2020 (2) TMI 1310 - AT - Income Tax

Deduction u/s 80HHC - CIT(A) directing the ld AO to exclude sales and excise duty as part of the total turnover for computing the deduction - HELD THAT - In assessee s own case for Assessment Year 1995-96 1997-98 2000-01 and 2001-02 onwards wherein the coordinate bench has directed the ld AO to not to consider the sales tax and excise duty in total turnover for computing the deduction u/s 80HHC of the Act. Further the above issue is also squarely covered in favour of the assessee by the decision of the Hon ble Supreme Court in CIT Vs. Laxmi Machine Works 2007 (4) TMI 202 - SUPREME COURT . Disallowance of royalty - allowable revenue expenditure - HELD THAT - The above issue is squarely covered in favour of the assessee by the decision of the Hon ble Delhi High Court 2017 (5) TMI 469 - DELHI HIGH COURT wherein the appeal filed by the revenue against the order of the coordinate bench for Assessment Year 2007-08 to 2009-10 has not been admitted. The coordinate bench in that order has held that the expenditure of royalty and technical guidance fees is revenue in nature. Taxing the interest income as profit of the business for computation of deduction u/s 80HHC - HELD THAT - It is undisputed that the assessee has eared interest income on fixed deposit has not been challenged as being taxed under the head income from other sources . Only in the case where the interest income is business income then only netting off can be allowed. In the present case the ld AO has held it to be the income from other sources and no argument were advanced before us that it is a business income the decision of the Hon ble Delhi High Court 2007 (1) TMI 86 - HIGH COURT DELHI does not apply to the facts of the case. In the result ground No. 1 of the appeal is dismissed and orders of the lower authorities are confirmed. Disallowance u/s 14A being 25% of the tax free dividend income earned by the appellant - HELD THAT - When the assessee contends before the AO that it did not incur any expenditure for the earning of exempt income the ld AO is duty bound to prove the explanation of the assessee incorrect with regard to examination of the books of assessee. In the present case the ld AO has not mentioned that what are those expenditure incurred by the assessee for earning of exempt income. Merely stating that certain expenditure are required to be incurred for earning the exempt income does not satisfy the requirement of provision of section 14A(2). Hon ble Supreme Court 2018 (3) TMI 805 - SUPREME COURT has held that before making any disallowance AO needs to record the satisfaction which is missing in this case. In the preset case it is apparent that assessee has not incurred or not disallowed any expenditure u/s 14A. We direct the ld AO to delete the disallowance u/s 14A.

Summary

Issues:
1. Exclusion of interest income for computing deduction under section 80HHC of the Income Tax Act.
2. Disallowance of tax-free dividend income under section 14A of the Act.
3. Treatment of sales tax and excise duty in total turnover for deduction under section 80HHC.
4. Disallowance of royalty and technical guidance fee.

Exclusion of Interest Income for Deduction under Section 80HHC:
The appellant contended that interest income of ?1,35,27,971 should be considered as business income for deduction under section 80HHC. However, the AO treated it as income from other sources. The CIT(A) upheld the AO's decision, stating that the immediate source of interest was a fixed deposit, not business operations. The appellant sought to set off the interest income against other business income, citing a Delhi High Court decision. The Tribunal dismissed the appeal, confirming the lower authorities' orders.

Disallowance of Tax-Free Dividend Income under Section 14A:
The AO disallowed ?55,76,844 as 25% of the tax-free dividend income earned by the appellant under section 14A. The appellant argued no expenditure was incurred for earning this income. The CIT(A) upheld the disallowance. The Tribunal ruled in favor of the appellant, stating that the AO failed to prove the appellant's explanation incorrect regarding the expenditure for earning exempt income, as required by section 14A(2) of the Act.

Treatment of Sales Tax and Excise Duty in Total Turnover for Deduction under Section 80HHC:
The appellant excluded sales tax and excise duty from total turnover for deduction under section 80HHC. The AO included these amounts, resulting in a higher turnover and deduction. The CIT(A) excluded sales tax and excise duty based on previous court decisions. The Tribunal dismissed the revenue's appeal, citing precedents that support the exclusion of these amounts from total turnover.

Disallowance of Royalty and Technical Guidance Fee:
The AO disallowed ?76,04,979 as royalty and ?2,50,349 as technical guidance fee. The Tribunal upheld these disallowances, citing a Delhi High Court decision that such expenditures are revenue in nature. The revenue's appeal against these disallowances was dismissed.

In conclusion, the Tribunal ruled in favor of the appellant regarding the disallowance of tax-free dividend income under section 14A and the treatment of sales tax and excise duty in total turnover for deduction under section 80HHC. However, the Tribunal upheld the decisions of the lower authorities regarding the exclusion of interest income for deduction under section 80HHC and the disallowance of royalty and technical guidance fee.