2018 (12) TMI 1759 - AT - Income Tax

Disallowance of expenditure relatable to the earning of tax exempt dividend income under the provisions of section 14A - HELD THAT - In the case of Godrej Boyce Manufacturing Co. Ltd. 2010 (8) TMI 77 - BOMBAY HIGH COURT has held that Rule 8D of the I.T. Rules r.w.s. 14A(2) of the I.T. Act is not arbitrary or unreasonable but can be applied only if the assessee s method is not satisfactory. It has been further held that Rule 8D is not retrospective and applies from A.Y. 2008-09. For the years for which Rule 8D is not applicable and in the event of that the AO is not satisfied with the explanation/working given by the assessee disallowance under section 14A has to be made on a reasonable basis. Almost similar view has been expressed by Hon ble Delhi High Court in the case of Maxopp Investment Ltd Others vs. CIT 2011 (11) TMI 267 - DELHI HIGH COURT Coordinate Mumbai Bench of the Tribunal in the case of M/s CIBA India Ltd Vs. DCIT 2015 (6) TMI 412 - ITAT MUMBAI while relying upon the decision of the Hon ble Bombay High Court in the case of CIT Vs. Godrej Agrovet Ltd. 2014 (8) TMI 457 - BOMBAY HIGH COURT taking into account the consideration of facts and circumstances of that case has held that the expenditure equal to 4% of the exempt income earned by the assessee would constitute reasonable disallowance u/s 14A - in our view the interest of justice will be met if the disallowance made u/s 14A of the Act is restricted to 5% of the total tax exempt earned income Deduction u/s 80IC - non-inclusion of the receipts on account of interest received from customers on account of delayed payments the provision of written back and sundry balances written back - HELD THAT - The income for the times as discussed above is eligible to be considered and included in the income the assessee for the purpose of deduction u/s 80IC of the Act. However the claim of duty draw back amounting to Rs. 427/- and Misc. receipts of Rs. 1201/- is not found tenable and the said receipts are to be excluded for the purpose of computing deduct ion u/s 80IC of the Act Addition on account of shortage of furnished goods - HELD THAT - As decided in own case 2013 (12) TMI 1697 - ITAT CHANDIGARH the Tribunal after discussing the facts of the case has observed that the shortage in the finished goods being very small and is normally due to wastage etc. and also considering the plea of the assessee that it is customary that some of the samples may be distributed for promotion of the products had deleted the addition. Depreciation @ 60% on computer software asset - HELD THAT - The assessment year involved is assessment year 2006-07. Even if the depreciation is allowed at a higher or normal rate of the depreciation rate the entire of the depreciation will be get absorbed / stands al lowed by now i.e. i.e. in the assessment year 2019-2020. We do not see any merit at this stage to interfere as it will not serve any purpose as the same will ultimately have nil tax effect. Hence without deliberating upon the merits of the issue we think that at this stage the findings of the CIT(A) needs not to be disturbed. This ground of the Revenue s appeal is therefore stands dismissed. Eligible profits u/s 80IC - CIT(A) in directing the Assessing officer to work out the profit on the sale of raw material and thereafter disallow the same for the eligible profits u/s 80IC - HELD THAT - What is to be disallowed is the prof it on the sale of the raw material. We do not find any infirmity in the order of the CIT(A) on this issue and the same is upheld. Deduction u/s 80IC on the income from waste and scrap sale - HELD THAT - The plea of the assessee is that the waste and scrap is generated out of the manufacturing activity of the assessee. The Ld. CIT(A) considering the facts and circumstances of the case has also held so. In view of this we do not find any infirmity in the order of the CIT(A) on this issue. This ground of the Revenue is therefore dismissed. Deduction u/s 80IC on the processing charges received by the assessee - HELD THAT - CIT(A) after considering the submissions of both the parties and also examining the facts of the case held that the same to be an activity carried out by the assessee for third par ty and has directed the Assessing officer to allow deduction u/s 80IC of the Act on the profits earned from the processing activity of the assessee. Addition on account of purchase of steam on arm length pricing from the sister concern - HELD THAT - CIT(A) after considering the submissions of the assessee and also considering the fact that only a reasonable profit @ 7.37 has been paid to the sister concern deleted the disallowance of the expenditure. We have considered the rival submissions and also have gone through the order of the CIT(A) and we do not find any infirmity in the same. In view of this there is no merit in the ground raised by the Revenue Only the profit element in the sale / purchase of raw material is to be excluded for deduct ion u/s 80IC

Summary

Issues Involved:
1. Disallowance of expenses under Section 14A of the Income Tax Act.
2. Exclusion of certain receipts from eligible profits for deduction under Section 80-IC of the Income Tax Act.
3. Deletion of additions on account of shortage of finished goods, free samples, and excess depreciation claimed.
4. Determination of manufacturing activity for Section 80-IC deduction.
5. Treatment of profits from the sale of raw material and waste/scrap for Section 80-IC deduction.
6. Arm's length pricing for the purchase of steam from a sister concern.

Detailed Analysis:

1. Disallowance of Expenses under Section 14A:
The assessee contested the disallowance of Rs. 2,70,645 for expenses related to earning tax-exempt dividend income under Section 14A. The Tribunal noted that Rule 8D of the I.T. Rules is not retrospective and applies from A.Y. 2008-09. For years prior, disallowance under Section 14A should be made on a reasonable basis. The Tribunal decided to restrict the disallowance to 5% of the total tax-exempt income, aligning with precedents where a certain percentage of exempt income was considered reasonable.

2. Exclusion of Certain Receipts from Eligible Profits for Deduction under Section 80-IC:
The assessee challenged the exclusion of interest received, provisions written back, sundry balances written back, and miscellaneous receipts from eligible profits for deduction under Section 80-IC. The Tribunal referred to its earlier decision in the assessee’s case, which allowed such inclusions. The Tribunal held that these receipts, which relate to the business activity, are eligible for inclusion under Section 80-IC. However, duty drawback and certain miscellaneous receipts were excluded from eligible profits.

3. Deletion of Additions on Account of Shortage of Finished Goods, Free Samples, and Excess Depreciation Claimed:
- Shortage of Finished Goods and Free Samples: The Tribunal upheld the CIT(A)'s decision based on its earlier ruling, which accepted that minor shortages and distribution of free samples are customary and do not warrant additions.
- Excess Depreciation on Printer: The Tribunal noted that regardless of the depreciation rate applied, the total depreciation would have been absorbed by the assessment year 2019-2020, resulting in a nil tax effect. Hence, no adjustment was necessary.

4. Determination of Manufacturing Activity for Section 80-IC Deduction:
The Revenue argued that the assessee’s activities did not constitute manufacturing. The Tribunal referred to its previous decision, which recognized the assessee’s activities as manufacturing, thus allowing the deduction under Section 80-IC.

5. Treatment of Profits from Sale of Raw Material and Waste/Scrap for Section 80-IC Deduction:
- Sale of Raw Material: The Tribunal agreed with the CIT(A) that only the profit element from the sale of raw material should be excluded from eligible profits under Section 80-IC.
- Waste and Scrap Sale: The Tribunal upheld the CIT(A)’s decision that income from waste and scrap, being a by-product of the manufacturing process, is eligible for deduction under Section 80-IC.

6. Arm's Length Pricing for Purchase of Steam from Sister Concern:
The Revenue contested the deletion of disallowance for the purchase of steam from a sister concern, arguing it was not an arm's length transaction. The Tribunal upheld the CIT(A)’s finding that the transaction was reasonably priced, and thus, the expenditure was allowable.

Conclusion:
The appeals were partly allowed, with specific adjustments made to the disallowance under Section 14A and the inclusion of certain receipts under Section 80-IC, while other grounds were dismissed based on established precedents and factual determinations.