2019 (3) TMI 990 - AT - Income Tax

Disallowance u/s 14A read with rule 8D - HELD THAT - The amount of divided earned by the assessee from its own subsidiary as well from outside / other companies, in our view, a total disallowance of ₹ 5 lacs will be justified in this case on account of administrative expenses. However, since the assessee itself has suo motu made disallowance of ₹ 2 lacs, the assessee will be given the benefit of the same. Disallowance of interest on notional basis u/s 36(i)(iii) - HELD THAT - In the light of the decision of the on Supreme Court in the case of CIT (LTU) Vs. Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT , no disallowance is attracted under this head as the assessee has demonstrated that it had sufficient own funds to meet the investments / advances given etc. This issue is accordingly decided in favour of the assessee. Allowability of Premium paid on redemption of Foreign Currency Convertible Bonds (FCCB) as business expenditure - capital receipt OR Revenue expenditure - HELD THAT - Tribunal in assessee s own case 2010 (3) TMI 1242 - ITAT CHANDIGARH held that the said expenditure is to be treated as Revenue expenditure, in the year of payment Disallowance of export commission for non deduction of TDS u/s 195 - addition u/s 40(a)(ia) - HELD THAT - The assessee had paid certain commission to foreign agents for procuring orders. The assessee has justified the payment of aforesaid commission by stating that those foreign agents had direct liaison with the parties, they not only fulfilled the procurement of orders but also are helpful in acquiring the payments of the sales made. AO disallowed the aforesaid commission holding that the assessee was liable to deduct tax at source in respect of the aforesaid payments. After going through the assessment orders, we find that the Assessing officer has not disputed that the aforesaid payments were made to foreign agents who were not taxable in India. Since income, if any, received or accrued to foreign agents was not taxable in India, hence, as per the settlement law, the expenditure cannot be disallowed for non-deduction of TDS on such payments.- No justification on the part of the lower authorities in disallowing the expenditure under this head. - Decided in favour of assessee Interest received - head of income - Income from other sources OR Business and Profession - Characterization of income - HELD THAT - It is an undisputed fact on the file that the aforesaid amount of interest has not been received by the assessee during the course of business i.e. to say that from customers or suppliers etc., hence, the same, in our view, cannot be treated as income from business or profession . Netting of the interest expenditure and the interest income received from other parties / banks etc. - alternative contention - We accordingly direct the Assessing officer to allow the expenditure incurred by the assessee for earning of the interest income i.e., if assessee is able to bring nexus between the expenditure incurred and the interest income earned, net of the income will be taxable under the head income from other sources . This ground is accordingly partly allowed in favour of the assessee. Treating the income from the profits of the units eligible for deduction u/s 80IB / 80IC of the Act - HELD THAT - So far as the claim of deduction in respect of the insurance claim, which admittedly was on account of loss of trading assets is concerned, it has been held time and again that if the loss therein is indemnified by way of compensation received from insurance company that can be said to be not a separate income, rather, the same will have effect for reducing loss / expenditure. Hence, if the assessee has booked the aforesaid loss, in relation to which insurance claim has been received, as expenditure, then the amount received by the assessee from insurance company will be eligible for deduction u/s 80IB/80IC of the Act. This issue is accordingly restored to the file of the Assessing officer for verification of the facts. Gains on the foreign exchange rate fluctuation - HELD THAT - The foreign exchange fluctuation gain is in respect of export receipts / receivable of the assessee and any gain in respect of receivable on account of foreign exchange fluctuation in fact contributes to the profits of the assessee from the sale/ export of the products. The assessee is held to be eligible to claim deduction u/s 80 IB / 80 IC of the Act in this respect. We direct the AO to verify whether these are independent receipts, if found so, the Assessing officer is directed to allow the income from sundry balance written back, commission / discount received and exchange rate fluctuation as the same is related to the business activity of the assessee, however, the income from rent is not allowable to be eligible u/s 80IC / 80IB of the Act. So far as the Misc. receipts is concerned, since we do not have exact details of such Misc. receipts, hence, the assessee has submitted that he does not press the issue relating to Misc. Receipts under the head Misc. Income . So far as the prior period income is concerned, the same is also not pressed. Ground No. 9 is accordingly partly allowed. Adjustment of head office expenses to claim deduction u/s 80IC/ 80IC - HELD THAT - As decided in assessee s own case upheld the findings of the CIT(A) to allocate the net of head office expenses. Following the same proposition and for the sake of consistency, the Assessing officer is directed to allocate the net of head office expenditure, and not the gross net expenditure under this issue. Treating interest reimbursement under Technology Upgradation Fund Scheme (TUFS) as capital receipt. Sales tax subsidy treated as a capital receipt. Treating the line/bay charges - capital receipt OR Revenue receipt - HELD THAT - As decided in assessee s own case 2010 (3) TMI 1242 - ITAT CHANDIGARH Tribunal after discussing the details upheld the order of the CIT(A) in that year treating the aforesaid expenditure as Revenue expenditure. No contrary decision has been cited before us. In view of this, the issue is accordingly decided in favour of the assessee. Interest received from customers / suppliers whether - treated as business income or not - HELD THAT - Admittedly, the interest received form customers / suppliers is a part of the business transaction and is received in the regular course of business, hence, we do not find any infirmity in the order of the CIT(A) while treating it as business income of the assessee.

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Disallowance of interest expenditure under Section 36(1)(iii).
3. Treatment of premium paid on redemption of Foreign Currency Convertible Bonds (FCCB) as capital or revenue expenditure.
4. Disallowance under Section 40(a)(ia) for non-deduction of TDS on commission paid to non-resident agents.
5. Classification of interest received as 'Income from Other Sources' versus 'Income from Business and Profession'.
6. Deduction under Section 80IB/IC for various incomes.
7. Allocation of head office expenses to units eligible for deduction under Section 80IB/IC.
8. Treatment of interest reimbursement under Technology Upgradation Fund Scheme (TUFS) as capital receipt.
9. Treatment of sales tax subsidy as capital or revenue receipt.
10. Treatment of line/bay charges as capital or revenue expenditure.
11. Excess expenditure claimed on power generation.
12. Netting of interest from customers/suppliers with expenses.

Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The assessee contested the disallowance of ?1055.23 lacs under Section 14A. The Tribunal noted that the assessee had sufficient own funds to meet the investments yielding tax-exempt dividend income, referencing decisions in 'CIT Vs. Kapson Associates' and 'ACIT Vs. Janak Global Resources Pvt Ltd'. The Tribunal ruled in favor of the assessee regarding interest expenditure but upheld a partial disallowance of ?5 lacs for administrative expenses, considering the dividend income earned and investments made.

2. Disallowance of interest expenditure under Section 36(1)(iii):
The Tribunal, referencing the Supreme Court decision in 'CIT (LTU) Vs. Reliance Industries Ltd.', concluded that no disallowance was warranted as the assessee had sufficient own funds to meet the investments/advances given.

3. Treatment of premium paid on redemption of FCCB:
The Tribunal referenced its prior decision in the assessee’s case, ruling that the premium paid on redemption of FCCB should be treated as revenue expenditure in the year of payment, aligning with the decision in 'CIT Patiala Vs. Industrial Cables (P) Ltd.' and 'Taparia Tools Ltd Vs. JCIT'.

4. Disallowance under Section 40(a)(ia) for non-deduction of TDS:
The Tribunal found that the commission paid to foreign agents was not taxable in India, thus disallowing the expenditure for non-deduction of TDS was unjustified. This issue was decided in favor of the assessee.

5. Classification of interest received:
The Tribunal ruled that the interest received from customers/suppliers should be treated as business income. However, for other interest income, the Tribunal allowed netting of interest expenditure against interest income if a nexus could be demonstrated.

6. Deduction under Section 80IB/IC:
The Tribunal restored the issue of insurance claim verification to the Assessing Officer. It ruled that gains from foreign exchange rate fluctuations related to export proceeds were part of sale consideration and eligible for deduction. Miscellaneous income and interest from employees were not considered business income, while the Tribunal allowed the inclusion of sundry balance written back, commission/discount received, and exchange rate fluctuation as business income, subject to verification.

7. Allocation of head office expenses:
Following prior Tribunal decisions, the Tribunal directed the allocation of net head office expenses to units eligible for deduction under Section 80IB/IC.

8. Treatment of interest reimbursement under TUFS:
The Tribunal restored this issue to the CIT(A) for fresh decision, referencing earlier assessment years.

9. Treatment of sales tax subsidy:
The Tribunal, referencing the Supreme Court decision in 'CIT-I Vs. M/s Chaphalkar Brothers', ruled that sales tax subsidy should be treated as a capital receipt.

10. Treatment of line/bay charges:
The Tribunal, referencing its prior decision, ruled that line/bay charges should be treated as revenue expenditure.

11. Excess expenditure claimed on power generation:
The Tribunal upheld the CIT(A)’s decision allowing the excess expenditure claimed by the assessee on power generation, noting that the Revenue did not contest this issue in earlier appeals.

12. Netting of interest from customers/suppliers with expenses:
The Tribunal upheld the CIT(A)’s decision allowing netting of interest from customers/suppliers with expenses, treating it as business income.

Conclusion:
The appeals were partly allowed, with several issues decided in favor of the assessee, particularly concerning disallowance of interest expenditure, treatment of FCCB premium, and classification of sales tax subsidy. Other issues were restored to the CIT(A) or the Assessing Officer for fresh consideration.

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