2014 (10) TMI 252 - HC - Income Tax

Interest receivable on investment in capital WIP Explanation 8 to section 43(1) ignored or not Held that - Following the decision in Deputy CIT v. Core Health Care Ltd. 2008 (2) TMI 8 - SUPREME COURT OF INDIA - the provisions of Explanation 8 to section 43(1) of the Act has no relevance in respect of section 36(1)(iii) of the Act - the proviso to section 36(1)(iii) of the Act inserted by the Finance Act, 2003, with effect from April 1, 2004, is only prospective and would not apply to the earlier AYs Decided against revenue. Interest u/s 36(1)(iii) disallowed - Whether interest-free loan given by the assessee to its sister concern was admissible as deduction u/s 36(1)(iii) - Held that - The Tribunal rightly was of the view that the assessee had charged interest on loans to its sister concern not below the interest paid on the funds utilized for the said purpose as the plea of the assessee was that it had been charging interest at the rate of 15.5 per cent. from its sister concern and the average cost of borrowings to the assessee was also 15.5 per cent Decided against revenue. Deduction u/s 80HHC - Whether deduction u/s 80HHC of the Act is to be restricted in view of section 80-IB(13) read with section 80-IA(9) Held that - Following the decision in Commissioner of Income-tax (Central), Ludhiana Versus M/s Davinder Exports, Guru Nanak Dev Nagar, Rahon Road, Ludhiana 2011 (4) TMI 96 - PUNJAB AND HARYANA HIGH COURT - if deduction u/s 80-IA has been taken, deduction u/s 80HHC was not admissible in view of section 80-IB(13) read with section 80-IA(9) of the Act Decided in favour of revenue. Computation of deduction u/s 80HHC - Exclusion of export turnover Held that - The Tribunal rightly held that the plea of the assessee is that it has realised certain portion within the period extended by the competent authority - out of the total outstanding export invoices the assessee realized a sum within the extended period - the competent authority has allowed the assessee to realise the outstanding export invoices - there is no justification for excluding a sum from the export turnover for computing the deduction u/s 80HHC of the Act th matter is rightly remitted back to the AO Decided against revenue. Claim of proportionate indirect expenses - Whether the assessee was entitled to claim proportionate indirect expenses only in respect of the unit which was carrying on export activity whereas the assessee was carrying business in two units, i.e., Barnala I and Barnala II Held that - The Tribunal was rightly of the view that following the decision in Surendra Engg. Corp. Versus Assistant Commissioner Of Income-Tax 2002 (12) TMI 199 - ITAT BOMBAY-H - The Tribunal had only remanded the matter to the AO to decide the issue in the light of the aforesaid judgment Decided against revenue.

Issues Involved:
1. Disallowance of interest on investment in capital work-in-progress.
2. Disallowance of interest under section 36(1)(iii).
3. Computation of relief under section 80HHC without reducing the deduction eligible under section 80-IA/80-IB.
4. Exclusion of export turnover for computing the deduction under section 80HHC.
5. Computation of indirect costs of the Barnala unit in proportion to the export of trading goods to the total turnover.

Detailed Analysis:

Re: Question (i) - Disallowance of Interest on Investment in Capital Work-in-Progress

The issue pertains to whether the interest paid, which was relatable to investment in capital work-in-progress, should be allowed. The Supreme Court in Deputy CIT v. Core Health Care Ltd. [2008] 298 ITR 194 (SC) held that Explanation 8 to section 43(1) of the Act does not apply to section 36(1)(iii). The proviso to section 36(1)(iii), inserted by the Finance Act, 2003, effective from April 1, 2004, is prospective and does not apply to earlier assessment years. Consequently, the Tribunal's decision to allow the interest was upheld, and this question was answered against the Revenue.

Re: Question (ii) - Disallowance of Interest under Section 36(1)(iii)

The controversy here is whether the interest-free loan given by the assessee to its sister concern was admissible as a deduction under section 36(1)(iii). The Tribunal found that the assessee charged interest at 15.5% from its sister concern, which matched the average cost of borrowings. The Assessing Officer's adoption of an 18.5% interest rate was deemed arbitrary and unsupported by facts. The Tribunal concluded that the assessee's interest charges were not below the interest paid on the funds used, thus no disallowance was warranted. This question was also answered against the Revenue.

Re: Question (iii) - Computation of Relief under Section 80HHC

The issue is whether the deduction under section 80HHC should be restricted in view of section 80-IB(13) read with section 80-IA(9). The court referred to its earlier decision in CIT v. Davinder Exports, which held that if a deduction under section 80-IA is taken, the deduction under section 80HHC is not admissible due to section 80-IB(13) read with section 80-IA(9). This question was thus answered in favor of the Revenue.

Re: Question (iv) - Exclusion of Export Turnover for Computing Deduction under Section 80HHC

The issue involves whether the outstanding amount of export sale proceeds, which remained pending, should be disallowed for calculating the benefit under section 80HHC. The Tribunal noted that the competent authority (Reserve Bank of India) had allowed the assessee to realize outstanding export invoices within an extended period. The Tribunal directed the Assessing Officer to recompute the deduction under section 80HHC accordingly. No error was found in the Tribunal's decision, and this question was resolved against the Revenue.

Re: Question (v) - Computation of Indirect Costs of the Barnala Unit

The matter concerns whether the assessee was entitled to claim proportionate indirect expenses only for the unit carrying out export activities. The Tribunal relied on the Special Bench decision in Surendra Engg. Corporation v. Asst. CIT, which was affirmed by the Bombay High Court. The Tribunal remanded the issue to the Assessing Officer to decide in light of this decision. No infirmity was found in the Tribunal's approach, and this question was also resolved against the Revenue.

Conclusion:

The appeal was disposed of by addressing each question based on precedents and the Tribunal's findings. Questions (i), (ii), (iv), and (v) were answered against the Revenue, while question (iii) was answered in favor of the Revenue. The Tribunal's decisions were largely upheld, with specific directions for recomputation and adherence to established legal principles.

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