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December 25, 2020

Maintenance of unit wise books of accounts is not mandatory to claim deduction u/s 80HH and 80I

by CA Shivam Jaiswal in Income Tax

Maintenance of unit wise books of accounts is not mandatory to claim deduction u/s 80HH and 80I

The Income Tax Act grants various deductions while computing the profits or gains of a business. Section 80HH of the Income Tax Act, 1961 grants deduction from profits and gains to an undertaking engaged in manufacturing or in the business of the hotel. The deduction is admissible at the rate of 20% of the profits and gains of undertaking for 10 assessment years. Certain conditions are to be fulfilled in order to be eligible for such a deduction.

According to Section 80-I, where the gross total income of an assessee includes any profits and gains derived from an industrial undertaking or a ship or the business of a hotel or the business of repairs to ocean-going vessels or other powered craft, to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to 20% thereof.

Provided that in the case of an assessee, being a company, the provisions of this section shall have effect in relation to profits and gains derived from an industrial undertaking or a ship or the business of a hotel, the deduction shall be of 25%.

Let us refer to the case of CIT v. Bongaigaon Refinery & Petrochemical Ltd. (2012), where the issue under consideration was whether assessee was bound to maintain segregated accounts for each of its units for claiming deduction under section 80HH and 80I or not.

Facts of the Case:

  • Assessee was engaged in refinery, petrochemical and polyester staple fibre business.
  • Assessee set up three units for production of separate and distinct products.
  • Assessing Officer (AO) allowed deduction under section 80HH and section 80I off the Income-tax Act, 1961 after examining the unit wise profit and loss statement filed by the assessee.
  • Commissioner revised the order under section 263 and disallowed the claim for deduction holding that the assessee should have maintained segregated accounts for each of the three units to avail benefit of section 80HH and section 80I.
  • In appeal, the Tribunal held that though there was no statutory requirement to maintain unit-wise accounts, in the facts of the case, the assessee should submit unit wise audited accounts and claim deduction under section 80HH and 80I.
  • On appeal, High Court set aside the order of the Tribunal in so as far as it required the assessee to submit unit wise audited accounts.

Observations of the Supreme Court (SC)

  • Deductions under sections 80HH and 80-I could be claimed by an assessee who was engaged in carrying on eligible business mentioned therein.
  • Deduction was granted on the profits and gains derived from the eligible business.
  • It could happen that an assessee could have more than one eligible business undertaking or one eligible and one non-eligible undertaking.
  • In such situations, disputes could arise as to whether profits of each undertaking were correctly determined by properly allocating the expenses and whether an assessee was obliged to maintain its accounts unit wise so as to be eligible for claiming deduction.
  • Supreme Court held that neither section 80HH nor section 80I statutorily obliged the assessee to maintain its accounts unit wise.
  • Supreme Court further held that it was open to the assessee to maintain its accounts in a consolidated form.
  • Supreme Court remitted the matter to the Assessing Officer to ascertain whether the assessee had correctly calculated the unit wise net profits for claiming deduction under section 80HH and 80I.
  • Supreme Court further observed that if profits were not correctly determined, auditors could determine and certify the unit wise net profit computation from the consolidated books of accounts and place the same before the Assessing Officer.

In conclusion, taxpayers are not bound to maintain segregated accounts for each of its units for claiming deduction under section 80HH and 80I. However, they should be in a position to demonstrate the manner in which unit wise profits have been calculated from the consolidated accounts.

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