2015 (12) TMI 400 - AT - Income Tax

Deduction u/s 10B - AO was of the view that even a switch over to Section 10B from Section 80IC of the Act was not admissible subsequently, therefore, held that the claim of the assessee for deduction u/s 10B of the Act was not tenable in law - CIT(A) allowed claim - Held that - In the present case, the claim of the assessee was under the statutory provisions, only when it became eligible for such claim u/s 10B of the Act. In the present case, the AO disallowed the claim of the assessee only for the reason that it was earlier claiming the deduction u/s 80IC(5) of the Act. However, the assessee had forgone its earlier claim of deduction u/s 80IC of the Act. In the instant case, the assessee had not simultaneously claimed the relief u/s 80IC of the Act, therefore, the Subsection (5) of the said Section 80IC of the Act cannot be used to debar the assessee for claiming the deduction under any other section of Chapter-VIA or Section 10A or 10B of the Act, particularly when the AO had nowhere stated that the assessee had not fulfilled the conditions necessary for claiming the deduction u/s 10B of the Act, he only disallowed the claim of the assessee by relying upon the provisions of Section 80IC(5) of the Act which are not applicable for this year as the assessee did not claim deduction u/s 80IC of the Act. We, therefore, do not see any valid ground to interfere with the findings given by the ld. CIT(A) on this issue. - Decided against revenue Disallowance of interest on unsecured loan advanced to others by observing that it was on higher rate of interest - CIT(A) allowed claim - Held that - AO had not brought any material on record to substantiate that the interest paid by the assessee to the creditors was not for the business exigencies or that the unsecured loans were utilized by the assessee elsewhere and not for the business purposes. Therefore, there was no justification in restricting the payment of interest at 8% instead of the actual rate of interest at 15%.Accordingly, we do not see any merit in this ground of the departmental appeal. - Decided against revenue Disallowance u/s 40A(2)(b) on interest on loan - CIT(A) allowed claim - Held that - The interest has been paid by the assessee on the advances or loans utilized for the business purposes and it is not the case of the AO that the loans or advances on which the interest was paid by the assessee were not used for the business purposes. In the instant case, the contention of the assessee that no such disallowance was made in the earlier year was not rebutted and no reason has been given for deviating from the past history. In the present case, the contention of the assessee before the ld. CIT(A) was that there was a credit balance of ₹ 3,81,09,510/- in the partners capital account as on 31.03.2009 and even if the balance of ₹ 2,72,43,107/- in the account of Mr. Pradeep Windlass was to be adjusted, a net balance of ₹ 1,80,66,403/- is left in the partners capital account. The said contention of the assessee had not been rebutted. We, therefore, by considering the totality of the peculiar facts of the present case, do not see any valid ground to interfere with the findings of the ld. CIT(A). - Decided against revenue- Decided against revenue

Issues Involved:
1. Deduction under Section 10B of the Income Tax Act.
2. Disallowance of interest on unsecured loans.
3. Relief on disallowance of interest related to advances to a partner.

Issue-wise Detailed Analysis:

1. Deduction under Section 10B of the Income Tax Act:

The primary grievance of the department was the allowance of deduction under Section 10B by the CIT(A). The department argued that the assessee had been claiming deductions under Sections 80HHC and 80IC in previous years and only switched to Section 10B in the assessment year 2009-10. The AO contended that the assessee's claim under Section 10B was not tenable as the assessee had already claimed deductions under other sections in prior years, and Section 80IC(5) prohibits claiming deductions under other sections if Section 80IC is claimed. Furthermore, the AO argued that the assessee was not a newly established undertaking as required under Section 10B.

The assessee countered that it fulfilled all the essential conditions for claiming deduction under Section 10B, including being a 100% export-oriented unit approved by the Ministry of Commerce & Industry. The assessee received the necessary approval on 17.09.2007 and claimed the deduction for the first full year in 2009-10. The CIT(A) observed that the AO misinterpreted Section 80IC(5) and that the assessee had not simultaneously claimed deductions under Section 80IC and Section 10B. The CIT(A) held that the assessee was eligible for the deduction under Section 10B as it fulfilled all the necessary conditions and the claim was made under statutory provisions.

2. Disallowance of interest on unsecured loans:

The AO disallowed interest on unsecured loans by restricting the rate of interest to 8% instead of the 15% claimed by the assessee, resulting in a disallowance of Rs. 2,14,669. The AO reasoned that the interest rate charged by the bank was lower and that the assessee should have repaid its unsecured loans instead of advancing interest-free amounts to a partner.

The CIT(A) deleted the disallowance, noting that similar payments of interest had been allowed in previous years and that the AO had not provided any material evidence to justify the restriction of the interest rate. The CIT(A) emphasized that the quantum of interest paid was based on business exigencies and should not be substituted by the AO's judgment.

3. Relief on disallowance of interest related to advances to a partner:

The AO disallowed Rs. 21,79,448 as interest on advances made to a partner, Mr. Pradeep Windlass, for the construction of his house, noting that the assessee did not have any interest-free funds to advance and was incurring heavy interest expenses on loans raised.

The CIT(A) restricted the disallowance to Rs. 4,00,006, corresponding to the interest paid to persons specified under Section 40A(2)(b) of the Act. The CIT(A) observed that no interest was paid to Mr. Pradeep Windlass in the past on his credit balances, and in fairness, none should be charged on his debit balance. The CIT(A) also noted that the assessee had a credit balance in the partner's capital account, which could cover the advances made to Mr. Pradeep Windlass.

Conclusion:

The ITAT upheld the CIT(A)'s order, allowing the deduction under Section 10B, deleting the disallowance of interest on unsecured loans, and restricting the disallowance of interest related to advances to a partner. The appeal of the department was dismissed.

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