[Cites 10, Cited by 0]

Madras High Court

Commissioner Of Income Tax vs M/S Pentamedia Graphics Ltd on 16 April, 2026

Author: G.Jayachandran

Bench: G. Jayachandran

                                                                                   T.C.(A).No.632 of 2010




                                  IN THE HIGH COURT OF JUDICATURE AT MADRAS
                                                      DATED: 16-04-2026
                                                          CORAM
                            THE HONOURABLE DR. JUSTICE G. JAYACHANDRAN
                                               AND
                              THE HONOURABLE MR. JUSTICE R.SAKTHIVEL
                                             Tax Case (Appeal).No. 632 of 2010

                Commissioner Of Income Tax,
                Chennai.                                      … Appellant
                                                             Vs.
                M/s.Pentamedia Graphics Ltd,
                25, I Main Road,
                United India Colony,
                Kodambakkam,
                Chennai - 600 024.                            … Respondent

                Prayer: Appeal under Section 260A of the Income Tax Act, 1961, against the
                order of the Income Tax Appellate Tribunal, Madras ‘B’ Bench, dated
                24.03.2008 in ITA No.554/Mds/2007.

                                    For Appellant:       Dr.S.Sathiyanarayanan
                                                         Senior Standing Counsel
                                    For Respondent:      Mr.G.Baskar,
                                                         for Mr.N.Muthukumar
                                                     JUDGMENT

(Order of the Court was made by G.Jayachandran J.)

The respondent, M/s.Pentamedia Graphics Limited, filed its return of

income for the assessment year 2003-04 on 01.12.2002. The case was selected for

scrutiny and it was found that the aggregate value of international transactions

made by the assessee exceeded Rs.5 crores. Hence, the case was referred to

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Transfer Pricing Officer (TPO). A notice under Section 143(2), along with

questionnaires, issued to the assessee company. After discussions with the

representative of the assessee company, the Assessing Officer computed the

taxable income after making the following disallowance/adjustments:

(a) Consultancy charges amounting to Rs.50,50,571/- included in the 'other income' was claimed by the assessee as business receipts, but for the purpose of computation of deduction under Section 10B the Assessing Officer excluded the said consultancy charges from the profits of the eligible business.

(b) While computing the eligible deduction under Section 10B the assessee company had deducted expenditure in foreign exchange both from the export and total turnover, but the Assessing Officer did not allow the foreign exchange expenditure to be deducted from the total turnover. As a result, the claim under Section 10B got restricted to Rs.1.94 crores as against the assessee’s original claim of Rs.3.99 crores.

(c) As per the Tax Audit Report export turnover stood at Rs.239.21 crores. The Assessing Officer noticed that out of this a sum of Rs.115.55 crores only was received by the assessee company in convertible foreign exchange within the extended time limit. Accordingly, the export turnover of the assessee company was restricted by the Assessing Officer to the said sum of Rs.115.55 crores. This restriction also affected the quantum of eligible deduction under Section 10B.

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(d) A sum of Rs.38,61,680/- representing ROC fees paid in connection with increase in the authorised share capital was disallowed by the Assessing Officer on the ground of being capital expenditure.

(e) Delayed employees’ contribution to PF and ESI amounting to Rs.20,08,411/- was disallowed by the Assessing Officer, under Section 2(24)(x)/36(1) (va). Belated employer’s contribution to PF and ESI amounting to Rs.20,20,549/- was disallowed by the Assessing Officer under Section 43B.

(f) Depreciation amounting to Rs.59,84,18,000/- as per the Companies Act debited to Profit & Doss Account was added back by the Assessing Officer. But she omitted to allow eligible depreciation computed in accordance with the I.T Rules.

(g) A sum of Rs.8,73,00,000/- out of interest on borrowed capital was disallowed by the Assessing Officer on account of interest-free advances made to the subsidiary companies.

(h) The assessee company during the year had earned corporate dividend amounting to Rs.3,65,51,000/- in respect of which deduction of equivalent amount under Section 80M was claimed by its. This deduction has been restricted by the Assessing Officer to Rs.3,47,23,450/- by netting off the estimated expenditure amounting to 5% of gross dividend against the dividend income.”

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2. The assessee company went on appeal before the Commissioner of

Income Tax (Appeals) in ITA No:133/2006-07. The Appellate Authority partly

allowed the assessee’s appeal. Particularly, accepted the plea of the assessee

challenging the Assessing Officer’s decision to modify the total turnover for the

purpose of calculating the deduction under Section 10B of the Income Tax Act, by

disallowing the deduction of expenditure in foreign exchange both from the export

turnover and the total turnover for computing the deduction under Section 10A was

upheld in favour of the assessee. Likewise, the assessee challenges in respect of

Assessing Officer’s decision to disallow the interest amount to an extend of

Rs.8.73 crores, by holding it as increase of advance to the subsidiaries, also held in

favour of the assessee observing that the Assessing Officer had failed to note that

this was only a book entry between loans and advance and sundry debtors and no

real transfer of funds involved. Thus, accepted the plea of the assessee and the

disallowance was deleted.

3. The Revenue, being aggrieved by the above order dated 17.11.2006 of the

Commissioner of Income Tax (Appeals) passed in I.T.A.No:133/06-07, by partly

allowing the appeal of the assessee, preferred appeal before Income Tax Appellate

Tribunal (ITAT) in ITA.No:554/Mds/2003-04.

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4. The Tribunal, vide order dated 24.03.2008, following its decision in ITA

No:2148/Mds/2007 (which form part of the same order and subject matter in

appeal T.C.(A).No.631/2010 pending before this Court), dismissed the appeal filed

by the Revenue both in respect of Revenue’s contention relating to the deduction

from total income claimed by assessee towards foreign exchange expenditure for

computing deduction under Section 10A and in respect of the allowability of

interest amounts due from the subsidiary, The Income Tax Appellate Tribunal,

referring the reasoning assigned by it in the connected appeal

ITA.No:2148/Mds/2007, adopted the same reasoning and relied upon precedents to

buttress its decision.

5. The Revenue is before us, being dissatisfied with the reasoning assigned

by the ITAT for dismissing the revenue appeal.

6. At the time of admission, the following two substantial questions of law

were framed by this Court.

1. Whether in the facts and circumstances of the case, the Tribunal was right in holding that deduction of expenditure in foreign exchange is allowable from the total turnover while computing deduction under section l0-A?

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2. Whether in the facts and circumstances of the case, the Tribunal was right in law in deleting the addition of interest of Rs.8.73 crores made towards diversion of interest bearing funds to subsidiaries without interest?

Substantial Question of Law: No.1

The identical substantial question of law came up before the Hon'ble

Division Bench of this Court in respect of the same assessee, formerly

M/s.Pentamedia Graphics Ltd. This Court, following the dictum laid down in

Commissioner of Income-Tax, Central-III vs. HCL Technologies Limited,

reported in [2018] 404 ITR 719 (SC), held as follows:

“20. Even in common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well.”

In view of the above, position of law settled by the Division Bench of this

Court following the dictum laid by Hon’ble Supreme Court in HCL

Technologies Limited case cited supra. The substantial question of law held in

favour of the assessee.

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Substantial Question of Law: No.2

This substantial question of law requires a fresh appreciation of facts. Based

on the book entries, the Assessing Officer has considered the sum of Rs.70.39

crores as ‘Loans and Advances’ to the subsidiary Company and disallowed the

proportionate interest. However, the statement of accounts and other material

placed before the Appellate Authority had brought to light that no cash transaction

was effected to the subsidiaries. Pending RBI approval, for the value of the

material supplied to the subsidiary company, the assessee Company been paid as

shares of the subsidiary Company. This explanation of the assessee been accepted

by the Appellate Authority as well as the Tribunal and disallowance been reversed.

However, we find that whether the said investment in the subsidiary

company is connected to any business expenditure is not been discussed either by

the Appellate Authority or the Tribunal. The version of the assessee regarding the

said investment has to be tested by the Assessing Officer afresh after affording

opportunity to the assessee to provide necessary materials. For that limited

purpose, the matter is remitted back to the Assessing Officer for fresh processing of

computing the tax in respect of this transaction and complete the assessment

preferably within three months.