2012 (7) TMI 587 - AT - Income Tax

Disallowance under section 14A - investment made by the assessee in the shares totaling ₹ 3.01 crores - Held that - where a business strategy had been adopted by the assessee by way of investment in shares of sick company in order to take over the said company for widening its operation of business, cannot be held to be investment per se - as the assessee has no intention to earn any dividend from the said investment as the company in which the amount was invested was running into losses - Rule 8D are applicable from assessment year 2008-09 and are not retrospective and year under appeal is assessment year 2006-07 - in favour of assessee. Disallowance under section 36(1)(iii) of the interest expenditure - Held that - In the case of the assessee where it has mixed funds available for its business activity, the plea of the assessee that it had interest free funds available for the purposes of advancing to its subsidiary cannot stand - transfer of funds in the range of ₹ 5 lacs from month to month also does not justify the plea of commercial expediency - against assessee. Disallowance on account of interest capitalized for the period prior to putting the assets to use - Held that - Considering the facts and circumstances of the case where the assessee has failed to establish its case of availability of non-interest bearing funds and specially in view of the mixed pool of funds available with the assessee no merit in the present ground of appeal raised by the assessee - against assessee. Dis allowance of deduction u/s 80IB/80IC on AMC charges - Held that - as AMC charges received by the assessee are directly relatable to the business carried on by the assessee of manufacturing, commissioning and erection of cooling system and consequently the assessee is eligible to the claim of deduction u/s 80IB/80IC - in favour of assessee. Dis allowance of deduction u/s 80IB/80IC on bad debts recovered - Held that - The amount received on recovery of bad debts is income derived from industrial undertaking and as the outflow of bad debts written off is allowable as a deduction while computing the income of the industrial undertaking eligible for deduction under section 80IB/80IC consequently, the inflow of the amount of bad debts recovered is includible as profits of eligible unit, on which deduction under section 80IB/80IC is claimed - in favour of assessee. Dis allowance of deduction u/s 80IA - Held that - assessee is entitled to the benefit of deduction under section 80-IA both on the manufactured items and the bought out components, used for the erection of cross flow (XE series) and counter flow (CM series) cooling tower and is not entitled to any deduction under section 80-IA on Round Bottle (RB) Cooling Towers and bought out components used for erection of Round Bottle Cooling Towers - partly in favour of assessee. Dis allowance of deduction u/s 80IB/80IC on bought out components - Held that - Even after assembling the unit the assessee was also providing the services by the AMC of the said unit in entirety and we find no merit in the observation of the Assessing Officer to the contrary - in favour of assessee. Charging of interest u/s 234B and 234C being consequential is dismissed - in favour of assessee.

Issues Involved:
1. Re-computation of book profits under section 115JB.
2. Deduction of bad debts under section 36(1)(vii).
3. Allowability of prior period expenses.
4. Classification of employee benefit expenses as ascertained or contingent liability.
5. Eligibility for deduction under sections 80IB and 80IC.
6. Disallowance under section 14A.
7. Disallowance under section 36(1)(iii).
8. Deduction on AMC charges under sections 80IB/80IC.
9. Deduction on recovery of bad debts under sections 80IB/80IC.
10. Deduction on bought-out components under sections 80IB/80IC.
11. Deduction on high sea sales under sections 80IB/80IC.
12. Re-computation of book profits under section 115JB related to section 80HHC.

Issue-wise Detailed Analysis:

1. Re-computation of Book Profits under Section 115JB:
The Assessing Officer added Rs. 14,05,700 to the book profits under section 115JB due to disallowance under section 14A. The CIT(A) deleted this addition based on the Supreme Court's ruling in Apollo Tyres, which limits the AO's jurisdiction to only the adjustments specified in the Explanation to section 115JB. The tribunal upheld the CIT(A)'s decision, stating that the disallowance under section 14A is not covered by the clauses mentioned in the Explanation to section 115JB.

2. Deduction of Bad Debts under Section 36(1)(vii):
The AO disallowed Rs. 39,68,062 as bad debts due to lack of evidence. The CIT(A) admitted additional evidence and allowed the claim in principle, directing the AO to verify if the amounts were shown as income in previous years. The tribunal upheld this decision, emphasizing the necessity to fulfill the conditions laid down in section 36(2).

3. Allowability of Prior Period Expenses:
The AO disallowed Rs. 16,49,912 as prior period expenses due to lack of details. The CIT(A) allowed Rs. 13,68,671, which the assessee had already added back to its income. The tribunal remitted the issue back to the AO for verification, ensuring no double disallowance.

4. Classification of Employee Benefit Expenses as Ascertained or Contingent Liability:
The AO disallowed Rs. 4,19,39,972 booked as employee benefit expenses, considering it a contingent liability. The CIT(A) allowed the claim, citing a special resolution and immediate allotment of shares. The tribunal agreed, noting that the liability had crystallized on 31.03.2006, and the expenditure was not contingent.

5. Eligibility for Deduction under Sections 80IB and 80IC:
The AO denied the deduction under sections 80IB/80IC, considering it a reconstruction of business. The CIT(A) allowed the claim, referencing a circular and tribunal rulings that the deduction is available to the undertaking, not the owner. The tribunal upheld this, stating that the business transfer did not constitute reconstruction.

6. Disallowance under Section 14A:
The AO disallowed Rs. 14,05,700 under section 14A, applying Rule 8D retrospectively. The CIT(A) upheld this. The tribunal disagreed, noting the investment was a business strategy, not for earning dividend, and Rule 8D is not retrospective. The disallowance was thus deleted.

7. Disallowance under Section 36(1)(iii):
The AO disallowed Rs. 4,40,150 for interest on advances to a subsidiary and Rs. 73,066 for interest capitalized on fixed assets. The CIT(A) upheld these disallowances. The tribunal confirmed the disallowance on advances but upheld the CIT(A)'s direction to capitalize interest based on debt-equity ratio.

8. Deduction on AMC Charges under Sections 80IB/80IC:
The AO disallowed the deduction on AMC charges, considering them not derived from manufacturing. The CIT(A) upheld this. The tribunal, referencing the Himachal Pradesh High Court's ruling, allowed the deduction, noting AMC charges are directly related to the business.

9. Deduction on Recovery of Bad Debts under Sections 80IB/80IC:
The AO disallowed the deduction on recovered bad debts. The CIT(A) upheld this. The tribunal allowed the deduction, referencing the Hyderabad Bench's ruling that recovery of bad debts is income derived from the industrial undertaking.

10. Deduction on Bought-out Components under Sections 80IB/80IC:
The AO disallowed the deduction on profits from bought-out components. The CIT(A) upheld this, referencing the Punjab & Haryana High Court's ruling. The tribunal, referencing the Mumbai Bench's ruling, allowed the deduction, noting the bought-out components were integral to the manufactured systems.

11. Deduction on High Sea Sales under Sections 80IB/80IC:
The AO disallowed the deduction on high sea sales, considering it trading income. The CIT(A) upheld this. The tribunal confirmed that high sea sales profits are not derived from manufacturing and thus not eligible for deduction.

12. Re-computation of Book Profits under Section 115JB Related to Section 80HHC:
The AO reworked the book profits under section 115JB by reducing the deduction under section 80HHC. The tribunal, referencing the Supreme Court's ruling in Ajanta Pharma, directed the AO to recompute the book profits, allowing the full deduction under section 80HHC.

Conclusion:
The tribunal's decision addressed multiple issues, providing clarity on the application of various sections of the IT Act, particularly concerning deductions under sections 80IB/80IC, disallowances under section 14A, and the computation of book profits under section 115JB. The tribunal upheld the CIT(A)'s decisions in several instances, emphasizing the importance of fulfilling statutory conditions and correctly interpreting the provisions of the Act.

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