2013 (9) TMI 337 - AT - Income Tax

Disallowance of Interest - Loan to sister partnership firm - nature of loan, business purpose or personal purpose - Whether the interest-free amount advanced to AG Info Solutions (partnership firm) was for commercial expediency or not Held that - it has to be examined whether the funds advanced by the taxpayer company was used for the personal purpose or for business of the firm where the taxpayer company has its full interest. Since this aspect was not examined, this Tribunal is of the considered opinion that the matter needs to be re-examined. - In S. A. Builders Ltd. v. CIT 2006 (12) TMI 82 - SUPREME COURT it was held that, whenever there was a nexus between the expenditure and the purpose of business which need not necessarily be for the business of the taxpayer itself, the payment of interest cannot be disallowed - the orders of the lower authorities are set aside and the issue is remitted back to the file of the Assessing Officer - decided partly in favor of assessee. Disallowance of Depreciation - business premises known as DD Milestone . - The depreciation with regard to DD Milestone building has already been remitted back to the file of the Assessing Officer - In respect of the other two flats in Link Horizon, Marine Drive, Ernakulam and in Uni-Housing at Ernakulam the claim of the taxpayer is that the flats were given to the directors for the purpose of the taxpayer s business. Therefore, it has to be examined whether the flats were in fact given to the directors for the business purpose of the taxpayer or not. For the sake of consistency, this Tribunal is of the considered opinion that this issue also needs to be re-examined by the Assessing Officer. Accordingly, the orders of the lower authorities on this issue are set aside and the issue is remitted back to the file of the Assessing Officer for re-consideration. The Assessing Officer shall re-examine the issue afresh and find out whether the flats in question were used by the directors for the business needs of the taxpayer and thereafter will decide the issue in accordance with law after giving opportunity of hearing to the taxpayer. Exemption u/s 10A - whether, blending and packing of tea amounts to manufacture so as to qualify the taxpayer for claiming exemption under section 10A of the Act - Held that - Commissioner of Income-tax (Appeals) had rightly allowed the claim of the taxpayer - The judgment of the jurisdictional High Court is binding on this Tribunal Tata Tea Ltd. Versus ACIT 2010 (1) TMI 743 - Kerala High Court - industrial units engaged in the very same activity ; i.e., blending, packing and export of tea in the special economic zones and free trade zones, will continue to enjoy tax exemption under section 10A and section 10AA respectively. The still worse position is that the appellant would be denied of export exemption available under section 80HHC even to a merchant exporter - Provisions of section 10A and the EXIM policy and found that manufacture as defined under the EXIM policy has a wider and literal meaning covering tea blending as well - blending and packing of tea qualifies for exemption under section 10A of the Act. - Decided against the assessee.

Issues Involved:
1. Disallowance of interest.
2. Disallowance of depreciation on business premises.
3. Depreciation on two flats.
4. Exemption under section 10A of the Income-tax Act.
5. Disallowance of proportionate interest and advance made to partnership firm free of interest for assessment years 2005-06 and 2006-07.
6. Depreciation for assessment years 2005-06 and 2006-07.
7. Depreciation on flats at Link Horizon and Uni-Housing for assessment years 2005-06 and 2006-07.

Detailed Analysis:

1. Disallowance of Interest:
The taxpayer advanced Rs. 13,44,278 to AG Info Solutions, a partnership firm involving the taxpayer's directors, for software development. The Assessing Officer disallowed Rs. 1,61,313 as proportionate interest, questioning the commercial expediency since AG Info Solutions closed down. The Tribunal referred to the Supreme Court's judgment in S. A. Builders Ltd. v. CIT, which allows interest deduction if there is a nexus between expenditure and business purpose. It was determined that the Assessing Officer did not examine whether the funds were used for business or personal needs of the partners. The matter was remitted back for re-examination in light of the Supreme Court and Kerala High Court judgments.

2. Disallowance of Depreciation on Business Premises:
The taxpayer claimed depreciation on a building, "DD Milestone," where 2,928 sq.ft. was used for business, and 800 sq.ft. was let out. The lower authority disallowed the entire depreciation claim, citing rental income. The Tribunal noted that only the depreciation for the let-out portion should be disallowed. The issue was remitted back to verify the actual usage of the building and to decide accordingly.

3. Depreciation on Two Flats:
The taxpayer claimed depreciation on flats provided to directors for business purposes. The Department argued the flats were not used exclusively for the taxpayer's business. The Tribunal remitted the issue back to the Assessing Officer to verify the usage of the flats and decide based on whether they were used for business purposes.

4. Exemption under Section 10A:
The Department contested the taxpayer's eligibility for exemption under section 10A, arguing that blending and packing tea does not constitute "manufacture." The Tribunal referenced the Kerala High Court's judgment in Girnar Industries and Tata Tea Ltd., which found blending and packing of tea qualifies for exemption under section 10A. The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision allowing the exemption, noting the jurisdictional High Court's binding judgment.

5. Disallowance of Proportionate Interest and Advance Made to Partnership Firm Free of Interest for Assessment Years 2005-06 and 2006-07:
The Tribunal found the issue identical to the one for assessment year 2004-05 and remitted it back to the Assessing Officer for re-examination in light of the directions provided for the assessment year 2004-05.

6. Depreciation for Assessment Years 2005-06 and 2006-07:
Similarly, the Tribunal found the issue identical to the one for assessment year 2004-05 and remitted it back to the Assessing Officer for re-examination based on the directions provided for the assessment year 2004-05.

7. Depreciation on Flats at Link Horizon and Uni-Housing for Assessment Years 2005-06 and 2006-07:
The Tribunal remitted the issue back to the Assessing Officer for re-examination, consistent with the directions provided for the assessment year 2004-05, to verify if the flats were used for business purposes.

Conclusion:
The taxpayer's appeals for the assessment years 2004-05, 2005-06, and 2006-07 were allowed for statistical purposes, while the Department's appeal for the assessment year 2004-05 was dismissed. The Tribunal directed the Assessing Officer to re-examine the issues afresh, considering the relevant judgments and providing a reasonable opportunity for hearing to the taxpayer.

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