2019 (11) TMI 1799 - AT - Income Tax

Deduction U/s.80IC - Claim denied as factory established at Rudrapur did not carry out any manufacturing - HELD THAT - Lower authorities have not properly examined the issues viz., whether the product sold at Rudrapur were subjected to manufacturing activity or not, independent of the audit report from the Central Excise. Therefore, we deem it fit to remit all these issues back to the AO for a fresh examination for the impugned assessment years. The assessee shall lay all materials in support of its contention before the Assessing Officer and comply with the requirements of the AO in accordance with law. AO shall also furnish the copy of Remand Report and its annexures to the assessee and consider the assessee s submissions on them and on due examination, shall pass appropriate orders for the impugned assessment years, in accordance with law. Disallowance u/s.14A - AO found that the assessee earned substantial dividend income and made investments in equity shares and mutual funds - AR submitted that the assessee made investments out of capital and reserves, representing interest free funds and not out of borrowed funds. The exempted income was earned out of the investments made long before - HELD THAT - We deem it fit to remit this issue back to the AO for a fresh examination. The assessee shall lay all materials in support of its contention before the Assessing Officer and comply with the requirements of the AO in accordance with law. The Assessing Officer is also free to conduct appropriate enquiry as deemed fit, however, he shall furnish due opportunity to the assessee on the materials etc., to be used against the assessee. Additional depreciation on electrical installation - AO held that additional depreciation is allowed in respect of new machinery or plant which has been acquired and installed in the business of manufacture of production - assessee pleaded that air circulators installed in the factory on which the additional depreciation was not allowed, it constitutes plant and machinery and thus eligible for depreciation allowed for plant and machinery - HELD THAT - We find that this issue has not been examined with reference to the facts and circumstances, while the assessee pleads that the impugned asset is air circulator and it is a plant machinery, without any discussion on this issue, the assessee s claim is considered as electrical installation. Therefore, we remit this issue back to the AO for a fresh examination and due decision. Weighted deduction U/s.35(2AB) on the R D expenditure incurred - HELD THAT - DR correctly said deduction claimed by the assessee is a statutory deduction which can be allowed by the AO only to the extent it is approved by the prescribed authority U/s.35(2AB). AO has allowed the claim to the extent the prescribed authority, the DSIR allowed. Therefore, he pleaded that the orders of lower authorities be confirmed. Depreciation @ 80% on the UPS - Additional depreciation at the rate of 20% for the additions made during the year - CIT(A) held that UPS cannot be considered to be an integral part of computer, since it is neither an input device nor an output device of a computer - UPS has other uses independent of a computer since it can be used in conjunction with other electrical devices like refrigerators, television sets, etc., and hence, confirmed the rate of depreciation at the rate of 15% as against the assessee s claim at the rate of 80% - HELD THAT - Since, the lower authorities have not recorded as to where and how the impugned UPS was claimed to have been used and has not recorded any finding as to how the claim was different from the impugned ITAT order relied on by the assessee, we deem it fit to remit this issue back for a fresh examination and pass due order, in accordance with law, after affording opportunity to the assessee. Leave salary U/s.43B r.w.s.35(2AB) - CIT(A) held that this issue was decided against the assessee based on the Hon ble Supreme Court s decision 2022 (10) TMI 617 - SUPREME COURT but allowed the assessee s alternate plea that the amount provided is not allowed as deduction atleast the actual amount paid before the due date for filing the return for the assessment year should be allowed as deduction.The corresponding ground of the assessee is dismissed. TDS u/s 195 - payments made for logistics ton non-resident entity for rendering managerial services outside India without tax deduction at source - HELD THAT - The profits of the services rendered outside India cannot be taxed in India unless the non-resident has permanent establishment/or business connection in India as envisaged in Sec.9(1) - CIT(A) deleted the addition relying on the decision of the Hon'ble Apex Court in the case of GE Technological Centre Pvt. Ltd. 2010 (9) TMI 7 - SUPREME COURT - Decided against revenue. Deduction as loss from cancellation of forward contracts - AO observed that this expenditure was incurred not for business of the appellant company but only to hedge against the currency fluctuation and therefore not allowable u/s 37 - HELD THAT - The assessee has entered into forward contract for hedging purposes against the underlying receivables (exports) and payables (imports) transactions in foreign currencies. As rightly explained by the assessee derivative products are intangible and are not capable of delivery or transfer. It was also explained that forex derivatives are not traded on security markets and therefore has no application of Sec.43(5). The assessee has entered into forward contracts for the purpose of its business and there was no dispute on this issue. As on the closing date, the foreign exchange was restated which resulted into loss and the assessee relied on Woodward Governor of India Ltd. 2009 (4) TMI 4 - SUPREME COURT wherein it was held that the loss incurred on account of restatement of foreign exchange as on the Balance sheet date is a business loss. - Decided against revenue. MAT - Disallowance of 14A while computing Book Profit - HELD THAT - AO is not prohibited for making disallowance U/s.14A. However, the Special Bench in Vireet Investments Pvt. Ltd 2017 (6) TMI 1124 - ITAT DELHI held that the Assessing Officer can make disallowance without resorting to explanation to 14A r.w.r.8D. Therefore, this issue is remitted back to the Assessing Officer for making appropriate disallowance U/s.14A U/s.115JB. The corresponding ground raised by the Revenue is treated as partly allowed.

Summary

Issues Involved:
1. Disallowance under Section 80IC
2. Disallowance under Section 14A
3. Additional depreciation on electrical installation
4. Weighted deduction under Section 35(2AB)
5. Depreciation rate on UPS
6. Leave salary under Section 43B read with Section 35(2AB)
7. Payments for logistics services under Section 40(a)(i)
8. Loss from cancellation of forward contracts
9. Allocation of expenditure to units claiming deduction under Sections 80IC and 10B
10. Disallowance under Section 14A while computing Book Profit under Section 115JB

Detailed Analysis:

1. Disallowance under Section 80IC:
The assessee claimed deductions under Section 80IC for its Rudrapur unit, engaged in manufacturing turbo chargers. The AO disallowed the claim, citing that the unit did not carry out any manufacturing activities, based on an audit observation by the Excise Department. The CIT(A) confirmed the disallowance. The Tribunal observed that the lower authorities had not properly examined whether the products sold at Rudrapur were subjected to manufacturing activity independently of the audit report from the Central Excise. The Tribunal remitted the issue back to the AO for a fresh examination.

2. Disallowance under Section 14A:
The AO made disallowances under Section 14A for expenses incurred towards earning exempt income. The CIT(A) directed the AO to rework the disallowance, excluding investments that earned taxable income. The Tribunal remitted the issue back to the AO for a fresh examination, directing the AO to consider only investments that earned tax-exempt income.

3. Additional Depreciation on Electrical Installation:
The assessee claimed additional depreciation on air circulators installed in the factory. The AO disallowed the claim, treating the asset as electrical installation. The CIT(A) upheld the disallowance. The Tribunal remitted the issue back to the AO for a fresh examination, directing the AO to verify whether the asset constitutes plant and machinery.

4. Weighted Deduction under Section 35(2AB):
The assessee claimed weighted deduction on R&D expenditure, which was partly disallowed by the AO as the expenditure was not certified by DSIR. The CIT(A) confirmed the disallowance. The Tribunal upheld the CIT(A)'s decision, agreeing that the deduction can only be allowed to the extent approved by DSIR.

5. Depreciation Rate on UPS:
The assessee claimed depreciation at 80% on UPS, treating it as an energy-saving device. The AO allowed depreciation at 15%, treating it as electrical installation. The CIT(A) confirmed the AO's decision. The Tribunal remitted the issue back to the AO for a fresh examination to determine the correct rate of depreciation.

6. Leave Salary under Section 43B read with Section 35(2AB):
The AO disallowed the provision for leave salary under Section 43B, but allowed the actual amount paid before the due date for filing the return. The CIT(A) confirmed the disallowance. The Tribunal upheld the CIT(A)'s decision, agreeing with the application of the Supreme Court's decision on the matter.

7. Payments for Logistics Services under Section 40(a)(i):
The AO disallowed payments made to Sonima Logistics, Germany, for non-deduction of tax at source. The CIT(A) allowed the appeal, applying a previous Tribunal decision in the assessee's favor. The Tribunal upheld the CIT(A)'s decision, following its earlier order.

8. Loss from Cancellation of Forward Contracts:
The AO disallowed the loss from cancellation of forward contracts, treating it as non-business expenditure. The CIT(A) allowed the appeal, following a previous Tribunal decision. The Tribunal upheld the CIT(A)'s decision, agreeing that the loss was a business loss.

9. Allocation of Expenditure to Units Claiming Deduction under Sections 80IC and 10B:
The AO apportioned R&D expenses to units claiming deductions under Sections 80IC and 10B, disallowing the apportioned expenditure. The CIT(A) allowed the appeal, applying a previous Tribunal decision. The Tribunal remitted the issue back to the AO for a fresh examination.

10. Disallowance under Section 14A while Computing Book Profit under Section 115JB:
The AO included the disallowance under Section 14A while computing book profit. The CIT(A) deleted the disallowance, following the Special Bench decision in ACIT vs. Vireet Investments Pvt. Ltd. The Tribunal remitted the issue back to the AO for making appropriate disallowance under Section 14A without resorting to Rule 8D.

Conclusion:
The appeals of the assessee were partly allowed, and the appeals of the Revenue were dismissed or partly allowed based on the detailed analysis and directions provided by the Tribunal for fresh examination and appropriate decisions in accordance with the law.