2011 (5) TMI 980 - AT - Income Tax

Summary

Issues Involved:
1. Deduction u/s 80HHC related to DEPB entitlements.
2. Deduction u/s 80IA for power project.
3. Disallowance of interest expenditure u/s 36(1)(iii).
4. Disallowance of house keeping charges u/s 40A(2)(b).

Summary:

1. Deduction u/s 80HHC related to DEPB entitlements:
The issue pertains to the re-computation of business profit and the allowance or rejection of deduction u/s 80HHC related to DEPB entitlements. The A.O. noted a negative profit after reducing 90% of export incentives, leading to the denial of deduction u/s 80HHC. The CIT (A) directed the A.O. to re-compute the profit following the method used in the preceding year. However, the Tribunal modified this direction, instructing the A.O. to follow the Bombay High Court's decision in CIT vs. Kalptaru Colour Chemicals, considering the entire sale proceeds of DEPB as profit and excluding 90% of it from the business profit for deduction eligibility. The A.O. is to pass a fresh order after allowing the assessee a reasonable opportunity of being heard.

2. Deduction u/s 80IA for power project:
The issue involves the eligibility of the assessee for deduction u/s 80IA for a power project. The A.O. rejected the claim citing reasons such as the enterprise not being a distinct entity, lack of separate plant and machinery, absence of government approval, non-maintenance of separate books, and incomplete address disclosure. The CIT (A) ruled in favor of the assessee, noting compliance with relevant provisions and the availability of necessary approvals and documents. The Tribunal upheld the CIT (A)'s decision, directing the A.O. to re-examine the Profit and Loss account of the power plant and compute the allowable deduction accordingly.

3. Disallowance of interest expenditure u/s 36(1)(iii):
The A.O. disallowed interest expenditure proportionate to investments in shares, citing lack of direct nexus between borrowed funds and investments. The CIT (A) deleted the disallowance, noting sufficient own funds generated from operations. The Tribunal confirmed the CIT (A)'s order, emphasizing the absence of direct nexus and the availability of own funds for investments, thus rejecting the Revenue's appeal.

4. Disallowance of house keeping charges u/s 40A(2)(b):
The A.O. disallowed house keeping charges citing excessive payments to related parties. The CIT (A) deleted the disallowance, and the Tribunal upheld this decision, referencing a similar ruling in the assessee's favor for the preceding year. The Tribunal found no difference in facts and rejected the Revenue's appeal on this issue.

Conclusion:
Both appeals of the Revenue are partly allowed for statistical purposes, with specific directions for fresh examination and computation by the A.O. in light of the Tribunal's findings and relevant judicial precedents.