Not mandatory to maintain separate books of accounts for claiming section 10A deduction

Virtusa Consulting Services Pvt. Ltd. Vs DCIT (Madras High Court)

Conclusion: AO did conduct an enquiry, called for details, the details were produced and thereafter, the assessment was completed. Therefore, the finding of the PCIT was erroneous, consequently, assumption of jurisdiction under Section 263 was not sustainable. Also, there was no requirement in law to maintain separate books of account for claiming deduction under section 10A. However, since the deductions under these sections were available only to the eligible units, AO might call for such details or information pertaining to different units to verify the claim and quantum of exemption, if so required.

Held:  In the instant case, PCIT proposed to set aside the assessment order by invoking his power under Section 263 on the ground that the profit percentage of 10A units was 24.6% as against 5.42% in non-10A units and the sales turnover of (>90%) was with its AEs only. Further, assessee-company had not maintained separate books of accounts for 10A units and in the absence of separate books of accounts for the 10A units, it was evident that assessee had shown lesser profit relating to non-10A units thereby, reducing the taxable profit by booking excessive expenditure. That it was stated that the average profit of 11.31% had been uniformly applied and the deduction allowed under Section 10A would have to be reworked accordingly, thereby, reducing the deduction under Section 10A, than what was claimed in the return of income. Therefore, in the opinion of the PCIT, the assessment order under Section 143(3) was erroneous and prejudicial to the interest of Revenue on the ground that the profit margin of 10A units was very high, when compared to the profit margin of non-10A units. Further, the assessee had not maintained separate books of accounts for 10A units and therefore, the average profit had to be ascertained and uniformly applied and therefore, the deduction allowed under Section 10A of the Act had to be reworked. It was held that from the assessment order under Section 143(3), AO did conduct an enquiry, called for details, the details were produced and thereafter, the assessment was completed. Therefore, the finding of the PCIT in that regard was erroneous, consequently, assumption of jurisdiction under Section 263 was not sustainable. CBDT by Circular No.1/2013, dated 17.01.2013, issued clarification that there was no requirement in law to maintain separate books of account, the same could not be insisted upon. However, since the deductions under these sections were available only to the eligible units, AO might call for such details or information pertaining to different units to verify the claim and quantum of exemption, if so required. In terms of the above clarification, there was no requirement to maintain separate books of account. By Instruction No.17/2013 dated 19.11.2013, the Field Officers of the Department were advised to follow Circular No.1/2013 dated 17.01.2013, in letter and spirit. By Instruction No.3/2014, dated 14.03.2014, the Department Representatives and the Standing Counsel of the Department were directed to be informed about Circular No.1/2013, who appear for the Department before the Tribunal and the Court. Thus, Tribunal committed an error in not interfering with the order passed by the PCIT.

FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT

This appeal, filed by the appellant/assessee under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), is directed against the order dated 18.08.2017, passed by the Income Tax Appellate Tribunal ‘D’ Bench, Chennai (for brevity “the Tribunal”) in I.T.A. No. 1218/Mds/2016 for the assessment year 2010-11.

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