2014 (1) TMI 297 - AT - Income Tax

Depreciation - Held that - Following Plastblends India Limited Vs. CIT 2009 (10) TMI 39 - BOMBAY HIGH COURT - The quantum of deduction under section 80-IA is not dependent upon the assessee claiming or not claiming depreciation, because, under section 80-IA the quantum of deduction has to be determined by computing total income from business after deducting all deductions allowable under sections 30 to 43D of the Act - For the purposes of deduction under Chapter VI-A, the gross total income has to be computed, inter alia, by deducting the deductions allowable under sections 30 to 43D of the Act, including depreciation allowable under section 32 of the Act, even though the assessee has computed the total income under Chapter IV by disclaiming the current depreciation - Decided against assessee. Interest income on fixed deposits - Held that - Following CIT Vs. Pandian Chemicals Ltd 2003 (4) TMI 3 - SUPREME Court - Incentive u/s.80IB is given to encourage industrial activity, hence deduction is given on income from industrial activity not on interest income from mere depositing the amount with bank or any other institution - interest income from fixed deposits being not the income from industrial activity is not eligible for deduction under section 80IB of the Act. The assessee has claimed set off of the interest expenditure against the interest income pleading that the said expenditure has direct nexus with the interest income - The said contention of the assessee has not been adjudicated by the authorities below - The issue has been restored for fresh adjudication. Whether disallowances made u/s 14A be added to compute book profits u/s 115JB - Held that - Following Godrej Consumer Products Ltd 2013 (11) TMI 1245 - ITAT MUMBAI - On combined reading of section 14A with clause (f) of the explanation to section 115JA or clause (f) of the explanation (1) to section 115JB - It can be observed that they do not have any type of conflict with each other. What has been provided under sub section (1) of section 14A is that the expenditure incurred for exempt income is not allowable as a deduction whereas under sub section (2) a method of computation of such expenditure has been provided and in sub section 3 to section 14A it has been mentioned that such method would be applicable even in cases where the assessee claims that no expenditure has been incurred by him in relation to exempt income - Under clause (f) of the explanation (1) of section 115JB it has been provided that the amount of expenditure relatable to exempt income is to be added back in the book profits while computing tax under section 115JB - On perusal of the provisions of section 14A along with section 115JB, it becomes clear that the expenditure relatable to exempt income as provided under sub section (1) of section 14A is required to be added back while computing book profit under section 115JB - Decided against assessee.

Summary

Issues Involved:

1. Disallowance of depreciation claims.
2. Treatment of interest income for deduction under section 80IB.
3. Disallowance of expenses under section 14A.
4. Set-off of interest income against interest expenses.
5. Addition of disallowed expenses under section 14A to book profits under section 115JB.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation Claims:

The assessee claimed depreciation on units Daman-II and Baddi-I, which were eligible for 80IB deduction. The Assessing Officer (AO) disallowed Rs. 2,24,96,821/- for A.Y. 2007-08 and Rs. 1,02,20,038/- for A.Y. 2008-09, as the assessee had not claimed depreciation earlier to maximize 80IB deductions. The CIT(A) upheld this disallowance, relying on the Mumbai High Court decision in Plastblends India Limited Vs. CIT, which stated that the quantum of deduction under section 80-IA must be determined after deducting all allowable deductions, including depreciation. This issue was decided against the assessee.

2. Treatment of Interest Income for Deduction under Section 80IB:

For A.Y. 2007-08, the AO treated interest income from fixed deposits as "income from other sources," disallowing its deduction under section 80IB. The CIT(A) confirmed this, citing the Supreme Court decision in CIT Vs. Pandian Chemicals Ltd., which held that interest on deposits is not derived from industrial activity. Similarly, for A.Y. 2008-09, the CIT(A) cited the Supreme Court decision in CIT vs. Liberty India, confirming that such interest income is not eligible for deduction under section 80IB. The Tribunal upheld these findings.

3. Disallowance of Expenses under Section 14A:

For A.Y. 2008-09, the AO disallowed expenses under section 14A read with Rule 8D, which was partly confirmed by the CIT(A). The CIT(A) directed the AO to exclude interest on term loans from the disallowance calculation. The Tribunal found no infirmity in the CIT(A)'s order, agreeing with the AO's well-reasoned dissatisfaction regarding the assessee's claim that no disallowance should be made.

4. Set-off of Interest Income Against Interest Expenses:

The assessee claimed that interest expenses should be set off against interest income due to a direct nexus. This issue was not adjudicated by the authorities below. The Tribunal restored this matter to the AO, directing a fresh adjudication after giving the assessee an opportunity to present its case. If a direct nexus is established, the AO should allow the set-off.

5. Addition of Disallowed Expenses under Section 14A to Book Profits under Section 115JB:

The assessee contested the addition of disallowed expenses under section 14A to book profits under section 115JB. The Tribunal upheld the lower authorities' action, referencing a co-ordinate bench decision in "M/s. Godrej Consumer Products Limited," which held that disallowed expenses under section 14A should be added back while computing book profits under section 115JB. The Tribunal directed that any expenditure found disallowable under section 14A should be added back while computing book profit under section 115JB.

Conclusion:

The appeals were partly allowed for statistical purposes, with specific directions for fresh adjudication on the set-off of interest expenses against interest income. The Tribunal upheld the disallowances and treatment of interest income as per the cited legal precedents.