2016 (12) TMI 1873 - AT - Income Tax

Disallowance u/s 14A - Assessee had received dividend income and claimed it as exempt - HELD THAT - AO has clearly stated in the assessment order that from the books of account of the assessee it was not possible to work out the exact amount of expenses incurred by it in earning the exempt income. Under these circumstances, it would be difficult to hold that the aforesaid rule has been invoked by the AO without recording any satisfaction. Thus, this argument of the assessee is rejected. We find force in argument of assessee that investment in the subsidiary / group companies should be excluded while working out the average amount of investments since investment in these companies have been made not for the purpose of earning exempt income but for acquiring control and for strategic reasons. As relying on Cheminvest Ltd 2015 (9) TMI 238 - DELHI HIGH COURT , CIT vs Oriental Structural Engineers Pvt Ltd 2015 (3) TMI 102 - DELHI HIGH COURT , Garware Wall Ropes Ltd 2015 (2) TMI 628 - ITAT MUMBAI and JM Financial Ltd 2014 (4) TMI 752 - ITAT MUMBAI . Therefore, the AO is directed to exclude the amount of investment made in the group companies for strategic reasons. For this limited purpose, this issue is sent back to the file of the AO, who shall decide this issue afresh s a result, ground 1 is partly allowed. Disallowance applying provisions of section 40A(2) with regard to the goods purchased from M/s Ganesh Polychem Ltd. - HELD THAT - AO has rightly brought out the facts that the rates charged by the sister concerns were exorbitant in comparison to other independent concerns. It is noted that the rates charged by M/s.Ganesh Polychem Ltd were almost double the uncontrolled rates. Therefore, under these circumstances, there was heavy burden upon the shoulder of the assessee to show that when the purchases were made from M/s.Ganesh Polychem Ltd in March / April, 2007, then at that time, the rates in the open market were equivalent to the price charged by the sister concern. No such evidence was brought on record by the assessee. Under these circumstances, it would be very difficult to believe that within two months period, the rates were reduced to half in the open market. In any case, no such evidence was brought on record by the assessee. It is also noted that the Ld. CIT(A) has already given appropriate relief by re-working the amount of disallowance at correct rates. We do not find any need for making any further interference in the order of the Ld. CIT(A) on this issue and, therefore, the same is hereby upheld. This ground is dismissed. Addition on account of difference in the balance shown in the account of Rashtriya Chemicals Fertilizers Ltd (RCF, hereinafter) and M/s. Amarjyot Chemicals Pvt Ltd (ACP) - HELD THAT - As noted by us that the assessee had submitted before the Ld. CIT(A) appropriate reconciliation wherein the reason was given for the difference and the same was duly reconciled. But, Ld. CIT(A) simply rejected the submission of the assessee by stating that he was not convinced with the submissions of the assessee. Thus, order passed by Ld. CIT(A) is neither properly speaking nor well reasoned. Under these circumstances, we find it appropriate to send this issue back to the file of the AO where the assessee shall get adequate opportunity of hearing to submit the reconciliation statement and other required details and evidences. The AO shall also consider all the arguments of the assessee including the arguments that the impugned difference is not leading to suppression of income, and therefore, no addition could be made on account of impugned difference. With these directions, this ground is send back to the file of the AO for deciding it afresh after giving adequate opportunity of hearing to the assessee. As a result, this ground may be treated as allowed, for statistical purposes. Depreciation claimed on the basis of letter of approval dated 10-10-2010 - In the appeal before Ld. CIT(A), the assessee submitted in detail that required approval from DSIR was received by the assessee and the same was produced before Ld. CIT(A) - HELD THAT - As stated by the Ld. Counsel that since required certificate has been provided by the assessee which has been examined by the Ld. CIT(A), and only thereafter relief has been provided by him in line with earlier years orders which have been confirmed by the Tribunal. Ld. DR could not point out anything incorrect or wrong in the factual finding of the Ld. CIT(A). Under these circumstances, we do not find any justification to interfere in the order of the Ld. CIT(A) on this issue. Thus, ground 1 raised by the Revenue is hereby dismissed. Disallowance made of claim of weighted deduction u/s 35(2AB)(3) of the Act - HELD THAT - We find that the relief has been granted by the Ld. CIT(A) after verifying the requisite approval in proper form. Nothing wrong or contradictory has been brought before us by the Ld. DR. Thus, we do not find any need or justification to interfere in the order of the Ld. CIT(A). Therefore, the order of the Ld. CIT(A) is upheld. Thus, ground of the Revenue is dismissed. Disallowance made by the AO on account of interest u/s 36(1)(iii) on loans advanced to subsidiary companies - as submitted by the Ld. Counsel of the assessee that this issue has been decided in favour of the assessee by the Ld. CIT(A) following the order of the Tribunal for A.Y. 2007-08 .HELD THAT - DR could not point out any distinction between the facts of A.Y. 2007-08 and the impugned year. Thus, in view of the order of the Tribunal for AY 2007-08, we find that the order of Ld. CIT(A) deserves to be upheld. Therefore, this ground is dismissed. Deduction u/s 10B - interest and finance charges should be allocated on the basis of CWIP as against on the basis turnover as was done by the AO - HELD THAT - It will not be appropriate to apportion the interest entirely on the basis of fixed assets. Similarly allocation on the basis of turnover may also not be a proper criteria for the purpose of allocation of interest keeping in view the peculiar facts and circumstances of the case. Therefore, in our considered opinion, as far as interest on unsecured loans (i.e. ₹ 3,60,32,974) and term loans (i.e. ₹ 7,05,53,202) is concerned, the same should be apportioned on the basis of fixed assets held under the gross block, i.e. 5.60% of such interest cost should be allocated to 10B unit and 94.40% should be allocated to non 10B unit. However, interest paid on working capital loans amounting to ₹ 25,61,18,560 should be apportioned in the ratio of net current assets, i.e. 5.81% of such interest should be allocated to 10B unit and 94.19% should be allocated to non- 10B units. The disallowance should be recomputed by the AO accordingly. As a result, this ground is partly allowed. Addition of expenditure was not debited to the P L Account by the assessee - HELD THAT - Since the impugned amount was not debited by the assessee in the P L Account, the disallowance made by the AO has been rightly deleted by Ld. CIT(A). No interference is called for in his order.

Summary

Issues Involved:
1. Disallowance under Section 14A.
2. Reducing disallowance under Section 14A while computing book profit under Section 115JB.
3. Disallowance of depreciation on assets purchased from Pravin Metal Corporation.
4. Disallowance under Section 40A(2) for goods purchased from Ganesh Polychem Limited.
5. Addition on account of difference in accounts of Rashtriya Chemicals and Fertilizers Limited and Amarjyot Chemicals Pvt Ltd.
6. Depreciation claimed on the basis of letter of approval.
7. Disallowance of weighted deduction under Section 35(2AB)(3).
8. Disallowance of interest under Section 36(1)(iii) on loans advanced to subsidiary companies.
9. Allocation of interest and finance charges for the purpose of Section 10B.
10. Deletion of addition for unexplained expenditure.

Detailed Analysis:

1. Disallowance under Section 14A:
The assessee challenged the disallowance of ?1,24,28,099/- made by the AO under Section 14A, arguing that it had sufficient interest-free funds and that the disallowance was incorrectly computed. The Tribunal noted that the assessee's own funds were significantly higher than the investments made in tax-free securities, citing judgments from the Bombay High Court (CIT v. Reliance Utilities Ltd and CIT v. HDFC Bank Ltd). Consequently, the disallowance of ?1,16,01,605 on account of interest was deleted. However, the Tribunal upheld the disallowance of administrative expenses computed under Rule 8D(2)(iii) but directed the AO to exclude investments made for strategic reasons in subsidiary/group companies.

2. Reducing disallowance under Section 14A while computing book profit under Section 115JB:
This ground was stated to be consequential to Ground 1 and was dismissed accordingly.

3. Disallowance of depreciation on assets purchased from Pravin Metal Corporation:
The issue of disallowance of ?22,057/- on depreciation was remanded back to the AO for fresh consideration, following directions from earlier Tribunal orders for previous assessment years.

4. Disallowance under Section 40A(2) for goods purchased from Ganesh Polychem Limited:
The AO disallowed 50% of purchases from Ganesh Polychem Ltd, a sister concern, due to excessive pricing compared to other vendors. The CIT(A) reduced the disallowance to 33%, considering the correct facts. The Tribunal upheld the CIT(A)'s decision, noting the lack of evidence from the assessee to justify the higher rates.

5. Addition on account of difference in accounts of Rashtriya Chemicals and Fertilizers Limited and Amarjyot Chemicals Pvt Ltd:
The AO made an addition of ?5,68,558 due to discrepancies in account balances. The Tribunal remanded the issue back to the AO for reconsideration, directing the AO to allow the assessee to provide reconciliation and other necessary details.

6. Depreciation claimed on the basis of letter of approval:
The AO disallowed depreciation of ?32,87,726/- due to the absence of an approval certificate from DSIR. The CIT(A) allowed the claim after the assessee provided the necessary approval. The Tribunal upheld the CIT(A)'s decision, noting no error in the factual findings.

7. Disallowance of weighted deduction under Section 35(2AB)(3):
The AO disallowed ?64,22,951/- of the weighted deduction claim due to incomplete documentation. The CIT(A) allowed the claim after verifying the required approval in Form 3CM. The Tribunal upheld the CIT(A)'s decision, finding no need for further verification.

8. Disallowance of interest under Section 36(1)(iii) on loans advanced to subsidiary companies:
The AO disallowed ?2,37,16,415/- of interest on loans to subsidiaries, questioning the business expediency. The CIT(A) deleted the disallowance, citing sufficient interest-free funds and business purpose. The Tribunal upheld the CIT(A)'s decision, noting consistency with previous years' orders.

9. Allocation of interest and finance charges for the purpose of Section 10B:
The AO allocated interest and finance charges based on turnover, reducing the deduction under Section 10B. The CIT(A) accepted the assessee's method of allocation based on capital work-in-progress. The Tribunal directed a more logical apportionment: interest on unsecured and term loans based on fixed assets, and interest on working capital loans based on net current assets.

10. Deletion of addition for unexplained expenditure:
The AO disallowed ?1,14,700/- as unexplained expenditure. The CIT(A) deleted the addition, noting the amount was not debited to the P&L Account. The Tribunal upheld the CIT(A)'s decision, finding no error in the factual findings.

Conclusion:
The appeals were partly allowed, with specific directions for remand and re-computation of disallowances and deductions as per the Tribunal's detailed analysis.