2018 (5) TMI 2003 - AT - Income Tax

Admission of additional grounds - computation of deduction u/s 80HHC AND treating reimbursement under technology up gradation fund scheme (TUFS) as revenue receipt instead of capital receipt - HELD THAT - Grounds is purely of legal in nature following the judgment of Hon ble Supreme Court in the case of M/s Hero Exports Ltd. Vs. CIT 2007 (11) TMI 13 - SUPREME COURT and NTPC Vs. CIT 1996 (12) TMI 7 - SUPREME COURT therefore both the additional grounds are hereby admitted and dealt with later in this order. Deduction u/s 80HHC - reduction of 90% of other income for the purpose of computation of deduction under 80HHC and effect of claims received, interest received provision written back and foreign exchange fluctuation in computation - HELD THAT - As gone through the order wherein the claims received, excess provisions written back and misc. income, foreign exchange fluctuation were allowed to the assessee relying on the judgment of CIT Vs. Metal Man Auto Pvt. Ltd. 2011 (2) TMI 330 - PUNJAB AND HARYANA HIGH COURT . Allocation Expenses under section 14A - HELD THAT - Similar matter was considered by the ITAT in the case of the assessee for the assessment year 2001-02 in 2014 (4) TMI 1261 - ITAT CHANDIGARH wherein it has been held that the disallowance was made on surmises and there was no merit in the disallowances made wrongly on the premise that borrowed funds were used for investment purpose. The Tribunal has affirmed the confirming of disallowance of ₹ 1,00,000/- made by the Ld. CIT(A). In the instant year the Ld. CIT(A) has confirmed an amount of ₹ 2,00,000/- being the expenses incurred for earning of the dividend income. Following the same rationale we hereby uphold the order of the Ld. CIT(A). Deduction u/s 80HHC - Calculation of indirect cost of Trading Goods - apportioning proportionate personnel expenses/administrative expenses/financial expenses and depreciation not relating to trading activities of the assessee's business for calculating indirect cost of trading exports while calculating deduction - HELD THAT - Since the matter travelled up to Tribunal in the earlier years in the assessee s own case for the A.Y. 2001-02 2012 (12) TMI 1197 - ITAT CHANDIGARH wherein it was directed to work out the indirect cost of the trading goods by calculating head wise expenditure claimed by the assessee and to compute the deduction allowed to the assessee under section 80HHC of the Act, following the same we hereby uphold the order of the Ld. CIT(A) directing the Assessing Officer to recomputed the profits. Deduction u/s 80HHC - exclusion of 100% of export turnover of EOU from export turnover (ETO) while calculating the deduction - HELD THAT - A.O. is directed to reduce 100% of the export turnover and total turnover of the EOUs of the assessee from the export turnover and the total turnover of the business of the assessee respectively for computing deduction under section 80HHC. Since the issue stand settled at this juncture the Assessing Officer is directed to follow the judgment of the Hon ble Bombay High Court in the case of CIT Vs. Hindustan Lever Ltd. 2014 (4) TMI 1012 - BOMBAY HIGH COURT Deduction u/s 10B - Non Exclusion of other income while calculating 10B - AO increasing total turnover of the undertaking for calculating exemption under section 10(B) by adding excise duty and export turnover of the trading goods - HELD THAT - As gone through the judgment in the case of Laxmi Machine Works 2007 (4) TMI 202 - SUPREME COURT and find it squarely applicable to the instant case. The Assessing Officer is directed to re-compute the eligible profits as per the guidelines laid down. Deduction u/s 10B - Allocation of Head Office Expenses - Apportionment of expenses namely personnel, administrative, financial to various units - HELD THAT - Correct income of the units cannot be worked out unless the proportionate expenses from the head office are taken into account. However, as duly submitted by the Ld. Counsel, in the own case for the assessment year 1998-99 while giving effect to the order of the ITAT, on similar issue, the A.O. has allocated head office expenses net of the income. This appears to be quite in order and , logical. Therefore, in the case of the assessee also the A.O. is directed to allocate the expenses net of income of the head office (expenses of Head Office (-) income, if any, of head office) in the proportion of the turnover of these units as already done in the assessment order and to work out and allow deduction u/s 10B in respect of these units accordingly. Treatment of Loss on export of trading goods for computation of deduction under section 80HHC - HELD THAT - Only positive profits can be considered for purposes of deduction. We, therefore, see no substance in the appeal. The same stands dismissed. - Decided in favour of revenue Deduction u/s 80IB on balance profits of EOU Unit - HELD THAT - CIT(A) agreed the Assessing Officer s contention that where the income of a unit is taken to be exempt under the provisions of Section 10B no part of its income is included in the gross total income and therefore no deduction could be allowed under any other Section of Income Tax Act,1961 included in Chapter XVI. The Ld. CIT(A) agreed with the contention of the assessee that deduction under section 80IB is claimed only on the domestic profits of the undertaking. It was held that the export profits claimed under section 10B are not included in claiming exemption under section 80IB. CIT(A) has referred the matter to the Assessing Officer to verify the claim. Since the principle has been laid down by the Ld. CIT(A) that only domestic profits are eligible for deduction under section 80IB, we see no reason to interfere in the order of the Ld. CIT(A). Deduction u/s 80IB on Misc. Income - AO observed that rent receipts have commercial connection with the profits of the industrial undertaking and there is no direct nexus between the profits and manufacturing activity of the unit - HELD THAT - As relying on M/S LIBERTY INDIA VERSUS COMMISSIONER OF INCOME TAX 2009 (8) TMI 63 - SUPREME COURT DEPB is not covered as profits derived from industrial undertaking and also the rent receipt. Reduction of scrap sales from total turnover for 80HHC - HELD THAT - The expenditure is incurred by the assessee not for generation of the scrap but for generation of the finished product. There is and cannot be any expenses which are incurred for generation of scrap. Scrap is bi-product of the manufacturing activity. Therefore, there are no expenses which could be excluded from the sale of scrap. Sales Tax Subsidy - Capital Receipt or not? - HELD THAT - Considering the facts and circumstances of the case in the light of decision in the case of Ponni Sugars Chemicals Ltd. 2008 (9) TMI 14 - SUPREME COURT and considering the above discussion, we are of the view that sales tax subsidy received by the assessee is capital receipt in nature and are not subjected to tax. The additions made by the Assessing Officer on account of receipt of sales tax subsidy are accordingly deleted in all the assessment years in appeals. Thus sales tax subsidy received by the assessee is capital in nature and, therefore, not taxable. Deduction under 3rd Proviso to 80HHC - AO disallowed deduction under section 80HHC(3)(c)(iii) on export incentives - HELD THAT - Before us the assessee brought to our notice the order of Hon ble jurisdictional High Court in the case of Guru Nanak Exports 2012 (11) TMI 718 - PUNJAB AND HARYANA HIGH COURT wherein the amendment brought with retrospective effect has been held ultra-vires with regard to the retrospective nature of the amendment.Since the amendment is not applicable to the case of the assessee before us this ground of appeal of the assessee is hereby allowed. Inclusion of Excise duty, Export Turnover of Traded Goods in total turnover for Calculating deduction under section 10B - HELD THAT - Exclude the profits attributable to the trading export activities and also the turnover of the trading export activity from the total turnover has been upheld. Appeal of the assessee on this ground is allowed. Disallowance of 50% of the Travelling expenses - HELD THAT - Even before the Ld. CIT(A) no evidence in support of the same has been filed. Even before us no evidence has been filed except a table pertaining to period, amount and purpose. No correspondence of whatever could not been furnished. Hence, we decline to interfere in the order of the Ld. CIT(A) - As a result this ground of appeal of the assessee is dismissed. Disallowance foreign travelling expenses of wife of CMD - Assessee contested that the wife of CMD also attends telephone calls note the messages for CMD in his absence - HELD THAT - AR relied on the judgment of JK Industries Vs. CIT 2011 (3) TMI 23 - CALCUTTA HIGH COURT wherein such amount was allowed since the tour has been sanctioned by the Board of Directors. However, no such resolution was produced before us in the instant case hence, keeping in view the facts and circumstances specific to this case and since no specific role of the spouse in the corporate meeting could be elicited, the disallowance made by the Ld. CIT(A) is hereby confirmed. As a result, this ground of appeal of the assessee is dismissed. Disallowance of line / bay charges - HELD THAT AO disallowed line / bay charges incurred in Year 199697 in the current year. The assessee submitted that the company paid the amount to PSEB as line charges and same was claimed as Revenue expenditure in the A.Y 1996-97 and not charged in that year and charged to P L Account of year 2004-05. It was submitted that the matter is pending before the appellate authorities. Since the assessee is following mercantile system of accounting for the current year the expenses incurred in the year 1996-97 cannot be allowed during this year.This ground of appeal of the assessee is dismissed. Interest to be taxed under the head Income From Other Sources - assessee has netted of interest income received during the year against the interest paid - HELD THAT - Referring to case of TUTICORIN ALKALI CHEMICALS FERTILIZERS LTD VERSUS COMMISSIONER OF INCOME-TAX 1997 (7) TMI 4 - SUPREME COURT the matter is referred to the file of the Assessing Officer to allow the netting of the interest if the assessee is able to prove the nexus between interest expenditure in the interest income. ground of appeal of the Assessee and of the Revenue is allowed for statistical purposes. Addition of legal and profession fees - Disallowance on notional basis owing to the demerger of textile unit - CIT(A) has deleted the disallowance made on notional basis and confirmed part as the assessee has not contraverted the findings of the Assessing Officer - HELD THAT -As held in the case of Digital Equipment India Pvt. Ltd. 2005 (11) TMI 482 - ITAT BANGALORE we hereby uphold the action of Ld. CIT(A) in deleting the adhoc disallowance made by the Assessing Officer. As a result this ground of the Revenue s appeal is dismissed with regard to ₹ 20 Lacs and that of the Assessee stands dismissed with regard to ₹ 5,36,646/. Nature of expenditure - expenditure incurred for implementation review of BPCS and TIM Software Systems pertaining to the back office functions - revenue or capital expenditure - HELD THAT - CIT(A) followed the rationale in the case of Amway Enterprises Vs. DCIT 2008 (2) TMI 454 - ITAT DELHI-C . While treating the expenditure as revenue in nature it was held that, if the advantage to the assessee consists merely in facilitating assessee s trading operations and enabling the management and conduct of the assessee s business to be carried on more efficient way it should be treated as Revenue expenditure. We find that the software implementation expenditure being in nature of augmenting efficiency should be treated as Revenue expenditure in nature. Income of sale of shares - AO held that the Long Term Capital Gain earned by the assessee be treated as income from speculation business in the context of Explanation to Section 73 - HELD THAT - The shares have been held as investments in the listed group company namely Vardhman Acrylics Ltd. and in IDBI. Hence, relying on the rationale of DCIT Vs. Jindal Exports Ltd.. 2006 (5) TMI 134 - ITAT DELHI-G wherein it is held that every transaction may give raise to capital gains or income assessable under any other head - we find that the transactions cannot be treated as speculative in nature and we hereby uphold the order of the Ld. CIT(A).

Summary

Issues Involved:
1. Reduction of 90% of Other Income under Section 80HHC.
2. Allocation of Expenses under Section 14A.
3. Calculation of Indirect Cost of Trading Goods.
4. Exclusion of Export Turnover and Total Turnover of EOU Unit while calculating 80HHC.
5. Non-Exclusion of Other Income while calculating 10B.
6. Allocation of Head Office Expenses.
7. Treatment of Loss on Export of Trading Goods for computation of deduction under Section 80HHC.
8. Deduction under Section 80IB on Balance Profits of EOU Unit.
9. Deduction under Section 80IB on Miscellaneous Income.
10. Reduction of Scrap Sales from Total Turnover for 80HHC.
11. Sales Tax Subsidy - Capital Receipt or not.
12. Deduction under 3rd Proviso to 80HHC.
13. Inclusion of Excise Duty, Export Turnover of Traded Goods in Total Turnover for Calculating Deduction under Section 10B.
14. Exclusion of 90% of Sale Value of DEPB instead of Profit for 80HHC.
15. Disallowance on account of Foreign Traveling Expenses.
16. Disallowance on account of Foreign Traveling Expenses of Wife of CMD.
17. Disallowance of Line/Bay Charges.
18. Treatment of Interest Reimbursement under TUFS Scheme.
19. Reducing 10% of Other Income from Indirect Cost for 80HHC.
20. Treating of Interest Income as Income from Other Sources.
21. Disallowance of 4/5th Expenses under Section 35D.
22. Software Expenses – Revenue or Capital.
23. Sale of Shares - Capital Gains or Speculation Income.

Detailed Analysis:

Issue 1: Reduction of 90% of Other Income under Section 80HHC
The Assessing Officer (AO) reduced 90% of various incomes like claims received, excess provision written back, previous year income, and miscellaneous income from the profit of the business. The CIT(A) and Tribunal held that only specific incomes such as rent received from employees and discount from suppliers should be reduced by 90%, while others like excess provision written back and previous year income should not be reduced.

Issue 2: Allocation of Expenses under Section 14A
The AO disallowed ?24.57 lacs under Section 14A for earning dividend income. The CIT(A) and Tribunal upheld the disallowance of ?2,00,000/- as expenses incurred for earning the dividend income, based on the balance sheet analysis showing sufficient own funds for investments.

Issue 3: Calculation of Indirect Cost of Trading Goods
The AO apportioned personnel, administrative, financial expenses, and depreciation not relating to trading activities for calculating indirect cost of trading exports. The CIT(A) directed the AO to recompute the deduction under Section 80HHC by considering the direct and indirect costs as worked out by the assessee, following the Tribunal's earlier decision.

Issue 4: Exclusion of Export Turnover and Total Turnover of EOU Unit while calculating 80HHC
The AO excluded 100% of the export turnover and total turnover of the EOU from the export turnover and total turnover of the business for calculating the deduction under Section 80HHC. The CIT(A) and Tribunal upheld this exclusion based on the Tribunal's earlier decision in the assessee's own case.

Issue 5: Non-Exclusion of Other Income while calculating 10B
The AO included excise duty and export turnover of trading goods in the total turnover for calculating exemption under Section 10B. The CIT(A) and Tribunal directed the AO to re-compute the eligible profits as per the guidelines laid down in the case of Laxmi Machine Works.

Issue 6: Allocation of Head Office Expenses
The AO allocated head office expenses to various units in proportion to their turnover. The CIT(A) directed the AO to allocate the expenses net of income of the head office in the proportion of the turnover of these units, following the Tribunal's earlier decision in the assessee's own case.

Issue 7: Treatment of Loss on Export of Trading Goods for computation of deduction under Section 80HHC
The AO did not adjust the profits of eligible business for deduction under Section 80HHC with the amount of loss on export of trading goods. The Tribunal allowed the adjustment based on the Supreme Court's judgment in IPCL Laboratories.

Issue 8: Deduction under Section 80IB on Balance Profits of EOU Unit
The AO disallowed the deduction under Section 80IB on the grounds that double deduction is not allowable. The CIT(A) referred the matter to the AO to verify the claim that deduction under Section 80IB is claimed only on the domestic profits of the undertaking.

Issue 9: Deduction under Section 80IB on Miscellaneous Income
The AO disallowed the deduction on rent receipts and DEPB benefits, considering them not derived from the industrial undertaking. The CIT(A) upheld the disallowance based on the Supreme Court's judgment in Liberty India Ltd.

Issue 10: Reduction of Scrap Sales from Total Turnover for 80HHC
The AO excluded the entire scrap sale from total turnover and profits of the business for calculating deduction under Section 80HHC. The CIT(A) and Tribunal included the sale of scrap in total turnover, following the jurisdictional High Court's decision in R.N. Gupta.

Issue 11: Sales Tax Subsidy - Capital Receipt or not
The AO treated the sales tax subsidy received from the Government of Punjab as a revenue receipt. The CIT(A) and Tribunal held it as a capital receipt, following the Tribunal's earlier decision in the assessee's own case and the Supreme Court's judgment in Ponni Sugars & Chemicals Ltd.

Issue 12: Deduction under 3rd Proviso to 80HHC
The AO did not allow deduction under Section 80HHC(3)(c)(iii) on export incentives. The Tribunal allowed the deduction, following the jurisdictional High Court's decision in Guru Nanak Exports, which held the retrospective amendment as ultra-vires.

Issue 13: Inclusion of Excise Duty, Export Turnover of Traded Goods in Total Turnover for Calculating deduction under Section 10B
The AO included excise duty and export turnover of trading goods in the total turnover for calculating deduction under Section 10B. The Tribunal directed the exclusion of these items, following the Tribunal's earlier decision in the case of VMT Spinning Co. Ltd.

Issue 14: Exclusion of 90% of Sale Value of DEPB instead of Profit for 80HHC
The Tribunal allowed the exclusion of 90% of the profit on transfer of DEPB instead of the sale value, following the rationale with regard to the ultra-vires of the proviso to Section 80HHC.

Issue 15: Disallowance on account of Foreign Traveling Expenses
The AO disallowed 50% of the foreign traveling expenses due to lack of evidence. The CIT(A) and Tribunal upheld the disallowance as no evidence was provided.

Issue 16: Disallowance on account of Foreign Traveling Expenses of Wife of CMD
The AO disallowed the foreign traveling expenses of the wife of CMD. The CIT(A) and Tribunal upheld the disallowance as no specific role of the spouse in the corporate meeting was established.

Issue 17: Disallowance of Line/Bay Charges
The AO disallowed line/bay charges incurred in the year 1996-97 in the current year. The CIT(A) and Tribunal upheld the disallowance as the expenses incurred in the year 1996-97 cannot be allowed during the current year.

Issue 18: Treatment of Interest Reimbursement under TUFS Scheme
The issue pertains to the treatment of interest reimbursement under the technology up-gradation fund scheme. The Tribunal remanded the matter to the CIT(A) for adjudication and passing a speaking order.

Issue 19: Reducing 10% of Other Income from Indirect Cost for 80HHC
The issue pertains to reducing 10% of other income from indirect cost for 80HHC. The Tribunal remanded the matter to the CIT(A) for adjudication and passing a speaking order.

Issue 20: Treating of Interest Income as Income from Other Sources
The AO treated the entire interest as income from other sources. The CIT(A) directed the AO to consider interest income from FDRs as income from other sources and interest on delayed payments from customers as business income. The Tribunal referred the matter back to the AO to allow the netting of interest if the nexus between interest expenditure and interest income is proven.

Issue 21: Disallowance of 4/5th Expenses under Section 35D
The AO disallowed ?20 lacs on a notional basis and ?5,36,646/- incurred in connection with the demerger scheme. The CIT(A) deleted the notional disallowance but upheld the disallowance of ?5,36,646/-. The Tribunal upheld the CIT(A)'s decision.

Issue 22: Software Expenses – Revenue or Capital
The AO treated software implementation expenses as capital in nature. The CIT(A) and Tribunal treated the expenses as revenue in nature, following the Special Bench decision in Amway Enterprises.

Issue 23: Sale of Shares - Capital Gains or Speculation Income
The AO treated the income from the sale of shares as speculation income. The CIT(A) and Tribunal treated it as capital gains, following the rationale in DCIT Vs. Jindal Exports Ltd.