2005 (8) TMI 579 - AT - Income Tax

Summary

Issues Involved:
1. Deduction under section 36(1)(iii) for interest paid on borrowed funds for business expansion.
2. Inclusion of excise duty, CST, and ST in total turnover for section 80HHC calculation.
3. Exclusion of 90% of gross or net interest for section 80HHC calculation.
4. Consideration of negative figure in section 80HHC(3) proviso calculation.
5. Disallowance of interest on loans made to sister concerns.

Detailed Analysis:

1. Deduction under Section 36(1)(iii) for Interest Paid on Borrowed Funds for Business Expansion:
The assessee-company's claim for deduction under section 36(1)(iii) amounting to Rs. 1,95,89,810 was initially rejected by the CIT(A). The Tribunal, however, found that the issue was covered in favor of the assessee by previous decisions in the assessee's own case for earlier assessment years. The Tribunal noted that judicial pronouncements, including those from the Bombay High Court and the Supreme Court, supported the view that interest on borrowings for business expansion is deductible under section 36(1)(iii), even if the assets acquired with such borrowed funds are not put to use during the relevant previous year. Consequently, the Tribunal directed the Assessing Officer to allow the deduction claimed by the assessee.

2. Inclusion of Excise Duty, CST, and ST in Total Turnover for Section 80HHC Calculation:
The CIT(A) had erroneously held that excise duty, CST, and ST should form part of the total turnover for the purpose of section 80HHC relief. The Tribunal, however, found that this issue was also covered in favor of the assessee by previous decisions in the assessee's own case. The Tribunal referred to judicial pronouncements from various High Courts, including the Madras, Bombay, Rajasthan, and Calcutta High Courts, which held that excise duty and sales tax should be excluded from the total turnover for section 80HHC purposes. Following these precedents, the Tribunal directed the Assessing Officer to exclude excise duty, CST, and sales tax from the total turnover for computing the deduction under section 80HHC.

3. Exclusion of 90% of Gross or Net Interest for Section 80HHC Calculation:
The issue was whether 90% of gross or net interest should be excluded from the profits of the business for section 80HHC calculation. The Tribunal found that the Delhi Special Bench of ITAT in the case of Lalsons Enterprises had held that if there is a direct nexus between interest earned and interest paid, only the net interest should be excluded to the extent of 90%. Since the interest received by the assessee from its customers was directly related to its business, the Tribunal directed the Assessing Officer to exclude only the net interest to the extent of 90% for computing the profits of the business as per Explanation (baa) below section 80HHC.

4. Consideration of Negative Figure in Section 80HHC(3) Proviso Calculation:
This ground was not pressed by the learned counsel for the assessee before the Tribunal and was accordingly dismissed as not pressed.

5. Disallowance of Interest on Loans Made to Sister Concerns:
The CIT(A) had upheld the disallowance of Rs. 1,90,000 on account of interest attributable to interest-free loans given to a sister concern. The Tribunal noted that similar disallowances in the assessee's own case for earlier assessment years had been consistently deleted by the Tribunal. The Tribunal observed that the loan in question was an old one, and no disallowance was made in the year when the loan was sanctioned. Following the consistent decisions in the assessee's favor for previous years, the Tribunal held that the disallowance was not justified and directed its deletion.

Conclusion:
The appeal of the assessee was partly allowed, with the Tribunal directing the Assessing Officer to allow deductions and exclusions as per the detailed analysis above.