2018 (5) TMI 1967 - AT - Income Tax

Expenses pertaining to foreign travel by the Directors and employees of the company - A.O has disallowed 10% of the expenses as the personal site seeing expenses cannot be ruled out - HELD THAT - the said disallowance is held to be unjustified and is hereby ordered to be deleted. Since the order of the Ld. CIT(A) is based on the order of the Coordinate Bench of ITAT in the case of DCIT Vs. Rico Auto Industries Ltd 2013 (10) TMI 926 - ITAT CHANDIGARH involving similar grounds, we decline to interfere in the order of the Ld. CIT(A). Disallowance of bad debts claimed by the assessee on account of transactions with the distributors who in turn supply products of the assessee to the retailers - HELD THAT - For the A.Y. 2013-14, the bad debts claimed by the assessee are on account of publicity charges not recovered from customers. The Assessing Officer disallowed the claim only on the basis that no efforts were made by the assessee to recover the amounts. As per the judgment of Hon ble Supreme Court in the case of TRF Ltd. Vs. CIT 2010 (2) TMI 211 - SUPREME COURT bad debts need not be proven to be irrecoverable. It is sufficient if the same are written off. Since the issue is squarely covered by the provisions under section 36(1)(vii) and section 36(2) of the Income Tax Act,1961, and since it is written off as irrecoverable, we decline to interfere in the order of the Ld. CIT(A). - Decided against revenue Disallowance under section 36(1)(iii) on purchase of Land - HELD THAT - Assessee has got sufficient funds as per the balance sheet as on year ending 2010. The share capital is of ₹ 2.57 Crores and the reserves and surplus are to the tune of ₹ 115.35 Crores. Hence, placing reliance on the decision of the Hon ble jurisdictional High Court in the case of Bright Enterprises Private Ltd. 2015 (11) TMI 342 - PUNJAB HARYANA HIGH COURT and judgment in the case of a CIT Vs. Omax bikes limited 2015 (8) TMI 1290 - ITAT CHANDIGARH , Hero Cycles Vs. CIT 2016 (2) TMI 1081 - ITAT CHANDIGARH wherein it has been held that if sufficient interest free funds are available the presumption is that the advances have been made out of such funds and no disallowance of interest under section 36(1)(iii) is called for, we hereby decline to interfere in the order of the Ld. CIT(A). Deduction u/s 80IC - HELD THAT - Reduction of profits to the extent of 10% has been done by the Assessing Officer on estimate basis without demonstrating by way of evidence whether any expenses on account of knowhow, goodwill, trade name, etc. had been incurred by the Phillaur unit with respect to Tahliwal unit . The same has not been demonstrated even before us. Further as rightly held by the Ld.CIT(A) , the provisions of sect ion 80IA (8) and 80IA (10) cannot be invoked in the present case in the absence of any transact ion between the two units. The Ld. DR has not pointed out any infirmity in the order of the Ld.CIT(Appeals) . We, therefore, uphold the order of the Ld.CIT(Appeals) in deleting the reduction of profits of the Tahliwal unit by 10% of the profits - Decided against revenue Disallowance of Section 80IC on Job Work - HELD THAT - As decided in the case of the assessee for the A.Y. 2006-07 the basic process is carried out by the appellant is the same whether the production is done for itself or job work. The Hon'ble Punjab and Haryana High Court in the case of CIT vs Impel Forge and Allied industries Ltd 2008 (12) TMI 370 - PUNJAB HARYANA HIGH COURT has held that the assessee is at liberty to manufacture for itself or others which makes no difference for the purpose of deduction under section 80IB of the act. In view of the same, the reduction in the claim made by the appellant under section 80IC on this account deserves to be deleted. These grounds of appeal are allowed Deduction u/s 80IB - breads and buns - HELD THAT - Assessee is an SSI unit as defined u/s 80IB(14(g) of the Act and is not manufacturing a prohibited item specified in the 11th Schedule of the Act and thus qualifies for deduction of its profits u/s 80IB of the Act as rightly held by the Ld.CIT(Appeals) . Disallowance u/s 14A - HELD THAT - We agree with the decision of the Ld. CIT(A) that Rule 8D cannot be applied for the year 2007-08. However it cannot be said that the assessee has not incurred any expenditure in respect of any exempt income. The total investment made by the company or to the tune of ₹ 76.12 crores and the dividend earned is ₹ 53.11 Crores. The assessee has got own funds for these investments which have been received in the form of share capital from M/s Goldman Sachs (Mauritius) to whom 360000 shares have been allotted. Keeping in view the peculiar facts and circumstances of the case a reasonable estimate of the expenses needs to be determined as Rule 8D cannot be invoked. We find that Ld. CIT(A) has reasonably estimated the disallowance keeping in view the entire facts and circumstances of the case. Addition u/s 8D(2)(i) (ii) - In the decision in the case of Dhampur Sugar Mills Vs. CIT (Alld) 2014 (9) TMI 791 - ALLAHABAD HIGH COURT wherein it was held that half percent of average investment is justified on account of disallowance under Rule 8D(2)(iii) on account of other expenses. Since the decision of the Ld. CIT(A) is based on the orders of the ITAT and the Hon ble High Court, we decline to interfere in the order of the Ld. CIT(A). Disallowance u/s14A cannot be considered in determination of tax under section 115JB - HELD THAT - Disallowance under section 14A read with Rule 8D cannot be added while computing book profits as per section 115JB as Explanation to that section does not specifically mentions section 14A of the Income Tax Act, 1961. See ACIT VS. Vireet Investments Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI Treatment of the sale tax subsidy as revenue receipt or capital receipt - HELD THAT - As major guidelines have been framed by the Hon ble Courts and since the nature of the capital subsidy and revenue subsidy is to be determined by going through the entire scheme of the Government, for determination of purpose test and to examine the whether the issue would be covered under the scheme to assist creation of capital asset or an operational subsidy post installation, the matter is being remanded back to the file of the Ld. CIT(A) to adjudicate afresh keeping in view the judgments and the nature of the scheme and adjudicate the issue by a speaking order in accordance with law.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Deduction under Section 80IC of the Income Tax Act, 1961.
3. Foreign Travel Expenses.
4. Bad Debts.
5. Disallowance under Section 36(1)(iii) on purchase of land.
6. Disallowance of Sales Tax Subsidy.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act, 1961:
Assessment Year 2007-08:
- The Assessing Officer (AO) disallowed ?36,02,230/- under Section 14A by invoking Rule 8D. The CIT(A) restricted the disallowance to 10% of the dividend income earned, amounting to ?5,31,145/-. The Tribunal upheld the CIT(A)'s decision, stating Rule 8D cannot be applied retrospectively for the year 2007-08.

Assessment Year 2008-09:
- The AO made a disallowance of ?46,40,472/- under Section 14A read with Rule 8D. The CIT(A) deleted ?38,82,025/- and confirmed ?7,58,447/- under Rule 8D(2)(iii). The Tribunal upheld the CIT(A)'s decision, citing that Rule 8D is applicable from AY 2008-09 and the disallowance was justified.

Assessment Year 2010-11:
- The Tribunal followed the Special Bench decision in ACIT vs. Vireet Investments Pvt. Ltd., holding that disallowance under Section 14A cannot be considered while computing book profits under Section 115JB. The disallowance was deleted.

2. Deduction under Section 80IC of the Income Tax Act, 1961:
Indirect Benefits:
- The AO disallowed 10% of the profits claimed under Section 80IC, attributing them to indirect benefits from the parent company. The CIT(A) deleted the disallowance, and the Tribunal upheld this decision, stating no evidence was provided to show transactions between the units.

Job Work Charges:
- The AO disallowed a proportionate amount of profits from job work charges under Section 80IC. The CIT(A) deleted the disallowance, and the Tribunal upheld this decision, citing precedents that job work charges qualify for deduction under Section 80IC.

NOIDA Unit (Small Scale Industrial Unit):
- The AO disallowed the deduction under Section 80IB for the NOIDA unit, claiming it did not qualify as an SSI unit. The CIT(A) deleted the disallowance, and the Tribunal upheld this decision, confirming the unit met the eligibility criteria under Section 11B of the IDR Act, 1951.

3. Foreign Travel Expenses:
- The AO disallowed 10% of foreign travel expenses on an ad hoc basis, suspecting personal use. The CIT(A) deleted the addition, stating the expenses were for business purposes. The Tribunal upheld the CIT(A)'s decision, citing lack of evidence for personal use.

4. Bad Debts:
Assessment Year 2012-13:
- The AO disallowed ?4.78 Lacs claimed as bad debts. The CIT(A) allowed the claim, and the Tribunal upheld this decision, stating the write-off was in compliance with Section 36(1)(vii) and Section 36(2).

Assessment Year 2013-14:
- The AO disallowed ?99,032/- claimed as bad debts. The CIT(A) allowed the claim, and the Tribunal upheld this decision, citing the Supreme Court's judgment in TRF Ltd. vs. CIT, which states proving irrecoverability is not necessary for write-offs.

5. Disallowance under Section 36(1)(iii) on purchase of land:
Assessment Year 2010-11:
- The AO disallowed ?13.37 Lacs of interest on borrowed funds used for purchasing land. The CIT(A) deleted the disallowance, and the Tribunal upheld this decision, citing sufficient own funds were available, following the jurisdictional High Court's decisions.

6. Disallowance of Sales Tax Subsidy:
Assessment Year 2010-11 to 2013-14:
- The AO treated the sales tax subsidy as revenue receipt. The CIT(A) upheld this decision, citing the Punjab & Haryana High Court's judgment in Abhishek Industries Ltd. The Tribunal remanded the issue back to the CIT(A) for reconsideration in light of various judgments, including the Supreme Court's decision in CIT vs. Meghalaya Steels Ltd., which clarified the treatment of subsidies.

Conclusion:
The Tribunal's decisions largely upheld the CIT(A)'s orders, emphasizing the need for evidence and proper application of legal principles. The issues of disallowance under Section 14A, deduction under Section 80IC, foreign travel expenses, bad debts, and sales tax subsidy were comprehensively addressed, with specific reliance on precedents and statutory provisions.