2021 (3) TMI 318 - AT - Income Tax

Deduction u/s 80IAB - case of the assessee was selected for scrutiny assessment - as per AO no development or insignificant development of SEZ was carried out by the assessee-company, and therefore it is not entitled for deduction under section 80IAB - Assessee has infringed SEZ Act and Rules while claiming lease rental from sister concern, as eligible for grant of deduction under section 80IAB - HELD THAT - Once the approval to such activity is granted by the prescribed authority, and such approval is valid, it will no longer be open for the AO to verify the satisfaction of the conditions prescribed under Rule 18DA in order to refuse deduction under section 80IB(8A). The DPCL had made application to the Development Commissioner for approval for setting up SEZ on 29.3.2011 which was granted by the Development Commissioner on 22.6.2011. The said application was duly received by KASEZ on 29.3.2011. The assessee had submitted complete details about the procedural documentation on this aspect and as per Rule 6(2)(a) of the SEZ Rules, one of the units in SEZ could start commercial production within three years from the date of letter of approval granted by the BOA. Unless the land is being purchased, how production could be started. This aspect has been considered by the ld.CIT(A) while taking note of these facts in paragraph 3.4 at page no.38 of the impugned order. We have taken cognizance of this paragraph in the earlier part of this order, therefore we are of the view that the ld.CIT(A) has appreciated the facts in right perspective on this reasoning also, and rightly did not agreed with the AO. AO has observed that MD of DPCL, Shri J.R. Vyas has accepted that a wrong claim of deduction under section 80IBA was made but as gone through the details recorded on this fold of reasoning. It was demonstrated that this statement was given under misconception of the facts demonstrated before the MD by the survey team. It is pertinent to note that statement made during the course of survey under section 131(1A)(3) of the Act was without administrating oath, because the authorized officer conducting survey is not empower to administer oath, and such statement does not carry much evidentiary value. It is a just an information for corroboration purpose. Therefore, on the strength of this statement, the ld.AO cannot deny the deduction to the assessee. This aspect has also been gone through by the ld.CIT(A). After going through the well reasoned finding of the ld.CIT(A) we do not wish to interfere in it on this issue. BOA has granted approval to the assessee. This approval has not been cancelled or suspended. It was valid. The assessee has offered a piece of land measuring 299151 sq.meters to DPCL at ₹ 1400/- per sq.meter as lease rent for a period of 99 years, and ₹ 2100/- per sq.meter towards development charges. Now this amount computed at the rate of ₹ 1400/- per sq.meter has been shown by the assessee as income from SEZ. Sister concern has already applied to the BOA Before the 31st March for approval. It could not be doubted by referring an aspect that capital expenditure shown and capitalized under the head work-in-progress was bogus. On the basis of such an observation, deduction otherwise admissible to the assessee cannot be denied. The assessee has fulfilled all necessary conditions under section 80IAB of the Act. It was having valid approval from BOA, and therefore, it has rightly claimed deduction. The ld.CIT(A) in the well reasoned order has examined all these reasoning given by the AO and thereafter observed that this aspect has been considered by the ITAT in various decisions, and the case of the assessee duly fall within the ambit of section 80IAB of the Act for grant of deduction. - Decided in favour of assessee. Expenditure for financial charges - assessee has debited a sum in the profit loss account which was treated as penal interest - Whether not for any violation of infringement of any law, and therefore, these are allowable - HELD THAT - CIT(A) has justified in accepting the contention of the assessee that the expenses incurred for late submissions of the documents to IDBI Bank wholly and exclusively for purpose of assessee s business, and not incurred for any offence prohibited by the law or for violation of any provisions. Explanation 1 to section 37(1) of the Act provides that the payment of any amount which was prohibited by law was not a business expenditure and it could not be allowed as an expenditure. It is needless to mention here that this type of expenditure do happen during normal incident of business. Late submission of the documents and payment for such lapse were not common in the normal course of business activities, and therefore, it cannot be termed as an expenditure for infraction of law so as to attract the Explanation-1 of section 37(1) of the Act, which is a residuary section for allowance business expenditure, besides allowance of the expenditure as per sections 30 to 36. Therefore, we are of the view the case of assessee does not fall under the Explanation 1 to section 37(1), and therefore, we confirm the action of the ld.CIT(A) in allowing the expenditure incurred towards late submissions of the documents. Disallowance of expenditure as not genuine and actually incurred - disallowance u/s 40A(3) of the Act for the year under consideration on the ground that since the expenditure in question is not claimed in P L Account, the question of deciding its allowability does not arise - disallowance of interest - expenditure in question is not claimed in P L Account, the question of deciding its allowability does not arise - HELD THAT - All these items the assessee has not claimed in profit loss account, and therefore, the question of deciding their allowable cannot be taken up in this accounting year. Taking into consideration the academic nature of the issue under these four heads of the appeal, we record a finding that ends of justice would meet if we vacate the finding of the AO that these expenditures are nongenuine, because in this year, there should not have been any occasion to record this finding when the expenditure have not been claimed in the accounts as well as in the return. It will be open for the Revenue to decide the genuineness of the expenditure as and when they are being claimed in future years by the assessee. With the above observation, the above four grounds of the appeal are partly allowed. Addition in respect of interest income after holding that the same is required to be treated as Income from other sources - HELD THAT - We find that Hon ble jurisdiction High Court in the assessee s own case for the earlier period has held that interest income earned by the assessee is derived from business of the undertaking and therefore allowable as business expenditure. We are of the view that the incidental activity of parking of surplus funds with the banks is a part of business decision taken in view of the commercial expediency and the interest income earned incidentally cannot be detached from its profits and gains derived by the undertaking; and therefore, in this year also claim of the assessee is to be allowed. Accordingly, we allow the claim of the assessee and treat the interest income as business income derived from the undertaking of the assessee. Recasting of the balance sheet by observing that expenditure debited in the work-in-progress has not been claimed in the profit loss account - HELD THAT - By filing CO, the department cannot take up a new issue. The scope of CO is discernible from plain reading of sub-section (4) of section 253 of the Income Tax Act, 1961. It contemplates that the respondent could file a CO against impugned order on any part of the order. In other words, if the Revenue has any grievance with the impugned order of the CIT(A), and on that issue it has not filed appeal, then on receipt of notice in the assessee s appeal, it can file CO. But here the Revenue wants to rake up altogether a new issue which was not subject matter of appeal before the ld.CIT(A); even it was not a subject matter before the AO in the assessment proceedings. Therefore, such CO is not maintainable, hence dismissed.

Summary

Issues Involved:
1. Deduction under Section 80IAB of the Income Tax Act, 1961.
2. Disallowance of financial charges as penal interest.
3. Non-adjudication of certain expenditures by the CIT(A).
4. Treatment of interest income as "Income from Other Sources."

Issue-wise Detailed Analysis:

1. Deduction under Section 80IAB of the Income Tax Act, 1961:
The Revenue's primary grievance was that the CIT(A) erred in accepting the assessee's claim for deduction under Section 80IAB. The assessee, a company incorporated to develop a Special Economic Zone (SEZ), claimed a deduction of ?41,62,61,487 under Section 80IAB. The AO rejected this claim on several grounds, including no significant development of the SEZ, infringement of SEZ Act & Rules, admission of a wrong claim by the company's MD, and bogus capital work-in-progress claims. The CIT(A) allowed the deduction, emphasizing that the SEZ Act has overriding provisions and that the AO cannot sit in judgment over approvals granted by the competent authority under the SEZ Act. The Tribunal upheld the CIT(A)'s decision, stating that once the approval for SEZ development is granted and valid, the AO has no jurisdiction to question it. The Tribunal also noted that the statement made by the MD during the survey does not hold significant evidentiary value and cannot be the sole basis for disallowing the deduction. The Tribunal concluded that the AO's reasons were not justifiable for rejecting the claim under Section 80IAB.

2. Disallowance of Financial Charges as Penal Interest:
The AO disallowed an expenditure of ?4,13,494 incurred by the assessee as penal interest for late submission of documents to IDBI Bank, treating it as an expense for violating provisions and thus hit by Explanation-1 to Section 37(1). The CIT(A) reversed this decision, holding that the expenditure was incurred wholly and exclusively for business purposes and was not for any offense prohibited by law. The Tribunal upheld the CIT(A)'s decision, stating that such expenses are common in the normal course of business and do not attract Explanation-1 to Section 37(1).

3. Non-adjudication of Certain Expenditures by the CIT(A):
The assessee contested the non-adjudication of certain expenditures by the CIT(A), including ?17,50,00,000 for land leveling, ?29,78,050 under Section 40A(3), ?37,67,094 not for business purposes, and ?4,74,71,691 as interest. The CIT(A) noted that these expenditures were not claimed in the profit & loss account but were debited to capital work-in-progress. The Tribunal vacated the AO's finding that these expenditures were non-genuine, stating that their genuineness should be decided in the year they are claimed. The Tribunal allowed the assessee's appeal on this issue for statistical purposes.

4. Treatment of Interest Income as "Income from Other Sources":
The AO treated an interest income of ?42,00,098 as "Income from Other Sources," which the assessee claimed should qualify for deduction under Section 80IAB. The CIT(A) upheld the AO's decision. The Tribunal, however, referred to the jurisdictional High Court's decision in the assessee's own case, which held that interest income earned by parking surplus funds with banks is derived from the business of the undertaking and thus qualifies for deduction under Section 80IAB. The Tribunal allowed the assessee's claim, treating the interest income as business income.

Cross Objection by Revenue:
The Revenue filed a cross-objection, seeking the liberty to recast the balance sheet of the assessee if the expenditures are held non-genuine. The Tribunal dismissed the cross-objection, stating that the Revenue cannot take up a new issue through a cross-objection that was not part of the original assessment or appeal proceedings.

Conclusion:
The Tribunal dismissed the Revenue's appeal and cross-objection, while partly allowing the assessee's appeal. The Tribunal upheld the CIT(A)'s decisions on the primary issues, emphasizing the overriding provisions of the SEZ Act and the validity of approvals granted under it.