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2011 (4) TMI 873 - AT - Income TaxDisallowance u/s. 14A - borrowed funds had been diverted for non business purposes for investment in shares - Held that - Perusal of the Balance Sheet as on 31.3.2003 shows that the assessee has a reserve and surplus as on 312.3.2003 at Rs. 70.71 crores & 31.3.2002 was of Rs. 59.36 crores which has increased to Rs. 70.71 crores during the year ended 31.3.2003. The secured loans during the year ended 31.3.2002 was Rs. 19.62 crores which came down as on 31.3.2003 to Rs. 17.92 crores whereas the unsecured loans as on 31.3.2002 stood at Rs. 6.73 crores which also came down to Rs. 5.68 crores as on 31-3-2003. Thus the claim of the assessee that the assessee did have sufficient funds in the form of surpluses and reserves to cover the investment in the purchase of shares stands supported. No disallowance out of the interest expenditure as made by the AO and as confirmed by the CIT(A) is sustainable - in favour of assessee. Deduction u/s. 80HHC - AO excluded 90% of the share of expenses and cash discount - Held that - There is no mention of any portion of the same to be discounts nor has the break up of the said amount between the rentals recovered and the discounts been placed before us. Admittedly, the said amount is the rentals in relation to the warehouse. Whether it is from the dealers or from the group companies the recoveries are nothing but rentals. The same having been shown in the income side it would have to be deemed that these are subletting charges received by the assessee and consequently in view of the specific provisions of clause (baa) of the Explanation to section 80HHC, we are of the view that the exclusion of the 90% of the same is on the right footing and does not call for any interference - against assessee. Deduction u/s 80HHC after reducing the deduction u/s 80-IB - Held that - The issue is squarely covered by the decision of M/s. MRF Ltd., 2009 (10) TMI 653 - MADRAS HIGH COURT stating that for deduction u/s 80HHC the deduction allowed u/s 80IB need not be reduced from the business profits - AO is directed to grant deduction u/s 80HHC without reducing the deduction u/s. 80IB - in favour of assessee. Restricting the deduction u/s. 80-IB - overhead expenses attributed to the new industrial unit - Held that - As decided in Food Specialities Ltd. vs. ACIT 1995 (3) TMI 156 - ITAT DELHI the basis of turnover would be one of the factors for working out the reasonable amount of over head expenses attributable to the new unit. The other important factor was the increase in the overhead expenses incurred by the assessee after the setting up of the new unit. The increased expenditure could be apportioned between the old units and the new units on the basis of turnover. Thus in this view of the decision the issue is set aside and restored to the file of the AO to consider the actual expenses - in favour of assessee by way of remand. Inclusion of scrap sales in the total turnover while computing the deduction u/s 80HHC - Held that - As decided in CIT Versus K. RAVINDRANATHAN NAIR 2007 (11) TMI 10 - SUPREME COURT OF INDIA the scrap sales formed part of the gross total income and as per the provisions of clause (baa) of the Explanation to section 80HHC, 90% of the same is to be deducted from the business profits.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961. 2. Restriction of relief under Section 80HHC of the Income Tax Act. 3. Computation of deduction under Section 80HHC after reducing the deduction under Section 80-IB. 4. Restriction of deduction under Section 80-IB. 5. Inclusion of scrap sales in total turnover while computing deduction under Section 80HHC. Issue-wise Detailed Analysis: 1. Disallowance under Section 14A of the Income Tax Act, 1961: The assessee contested the disallowance of Rs. 1,86,26,364/- made by the Assessing Officer (AO) on the grounds that borrowed funds were diverted for non-business purposes, specifically for investment in shares. The CIT(A) upheld the disallowance under Section 14A. However, it was noted that the AO did not invoke Section 14A explicitly. The assessee argued that it had sufficient reserves and surpluses to cover the investments. The Tribunal found that the assessee's reserves and surpluses were indeed sufficient and thus, the disallowance of interest expenditure was not sustainable. Consequently, the disallowance was deleted, and the applicability of Section 14A was not addressed as it was not invoked by the AO. 2. Restriction of Relief under Section 80HHC of the Income Tax Act: The assessee challenged the CIT(A)'s decision to uphold the AO's restriction on the relief granted under Section 80HHC. The specific contention was regarding the exclusion of 90% of the share of expenses and cash discounts while computing the deduction. The Tribunal observed that the share of expenses was related to rent recovered from group companies using the warehouse leased by the assessee. It was deemed as rental income and, as per clause (baa) of the Explanation to Section 80HHC, 90% of such receipts were correctly excluded by the AO. The Tribunal upheld the CIT(A)'s order on this matter. 3. Computation of Deduction under Section 80HHC after Reducing the Deduction under Section 80-IB: The issue involved the reduction of the deduction under Section 80HHC by the amount of deduction under Section 80-IB. The Tribunal referred to the jurisdictional High Court's decision in CIT v. M/s. MRF Ltd., which held that deductions under Sections 80HH and 80-I are independent and can be claimed on the gross total income. Following this precedent, the Tribunal reversed the CIT(A)'s order and directed the AO to grant the deduction under Section 80HHC without reducing the deduction under Section 80-IB. 4. Restriction of Deduction under Section 80-IB: The assessee contested the restriction of deduction under Section 80-IB. Both parties agreed that the issue was covered by the Tribunal's decision in the assessee's own case for the assessment year 2001-02. The Tribunal followed the earlier decision, which directed the AO to consider actual expenses and apportion overhead expenses based on turnover. The issue was restored to the AO for reconsideration. 5. Inclusion of Scrap Sales in Total Turnover while Computing Deduction under Section 80HHC: The assessee argued against the inclusion of scrap sales in the total turnover for computing the deduction under Section 80HHC. The Tribunal noted that scrap sales are part of the business income and, as per the Supreme Court's decision in K. Ravindranathan Nair, 90% of such receipts must be excluded from business profits under clause (baa) of the Explanation to Section 80HHC. The Tribunal confirmed the CIT(A)'s finding on this issue. Conclusion: The assessee's appeal was partly allowed for statistical purposes. The Tribunal provided specific directions on each issue, upholding some of the CIT(A)'s decisions while reversing others based on established legal precedents. The order was pronounced on 21.04.2011.
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