2018 (5) TMI 2008 - AT - Income Tax

MAT Computation u/s 115JB - TUF subsidy - HELD THAT - The case of Krishi Rasayan Exports Pvt. Ltd. vs. ACIT ( 2017 (3) TMI 1051 - ITAT KOLKATA is on the similar interest subsidy which was required to be excluded from Book profit. We accordingly direct AO to exclude the TUF subsidy while computing book profit u/s.115JB. Disallowance u/s.14A - HELD THAT - From the Balance Sheet and the annexures as submitted before lower authorities, it can be seen that a major portion of the investment made by the assessee are in group concerns and are strategic in nature. These investment in group concern are not for the purpose of earning any dividend income. Strategic investment made in group concerns should not be considered for calculating the action u/s. 14A. As per the documents placed on record, sufficient interest free funds were available with the assessee company and therefore, no disallowance under Rule 8D(2)(ii) be made of interest expenditure. The same is also clear from the Balance Sheet and the relevant annexures placed on record. Further, in respect of own funds, presumption has to be made that the investment made are from own funds. The Honble Jurisdictional High Court in HDFC Bank Ltds case 2014 (8) TMI 119 - BOMBAY HIGH COURT . has upheld the above proposition. Respectfully following the jurisdictional High Court judgment we direct AO to delete the disallowance of interest. Disallowance under Rule 8D(2)(iii) is restored to AO to compute in accordance with the latest decision of Supreme Court in the case of Maxoop Investment 2018 (3) TMI 805 - SUPREME COURT

Issues Involved:
1. Classification of guarantees issued by the assessee as international transactions under section 92B(1) of the IT Act.
2. Treatment of interest subsidy credited to the Profit and Loss account as capital in nature.
3. Treatment of interest subsidy for calculating Minimum Alternate Tax (MAT) under section 115JB.
4. Disallowance under section 14A of the IT Act.
5. Addition of disallowance under section 14A to the Book Profit while computing MAT under section 115JB.
6. Disallowance of interest expenditure for extending interest-free loans to sister concerns.
7. Disallowance of employees' contribution to Provident Fund due to delayed payment.
8. Disallowance of expenses alleged to be prior period expenditure.
9. Treatment of stamp duty value as full value of consideration for computing capital gains.

Detailed Analysis:

1. Classification of Guarantees as International Transactions:
The assessee contested the classification of guarantees issued to banks on behalf of its Associated Enterprises (AEs) as international transactions under section 92B(1). The Tribunal noted that the guarantees were issued to further business interests in overseas markets, constituting shareholder activities, thus no guarantee fee was required. The Tribunal referenced the case of Everest Kento Cylinders Ltd., where a 0.5% rate was deemed arms length, directing the AO to restrict the guarantee commission rate to 0.5%.

2. Treatment of Interest Subsidy as Capital in Nature:
The assessee received interest subsidy under the Technology Upgradation Fund Scheme (TUF) from the Ministry of Textile, Government of India, aimed at modernizing the textile industry. The Tribunal held that the subsidy was capital in nature, referencing decisions in similar cases like Grabal Alok Impex Limited, where such subsidies were treated as capital receipts not chargeable to tax.

3. Treatment of Interest Subsidy for MAT Calculation:
The Tribunal ruled that the interest subsidy, being capital in nature, should also be excluded from book profits for MAT purposes under section 115JB. This is consistent with the principle that capital receipts are outside the ambit of taxable income under section 4 of the Income Tax Act.

4. Disallowance under Section 14A:
The AO disallowed ?10,88,24,112 under section 14A, related to expenses incurred for earning exempt income. The Tribunal noted that the investments were strategic and funded from the assessee's own funds, thus no interest expenditure should be disallowed. The Tribunal directed the AO to compute disallowance under Rule 8D(2)(iii) in accordance with the Supreme Court's decision in Maxopp Investment Ltd.

5. Addition of Disallowance under Section 14A to Book Profit for MAT:
The Tribunal directed the AO to exclude the disallowance under section 14A from the book profit calculation for MAT purposes, aligning with the principle that non-income items should not be included in book profits.

6. Disallowance of Interest Expenditure for Interest-Free Loans:
The AO disallowed ?8,37,01,584 as proportionate interest expenditure for interest-free loans to sister concerns. The Tribunal, referencing the jurisdictional High Court's decision in Reliance Utilities & Power Limited, held that since the assessee had sufficient own funds, no disallowance should be made.

7. Disallowance of Employees' Contribution to Provident Fund:
The AO disallowed ?74,37,578 due to delayed payment of employees' contribution to the Provident Fund. The Tribunal upheld this disallowance, adhering to the specified due dates under the Act.

8. Disallowance of Prior Period Expenditure:
The AO disallowed ?31,44,360 as prior period expenditure. The Tribunal confirmed this disallowance, as the expenses pertained to a prior period and were not allowable in the current assessment year.

9. Treatment of Stamp Duty Value for Capital Gains:
The AO treated ?93,80,000 as the full value of consideration for computing capital gains on property transfer. The Tribunal upheld this treatment, aligning with the provisions for determining the full value of consideration based on stamp duty value.

Conclusion:
The Tribunal provided a detailed analysis and directions for each issue raised by the assessee, referencing relevant case laws and judicial precedents. The judgment emphasized the principles of arms length pricing, the nature of subsidies, and the proper computation of disallowances and book profits under the IT Act.

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