2015 (7) TMI 770 - AT - Income Tax

Disallowance of deduction under section 80 IB - exclusion of duty drawback from computation of eligible profit - Held that - As per the judgment of Hon ble Apex Court in Liberty India (2009 (8) TMI 63 - SUPREME COURT) export incentive in any form is not an income derived from industrial undertaking and these judgments of Hon ble Apex Court in context of deduction u/s 80HHC cannot help the assessee in a case where the dispute is with regard to allowability of deduction u/s 80IB because the allowability of deduction u/s 80IB in respect of export incentive is squarely and directly covered against the assessee by the judgment of Hon ble Apex Court in Liberty India (supra) and therefore, there is no merit in the synopsis filed by the assessee - Decided against assessee. Disallowance u/s 14A - Held that - Assessing Officer has added the total investment in share of ₹ 1,86,74,948/- as on 31/03/2009 for working out the disallowance. Admittedly, this investment amount includes two investments in foreign subsidiaries and since the dividend income from these two investments is not exempt, this investment should not be included in the amount of investment for the purpose of making disallowance u/s 14A of the Act. To this extent, we find force in the contentions of Learned A.R. of the assessee and direct the Assessing Officer to recompute the disallowance u/s 14A of the Act after excluding the amount of investment in foreign subsidiaries. In respect of loans, it cannot be said that no part of these loans was used for making investment in shares because overall availability of own funds is different thing and the availability of own fund at the time of making investment in share is altogether different thing and if the assessee does not establish that on the date of making investment in share, own fund was available, it has to be accepted that mixed funds were used for making investment in share and as a consequence, disallowance u/s 14A as per formula prescribed in Rule 8D has to be made. We direct the Assessing Officer to recompute the disallowance after excluding the amount of investment in foreign subsidiaries. Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Disallowance of deduction under section 80IB due to exclusion of duty drawback from computation of eligible profit.
2. Disallowance of expenditure claimed under section 14A of the Act.

Analysis:

Issue 1 - Disallowance of Deduction under Section 80IB:
The appellant contested the disallowance of deduction under section 80IB amounting to Rs. 1,26,12,083 due to the exclusion of duty drawback from eligible profit. The appellant argued that the duty drawback should be considered as an incidental profit and relied on a judgment by the Hon'ble Delhi High Court. However, the Revenue supported the disallowance, citing the judgment of the Hon'ble Apex Court in the case of Liberty India. The tribunal noted that the issue was whether the duty drawback constituted an export incentive derived from the industrial undertaking. The tribunal differentiated the case from the Delhi High Court judgment, emphasizing that the duty paid by the assessee was refunded in that case, resulting in no profit. In contrast, the duty drawback in the present case did not equate to the duty paid by the assessee. Consequently, the tribunal held that the Liberty India judgment applied, disallowing the deduction under section 80IB.

Issue 2 - Disallowance under Section 14A:
The appellant challenged the disallowance of Rs. 7,37,928 under section 14A of the Act. The appellant argued that no borrowed funds were used for share investments and pointed out the shareholder's fund exceeding the investment amount. The tribunal agreed that investments in foreign subsidiaries generating taxable income should not be considered for disallowance under section 14A. However, regarding the use of borrowed funds for investments, the tribunal noted a secured loan of Rs. 7,513.58 lac, indicating mixed funds usage. As the appellant failed to establish the direct nexus of borrowed funds with taxable income, the tribunal directed the Assessing Officer to recompute the disallowance under section 14A after excluding the investment in foreign subsidiaries. Consequently, the tribunal allowed this ground of the appellant for statistical purposes.

General Grounds:
The tribunal noted that Grounds 4 and 5 were general and did not require separate adjudication. As a result, the appeal of the assessee was allowed partly for statistical purposes.

This detailed analysis covers the issues involved in the legal judgment, providing a comprehensive understanding of the tribunal's decision on each matter.