2022 (5) TMI 1570 - AT - Income Tax

Disallowance of deduction u/s 80IC - interest income earned on fixed deposits - profits and gains derived from manufacture/production of any article or things - HELD THAT - In case of Liberty India Ltd. 2009 (8) TMI 63 - SUPREME COURT while reiterating identical view has observed that the income qualifying for deduction must have a first degree relationship with the eligible business. In the facts of the present appeal admittedly the interest income which the assessee has claimed as deduction u/s 80IC was earned on fixed deposits kept in bank for the purpose of securing the entry tax which was under dispute. However it cannot be said that such interest income has any direct nexus with profits and gains derived from manufacture/production of article or things. In our view the dispute relating to entry tax would not have any impact on the manufacturing activity of the assessee since in the worst case the assessee would have brought the raw materials/goods on payment of entry tax. Thus payment or nonpayment of entry tax would not have stalled the manufacturing activity of the assessee. Thus it cannot be said that the interest income earned by the assessee is part of profits and gains derived from manufacture or production of article or things. Therefore in our humble opinion the interest income earned by the assessee would not qualify for deduction u/s 80IC of the Act. Disallowance made u/s 14A r.w.r. 8D. - HELD THAT - Insofar as assessment year 2013-14 as before us the assessee has submitted that it had sufficient interest refund available to take care of the investment made. In this regard we must observe neither before the departmental authorities nor before us the assessee has furnished any working computing the disallowance u/s 14A r.w.r. 8D. Therefore in absence of any such computation/working by the assessee we are unable to record any conclusive finding regarding assessee s claim. Necessity of recording satisfaction - For assessment year 2014-15 submission of learned counsel for the assessee that the AO has not recorded any valid satisfaction is unsustainable. Recording of satisfaction by the AO regarding correctness of assessee s claim would arise when the assessee itself has computed disallowance u/s 14A r.w.r. 8D on its own in the return of income furnished to the department. When the assessee has not made any such claim in the return of income AO cannot record satisfaction in vacuum. Having held so it is necessary to observe before us assessee has submitted that the assessee had sufficient interest free refund with it to take care of the investment. Since the aforesaid claim of the assessee has not been examined factually by the departmental authorities with reference to availability of funds in the books of account; we deem it appropriate to restore this issue to the AO for factual verification of assessee s claim. Disallowance of administrative expenses under Rule 8D(2)(iii) AO has to compute the disallowance by considering only those investments which have yielded exempt during the year. With the aforesaid observations the issue is restored back to the Assessing Officer for fresh adjudication. Deduction u/s 80G - deduction was disallowed due to non-furnishing of supporting evidence - HELD THAT - Commissioner (Appeals) has observed that the assessee not only failed to furnish the receipt issued by the donee but also could not furnish the eligibility certificate of the donee. In our view for claiming deduction under section 80G assessee is required to furnish the supporting evidence if called upon to do so by the AO. In absence of such supporting evidence assessee s claim of deduction could not have been allowed. To enable the assessee to furnish the supporting evidences to prove the claim of deduction u/s 80G we restore this issue to the AO for fresh adjudication after due opportunity of being heard to the assessee.

Summary

Issues Involved:
1. Disallowance of deduction under section 80IC in respect of interest income.
2. Disallowance made under section 14A read with Rule 8D.
3. Deduction claimed under section 80G.

Issue-wise Detailed Analysis:

1. Disallowance of deduction under section 80IC in respect of interest income:
The primary issue was whether the interest income earned on fixed deposits, which were made to secure entry tax payable, qualifies for deduction under section 80IC of the Income-tax Act, 1961. The assessee argued that since the fixed deposits were made out of business funds and had a direct nexus with the manufacturing activities, the interest income should be eligible for deduction under section 80IC. The Assessing Officer and the Commissioner of Income Tax (Appeals) disallowed the claim, stating that the interest income did not have a direct nexus with the manufacturing activity. The Tribunal upheld this view, referencing the Supreme Court's interpretation of "derived from" in cases like Pandian Chemical Ltd. Vs. CIT and Liberty India Ltd. vs. CIT, which mandates a direct and proximate nexus with the manufacturing activity. The Tribunal concluded that the interest income did not qualify for deduction under section 80IC because it was not directly derived from the manufacturing or production of articles or things.

2. Disallowance made under section 14A read with Rule 8D:
For the assessment year 2013-14, the Assessing Officer disallowed Rs. 13,19,905/- under section 14A based on the Auditor's report, which the assessee had not disallowed in its income computation. The Tribunal found no merit in the assessee's argument regarding the non-recording of satisfaction by the AO, as the information was obtained from the assessee's own audit report. For the assessment year 2014-15, the AO disallowed Rs. 24,38,065/-, noting the assessee earned substantial exempt income but did not disallow any expenditure under section 14A. The Tribunal noted that the AO had recorded satisfaction and that the assessee's claim of having sufficient interest-free funds was not factually examined. The Tribunal restored the issue to the AO for verification of the assessee's claim and directed the AO to compute disallowance by considering only those investments yielding exempt income during the year.

3. Deduction claimed under section 80G:
For the assessment year 2013-14, the assessee claimed a deduction of Rs. 12,500/- under section 80G for a payment made to Lion’s Club. The AO disallowed the claim due to the assessee's failure to furnish supporting evidence. The Commissioner (Appeals) upheld the disallowance, noting the absence of the receipt from the donee and the eligibility certificate. The Tribunal agreed that the deduction claim could not be allowed without supporting evidence. However, to provide the assessee an opportunity to furnish the necessary evidence, the Tribunal restored the issue to the AO for fresh adjudication.

Conclusion:
The Tribunal upheld the disallowance of deduction under section 80IC for interest income, citing lack of direct nexus with manufacturing activities. It restored the disallowance issues under section 14A for both assessment years to the AO for fresh adjudication and factual verification of the assessee's claims. The Tribunal also restored the issue of deduction under section 80G to the AO, allowing the assessee to furnish supporting evidence. The appeals were partly allowed for statistical purposes.