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2012 (9) TMI 732 - AT - Income TaxDisallowance u/s. 14A - CIT(A) deleted the addition - Held that - As decided in Maxopp Investment Ltd. & Others Versus Commissioner of Income Tax 2011 (11) TMI 267 - DELHI HIGH COURT as under the expression expenditure incurred refers to actual expenditure and not to some imagined expenditure. The actual expenditure that is in contemplation u/s. 14A(1) of the Act is the actual expenditure in relation to or in connection with or pertaining to exempt income - as in the present case A.O. had made the disallowance for interest and other expenses pertaining to the investments on an estimate basis at 10% of the dividend income A.O. has not given any finding with respect to incurring of expenses for earning tax free income. Thus disallowance of expenses on adhoc basis @ 10% of dividend income without giving any finding of fact warrants to be deleted - in favour of assessee. Inclusion of amount of sales tax and excise duty while computing the total turnover for the purpose of deduction u/s. 80HHC - CIT (A) directed to reduce the addition - Held that - As decided in CIT Versus Lakshmi Machine Works 2007 (4) TMI 202 - SUPREME COURT excise duty and sales tax were includible in the total turnover , which was the denominator in the formula contained in section 80HHC(3) as it stood in the material time whereas amendments to section 80HHC(3) indicate exclusion of book profits but reasoning in this judgment is confined to the workability of the formula in section 80HHC(3) as it stood at the material time - in favour of assessee. Computation of deduction u/s 80HHC - 90% exclusion of net interest/rent or gross interest/rent - Held that - As the facts in the year under appeal are identical to that of earlier year wherein the co-ordinate Bench has taken a view with respect to interest income and held that 90% of not the gross interest/rent but only the net interest/rent have to be reduced from business profits while computing deduction u/s. 80HHC. Further in the case of ACG Associates Capsules (P) Ltd. (2012 (2) TMI 101 - SUPREME COURT OF INDIA) the Hon ble Apex Court has held that net interest needs to be reduced under Cl.(1) of Explanation(baa) to Sec. 80HHC for determining profits of business. Thus 90% of the net interest be reduced for determining profit for the purpose of deduction u/s. 80HHC. We therefore direct the A.O. to allow the deduction after verification - in favour of assessee. Computation of deduction u/s. 80HHC - receipt of insurance claim - Held that - there is no profit element involved in insurance receipts, as the insurance claim is purely for the recovery of loss of material and asset of the company due to damage to the material and assets. We are of the view that the expenditure incurred by the assessee on material and assets lost due to damage is more than the insurance claim and there was no income to the assessee in the nature of insurance claim - the same will not be included either in the total turnover nor in the business profits of the assessee for the purpose of computation of deduction u/s. 80HHC of the Act - in favour of assessee. Computation of deduction u/s. 80HHC - brokerage of investment - Held that - As this brokerage income in any way is not related to export earning but the expenditure relating to this brokerage income of any expenditure, the same will be reduced and only net income has to be excluded to the extent of 90% under clause (baa) while computing deduction u/s. 80HHC - partly in favour of assessee. Adhoc disallowance of 5% of Sales promotion - Held that - The co-ordinate Bench on identical matter, in assessee s own case, in earlier year has decided the matter by holding that the assessee has not vouched the expenses and the AO on scrutiny found that these expenses include the office expenses incurred at its branches at Madras, Bombay, Delhi and Kolkata and on scrutiny of these expenses finds that there are many expenses which have been incurred in providing tea, coffee, refreshments cold drinks, etc. to various visitors but nature of all these expenses reveals that these are many expenses which are not subject to verification and not properly vouched also - even now before that the assessee could not adduce anything to controvert that the expenses are vouched fully and there is no personal element in these expenditures accordingly the disallowance is confirmed - against assessee. Disallowance of Interest on loan - loan is for nonbusiness purpose - Held that - That Revenue has not brought any nexus of borrowed funds being used for investments and the basis of the conclusion is on the basis of assumption. On the other hand the assessee has demonstrated with the help of details and its accounts that the investments have been made out of the sale of investments and out of free reserves. It has not utilized unsecured loans for the purpose of making investments - as Revenue has not been in a position to rebut the facts by bringing any material on record no disallowance can be warranted - in favour of assessee.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act. 2. Computation of total turnover for the purpose of deduction under Section 80HHC. 3. Reduction of 90% of certain incomes from business profits for Section 80HHC deduction. 4. Adhoc disallowance of sales promotion expenses. 5. Adhoc disallowance of office expenses. 6. Disallowance of interest on loan treated as non-business purpose. Issue-wise Detailed Analysis: 1. Disallowance under Section 14A of the Income Tax Act: The Revenue appealed against the deletion of disallowance of Rs. 12,96,839/- under Section 14A for expenses incurred to earn exempt dividend income. The Assessing Officer (A.O.) had estimated the disallowance at 10% of the dividend income. The CIT (A) deleted the disallowance, stating that the A.O. could not establish a direct relationship between the investments and interest-bearing funds. The Tribunal upheld the CIT (A)'s decision, citing the Delhi High Court's decision in Maxopp Investment Ltd. vs. CIT, which emphasized that disallowance under Section 14A requires actual expenditure and not estimated or imagined expenditure. 2. Computation of Total Turnover for the Purpose of Deduction under Section 80HHC: The A.O. included sales tax and excise duty in the total turnover for Section 80HHC deduction computation, which the assessee contested. The CIT (A) ruled in favor of the assessee, relying on the Supreme Court's decision in Lakshmi Machine Works, which excluded sales tax and excise duty from the total turnover. The Tribunal upheld the CIT (A)'s decision, noting that the issue was already settled in favor of the assessee in earlier years and by the Supreme Court. 3. Reduction of 90% of Certain Incomes from Business Profits for Section 80HHC Deduction: The A.O. reduced 90% of various incomes (interest on margin money, interest on ICD, calibration income, insurance claim, brokerage on investments, and lease rent) from business profits for Section 80HHC deduction. The CIT (A) gave partial relief, excluding certain incomes from the total turnover and business profits. The Tribunal upheld the CIT (A)'s decision, directing the A.O. to allow the deduction after verification, especially considering the Supreme Court's decision in ACG Associated Capsules (P) Ltd. vs. CIT, which mandated the reduction of net income and not gross income. 4. Adhoc Disallowance of Sales Promotion Expenses: The A.O. disallowed 5% of sales promotion expenses (Rs. 3,95,703/-) due to unverifiable and improperly vouched expenses. The CIT (A) upheld this disallowance. The Tribunal also upheld the disallowance, noting that similar disallowances were confirmed in the assessee's earlier years' cases. 5. Adhoc Disallowance of Office Expenses: The A.O. disallowed 10% of office expenses (Rs. 93,077/-) due to unverifiable and improperly vouched expenses. The CIT (A) upheld this disallowance. The Tribunal upheld the disallowance, citing similar decisions in the assessee's earlier years' cases. 6. Disallowance of Interest on Loan Treated as Non-Business Purpose: The A.O. disallowed Rs. 4,33,333/- as interest on a loan, assuming it was used for non-business purposes (investment in mutual funds). The CIT (A) upheld the disallowance. The Tribunal, however, deleted the disallowance, noting that the investments were made prior to receiving the loan and were funded from internal accruals and reserves. The Tribunal relied on the Bombay High Court's decision in Reliance Utilities and Power Ltd., which presumes that investments are made from interest-free funds if available. Conclusion: The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, providing relief on several grounds while upholding certain disallowances. The decisions were primarily based on established legal precedents and factual verifications.
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