2020 (6) TMI 335 - AT - Income Tax

Disallowance of expenses made pertaining to those incurred for the purpose of earning exempt income, as per the provisions of section 14A of the Act r. w. r. 8 D - HELD THAT - Assessee has demonstrated the availability of sufficient own funds for the purpose of making investment of own funds available as against total investment we hold that the said facts and circumstances of the assessee warrant no disallowance of interest in the present case, following the decision of the ITAT in the case of the assessee for assessment year 2011 - 12 2019 (3) TMI 990 - ITAT CHANDIGARH Similarly in the case of administrative expenses we have noted that almost entire amount of dividend income has been earned from subsidiary company of the assessee in which investment was made in the preceding years only. As noted by the ITAT in the case of the assessee for assessment year 2011 - 12 since the investment in subsidiaries do not require much administrative indulgence, the disallowance cannot be calculated as prescribed by Rule 8 D in the ratio of investments made and considering the past history of the assessee wherein against exempt income earned and in assessment years 2006 - 07 and 2007 - 08 2018 (12) TMI 1623 - ITAT CHANDIGARH disallowance has been upheld by the ITAT. We direct the disallowance in the present case wherein the facts indicate that the assessee has earned dividend income. Direct the AO to restrict the disallowance in all u/s 14 A in the present case. This ground of appeal raised by the assessee is, therefore, allowed in above terms. Treatment of interest earned - as income from other sources OR income from business and profession - HELD THAT - Since the issue of interest income to be taxable under the head other sources stands adjudicated by the ITAT against the assessee the said decision will squarely apply in the present case also and following the directions of the ITAT in the said year, we uphold the plea of the assessee to netting of interest expenditure against the said income directing the AO to allow netting of subject to there being direct nexus between the interest income earned as directed by the I TAT in the case of the assessee in assessment years 2006 - 07 and 2007 - 08 above. Ground raised by the assessee is allowed in above terms. Disallowance of deduction u/s 80 IC/ 80 IB - HELD THAT - Receipts no arguments have been forwarded by the assessee and, therefore, the disallowance of deduction u/ s 80 IB/ 80 IC on the same amounting is upheld. As for the interest received from bank and other, we do not find any merit in the claim of the assessee that having been earned on security deposits made with Electricity Board they were purely in the nature of business income and hence eligible for deduction u/ s 80 IB/ 80 IC. The said income as described by the assessee does not have any first degree nexus with the industrial undertakings of the assessee and, therefore, we hold that the same is not eligible for deduction u/ s 80 IB/ 80 IC of the Act. We hold that the assessee is eligible to deduction u/s 80 IB/ 80 IC of the Act on the damages against cancellation, commission from shipping while it is held not eligible for deduction on the other receipts, interest receipts from bank and others and rental income, which we direct the AO to restrict the disallowance to the net rental income excluding the expenses incurred for earning the same. Allocation of head office expenses to units claiming deduction u/s 80 IB/ 80 IC - HELD THAT - CIT(A) directed the AO to allocate head office expenses net of head office income for the said purpose following the decision of the ITAT in assessee s own case 2018 (12) TMI 1623 - ITAT CHANDIGARH Treatment of line/ bay charges - Revenue or capital expenditure - HELD THAT - This issue stood adjudicated in favour of the assessee in its own case by the ITAT in assessment years 2011 - 12 and 2012 - 13 treat the aforesaid expenditure as Revenue expenditure. No infirmity in the order of the CIT(A) treating the interest received on account of delayed payments from customers and suppliers as business income. Deduction u/s 80 IB and 80 IC on the interest from customers and employees, miscellaneous receipts comprising brokerage from ocean freight, foreign exchange gains, insurance claim and rebate discount - HELD THAT - We agree with the Ld. Counsel for the assessee that the issue of claim of deduction u/ s 80 IB/ 80 IC of the Act on interest income received from customers and misc. receipts in the nature of ocean freight, forex gain already stand decided in favour of the assessee by the ITAT in preceding years in the case of the assessee itself. We therefore see no reason to interfere in the order of the LD. CIT(A) with respect to allowance of the aforesaid claims. As for claim of deduction u/ s 80 IB/ 80 IC of the Act on insurance claim received, the issue is restored back to the AO with the direction to adjudicate it in accordance with the direction of the ITA T in the case of the assessee on the identical issue in A. Y 2011- 12 Treatment of interest received under TUF Scheme as capital receipt . Sales tax subsidy to be treated as capital receipt - See Chaphalker Brothers Pune 2017 (12) TMI 816 - SUPREME COURT Mat credit shall include surcharge and cess . See VMT Spinning Company Ltd. 2015 (7) TMI 1334 - ITAT CHANDIGARH Interest income as assessable under the head Business Income is rejected but at the same time its plea of netting the said income is accepted and the AO is directed to allow netting subject to there being direct nexus between the interest income and expenditure incurred.

Summary

Issues Involved:

1. Applicability of Section 14A read with Rule 8D for disallowance of expenses.
2. Treatment of interest income as 'Income from Other Sources' versus 'Income from Business and Profession'.
3. Disallowance of deduction under Sections 80IC/80IB on rental income, interest from others, and miscellaneous receipts.
4. Allocation of head office expenses to units claiming deduction under Sections 80IB/80IC.
5. Treatment of line/bay charges as capital expenditure versus revenue expenditure.
6. Treatment of interest from customers and suppliers as 'Business Income' versus 'Income from Other Sources'.
7. Deduction under Sections 80IB/80IC on interest from customers and employees, miscellaneous receipts, and insurance claims.
8. Treatment of reimbursement of interest under TUF Scheme as capital receipt versus revenue receipt.
9. Treatment of sales tax subsidy as capital receipt versus revenue receipt.
10. Inclusion of surcharge and cess in MAT credit calculation.

Issue-Wise Detailed Analysis:

1. Applicability of Section 14A read with Rule 8D for disallowance of expenses:
The Tribunal examined whether the disallowance of expenses under Section 14A read with Rule 8D was justified. The assessee had earned substantial exempt income and made a suo moto disallowance. The AO invoked Rule 8D for additional disallowance, which was recalculated by the CIT(A). The Tribunal, considering past decisions and the availability of sufficient own funds for investments, restricted the disallowance to ?2.25 lacs.

2. Treatment of interest income as 'Income from Other Sources' versus 'Income from Business and Profession':
The Tribunal upheld the AO's decision to treat the interest income as 'Income from Other Sources' but allowed the netting of interest expenses against this income, provided a direct nexus between the interest income earned and the interest expenditure incurred was established.

3. Disallowance of deduction under Sections 80IC/80IB on rental income, interest from others, and miscellaneous receipts:
The Tribunal held that rental income from accommodations rented to employees did not have a nexus with the industrial undertaking and thus was not eligible for deduction under Sections 80IC/80IB. However, only the net rental income after deducting related expenses should be disallowed. For miscellaneous receipts, damages against order cancellations were deemed eligible for deduction, while other miscellaneous receipts were not. Interest from others, including security deposits with the Electricity Board, was not considered eligible for deduction.

4. Allocation of head office expenses to units claiming deduction under Sections 80IB/80IC:
The Tribunal upheld the CIT(A)'s decision to allocate head office expenses net of head office income for calculating eligible profits for deduction under Sections 80IB/80IC, following the precedent set in previous years.

5. Treatment of line/bay charges as capital expenditure versus revenue expenditure:
The Tribunal ruled in favor of treating line/bay charges as revenue expenditure, consistent with decisions in previous assessment years.

6. Treatment of interest from customers and suppliers as 'Business Income' versus 'Income from Other Sources':
The Tribunal upheld the CIT(A)'s decision to treat interest from customers and suppliers as 'Business Income,' aligning with prior decisions where such interest was intrinsically linked to the business activity.

7. Deduction under Sections 80IB/80IC on interest from customers and employees, miscellaneous receipts, and insurance claims:
The Tribunal allowed deductions under Sections 80IB/80IC for interest from customers and certain miscellaneous receipts like brokerage from ocean freight and forex gains, following past decisions. Insurance claims were to be verified for their nature, with claims related to trading assets being eligible for deduction.

8. Treatment of reimbursement of interest under TUF Scheme as capital receipt versus revenue receipt:
The Tribunal upheld the CIT(A)'s decision to treat the reimbursement of interest under the TUF Scheme as a capital receipt, consistent with judicial precedents that considered the purpose of the subsidy for modernizing plant and machinery.

9. Treatment of sales tax subsidy as capital receipt versus revenue receipt:
The Tribunal ruled that sales tax subsidy received under the Madhya Pradesh Industrial Promotion Assistance Scheme was capital in nature, following the Supreme Court's decision in CIT Vs. Chaphalkar Brothers and previous Tribunal decisions.

10. Inclusion of surcharge and cess in MAT credit calculation:
The Tribunal upheld the inclusion of surcharge and cess in the MAT credit calculation, following the precedent set in the case of VMT Spinning Company Ltd.

Conclusion:
The appeals were partly allowed, with specific directions on each issue based on past judicial decisions and the facts of the case. The Tribunal's decisions were consistent with prior rulings and judicial precedents, ensuring a fair and just resolution of the issues.