2016 (9) TMI 507 - HC - Income Tax

Disallowance of deduction u/s 80 IB - Tribunal upholding the decision of ld. CIT(A) reducing the disallowance of deduction u/s 80 IB on the issue of inter-unit investments - allocating interest expenditure of Ludhiana unit for the funds invested in Unit-I, Unit-II and Unit-III at Samba (J&K) based on ration between own capital and borrowed funds - Held that - The CIT (Appeals) held that the assessee could only make a claim that such transfers were from self-generated funds which did not carry any interest. In this regard, it was further noted that as per the balance-sheet of the Ludhiana Unit, interest-free funds were available and that the funds had also been borrowed by the Ludhiana Unit from financial institutions on interest. The CIT (Appeals), accordingly, adopted the approach of finding out the ratio of the borrowed funds to the interest-free funds. It was found that as per the balance-sheet as on 31.03.2008, about 43 per cent of the capital constituted the interest-free reserves amounting to about ₹ 48.6768 crores, whereas, the borrowed funds constituted 57 per cent of the available funds aggregating to about ₹ 65.35 crores. He, accordingly, apportioned the amounts in respect of the three units depending on the amounts advanced by the Ludhiana Unit to each of them. The ITAT upheld this decision. The approach of the CIT (Appeals) and the ITAT cannot be said to be perverse, irrational or absurd. In fact, it is settled now that when there are interest-bearing funds and interest-free funds, the presumption is that an assessee would invest the amount yielding exempt income from the interest-free funds in the first instance. However, keeping all the facts and circumstances of the case in mind, the appellate authority decided to apportion the amount. - No substantial question of law.

Summary

Issues Involved:
1. Disallowance of deduction under Section 80-IB on inter-unit investments
2. Addition of advances to sister concerns
3. Deduction under Section 80-IB for Unit-II, Samba
4. Allocation of interest expenditure for multiple units based on own capital and borrowed funds

Analysis:

Issue 1: Disallowance of deduction under Section 80-IB on inter-unit investments
The appellant challenged the ITAT's decision upholding the CIT(A)'s reduction of the disallowance of deduction under Section 80-IB on the issue of inter-unit investments. The Assessing Officer disallowed the deduction, alleging that the assessee transferred funds to eligible units to inflate profits for availing more deduction under Section 80-IB. The CIT(A) and ITAT considered the evidence and balance-sheet details. They found that the Ludhiana Unit had interest-free funds and reserves to invest in the Samba Units. The CIT(A) calculated the ratio of borrowed funds to interest-free funds and apportioned the amounts accordingly. The appellate authorities' decision was deemed reasonable, considering the facts and circumstances of the case.

Issue 2: Addition of advances to sister concerns
The appellant contested the ITAT's decision to delete the addition of a specific amount made by the AO on account of advances to sister concerns. The Assessing Officer applied a higher interest rate on the advances, which was reduced by the appellate authority to a lower rate. The court found the appellate authority's decision acceptable and not irrational. This issue did not raise a substantial question of law.

Issue 3: Deduction under Section 80-IB for Unit-II, Samba
The appellant questioned the ITAT's decision to allow a higher deduction under Section 80-IB for Unit-II, Samba, which was earlier claimed at a lower amount. The Assessing Officer had rejected the claim, citing the failure to file a revised return for claiming enhanced deduction. The ITAT upheld the CIT(A)'s decision based on the facts of the case. The issue was settled against the department based on a previous judgment, and no substantial question of law was raised.

Issue 4: Allocation of interest expenditure for multiple units
The appellant raised concerns about the ITAT's decision to allocate interest expenditure of one unit for funds invested in other units based on the ratio of own capital and borrowed funds. The appellant argued that no evidence of self-generated funds being used was provided. The court found the approach reasonable, considering the available evidence and the presumption that an assessee would invest income from interest-free funds first. The decision was upheld as not perverse or absurd.

In conclusion, the court dismissed the appeal, finding that the authorities had appropriately considered the evidence and made reasoned decisions based on the facts and circumstances of the case.