2012 (12) TMI 811 - AT - Income Tax

Transfer Pricing Arm length price determined by TPO u/s 92CA (3) Assessee argued that Comparable company is in the business of Exploration of oil and natural gas whereas the assessee is in the business of manufacture of lubricants - Held that - As concluding from the facts of the case, the order is set aside and the matter of transfer pricing for determining the ALP in respect of exports by the assessee to their AEs, to the file of the TPO for giving a reasoned order as to how the domestic prices are comparable in all respects to the exports made by the assessee to their AEs in terms of Rule 10B. Issue remand back to AO Disallowance of Capital Loss - AO disallowed advanced to one of the subsidiaries which was stated to have become sick and incurring loss Held that - From the order of AO & CIT(A) it is not clear as to the purpose of loan and the line of the business subsidiary. Therefore restore the issue of write off to the file of the Assessing Officer for considering de-novo in accordance with law. Issue remand back to AO Disallowance u/s 14A - Interest expense in relation to earning income u/s 10 Held that - Once the profit and loss account of the floriculture division has been accepted and the net profit(loss) excluded from the total income there is no question of further estimating disallowance of interest. Prior to insertion of sub-section 2 & 3 to Sec 14A, the AO has no power to artificially allocate certain expenditure as having been incurred in relation to earning the income which does not form part of the total income. In absence of any finding that some expenditure were definitely incurred in relation to earning dividend income no artificial allocation can be made so as to disallow the same. Delete the estimated addition of notional interest on borrowed funds deemed to have been utilized for floriculture division. In favour of assessee Deduction in respect of certain inter-corporate dividends AO restrict the deduction u/s 80M - Assessee contended that the balance non-corporate dividend should also be considered as deemed dividend for the purpose of deduction u/s 80M Held that - Since this aspect has not been adjudicated by either by the AO or by CIT(A), we restore this issue to the file of the AO for considering the issue de-novo in accordance with law after providing reasonable opportunity of being heard to the assessee. Issue remand back to AO Computation of book profits u/s 115JB Treatment of provision for doubtful debts Held that - In view of the amendments to Sec. 115JB introduced by the Finance (No.2) Act of 2009 inserting clause (i) to Explanation (1) to sub-section (2) to Sec. 115JB with respective effect from 01/04/2001, any amount set aside towards diminution in the value of assets should be added back to the book profits computed in accordance with part II & III of schedule VI to the Companies Act. It has been held that the provision for bad and doubtful debts is a provision for diminution in the value of assets as decided in case of HCL Comnet Systems & Services Ltd. (2008 (9) TMI 18 - SUPREME COURT). In favour of revenue Levy of interest u/s 234D Applicability of Sec. 234D Held that - Following the decision in case of Ekta Promoters (2008 (7) TMI 452 - ITAT DELHI-E) wherein it has been held that section 234 has been inserted by the Taxation Laws (Amendment) Act, 2003 with effect from 01.06.2003 applicable from AY 2004-05. Since the assessee s case falls in AY 2003-04, we direct the AO to delete the levy of interest. In favour of assessee Credit of TDS - Interest income received from UTI was taxed in the A.Y 2003-04 - TDS certificates for the taxes deducted by UTI were filed along with the return for A.Y 2004-05 because the TDS certificates were belatedly sent by UTI Held that - The TDS certificates have been filed in original and full particulars have been furnished, credit for TDS has not been given. Hence, AO is directed to give credit of TDS for AY 2003-04. In favour of assessee

Summary

Issues Involved:
1. Addition based on Arm's Length Price (ALP) of export transactions.
2. Disallowance of Rs. 3,28,162/- as capital loss.
3. Classification of interest income as "income from other sources."
4. Disallowance of notional interest on floriculture division.
5. Restriction of deduction under Section 80M.
6. Addition of provision for doubtful debts while computing book profits under Section 115JB.
7. Levy of interest under Section 234D.
8. Credit for taxes deducted at source (TDS).

Detailed Analysis:

1. Addition based on Arm's Length Price (ALP) of export transactions:
The primary issue was the addition of Rs. 50,28,877/- made by the Assessing Officer (AO) based on the ALP of export transactions with an Associated Enterprise (AE), determined by the Transfer Pricing Officer (TPO) under Section 92CA(3). The AO added this amount after applying the Comparable Uncontrolled Price (CUP) method and comparing domestic rates with permissible deductions. The assessee contested this addition, arguing that the TPO incorrectly denied various adjustments and ignored DEPB incentives. The CIT(A) upheld the TPO's findings, stating that export incentives are not directly linked to industrial undertakings and thus should not be included in the export price. The CIT(A) also rejected the assessee's claim for further deductions of fixed overheads from domestic prices. The appellate tribunal set aside the matter to the TPO for a reasoned order, allowing ground Nos. 1 to 3 for statistical purposes.

2. Disallowance of Rs. 3,28,162/- as capital loss:
The AO disallowed the amount advanced to a subsidiary, treating it as a capital loss rather than a revenue loss. The CIT(A) confirmed this view, relying on precedent cases. The appellate tribunal noted that the purpose of the loan and the business line of the subsidiary were not clear. If the subsidiary was in the same line of business or the advance was made in the course of business, the amount could be allowable as bad debt or business loss. The issue was restored to the AO for reconsideration, allowing this ground for statistical purposes.

3. Classification of interest income as "income from other sources":
The assessee argued that interest income should be assessed as business income. The CIT(A) upheld that it should be taxed as "income from other sources." The assessee did not press this issue due to no tax effect, and the ground was dismissed as not pressed.

4. Disallowance of notional interest on floriculture division:
The AO disallowed Rs. 10 lakhs as estimated expenditure on the floriculture division, which is exempt under Section 10. The CIT(A) reduced this to Rs. 9.50 lakhs. The assessee argued that no borrowed funds were used for the floriculture division. The appellate tribunal found that the issue was covered by a prior ITAT decision, which held that without a finding of actual expenditure related to exempt income, no artificial allocation should be made. The disallowance was deleted, allowing this ground.

5. Restriction of deduction under Section 80M:
The AO restricted the deduction under Section 80M to Rs. 13.07 lakhs, disallowing the balance. The CIT(A) confirmed this. The assessee contended that UTI dividends should be considered for deduction. The issue was restored to the AO for reconsideration, allowing this ground for statistical purposes.

6. Addition of provision for doubtful debts while computing book profits under Section 115JB:
The AO added Rs. 5,66,92,740/- being provision for doubtful debts to the book profits under Section 115JB, following a retrospective amendment and Supreme Court precedent. The appellate tribunal upheld this addition, dismissing grounds 9 to 12.

7. Levy of interest under Section 234D:
The issue was covered by a prior ITAT decision, which held that Section 234D applies prospectively from AY 2004-05. The appellate tribunal directed the AO to delete the interest levy for AY 2003-04, allowing this ground.

8. Credit for taxes deducted at source (TDS):
The assessee raised an additional ground for credit of TDS amounts. The appellate tribunal directed the AO to give credit for the TDS amounts of Rs. 21,08,971/- and Rs. 4,21,797/-, allowing this additional ground.

Conclusion:
The appeal was partly allowed for statistical purposes, with several issues restored to the AO for reconsideration and specific directions provided for others.