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2016 (4) TMI 904 - AT - Income TaxComputation of deduction u/s. 80-IA - Allocation of expenditure - Held that - There cannot be any segregation of those facilities for a particular unit. Namely, the directors who are looking over all management of the company as a whole, they must have devoted energy to plastic division, textile division and CPP units. Therefore, expenses incurred on their remuneration and salaries ought to be debited in the CPP units also. This was the basic principle for identifying the expenditure which are incurred under the common head, but element of the involvement with CCP units cannot be ruled out. In the past, the Tribunal has recorded independent findings on each item. In these assessment years, as discernible from the finding of the ld.CIT(A), the ld.First Appellate Authority has included the items for allocation on the basis of past practice. Similarly, the first Appellate Authority has upheld the exclusion of certain items as discernible in the table extracted (supra) on the basis of past history. Before us, neither party was able to point out any circumstances which can demonstrate the disparity on the facts or about the nature of expenditure which deserves to be either included for allocation or excluded from allocation. Considering the detailed finding of the CIT(A) in Asstt.Year 2010-11, in the light of the Tribunal order in the Asstt.Years 2004-05 to 2008-09, we are of the view that the issue in dispute is squarely covered. The ld.First Appellate Authority has excluded the items, namely, general charges, misc. expenses, interest and financial charges, directors fees, rent and taxes, stationery and printing, charity and donations, salary and wages of corporate division, contribution to PF of corporate division, welfare expenses of cooperative division and rent. We do not find any error in the order of the ld.CIT(A) for exclusion of these items from allocation to the CPP units. Similarly, the ld.First Appellate Authority has upheld the inclusion of items for allocation viz. directors remuneration, directors travelling expenses, audit fees, computer maintenance expenses, security charges etc. and we do not find any error in the order of the ld.CIT(A) on this issue. Disallowance u/s 14A - Held that - The investment made by the assessee was not out of interest bearing fund. It has its own surplus fund out of which investment has been made. The assessee has demonstrated that it had own funds of ₹ 1981.55 crores in the Asstt.Year 2009-10 and investment in the mutual fund was only ₹ 144.51 crores. The assessee has also submitted that its investment in earning exempt income has been reduced during the year from 78.45 crores to ₹ 18.09 crores. The assessee has submitted these details in its submissions reproduced by the AO. Similarly, in the Asstt.Year 2010-11, it has reserve fund of ₹ 2319.17 crores and made investment of ₹ 111.09 crores. AO has not given any heed to these submissions or figures submitted by the assessee. The assessee has further made disallowance of ₹ 5.12 lacs in the Asstt.Year 2009-10. This was mainly for management of investment. He simply discussed the background for bringing section 14A as well Rule 8D on the statute book. He has specifically not worked out the amounts even on the basis of Rule 8D. He called for a working from the assessee and made a lumpsum addition in both the years. The ld.AO has not recorded any finding that amounts added back by the assessee are not commensurate with the administrative expenses which might be attributable to earning exempt income. Because, on interest expenses account, there cannot be any disallowance as the assessee has far more interest free fund than investment. We are of the view that the ld.CIT(A) has looked into all these aspects in the Asstt.Year 2009-10 before deleting the disallowance. We do not find any error in the order of the ld.CIT(A) on this issue in Asstt.Year 2009-10. Consequently, we allow the ground of appeal raised by the assessee in the Asstt.Year 2010-11 and delete the disallowance made by the AO. Computation of deduction admissible under section 80IC - Held that - The case of the assessee is that financial charges cannot be allocated in the ratio of sales, because, the sales have no direct influence on the interest expenditure. The financial charges are relevant to the investment made by an assessee. In other words, suppose an assessee has made investment after borrowing funds due to some reason or market conditions he could not effect the sales, then, if we go by the logic of the AO, there would be a lesser allocation. The assessee has allocated the expenditure on account of financial charges, keeping in view the investment in Bhaddi units. In other words, these are direct expenditure relatable to Bhaddi units. Therefore, the ld.CIT(A) has rightly deleted the allocation of interest/financial charges in the Bhaddi made on the basis of sales ratio. We do not find any infirmity in the order of the ld.CIT(A) on this issue. Expenditure for PMS Services - Held that - No doubt, the expenses were incurred by the assessee towards consultancy charges for making investment. On sale of investment, capital gain would arise to the assessee, but the expenses incurred by the assessee are not directly linked to the purchase of investment. These are paid for consultancy. If the expenses are not to be capitalized in the investment, then how the assessee will get this set off. Therefore, the ld.CIT(A) has rightly observed that the expenses were not incurred towards purchase of investment, rather, these were incurred towards consultancy charges in order to keep track on the investment. Therefore, we do not see any error in the order of the ld.CIT(A). Addition on foreign exchange gains - Held that - Though section 43A begins with a non obstante clause, it makes section 43(1) its integral part. This is because section 43A requires the cost to be recomputed in terms of section 43A for the purposes of depreciation Sections 32 and 43(1) . A perusal of section 43A makes it clear that insofar as the depreciation is concerned, it has to be allowed on the actual cost of the asset, less depreciation that was actually allowed in respect of earlier years. However, where the cost of the asset subsequently increased on account of devaluation, the written down value of the asset has to be taken on the basis of the increased cost minus the depreciation earlier allowed on the basis of the old cost. One more aspect needs to be highlighted. Under section 43A, as it stood at the relevant time, it was inter alia provided that where an assessee had acquired an asset from a country outside India for the purposes of his business, and in consequence of a change in the rate of exchange at any time after such acquisition, there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or part of the cost of the asset or for repayment of the whole or part of the moneys borrowed by him for the purpose of acquiring the asset, the amount by which the liability stood increased or reduced during the previous year shall be added to or deducted from the actual cost of the asset as defined in section 43(1). See ACIT Vs. Elecon Engineering 2010 (2) TMI 23 - SUPREME COURT OF INDIA
Issues Involved:
1. Allocation of common headquarter expenses for calculating profit of Captive Power Plant (CPP) for deduction under section 80-IA. 2. Allocation of salary expenses of employees of the corporate division for deduction under section 80-IC. 3. Disallowance under section 14A of the Income Tax Act. 4. Treatment of foreign exchange fluctuation gains. 5. Treatment of Portfolio Management Scheme (PMS) service charges. Detailed Analysis: 1. Allocation of Common Headquarter Expenses for Calculating Profit of Captive Power Plant (CPP) for Deduction under Section 80-IA: The primary issue was whether certain common headquarter expenses should be allocated to the CPP for calculating profit eligible for deduction under section 80-IA. The AO allocated expenses based on the turnover ratio of CPP to the total turnover. The CIT(A) upheld the allocation of specific expenses such as Directors’ remuneration, Directors’ traveling expenses, audit fees, computer maintenance expenses, and security charges but deleted others like general charges, miscellaneous expenditure, interest, and financial charges. The Tribunal upheld the CIT(A)’s decision, noting that the allocation was consistent with past practices and supported by the Tribunal's findings in earlier years. 2. Allocation of Salary Expenses of Employees of the Corporate Division for Deduction under Section 80-IC: The AO allocated salary expenses to the Baddi unit based on the sales ratio, which was disputed by the assessee. The CIT(A) directed that the allocation should be based on the investment ratio rather than the sales ratio, aligning with past Tribunal decisions. The Tribunal upheld the CIT(A)’s order, emphasizing that the allocation should reflect the actual investment in the Baddi unit. 3. Disallowance under Section 14A of the Income Tax Act: The AO invoked Rule 8D to disallow expenses related to earning exempt income under section 14A. The assessee argued that investments were made from owned funds, and only a minimal amount should be disallowed. The CIT(A) accepted the assessee’s argument for the assessment year 2009-10 but upheld the AO’s disallowance for 2010-11, citing the AO’s dissatisfaction with the assessee’s claim. The Tribunal found the AO’s application of Rule 8D without proper justification and deleted the disallowance for both years, emphasizing the need for a clear finding of dissatisfaction with the assessee’s claim before applying Rule 8D. 4. Treatment of Foreign Exchange Fluctuation Gains: The AO added foreign exchange gains to taxable income, which the assessee argued should be adjusted against the cost of acquiring shares in foreign subsidiaries as per section 43A. The CIT(A) deleted the addition, aligning with the Supreme Court’s decision in ACIT Vs. Elecon Engineering Co. Ltd., which supports adjusting such gains against the cost of capital assets. The Tribunal upheld the CIT(A)’s decision, confirming that the gains should be treated on capital account and adjusted from the cost of the asset. 5. Treatment of Portfolio Management Scheme (PMS) Service Charges: The AO disallowed PMS service charges, treating them as capital expenditure. The CIT(A) deleted the disallowance, viewing the charges as revenue expenditure incurred for managing investments. The Tribunal upheld the CIT(A)’s decision, noting that the expenses were for consultancy services related to investment management and not directly linked to the purchase of investments. Conclusion: The Tribunal’s judgment addressed multiple issues concerning the allocation of expenses and the treatment of specific gains and charges, consistently applying past practices and judicial precedents to uphold the CIT(A)’s decisions, except for the disallowance under section 14A, which was deleted for both assessment years.
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