2013 (12) TMI 902 - AT - Income Tax

Fall in G.P.rate - Held that - Following CIT Vs. Smt. Poonam Rani 2010 (5) TMI 57 - HIGH COURT OF DELHI - The AO has not pointed out any particular defect or discrepancy in the account books maintained by the assessee - The CIT(A) was satisfied that the assessee had furnished complete details, including quantitative details in respect of purchase of raw material, manufacture and sale of the finished products - The Assessing Officer had not invoked the provisions of Section 145(3) of the Act - The addition on estimate basis without rejecting the books of accounts was not justified - Decided against Revenue. Disallownace u/s 14A - Held that - The assessee made an investment in tax free bonds and units and earned tax free dividend income - The partners current capital was non-interest bearing and used for investment in mutual fund - Following assessee s own case for earlier A.Y. 2007-08 and 2008-09 - Nothing was brought on record to prove the nexus between the interest bearing funds and the investment in bonds and mutual funds on which exempted dividend income was earned by the assessee - The disallowance made by the Assessing Officer and sustained by the learned CIT(A) was not justified - Decided in favour of assessee. Depreciation on WEG installed - Held that - Following assessee s own case for earlier A.Y. 2008-09 - The assessee was eligible for depreciation under section 32 of the Act on the wind mills - The issue was restored for fresh adjudication. Interest on FDR - Held that - The assessee pledged the FDR as security for export oriented units (EOU) - The FDRs were pledged for commercial expediency of the assessee - Following CIT Vs. Jagdish Prasad M. Joshi 2008 (11) TMI 326 - BOMBAY HIGH COURT - It is to be considered as business income and eligible for deduction under section 10B of the Act - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of trading addition made by the Assessing Officer.
2. Sustaining disallowance under Section 14A.
3. Depreciation on WEG installed in the A.Y. 2008-09.
4. Addition of interest earned on FDR under Section 10B.

Issue-wise Detailed Analysis:

1. Deletion of Trading Addition Made by the Assessing Officer:
The department's grievance related to the deletion of a trading addition made by the Assessing Officer (AO). The AO noted a lower Gross Profit (GP) rate for the Non-Export Oriented Unit (Non-EOU) compared to the Export Oriented Unit (EOU) and applied a GP rate of 35.54% for Unit-I, resulting in an addition of Rs. 40,77,246/-. The assessee explained the differences in GP rates due to tax exemptions for the EOU unit and maintained separate books for both units. The CIT(A) observed that the AO did not reject the books of accounts or point out specific defects. The CIT(A) noted that the AO's comparison of the two units was inappropriate due to their different operational natures. The ITAT upheld the CIT(A)'s decision, stating that the AO's presumption was incorrect and that the addition without rejecting the books of accounts was not justified.

2. Sustaining Disallowance Under Section 14A:
The AO disallowed Rs. 15,05,443/- under Section 14A, considering the interest paid on borrowings used for investments in tax-free bonds and mutual funds. The assessee argued that no borrowed funds were used for these investments and that interest paid to partners was allowable under Section 40(b). The CIT(A) upheld the disallowance, but the ITAT found that no nexus was established between interest-bearing funds and the investments. The ITAT noted that the assessee had sufficient non-interest bearing funds and that similar disallowances were not made in previous years. Consequently, the ITAT deleted the disallowance.

3. Depreciation on WEG Installed in the A.Y. 2008-09:
The assessee contended that the depreciation issue was covered by an earlier ITAT order, which allowed depreciation on wind mills. The ITAT directed the AO to allow depreciation on the written down value as per the previous order, thus allowing the assessee's appeal for statistical purposes.

4. Addition of Interest Earned on FDR Under Section 10B:
The AO added Rs. 8,63,024/- as interest income from FDRs, not allowing exemption under Section 10B. The assessee argued that the FDRs were pledged for business purposes, making the interest business income. The CIT(A) upheld the addition, but the ITAT found that the FDRs were pledged for commercial expediency. Citing relevant case laws, the ITAT concluded that the interest income was business income and eligible for deduction under Section 10B, thus allowing the assessee's appeal.

Conclusion:
The ITAT dismissed the department's appeal and partly allowed the assessee's appeal, providing relief on the issues of trading addition, disallowance under Section 14A, and interest income from FDRs. The issue of depreciation was allowed for statistical purposes.