The Income Tax Act allows deductions under sections 10AA and 35(1)(iv) when the taxpayer maintains clear, separate accounting for exempt and non-exempt activities, as arbitrary profit adjustments by authorities are not legally tenable.

ORDER

PER BENCH:

These are cross appeals preferred by the assessee as well as the Revenue against the orders of respective assessment years passed by the Learned Commissioner of Income-tax (Appeals) – 16, Chennai (hereinafter referred to as ‘Ld.CIT(A)’), dated 28.06.2024 for the assessment years (A.Y.) 2012-13 and A.Y.2013-14.

2. For convenience, the appeals of the revenue are taken first for adjudication. The grounds of appeal of the revenue in ITA No.2631/Chny/2024 - AY 2012-13 and No 2632/Chny/2024- AY 2013-14 are extracted below:

3. At the outset, we find that there is a delay of 43 days in filing the appeal in ITA No.2631/Chny/2024 and 49 days in filing the appeal in No.2632/Chny/2024 filed by the revenue and the revenue explained the reasons for delay in filing the appeals. The revenue has filed affidavit stating the reasons for delay in filing the appeal is due to Circle 8(1), Hyderabad is a corporate circle and merged with three circles. In between, assessment cases and penalty cases are received and in time bound manner the same had to be disposed of in addition to regular work. Meanwhile, Annual general transfers 2024 took place and the official of Circle -8(1) looking the judicial matters got transferred. After considering the affidavit filed by the revenue and also hearing both the parties, we find that there is a reasonable cause for the revenue in not filing appeals on or before the due date prescribed under the law and thus, in the interests of justice, we condone delay in filing of appeals and admit the appeals filed by the revenue for adjudication.

4. Grounds of appeal of the Revenue in ITA No.2631/Chny/2024

1. Both on the facts and in the circumstances of the case, the CIT (A) is not justified in deleting the disallowance of Rs.27,19,46,873/- made u/s.10AA.

2. Any other grounds that may be arisen during the hearing.

5. Grounds of appeal of the Revenue in ITA No.2632/Chny/2024

1. Both on fact and in the circumstances of the case, the Ld CIT(A) is no justified in deleting the disallowance of Rs.26,53,91,540/- made u/s 10AA.

2. Both of fact and in the circumstance of the case, the Ld. CIT(A) is not justified in deleting the disallowance of Rs.8,90,35,000/- made under section 35(1)(iv).

3. Any other grounds that may be arisen during the hearing.

6. Issue No 1- Deduction u/s.10AA of the Income Tax Act, 1961 :

6.1 Since the issue of deduction under section 10AA of the Income Tax Act, 1961 (in short “the Act”) is common in both the appeals, the same is taken up first.

6.2 The assessee is engaged in the business of software development. During the previous year relevant to the AY 2012-13 and AY 2013-14, the assessee had claimed deduction under section 10AA of the Act to the tune of Rs.39,97,42,604/- and Rs. 37,38,05,542/- respectively.

6.3 It was the case of the revenue that the assessing officer on perusal of the profit and loss account of the assessee, had observed that the net profit ratio was higher in 10AA units as compared to non 10AA units. The assessing officer therefore issued a notice to the assessee to explain the reason for such huge profits in 10AA units, which was exempt from tax. The assessing officer thereafter, not being satisfied with the reply filed by the assessee, proceeded to re-compute the deduction available to the Respondent assessee by applying overall net profit ratio of 16.31% / 13.32% respectively for AY 2012-13 and AY 2013-14. The assessing officer thus denied deduction to the tune of Rs.27,19,46,873/- and Rs.26,53,91,540/- under section 10AA of the Act respectively for the said assessment years.

6.4 Aggrieved by the order of the assessing officer, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals) [‘CIT(A)’]. The ld.