2025 (3) TMI 452 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D - Assessee submitted that interest free own funds are available and exceeding the investment - HELD THAT - As per the chart submitted by the Assessee the investment has been made in the entities controlled by the Assessee therefore the Ld. Assessee s Representative contended that no expenditure is required to earn any dividend income as the same are not regular investment/traded in stock exchange. Further the interest free own funds are available which is exceeding the investment the said fact could be corroborated from the audited financials. By following the ratio laid down in the case of South Indian Bank Ltd. 2021 (9) TMI 566 - SUPREME COURT we delete the disallowance made by the A.O. u/s 14A read with Rule 8D (2) (ii). Additional claim which was not made in the revised return of income - Nature of receipt - whether the incentives granted in the form of Reward to the Assessee as per PTF Policy of 2015 to 2020 being an eligible export under PTP Policy is chargeable to the tax or not? - Reward under MEIS Scheme as capital receipt in the computation of the total income under the normal provision of the Act as well as in computing the book profit u/s 115JB - HELD THAT - As relying on Pruthvi Brokers and Shareholders 2012 (7) TMI 158 - BOMBAY HIGH COURT we find no merit in the contention of the Ld. Departmental Representative that the Assessee cannot make additional claim which was not made in the revised return of income. Nature of receipt - Export incentives under MEIS are incentives granted in the form of Reward as per FPT Policy 2015 to 2020 to the eligible exports under FTP Policy which being not an assistance received by the Assessee for export under the scheme of Government but the same is a Reward for efforts undertaken to enhance the exports and considering the purpose of the scheme and by relying on the order of Eastman Exports Global Clothing Pvt. Ltd. 2024 (10) TMI 740 - ITAT CHENNAI we are of the opinion that the aforesaid Reward is not chargeable to tax being capital in nature under the normal provisions of the Act. we allow Ground of the Assessee and direct the A.O. to allow the claim of the Assessee in terms of the observation made hereinabove. MAT computation - As relying on the ratio laid down in the case of Ankit Metal and Power Limited 2019 (7) TMI 878 - CALCUTTA HIGH COURT wherein it is held that interest subsidy and Power subsidy being capital receipts could not form part of book profit u/s 115JB of the Act we direct the A.O. to exclude the amount received by the Assessee under MEIS being capital receipt in computing book profit u/s 115JB of the Act. Accordingly we allow the Ground No. 2 of the Assessee.

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment were:

Whether the disallowance of Rs. 40,39,663/- under Section 14A of the Income Tax Act, read with Rule 8D of the Income Tax Rules, was justified.
Whether the reward of Rs. 3,51,14,183/- received under the Merchandise Exports from India Scheme (MEIS) should be considered a capital receipt and thus not taxable under the normal provisions of the Income Tax Act and in computing book profit under Section 115JB.
Whether the excessive interest charged under Sections 234B and 234C by the Assessing Officer (AO) was justified.

2. ISSUE-WISE DETAILED ANALYSIS

Disallowance under Section 14A:

Relevant legal framework and precedents: Section 14A of the Income Tax Act pertains to the disallowance of expenditure incurred in relation to income not includible in total income. Rule 8D provides the method for determining the amount of expenditure in relation to such income.
Court's interpretation and reasoning: The Tribunal considered the Assessee's argument that investments were made in entities controlled by the Assessee, and no expenditure was required to earn dividend income as these were not regular investments or traded on the stock exchange. It was also noted that the Assessee had sufficient interest-free own funds exceeding the investments.
Key evidence and findings: The Tribunal referred to the audited financials and the ratio laid down in the case of South Indian Bank Ltd. Vs. CIT, which supported the Assessee's contention that no disallowance was warranted.
Application of law to facts: Based on the evidence and legal precedents, the Tribunal deleted the disallowance made by the AO under Section 14A read with Rule 8D(2)(ii).
Treatment of competing arguments: The Tribunal favored the Assessee's arguments over the Department's reliance on the findings of the lower authorities.
Conclusions: The Tribunal allowed Ground No. 1.0 and 1.1, deleting the disallowance under Section 14A.

Reward under MEIS Scheme:

Relevant legal framework and precedents: The MEIS rewards are governed by the Foreign Trade Policy 2015-2020. The legal question was whether these rewards constitute taxable income under Section 2(24) of the Income Tax Act.
Court's interpretation and reasoning: The Tribunal examined whether the MEIS reward is an 'assistance' as per Section 2(24)(xviii) or a 'reward' for efforts to enhance exports. The Tribunal relied on precedents, including the Chennai Bench decision in Assistant Commissioner of Income Tax Vs. Eastman Exports Global Clothing Pvt. Ltd., which held that MEIS rewards are not income under Section 2(24).
Key evidence and findings: The Tribunal noted the distinction between 'assistance' and 'reward', emphasizing that the MEIS reward is not an assistance but a recognition of export efforts.
Application of law to facts: Applying the purpose test from the Ponni Sugars & Chemicals Ltd. case, the Tribunal concluded that the MEIS reward is a capital receipt, not chargeable to tax.
Treatment of competing arguments: The Tribunal dismissed the Department's argument that the Assessee's additional ground could not be entertained, citing the Bombay High Court's decision in Pruthvi Brokers and Shareholders.
Conclusions: The Tribunal allowed Ground No. 2, directing the AO to treat the MEIS reward as a capital receipt and exclude it from book profit computation under Section 115JB.

Excessive Interest under Sections 234B and 234C:

This issue was not detailed in the judgment, and the Tribunal's decision focused primarily on the two main grounds discussed above.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning:

"By following the ratio laid down in the case of South Indian Bank Ltd. Vs. CIT, we delete the disallowance made by the A.O. u/s 14A read with Rule 8D (2) (ii) of the Act."
"We hold that the benefit by way of MEIS scrips could not fall within the meaning of the terms 'subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement provided under section 2(24)(xviii) of the Act."

Core principles established:

Investments in entities controlled by the Assessee, with sufficient interest-free own funds, do not warrant disallowance under Section 14A.
MEIS rewards are capital receipts, not taxable as income under the Income Tax Act, and should be excluded from book profit calculations under Section 115JB.

Final determinations on each issue:

The Tribunal allowed the appeal regarding the disallowance under Section 14A.
The Tribunal allowed the appeal regarding the MEIS reward, directing it to be treated as a capital receipt and excluded from book profit under Section 115JB.
The appeal was allowed in favor of the Assessee.

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