2018 (4) TMI 639 - AT - Income Tax

Disallowance of interest u/s 36(1)(iii) - Held that - The assessee was engaged in production of various steel items which was capital intensive and therefore, in continuous need of uninterrupted power supply. The power supply was of utmost importance to carry out day to day activities of the manufacturing and the aforesaid agreement entitled the assessee to obtain 35KWH power supply at average rate of ₹ 2.75 per unit. Therefore, the said agreement was beneficial for the business interest of the assessee and the investment in the said entity was to finance the power project and hence, part and parcel of the same transaction. Further, the assessee was under an obligation to make the aforesaid investment before becoming entitled to obtain power in terms of the agreement. Hence, on factual matrix, proportionate disallowance u/s 36(i)(iii) as made by Ld. AO was not justified. Interest disallowance u/s 14A read with Rule 8D(2)(ii) qua the above investments - Held that - We restrict the impugned expenses disallowance u/s 14A to ₹ 12,355/-, being exempt income earned by the assessee. Ground No. 4 of assessee s cross objection stands partly allowed. Disallowance u/s 145A on account of unutilized closing balance lying as Cenvat / Modvat Credit stood squarely covered in assessee s favor by the judgment in CIT Vs Diamond Dye Chem Limited 2017 (7) TMI 616 - BOMBAY HIGH COURT - the assessee is consistently following exclusive method to account for excise duty in the books of accounts. We also concur with the view that whatever method of accounting i.e. exclusive method or inclusive method is followed by the assessee, the same would be tax / revenue neutral in nature since the adjustment of stock in a particular period shall result into corresponding variation in the subsequent year and further, the credit balance lying as Cenvat / Modvat Credit was adjustable in subsequent year against excise duty liability arising in subsequent period. Therefore, respectfully following aforesaid binding judicial precedent, we delete the impugned additions. Addition u/s 40A(9) pertains to school expenses reimbursed by assessee to an educational society - Held that - CIT(A) has rejected the claim of the assessee since the same did not fulfill the prescribed conditions of Section 40A(9). We also find that the nature of payment made by the assessee does not come within the purview of Section 40A(9) / (10). However, the Ld. AR has submitted that the same being incurred for the welfare of employee s children, which in turn, helps in smooth running of assessee s business, the same has been incurred for the business purposes of the assessee and hence, allowable u/s 37(1). Upon perusal, we find that there is not enough material on record to substantiate this fact. The school is situated at Khopoli where the manufacturing plant of the assessee is situated and therefore, we find some strength in the argument of Ld. AR. Hence, on factual matrix, we deem it fit to restore the matter back to the file of Ld. AO for considering the assessee s claim u/s 37(1) with a direction to the assessee to demonstrate that the said expenditure has mainly been incurred for the children of the assessee s employee and the same has resulted into smooth & efficient running of assessee s business and the conditions as envisaged by Section 37(1) are fulfilled

Issues Involved:

1. Disallowance of interest under Section 36(1)(iii).
2. Disallowance under Section 14A.
3. Disallowance under Section 145A.
4. Disallowance under Section 40A(9).
5. Directions given by CIT(A) to AO for verification and remedial action.

Detailed Analysis:

1. Disallowance of Interest under Section 36(1)(iii):

The revenue challenged the CIT(A)'s direction to the AO to verify and take remedial action regarding the interest component attributable to capital work-in-progress. The AO had initially disallowed ?1,51,23,277/- as interest expenditure, arguing that the interest expenditure was mainly against working capital loans. The assessee contended that the investment in Wardha Power Company Private Limited was for business purposes, specifically to secure a power supply essential for its manufacturing operations. The Tribunal found merit in the assessee's argument, supported by the decision in S.A. Builders Vs. CIT, and deleted the disallowance, concluding that the investment was commercially expedient.

2. Disallowance under Section 14A:

The AO disallowed ?54,14,362/- under Section 14A, comprising interest and expenses related to exempt income. The Tribunal noted that the disallowance under both Sections 14A and 36(1)(iii) resulted in double disallowance. The Tribunal observed that the investment in Wardha Power Company was incapable of yielding exempt dividend income as it was in the form of share application money. Consequently, the interest disallowance under Rule 8D(2)(ii) was deleted. For expenses under Rule 8D(2)(iii), the Tribunal restricted the disallowance to ?12,355/-, the amount of exempt income earned, following various judicial precedents.

3. Disallowance under Section 145A:

The AO added ?14,53,332/- to the closing stock under Section 145A, arguing that the unutilized Cenvat/Modvat credit should be included. The Tribunal, referencing the Bombay High Court's decision in CIT Vs Diamond Dye Chem Limited, held that the method of accounting (exclusive or inclusive) would not affect the net result and was tax/revenue neutral. Therefore, the disallowance was deleted.

4. Disallowance under Section 40A(9):

The AO disallowed ?59,87,867/- reimbursed to an educational society for a school, arguing it was not incurred for business purposes. The Tribunal found that the nature of the payment did not fall under Section 40A(9)/(10) but could be considered under Section 37(1) if it was for the welfare of employees' children and facilitated smooth business operations. The matter was remanded to the AO to verify if the expenditure met the conditions of Section 37(1).

5. Directions Given by CIT(A) to AO for Verification and Remedial Action:

The revenue contended that the CIT(A) erred in directing the AO to verify and take remedial action on various issues, arguing that CIT(A) did not have the power to set aside issues for verification. The Tribunal found that the CIT(A) had not set aside the issues but directed further verification. For disallowance under Section 14A related to diminution in value of investments, the Tribunal noted that no fresh provision was made during the year and expunged the directions. For disallowance under Section 36(1)(iii) related to capital work-in-progress and interest-free loans, the Tribunal sustained the directions for further verification by the AO.

Conclusion:

The Tribunal partly allowed the appeal and cross-objection, providing relief on certain disallowances while remanding others for further verification. The order emphasized the importance of commercial expediency and the factual matrix in determining the allowability of expenses and disallowances under various sections of the Income Tax Act.

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