2020 (12) TMI 55 - AT - Income Tax

Disallowance u/s.14A read with Rule 8D - As contended by AR own funds available with the assessee during the financial year 2013-14 were sufficient to make the corresponding investments, and hence no interest bearing borrowed funds were utilized for making such investment - HELD THAT - As relying on RELIANCE UTILITIES POWER LTD. 2009 (1) TMI 4 - BOMBAY HIGH COURT and HDFC BANK LTD. 2016 (3) TMI 755 - BOMBAY HIGH COURT held that, where both interest-free funds and interest bearing funds (mixed funds) are available to an assessee and the interest-free funds are more than the investments made by the assessee, then the presumption that can be drawn is that the investment in the tax-free securities would have been made out of the interest-free funds available with the assessee. In the facts of the present case, we note that the interestfree funds of its own available with the assessee in the form of share capital and free reserves were substantially more than the corresponding investments made to earn the interest free income and therefore we are of the view that the interest disallowance made by the AO u/s 14A read with Rule 8D(2)(ii), was rightly deleted by the ld. CIT(A). Disallowance u/s 14A read with Rule 8D(2)(ii) on account of interest was involved in assessee s own case for A.Y. 2010-11 as noted that there was sufficient own funds available with the assessee to make the investments and, therefore upheld the ld. CIT(A) s deleting the said interest disallowance. Identical view was expressed by this Tribunal to delete similar interest disallowance made in assessee s own case for A.Ys. 2011-12 2012-13 in the order dated 2018 (1) TMI 1614 - ITAT KOLKATA . Therefore, we uphold the impugned order of the ld. CIT(A) deleting the disallowance made by the Assessing Officer on account of interest under section 14A read with Rule 8D(2)(ii). Disallowance on account of common administrative expenses under section 14A read with Rule 8D(2)(iii) -The same was restricted by the ld. CIT(A) to the extent of exempt dividend income actually earned by the assessee during the year under consideration by following, the decision of the Hon ble Delhi High Court in the case of Joint Investment Limited vs.- CIT 2015 (3) TMI 155 - DELHI HIGH COURT - no reason to interfere with the impugned order of the ld. CIT(A) restricting the disallowance made on account of the common administrative expenses to the amount of exempt dividend income actually earned by the assessee during the year under consideration. Disallowance u/s 14A of the Act read with Rule 8D while computing the book profits u/s 115JB - there is no enabling provision in clause (f) of Explanation 1 to Section 115JB for making any adjustment in respect of expenditure disallowed as per Rule 8D.The scope of clause (f) cannot be enlarged in order to bring within its ambit the provisions of Sub-Section (2) (3) of Section 14A of the Act and therefore the disallowance made by applying Rule 8D cannot also be imported. The Special Bench of this Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI has held that the computation mechanism provided under Rule 8D of the Rules cannot be applied for computing addition in terms of clause (f) of Explanation 1,for arriving at the book profit u/s 115JB of the Act. - CIT(A) has rightly deleted the addition by the AO u/s 14A read with Rule 8D, while computing book profit u/s 115JB. Addition u/s 80-IE - profits derived by its eligible Centply Unit in the State of Assam - case of the assessee was selected for regular scrutiny under CASS - HELD THAT - When the assessee has placed the audited stand alone accounts of the Cent Ply unit at Assam before the AO and still if the AO was of the view that the profits of the units set up in backward areas should be lower than other units in developed areas, then the onus lay on the AO to establish the same with cogent material and corroborative evidence on at least find fault or infirmity in the books produced by the assessee. We however note that the AO clearly failed to do so. Nothing tangible was brought on record to support such reasoning. Instead the disallowance was made on the last ray of assessment purely on suspicion. According to us, the fact that high profits were earned by the eligible unit in comparison to other businesses by itself cannot lead to conclusion that the deduction claimed u/s 80IE was excessive. In this regard, it would first be relevant to examine the provisions of sub-section (10) of Section 80-IA of the Act which empowers the AO of the assessee having eligible business to scale down the profits which provision has been incorporated by sub-section (6) of section 80IE by virtue of which sub-section (5) and subsection (7) to (12) of section 80IA has been incorporated in to section 80IE. AO failed to show that there existed any arrangement between the assessee and its connected persons or other ineligible units, by which the transactions were so arranged as to produce more than the ordinary profits in the hands of the assessee. Since the AO was unable to show that there was any arrangement in terms of Section 80IA(10) of the Act, the AO could not have invoked the deeming provision and then estimated and scaled down the profits of the eligible unit of the assessee. Thus, the AO erred in estimating the profit of the eligible unit without satisfying the condition precedent as prescribed in section 80IE(6) read with section 80IA(10) of the Act. Inter-unit transactions were reported in Form 3CEB filed along with the return of income wherein the auditor had certified the same to be at arm s length. We note that the AO did not dispute the arm s length value of these goods transacted by the eligible unit with it depots. We also note that the AO also did not deem it fit to refer these specified domestic transactions for transfer pricing scrutiny. Hence, when the AO had not disputed the arm s length value of the transactions covered u/s 80IA(8),then his action of disputing the profitability of such eligible unit and holding it to be excessive, was clearly unsustainable in law as well as on facts. From the audit report issued Central Excise Audit for the relevant financial year 2013-14, it is noted that the Central Excise Department did not dispute the invoice rates at which the goods were transferred by the eligible Assam Unit to its depots, which also showed that the goods were cleared by the eligible Assam Unit at market value . We therefore note that, even on merits, the inter-unit transactions conducted by the eligible unit covered u/s 80IA(8) (10), were at arm s length and did not yield any more than ordinary profits to attract the rigors of Section 80IA(10) of the Act and enable the AO to estimate the profits of the eligible unit. Enhancement notice u/s 251 - Burden lay on the Revenue, to first demonstrate that the transactions between the assessee and the other related person were 'arranged' with a view to produce more profit to the assessee carrying on eligible business, and not the other way round. It was on this principle reason that the ld. CIT(A) allowed the appeal of the assessee. The ld. CIT(A) further took note of the fact that the profitability of the eligible Assam Unit was comparable with earlier years and therefore the AO could not have resorted to estimation of profits without first rejecting the books of accounts u/s 145(3) of the Act. We note that it was with a view to further verify the averments of the assessee and in exercise of his co-terminus powers that the ld. CIT(A)had issued enhancement notice u/s 251 of the Act and, thereafter made suo moto enquiries in exercise of the powers vested in him u/s 250(4) of the Act. Hence, it was a clear case of exercise of overriding power by ld. CIT(A) in terms of Rule 46A(4) and it was not a case where the assessee on his own volition had furnished additional evidence or fresh document, which would have been subjected to sub-rule (1) to (3) of Rule 46A of the Rules. In the instant case, the explanations regarding the factors influencing the higher profitability of the eligible Assam Unit had come on the record of the ld. CIT(A), because he had decided to examine the facts of the case in depth and then adjudicate upon the matter on the basis of evidence and material, thus, gathered. We note that the ld. CIT(A) was empowered to do so under the provisions of section 250(4) of the Act. The result of such enquiry conducted by him could have either gone to further cement or enhance the case made out by the AO or help out the assessee against the findings of the AO. In the instant case, the results of the enquiries thus conducted supported the case of the assessee and not that of the Revenue. However, the fact remains that such material was gathered by the ld. CIT(A) on his own motion, and therefore there was no requirement, in law for him, to consult the AO on the same. Education Cess and the Secondary and Higher Education Cess incurred by the assessee is deductible while computing profits from business - We direct the AO to allow the deduction of the education cess in computing total income of the assessee company. Computation of book profit u/s 115JB - Subsidies received by the assessee for setting up new industries, by way of refund of VAT and excise dutyare liable to be excluded from the computation of book profit u/s 115JB

Summary

Issues Involved:

1. Disallowance under Section 14A read with Rule 8D.
2. Adjustment under Section 14A while computing book profit under Section 115JB.
3. Disallowance of deduction under Section 80-IE.
4. Deductibility of education cess and Secondary and Higher Education cess.
5. Treatment of government incentives as capital receipts and their exclusion from book profit under Section 115JB.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:

The Revenue challenged the deletion of ?34,29,000/- disallowed by the AO under Section 14A read with Rule 8D. The assessee argued that its own funds were sufficient to cover the investments, negating the need for interest-bearing borrowed funds. The Tribunal upheld the CIT(A)'s decision, citing the Bombay High Court's ruling in Reliance Utilities & Power Limited, which established that if an assessee's interest-free funds exceed its investments, it can be presumed that the investments were made from these funds. The Tribunal also noted that similar disallowances were deleted in the assessee's previous assessment years.

2. Adjustment under Section 14A while computing book profit under Section 115JB:

The Revenue's appeal against the CIT(A)'s decision to disallow adjustments under Section 14A while computing book profit under Section 115JB was dismissed. The Tribunal noted that there is no provision in clause (f) of Explanation 1 to Section 115JB for adjustments based on Rule 8D. This position was supported by the Special Bench decision in ACIT vs. Vireet Investment Pvt. Ltd., which held that Rule 8D's computation mechanism cannot be applied to book profit calculations under Section 115JB.

3. Disallowance of deduction under Section 80-IE:

The AO had disallowed ?22,47,63,955/- of the deduction claimed under Section 80-IE, suspecting profit shifting from non-eligible to eligible units. The CIT(A) deleted this disallowance, and the Tribunal upheld this decision. The Tribunal found that the AO's estimation was based on flawed comparisons and lacked tangible evidence of any "arrangement" to shift profits. It was noted that the assessee's profitability was consistent with previous years, and no defects were found in the books of accounts. The Tribunal emphasized that the AO could not estimate profits without rejecting the books of accounts under Section 145(3).

4. Deductibility of education cess and Secondary and Higher Education cess:

The Tribunal allowed the assessee's claim for deducting education cess and Secondary and Higher Education cess, citing the Bombay High Court's decision in Sesa Goa Ltd. and the Rajasthan High Court's decision in Chambal Fertilizers & Chemicals Ltd. The Tribunal also referenced similar favorable decisions by coordinate benches, concluding that education cess is deductible while computing business profits.

5. Treatment of government incentives as capital receipts and their exclusion from book profit under Section 115JB:

The assessee received subsidies from the Central and State Governments for setting up new units, which were treated as capital receipts. The Tribunal agreed with the assessee's claim that these subsidies should be excluded from book profit under Section 115JB, following the Supreme Court's decision in CIT Vs Chaphalkar Brothers and the Calcutta High Court's decision in Pr. CIT vs Ankit Metal & Power Ltd. The Tribunal emphasized that subsidies aimed at industrial development and employment generation are capital in nature and should not be included in book profits.

Conclusion:

The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objections, affirming the CIT(A)'s decisions on all issues, including the disallowances under Section 14A, adjustments under Section 115JB, and the treatment of government incentives as capital receipts. The Tribunal also upheld the deductibility of education cess and Secondary and Higher Education cess.