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2016 (6) TMI 586 - AT - Income TaxDisallowance u/s 14A - investment in tax-free securities - disallowance of 25% of the salary of Sr. Vice- President, Finance & VP Finance & Secretary - Held that - In the return of income filed by the assessee, the assessee has not shown any expenditure incurred for earning the exempt income. Therefore, in accordance with the provisions of section 14A r.w. Rule 8D the Assessing Officer made the disallowance of expenditure for earning the exempt income. Even during the course of assessment proceedings, the assessee has not accepted any expenditure for earning the exempt income. Only before the ld. CIT(A), the AR of the assessee has submitted that the assessee has agreed for disallowance of 25% of the salary of Sr. Vice- President, Finance & VP Finance & Secretary at ₹.26,45,886/- ₹.15,37,990 ₹.11,07,896 , which was not accepted by the ld. CIT(A) since there was no substance as the investment of the assessee is quite substantial. The ld. CIT(A) has passed a detailed order, which is reproduced hereinabove. In view of the above, we are unable to accept that only the expenditure of ₹.26,45,886/- would have incurred to handle the investment of huge magnitude of ₹. 338.98 crores. Under the above facts and circumstances, the Assessing Officer has rightly applied Rule 8D and worked out the expenditure relatable to earning of exempt income, which was confirmed by the ld. CIT(A) and we find no infirmity in the order passed by the ld. CIT(A). - Decided against assessee. Disallowance u/s 14A - Held that - The Department has not disputed over the quantum of investment made by the assessee to the extent of ₹.338.96 crores and receipt of exempt income amounting to ₹.11.70 crores. The value of investment was ₹.344.74 crores and ₹.338.96 crores as on 31.3.2007 and 31.3.2008 respectively. The investment as on 31.3.2008 was ₹ 338.96 crores. The sale proceeds of investments during the year was ₹.964.52 crores, which was higher by ₹.5.78 crores than purchase of investments of ₹.958.74 crores. There is no dispute on the free reserve and surplus funds available with the assessee of ₹.791.40 crores. When the assessee got its own fund and non-interest bearing funds more than the investment in tax-free securities, then there is no question of deeming that the assessee has used the borrowed funds for investment in tax-free securities. By following the decision of the ITAT, Mumbai in the case of HDFC Bank Ltd. v. DCIT (supra), wherein it was held that if assessee s own fund and non-interest bearing funds are more than the investment in tax-free securities, then there is no basis for deeming that the assessee has used the borrowed funds for investment in tax-free securities, the ld. CIT(A) has held that the assessee had sufficient interest-free funds of its own to make investment in tax-free territory and hence no interest can be disallowed under Rule 8D(2)(ii). No infirmity in the order passed by the ld. CIT(A) and thus, the ground raised by the Revenue stands dismissed. Disallowance of expenses on dies and moulds - Held that - As decided in assessee s own case for earlier AYs replacement of dies and mould was only revenue expenditure after distinguishing the facts of the assessee s case from that of the Hon ble Supreme Court in the case of CIT v. Saravana Spinning Mills Pvt. Ltd (2007 (8) TMI 16 - SUPREME COURT OF INDIA ). - Decided in favour of assessee Disallowance of product launch expenditure - Held that - CIT(A) has held that the expenditure on product launch, advertisement and sales promotion is allowable as revenue expenditure under section 37(1) of the Act and moreover, amortization of the impugned expenditure under section 35D is also not warranted. As the Department has not accepted the decision of the Hon ble Jurisdictional High Court in the case of CIT v. Brilliant Tutorials Ltd. 2007 (1) TMI 147 - MADRAS High Court relied on by the ld. CIT(A) and against this decision, the Department has preferred SLP Before the Hon ble Supreme Court. However, the ld. DR could not file any decision against the decision of the Hon ble Jurisdictional High Court in the case of CIT v. Brilliant Tutorials Ltd. (supra). Until and unless the decision is reversed, the decision of the Hon ble Jurisdictional High Court is having binding nature, therefore, we find no infirmity in the order passed by the ld. CIT(A) on this issue- Decided in favour of assessee TDS u/s 195 - disallowance under section 40(a)(i) - non-deduction of tax at source on the foreign remittances made for agency commission - Held that - With regard to the issue as to whether the TDS has to be deducted or not when the commission payment made to the overseas agents, the issue is squarely covered in favour of the assessee by the decision of the Hon ble Jurisdictional High Court in the case of CIT v. Faizan Shoes Pvt. Ltd. 2014 (8) TMI 170 - MADRAS HIGH COURT wherein held the services rendered by the non-resident agent can at best be called as a service for completion of the export commitment and would not fall within the definition of fees for technical services - Section 9 of the Act is not applicable to the case on hand and section 195 of the Act does not come into play Decided against Revenue. Set off of the loss of 80IC units against the income of other units - Held that - With regard to set off of losses of 80IC unit against the profit of other units, we find that the Hon ble Delhi High Court in the case of CIT v. KEI Industries Ltd.(2015 (3) TMI 618 - DELHI HIGH COURT) has held that loss suffered by the assessee in a unit entitled to exemption under section 10B of the Income-tax Act, 1961 cannot be set off against income from any other unit not eligible for such exemption. - Decided in favour of revenue
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961, read with Rule 8D. 2. Deletion of disallowance of interest under Rule 8D(2)(ii). 3. Deletion of disallowance of expenses on dies and moulds. 4. Deletion of disallowance of product launch expenditure. 5. Deletion of disallowance under Section 40(a)(i) for non-deduction of tax at source on foreign remittances. 6. Set off of loss of 80IC units against the income of other units. Detailed Analysis: 1. Disallowance under Section 14A read with Rule 8D: The assessee challenged the confirmation of disallowance under Section 14A of the Act. The Assessing Officer (AO) observed that the assessee derived exempt income but did not allocate any expenditure towards it. Applying Rule 8D, the AO quantified the disallowance at ?3,66,11,461/-. The CIT(A) upheld the disallowance under Rule 8D(2)(iii) but deleted the interest disallowance under Rule 8D(2)(ii). The Tribunal confirmed the CIT(A)'s decision, stating that the assessee had sufficient interest-free funds to make investments in tax-free securities, thus no interest could be disallowed under Rule 8D(2)(ii). 2. Deletion of disallowance of interest under Rule 8D(2)(ii): The Revenue appealed against the deletion of disallowance of ?1,95,18,961/- under Rule 8D(2)(ii). The CIT(A) found that the assessee had sufficient interest-free funds to make investments in tax-free securities, and thus, no interest could be disallowed. The Tribunal upheld this decision, referencing the ITAT Mumbai's decision in HDFC Ltd. v. DCIT and the Bombay High Court's decision in CIT v. Reliance Utilities and Power Ltd., which supported the view that if the assessee's own funds exceed the investments in tax-free securities, no interest disallowance is warranted. 3. Deletion of disallowance of expenses on dies and moulds: The assessee claimed expenditure on dies, jigs, and moulds as revenue expenditure. The AO treated this as capital expenditure and allowed depreciation, disallowing ?23,29,55,420/-. The CIT(A) and the Tribunal followed the ITAT's earlier decisions in the assessee's own case, holding that such expenditure is of a revenue nature and allowed the claim. 4. Deletion of disallowance of product launch expenditure: The AO disallowed ?41,28,15,721/- out of ?51,07,57,162/- claimed as product launch expenditure, treating it as capital expenditure. The CIT(A) allowed the expenditure as revenue expenditure under Section 37(1) of the Act, supported by various judicial precedents. The Tribunal upheld the CIT(A)'s decision, referencing the jurisdictional High Court's decision in CIT v. Brilliant Tutorials Ltd., which treated such expenses as revenue expenditure. 5. Deletion of disallowance under Section 40(a)(i) for non-deduction of tax at source on foreign remittances: The AO disallowed ?12.61 crores for non-deduction of tax at source on foreign remittances for agency commission. The CIT(A) and the Tribunal followed the jurisdictional High Court's decision in CIT v. Faizan Shoes Pvt. Ltd., which held that commission paid to non-resident agents for services rendered outside India is not taxable in India, and thus no TDS is required. 6. Set off of loss of 80IC units against the income of other units: The AO disallowed the set off of loss from the Himachal unit against profits from other units, citing Section 80-IA(5). The CIT(A) allowed the set off, but the Tribunal reversed this decision, following the Delhi High Court's ruling in CIT v. KEI Industries Ltd., which held that losses from units eligible for exemption cannot be set off against income from other units. Conclusion: The Tribunal dismissed the assessee's appeal and partly allowed the Revenue's appeal, confirming the disallowance under Rule 8D(2)(iii), allowing the deletion of interest disallowance under Rule 8D(2)(ii), treating expenditure on dies and moulds as revenue expenditure, allowing product launch expenditure as revenue expenditure, and confirming no TDS requirement on foreign commission payments. However, it reversed the CIT(A)'s decision on the set off of 80IC unit losses, disallowing the set off against other unit profits.
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