No Tax Impact Due to Section 80IB Deduction: Gujarat HC Upholds ITAT Ruling in Favour of Asian Tiles [Read Order]

The Gujarat High Court has rejected a series of appeals filed by the Revenue against Asian Tiles Ltd, upholding the Income Tax Appellate Tribunal (ITAT) ruling that additions made to the company’s income on account of alleged clandestine removal of goods were eligible for full deduction under Section 80IB of the Income Tax Act, 1961. As a result, the assessee had no net tax burden, and the appeals were revenue neutral.

These are a batch of appeals (No. 576-590, 621-626 of 2018) arising out of a common order of the ITAT, Ahmedabad, dated 5 May 2017. Appeals were filed by the Asian Tiles Ltd and similarly located assessees who were subjected to search and seizure by the income tax authorities. Separately, the preventive team of the Excise Department found prima facie evidence of clandestine removal of items, which implied likely evasion of excise duty.

The show cause notice was waiting from the Excise Department, and the Assessing Officer (AO) passed assessments. The AO added to the income the projected gross profit from the suspected sale of undeclared goods and also added the unexplained investments.

The Commissioner of Income Tax (Appeals) [CIT (A)] partially approved the assessees’ appeals and held that net profit should be taxed and not gross profit. Moreover, he also held that the additional income will be eligible for deduction under Section 80IB.

The parties preferred an appeal to the ITAT. The ITAT upheld the finding of clandestine removal and suppressed profits but limited the increase to only 1% of stated sales holding that the deduction under Section 80IB should be accorded to the additional income.

The Revenue contended that the ITAT’s methodology of limiting the additions to 1% of sales was not on a clear foundation and if income was diverted by the assessee, higher additions should have been retained.

However, the High Court did not wish to go into the merits of the additions further, as any addition (whether 1% of sales, net profit or gross profit) would anyway be exempt from tax on account of the Section 80IB deduction.

The Court, consisting of Justice Akil Kureshi and Justice B.N. Karia, held that since the entire income (including the additions) was eligible for deduction under Section 80IB and there was no evidence of income from non-eligible sources, the result was revenue neutral and there would be no additional tax liability notwithstanding the quantum of additions.

The Gujarat High Court dismissed all the appeals on the ground that there was no tax impact as the additions to the income were completely deductible under Section 80IB. The decision confirms that the procedure is academic as far as tax collection is concerned when valid deductions offset any increases made during assessment.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates