2010 (12) TMI 521 - AT - Income Tax

Deduction u/s 80IB - assessee company had 6 manufacturing/trading units related to photo sensitized goods/chemicals and photographic equipment etc. at various locations, along with return of income filed, the assessee submitted its P and L A/c showing its manufacturing/trading activities in different products, unit-wise - Apropos interest receipts, the AO held that the interest earned had been derived from FDRs kept as margin money/bank guarantees for import of raw-material, due to which, the interest earned was to be excluded from the profits of the eligible units for calculation of deduction u/s 80IB of the Act Regarding the insurance claims received by the assessee on account of goods in transit, the AO relied on CIT vs. Khemka Container P. Ltd. , 275 ITR 559 (P and H) to hold that as such claims received could not be held to be income derived from industrial undertaking so as to qualify deduction u/s 80IB of the Act Regarding disallowance u/s 14A - Rule 8D of the I.T. Rules - This was done without pointing out any inaccuracy in the method of apportionment or allocation of expenses, as adopted by the assessee - The onus was on the AO to establish any such expenditure. This onus has not been discharged - Appeal is dismissed

Summary

Issues involved:
1. Deduction u/s 80IB for insurance claims received by the assessee.
2. Disallowance u/s 14A of the Income Tax Act.

Analysis:

Issue 1: Deduction u/s 80IB for insurance claims received by the assessee:
The appeal was against the order passed by the CIT(A) for assessment year 2007-08. The AO observed that the assessee had excluded interest income and other miscellaneous receipts from its turnover in Dadra and Samba units. The assessee argued that interest income was earned on deposits made for business purposes and that insurance claims were directly related to the business of the eligible units. The CIT(A) allowed miscellaneous receipts, excess provision, and excess depreciation as eligible for deduction. The AO, however, excluded interest income and insurance claims from deduction u/s 80IB. The CIT(A) directed the AO to include the insurance claim amounts for calculating the deduction u/s 80IB. The tribunal upheld the CIT(A)'s decision, citing a relevant case law and rejecting the AO's argument that insurance receipts do not qualify for deduction u/s 80IB.

Issue 2: Disallowance u/s 14A of the Income Tax Act:
The AO made a disallowance under section 14A by applying Rule 8D of the Income Tax Rules. The CIT(A) restricted the disallowance amount, considering the expenses disallowed by the assessee. The department appealed this decision, arguing that the disallowance was correctly made by the AO as per Rule 8D. The tribunal examined the case and found that the AO did not establish any expenditure incurred by the assessee for earning dividend income. The tribunal referred to various judicial precedents emphasizing the need for a clear finding of incurring expenditure before making disallowances under section 14A. As the AO failed to discharge the onus of establishing the nexus between expenses and exempt income, the tribunal confirmed the CIT(A)'s decision to restrict the disallowance. The appeal by the department was dismissed.

In conclusion, the tribunal upheld the CIT(A)'s decisions on both issues, confirming the inclusion of insurance claim amounts for deduction u/s 80IB and restricting the disallowance u/s 14A based on the lack of evidence of expenditure related to exempt income. The appeal filed by the department was dismissed.