2013 (7) TMI 697 - HC - Income Tax

Disallowance u/s 37 - Services rendered by the commission agents - Tribunal deleted the disallowance - Held that - entire issue hinges on appreciation of material on record. The Commissioner as well as the Tribunal concurrently held that there was sufficient evidence on record of the assessee having paid commission to the agents who had rendered service as per the agreements. Such payments were made through cheques and were found to be genuine. Commission agents in no way related to the assessee company and the payments were duly reflected in their income returns - Decided against Revenue. Disallowance u/s 14A - Investment in subsidiaries and administrative expenses - Held that - Tribunal has bifurcated the expenditure in two parts first related to investment of Rs. 5907.18 lakhs in foreign subsidiaries it was held that the dividend income from such subsidiaries is taxable in India and that therefore Section 14A would have no applicability. The remaining amount pertain to investment of Rs. 38 Crores rounded off made in Indian subsidiaries. In this respect the Tribunal noted that the assessee had to its disposal own interest free funds many times over the investment in question. As per the balance sheet as on 31st March 2005 the assessee had interest free fund of Rs. 929.57 Crores - Decided against Revenue. Deduction u/s 80IB - Tribunal granted deduction - Held that - Following decision of Nirma Industries Limited v. Deputy Commissioner of Income-Tax 2006 (2) TMI 92 - GUJARAT High Court - Decided against Revenue.

Summary

Issues:
1. Disallowance of sales commission expenses under section 37 of the Income Tax Act.
2. Disallowance under section 14A of the Income Tax Act for interest expenses on investments in subsidiaries and administrative expenses.
3. Disallowance of deduction under section 80IB of the Income Tax Act for interest income on late recovery of sale proceeds from debtors.
4. Disallowance of deduction under section 80IB of the Income Tax Act for duty drawback income.

Issue 1 - Disallowance of Sales Commission Expenses:
The case involved an appeal by the Revenue against the Income Tax Appellate Tribunal's decision confirming the deletion of disallowance of sales commission expenses. The Assessing Officer disallowed Rs. 9.34 crores of sales commission, questioning the actual services rendered by the commission agents. However, the CIT [A] and Tribunal found evidence that the payments were made as per agreements for services rendered by the agents, leading to increased sales. The Tribunal upheld the CIT [A] decision, emphasizing the evidence provided by the assessee and the genuine nature of the transactions. The Tribunal concluded that no interference was required as there was sufficient evidence supporting the commission payments.

Issue 2 - Disallowance under Section 14A:
The second issue involved disallowances made by the Assessing Officer under Section 14A for interest expenses on investments in subsidiaries and administrative expenses. The CIT [A] deleted these disallowances, which the Tribunal upheld. The Tribunal found that no disallowance could be made under Section 14A for investments in foreign subsidiaries as the dividend income was taxable in India. Regarding investments in Indian subsidiaries, the Tribunal noted the substantial interest-free funds available to the assessee, leading to the rejection of the Revenue's appeal.

Issue 3 - Disallowance under Section 80IB for Interest Income:
The third issue concerned disallowances under Section 80IB for interest income on late recovery of sale proceeds from debtors. The Tribunal confirmed the CIT [A] decision in favor of the assessee, citing a judgment in a similar case involving Nirma Industries Limited. The Tribunal declined to interfere, stating that the issue was squarely covered by the previous judgment, which discussed the nature of interest income in such scenarios.

Issue 4 - Disallowance under Section 80IB for Duty Drawback Income:
The final issue involved the assessee's claim for deduction under Section 80IB for duty drawback receipts. The Revenue relied on a Supreme Court decision, but the Tribunal favored the assessee based on a subsequent Delhi High Court decision. The Tribunal noted a direct correlation between exports and duty drawback receipts, distinguishing the case from the Supreme Court decision. Despite doubts about the conclusion, the Tribunal dismissed the Tax Appeal due to the small amount involved, leaving the question open for the Revenue to pursue in the future.