2010 (2) TMI 1249 - AT - Income Tax

Issues Involved:
1. Adjustment of the value of closing stock by the amount of excise duty u/s 145A.
2. Disallowance of excess payment of interest to specified persons u/s 40A(2)(b).
3. Eligibility of certain receipts for deduction u/s 80HHC.
4. Eligibility of certain receipts for deduction u/s 80IB.

Summary:

1. Adjustment of the value of closing stock by the amount of excise duty u/s 145A:
The assessee valued its closing stock of raw material net of excise duty. The A.O. held that u/s 145A, the closing stock should include excise duty, leading to an addition of Rs. 45,89,259/-. The Ld. CIT(A) confirmed this, citing it as a one-time adjustment for the assessment year 1999-2000. The Tribunal, referencing the Delhi High Court's decision in Mahavir Aluminium Limited, ruled that adjustments should be made to all items covered u/s 145A, not just closing stock. Consequently, the assessee's ground was allowed.

2. Disallowance of excess payment of interest to specified persons u/s 40A(2)(b):
The A.O. disallowed Rs. 1,38,850/- for interest paid to the Director at 15% per annum, deeming it excessive compared to the 13.25% paid on bank loans. The Ld. CIT(A) upheld this disallowance. However, the Tribunal noted that the effective interest rate on bank loans, considering quarterly compounding, was not less than 14%, and bank loans required securities, unlike the unsecured loans from the Director. The Tribunal deleted the disallowance, referencing past decisions in the assessee's favor.

3. Eligibility of certain receipts for deduction u/s 80HHC:
The A.O. excluded certain receipts from the profit of business for deduction u/s 80HHC. The Ld. CIT(A) included insurance moneys and sale of by-products but excluded interest received and reimbursement of I.S.O. fee. The Tribunal ruled that interest from customers should be included in total turnover but not in business profits, and only net interest on FDRs should be excluded if a nexus is established. The reimbursement of I.S.O. fee and insurance claims were remanded to the A.O. for verification. The sale of empty drums was upheld as part of business profits. This ground was partly allowed.

4. Eligibility of certain receipts for deduction u/s 80IB:
The A.O. and Ld. CIT(A) excluded certain receipts from deduction u/s 80IB, deeming them not derived from the industrial undertaking. The Tribunal dismissed the claim for incentive (D.E.P.B) based on the Supreme Court's decision in Liberty India vs. CIT. However, it accepted the sale of by-products and insurance claims as eligible, and remanded the refund of I.S.O. fee to the A.O. for verification. Interest on FDRs was held ineligible, while interest from domestic customers was deemed eligible. This ground was partly allowed.

Other Appeals:
The issues in I.T.A.No. 350/Ind/2008 and I.T.A.No. 351/Ind/2008 were identical to those in I.T.A.No. 768/Ind/2006 and were decided similarly. The appeals were partly allowed.

Conclusion:
All the appeals were partly allowed. This order was pronounced in the open court on 26th February, 2010.

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