2013 (5) TMI 447 - AT - Income Tax

Disallowance of interest at the rate of 18% - Held that - It is seen that a sum of Rs.41 lakhs was advanced during the year under consideration out of export proceeds received by the assessee. It means that the assessee has advanced the amount to its sister concern out of the profit of the year. Therefore, on this amount, disallowance of interest was not justified. However, a sum of Rs.29 lakhs was advanced on 28-3-2008 out of packing credit limits obtained by the assessee, therefore, on this amount, the disallowance has to be made. Partly in favour of assessee. Coputaion of profit derived from export of EOU for the purpose of computing deduction u/s 10B - Exclusion of interest received on margin money - Held that - Applying the case of ACG Associated Capsules P. Ltd 2012 (2) TMI 101 - SUPREME COURT OF INDIA to this case AO directed that interest income has to be set off against interest expenditure. If the interest expenditure is less or the interest income is more then the difference of excess interest received by the assessee is to be reduced while calculating the deduction under Section 10B. Sale of bardana and waste material generated during course of production of industrial undertaking has a direct and immediate nexus with industrial undertaking and, therefore, deduction under Section 80IB on the amount of sale of bardana and waste material generated during course of production is allowable. sEE Nirma Industries Ltd. Vs. ACIT, 2005 (4) TMI 242 - ITAT AHMEDABAD & Wippro Limited Vs. DCIT, reported in 2005 (6) TMI 210 - ITAT BANGALORE-B). Therefore, the action of the AO in treating the sale of bardana as income from other sources, as CIT(A), is not justified. In favour of assessee. Allowance of deduction under Section 10B by the AO at 90% of the profit derived from export of EOU - Held that - Assessee deserves to succeed on this issue also. It is seen that the 90% deduction was restricted only for one year i.e. for assessment year 2003-04, otherwise deduction under Section 10B is allowable at 100%. In earlier year also, the deduction was allowed 100%. Therefore,direct the AO to allow 100% deduction against 90% directed by the CIT.

Summary

Issues:
1. Disallowance of interest on advances made to sister concern.
2. Treatment of interest received on margin money and sale proceeds of Bardana for deduction under Section 10B.
3. Deduction under Section 10B restricted to 90% by AO.

Issue 1: Disallowance of interest on advances made to sister concern
The AO disallowed a portion of interest on advances made to sister concerns by the assessee. The CIT(A) restricted the disallowance to a lower amount, considering the source of funds and nature of advances. The ITAT found that disallowance was not justified on advances made out of profits, but upheld the disallowance on advances made from packing credit limits. The ITAT sustained a partial disallowance based on the written submission by the assessee, ordering accordingly.

Issue 2: Treatment of interest received on margin money and sale proceeds of Bardana for deduction under Section 10B
Regarding interest received on margin money and sale proceeds of Bardana, the ITAT referred to relevant legal precedents. It directed the AO to set off interest income against interest expenditure for computing deduction under Section 10B. The ITAT ruled in favor of the assessee, allowing the deduction on the sale proceeds of Bardana as it had a direct nexus with the industrial undertaking, contrary to the AO's treatment.

Issue 3: Deduction under Section 10B restricted to 90% by AO
The AO disallowed the deduction claimed under Section 10B, citing non-filing of audit report and business reconstruction. The CIT(A) allowed the deduction at 90% instead of 100%, disagreeing with the assessee's interpretation of the restriction. The ITAT found that the 90% deduction was applicable only for one year (2003-04) and directed the AO to allow 100% deduction, contrary to the CIT(A)'s decision. The ITAT ordered in favor of the assessee, allowing the appeal in part.

In conclusion, the ITAT's judgment addressed the issues of interest disallowance, treatment of interest income, and deduction under Section 10B. It provided detailed reasoning based on legal principles and precedents, ultimately allowing the appeal in part and directing the AO to make appropriate adjustments in line with the findings.