2018 (9) TMI 1685 - AT - Income Tax

Disallowance on account of pro rata interest on loan given to sister concern u/s 36(1)(iii) - availability of own funds - Held that - Hon ble Supreme Court in the case of CIT vs. Munjal Sales Corporation, 2008 (2) TMI 19 - SUPREME COURT held that if assessee has huge interest free funds including the profit earned by the assessee during the year which is sufficient to cover the advancement of loan, then no interest should be disallowed. The assessee has demonstrated that the huge amount of money was lying in the capital of the partners and the profit earned during the relevant assessment year itself was approximately ₹ 1.19 crores. Therefore, such an availability of funds interest free is sufficient to cover up a small interest free loan of ₹ 16 lacs given to sister concern. Accordingly, the disallowance of ₹ 1,14,777/- is deleted. In the result appeal of the assessee is allowed. Rectification of mistake - Supporting manufacturers deduction u/s 80IB on duty drawback / DEPB allowed - Failure to apply the judgment of the Jurisdictional High Court - CIT(A) has rectified his order and has allowed this issue in favour of the department - Held that - Following a binding judicial precedents of the Jurisdictional High Court in the rectification proceedings has been upheld by ACIT vs. Saurashtra Kutch Stock Exchange Ltd. (2008 (9) TMI 11 - SUPREME COURT), wherein held that failure to apply the judgment of the Jurisdictional High Court even rendered subsequently gives rise to a mistake apparent from records and the appellate authority has to rectify its judgment so as to bring in consonance with the judgment of the Hon ble Jurisdictional High Court. Therefore, we hold that there is no legal infirmity by the Ld. CIT (A) in rectifying his earlier order and same is much within the scope of section 154. Thus, the appeal of the assessee on this issue is dismissed. Levy of penalty u/s 271(1)(c) - disallowance of deduction u/s 80IB; and also on account of disallowance of pro-rata interest - Held that - The assessee s claim of deduction u/s 80IB on Duty Drawback/DEPB at the time of filing of return was then supported by various judgments of the Tribunal which was also confirmed by the Hon ble Jurisdictional High court as discussed in the earlier part of the order. Under these circumstances it cannot be held that the assessee s claim at the time of filing of return of income was either not correct or was not bonafide. AO had relied upon the judgment of Liberty India vs. CIT (2009 (8) TMI 63 - SUPREME COURT) held that such a claim was not allowable even at the time of filing of return of income. However, such a reasoning is not held to be tenable, because the Hon ble High Court in its judgment and order dated 13th May, 2008 had considered various judgments of the High Court as well as the Supreme Court in the case of CIT vs. Baby Marine Exports,(2007 (3) TMI 206 - SUPREME COURT), wherein deduction u/s 80HHC on duty drawback/DEPB in case of supporting manufacturer was allowed. Thus, it cannot be held that assessee was guilty of furnishing of inaccurate particulars of income. Such a levy of penalty of disallowance of deduction cannot be upheld and same is directed to be deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of ?1,14,777/- on account of pro rata interest on loan given to sister concern under Section 36(1)(iii).
2. Allowability of deduction under Section 80IB amounting to ?37,16,691/-.
3. Legality of the order passed under Section 154.
4. Levy of penalty under Section 271(1)(c).

Detailed Analysis:

1. Disallowance of ?1,14,777/- on account of pro rata interest on loan given to sister concern under Section 36(1)(iii):
The assessee challenged the disallowance of ?1,14,777/- on account of pro rata interest on an interest-free loan of ?16 lacs given to its sister concern, M/s. FLOTEX India. The assessee argued that the loan was given out of the capital of the partners and the profits earned during the relevant year, which were sufficient to cover the loan amount. The AO disallowed the interest following the judgment of the Punjab & Haryana High Court in the case of CIT vs. M/s. Abhishek Industries Ltd., but this judgment was later overruled by the Supreme Court in CIT vs. Munjal Sales Corporation. The Tribunal found that the assessee had sufficient interest-free funds to cover the loan and deleted the disallowance of ?1,14,777/-. The appeal of the assessee was allowed.

2. Allowability of deduction under Section 80IB amounting to ?37,16,691/-:
The revenue's appeal challenged the allowability of deduction under Section 80IB amounting to ?37,16,691/-. However, since the tax effect was less than ?20 lacs, the appeal was treated as non-maintainable in view of the CBDT circular No.3/2018 dated 10.07.2018. Consequently, the revenue’s appeal was dismissed.

3. Legality of the order passed under Section 154:
The assessee contested the order passed under Section 154, which disallowed the deduction under Section 80IB in respect of export incentives. The AO had initially disallowed this deduction following the Supreme Court's judgment in Liberty India vs. CIT. The CIT(A) had allowed the deduction based on the ITAT's decision in ACIT vs. M/s. Mittal Overseas. However, the AO filed for rectification under Section 154, citing a binding judgment of the Punjab & Haryana High Court in the case of CIT vs. M/s. Mittal Overseas, which ruled against the assessee. The CIT(A) rectified the order to align with the High Court's judgment. The Tribunal upheld the CIT(A)'s rectification, stating that failure to apply the binding precedent constitutes a mistake apparent from the record. Thus, the appeal of the assessee on this issue was dismissed.

4. Levy of penalty under Section 271(1)(c):
The assessee challenged the penalty levied on the disallowance of deduction under Section 80IB and the disallowance of pro rata interest of ?1,14,777/-. Since the disallowance of pro rata interest was deleted, the penalty on this disallowance was also directed to be deleted. Regarding the penalty on the disallowance of deduction under Section 80IB, the Tribunal noted that at the time of filing the return, the assessee’s claim was supported by various judgments, including a binding precedent from the Jurisdictional High Court. Therefore, the assessee could not be accused of furnishing inaccurate particulars of income. The Tribunal directed the deletion of the penalty.

Conclusion:
The Tribunal allowed the assessee's appeal regarding the disallowance of ?1,14,777/- and directed the deletion of the penalty related to this disallowance. The revenue's appeal regarding the deduction under Section 80IB was dismissed due to the low tax effect. The Tribunal upheld the CIT(A)'s order passed under Section 154, aligning with the binding precedent. The penalty on the disallowance of deduction under Section 80IB was also directed to be deleted.