordingly the AO is directed to re-compute the deduction after taking into account disallowances made above. Accordingly this ground of the assessee is allowed.

    33. The next ground of appeal raised by the assessee relates to disallowances of expenditure u/s 40(a)(ia). The assessee has incurred expenditure of Rs. 9,00,000/- towards rent paid to ETS Technology Solutions Pvt. Ltd. Similarly the assessee paid Rs. 10,72,000/- to various parties towards professional and consultancy charges and not deducted the tax at source. The AO has disallowed the same u/s 40(a)(ia) on the ground that the assessee has not deducted and after deduction not remitted the tax deducted at source within the due date and accordingly disallowed Rs. 9,00,000/- and Rs. 10,72,000/-u/s 40(a)(ia) and added back to income. The CIT(A) upheld the addition made by the assessee.

    34. This issue was already dealt by us in para No. 14 of this order. Following the same ratio, this issue is decided in favour of the Revenue and against the assessee.

    35. Ground No. 6 - Regarding disallowances of unpaid liability u/s 43B. The authorized representative appeared for assessee submitted that the service tax is not covered within the meaning of any tax or duty under section 43B and urged us to delete the addition made by the assessing officer. He reiterated that service tax is not a duty and not covered by provisions of section 43B and the assessing officer was erred in adding the same under section 43B. Similarly the assessee has made provision in the books of accounts for provision for leave encashment and said that he has maintained his books of accounts on accrual basis and recognized the leave encashment which accrue for the year has been made provision in the books of accounts. He further submits that it is liability which needs to be paid in future, he further submits that it is not tax or duty which is not covered by section 43B, thereby a provision is created in the books of accounts and requested to delete the addition.

    36. On the other hand the DR submitted that the assessing officer has made the addition and the authorized representative of assessee has agreed for the addition is now filed appeal against the addition. Having consented for disallowances during assessment proceedings the appellant cannot take a plea that the AO has erred in disallowing the same. Once the assessee gives his consent for addition he has lost his right of appeal. The DR placed his reliance on the order of Tribunal, Hyderabad Bench in the case of Sri. D. Rajaram (HUF) in IT Appeal. No. 718/Hyd/22 (sic). It was further submitted that moreover section 43B very clearly covers even service tax which is a statutory liability. The provisions of section 43B which state that "any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force" . The DR submitted that service tax is a tax levied is also covered u/s 43B.

    37. The DR further submitted that the assessee has claimed provision for leave encashment which was not allowed as deduction under the provisions of Income Tax Act and it is against accounting standards, therefore prayed to uphold the order of the CIT(A).

    38. We have heard both the parties and perused the material on record and carefully considered assessment order and CIT(A) order. Admittedly the assessee has not paid the service as required under the provisions of section 43B which is also very much covered u/s 43B. The provisions of section 43B is very clear and it states that "any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force". Therefore even service tax is liability which covers u/s 43B and non -payment the same within the stipulated time as specified under section 43B attracts disallowances. Accordingly we upheld the disallowances and confirmed the disallowances.

    39. Now we take up the issue relating to disallowances of leave encashment. Leaven encashment is allowed as deduction on payment basis. The assessee has debited sum of Rs. 7,24,955/- towards provision for leave encashment for future liability. Provision for leave encashment which was not allowed as deduction under the provisions of Income Tax Act and it is against the provisions of Income Tax Act and accounting standards. No judgements in favour of the assessee are cited before us. Therefore, we uphold the disallowances of provisions for leave encashment and accordingly confirmed the disallowances. This ground of the assessee is dismissed.

    40. Ground No. 7 - The assessee not pressed the ground hence dismissed for not pressed.

    41. Ground No-8 Regarding Addition of Rs. 11,94,471/-being ROC & other Expenses incurred for increase in authorized capital. The Authorised representative submitted that, the assessee has incurred sum of Rs. 11,94,471/-towards increase in authorized capital of the company and the same allowable as deduction u/s 35D. The assessee further submitted that they have treated it as revenue expenditure as it was incurred owing to the requirements of increase in capital and also the claim is supported by accounting standards. Therefore requested to delete the addition.

    42. On the other hand the DR submitted that, the expenditure incurred towards increase in authorized capital is in the nature of capital expenditure and cannot be allowed. The DR relied on the judgments of Hon'ble Apex court decision in the case of Brooke Bond India Ltd v. CIT [1997] 225 ITR 798 / 91 Taxman 26 and the judgement in the case of Vazir Sultan Tobacco Co Ltd. v. CIT [1988] 174 ITR 689/ 41 Taxman 7 (AP).

    43. We have heard both the parties and perused the materials on record. The amount incurred for increase in authorized capital is in the nature of capital expenditure in view of the Hon'ble Supreme Court judgment in the case of Brooke Bond India Ltd (supra) and, therefore, we are of the considered opinion that the assessing Officer rightly disallowed the expenditure. Accordingly we dismiss the ground of the assessee.

    44. Ground Nos. 9 to 11 are with regard to the disallowance of Rs. 2,08,94,401 from export turnover. We have already dealt with this issue in para Nos. 20 and 21 of this order and the issue is decided in favour of the assessee following the same ratio. These grounds are allowed in favour of the assessee.

    45. In the result, appeals of the assessee are partly allowed.

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    Comments

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