2016 (8) TMI 1496 - AT - Income Tax

Deduction of the profit derived from industrial undertaking u/s 80IC - substantial expansion carried out by the assessee in the 6th year of the new industrial undertaking - Claim restricted to 25% - HELD THAT - As relying on own case 2015 (6) TMI 725 - ITAT CHANDIGARH we hold that the assessee before us is entitled to only 25% of deduction during the present year because the assessee has already availed the period of full deduction @ 100% in the earlier five years i.e. from assessment years 2004-05 to 2008-09. In this background, we find nothing wrong with the order of Ld. CIT(A) and we uphold the same. Accordingly, assessee s appeal is dismissed. Disallowance u/s 14A r.w.r. 8D - assessee applied provisions of Rule 8D and has not considered any interest disallowance holding that no interest expenditure is related to exempt income earned by the assessee - HELD THAT - It is the duty of the revenue to establish nexus of the funds that assessee has used the interest bearing funds for the purposes of earning exempt income to make any disallowance u/s 14A with respect to interest expenditure. As AO has not established the nexus about investment of interest bearing funds in exempt income generating apparatus, no disallowance u/s 14A rwr 8D can be made on account of interest expenses. Reverse the finding of the ld CIT (A) in confirming the disallowance on account of interest expenses u/s 14 r.w.r. 8D of the Income tax Rules. Regarding the issue of other expenses we confirm the finding of the ld CIT (A) in confirming disallowance - out of total disallowance on account of interest expenses stands deleted andon account of other expenditure is confirmed. In the result ground of the appeal is partly allowed..

Summary

Issues Involved:

1. Validity and jurisdiction of the CIT(A)'s order.
2. Restriction of deduction under Section 80-IC of the Income Tax Act, 1961.
3. Eligibility of other income for deduction under Section 80-IC.
4. Disallowance under Section 14-A read with Rule 8D.
5. Levy of interest under Sections 234-A, 234-B, 234-C, and 234-D, and withdrawal of interest under Section 244-A of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Validity and Jurisdiction of the CIT(A)'s Order:
The appellant contended that the order passed by the CIT(A), Shimla, dated 09.02.2016, was bad in law, illegal, without jurisdiction, and void. However, this ground was dismissed as it was general in nature.

2. Restriction of Deduction Under Section 80-IC:
The appellant argued that the CIT(A) erred in affirming the order of the Deputy Commissioner of Income Tax (DCIT) by restricting the claim of deduction under Section 80-IC from ?4,30,68,526/- to ?1,06,69,693/-, being 25% instead of 100% claimed by the appellant, on account of substantial expansion carried out in the industrial undertaking. The Tribunal referred to the coordinate bench's decision in M/s. Hycron Electronics Vs. ITO, which held that the deduction under Section 80-IC is limited to 100% for the first five years and 25% thereafter, even if substantial expansion is carried out. The Tribunal upheld the CIT(A)'s order, dismissing the appellant's claim for a higher deduction.

3. Eligibility of Other Income for Deduction Under Section 80-IC:
The appellant's claim for deduction of other income amounting to ?3,89,755/- under Section 80-IC was also restricted. The Tribunal again referred to the precedent set in the case of M/s. Hycron Electronics and upheld the CIT(A)'s decision, dismissing the appellant's ground.

4. Disallowance Under Section 14-A Read with Rule 8D:
The appellant contested the disallowance of ?14,47,472/- under Section 14-A read with Rule 8D, without proving the nexus between the expenditure disallowed and the exempted dividend income amounting to ?38,36,173/-. The Tribunal noted that the Assessing Officer (AO) had applied Rule 8D mandatorily without establishing the nexus between the interest-bearing funds and the exempt income. The Tribunal cited the Punjab and Haryana High Court's decision in CIT v. Abhisek Industries Limited, which held that the AO must record satisfaction based on credible evidence that interest-bearing funds were used to earn tax-free income. Since the AO did not establish this nexus, the Tribunal deleted the disallowance of ?9,36,449/- on account of interest expenses but confirmed the disallowance of ?5,11,023/- on account of other expenses.

5. Levy of Interest Under Sections 234-A, 234-B, 234-C, and 234-D, and Withdrawal of Interest Under Section 244-A:
This ground was dismissed as consequential in nature, following the decisions on the substantive grounds.

Conclusion:
The Tribunal partly allowed the appeal. The disallowance of ?9,36,449/- on account of interest expenses under Section 14-A read with Rule 8D was deleted, while the disallowance of ?5,11,023/- on account of other expenses was confirmed. The Tribunal upheld the CIT(A)'s order regarding the restriction of the deduction under Section 80-IC and the eligibility of other income for deduction under the same section. The grounds related to the validity and jurisdiction of the CIT(A)'s order and the levy of interest were dismissed.