2012 (10) TMI 609 - AT - Income Tax

Disallowance of sales commission expenditure - part disallowance confirmed by CIT(A) - Held that - Clear finding is given by CIT(A) that the assessee has given evidence that the recipient provided information in respect of services which helped the sales to mature and realize and therefore payment of commission is justified except for 6 parties - As in respect of these 6 parties the A.O. after inquiry has brought on record that the agents had no role in achieving the sales and these customers directly approached the assessee for all transactions but the assessee failed to file letters of these agents who have been told by assessee furnishing other information such as report about reputation status financial standings etc. & have also helped in realization. No interference in part disallowance confirmed by CIT(A) - against assessee. Disallowance u/s 14A - huge investments in its subsidiary companies in the form of equity and preference shares - Held that - With regard to the investment of Rs. 5907.18 lacs in foreign subsidiaries no disallowance can be made u/s 14A because dividend income from foreign subsidiaries is taxable in India. Regarding balance investment of Rs. 38 crores approximately in Indian subsidiaries we find that interest free own funds of the assessee is many times more than this investment because interest free funds available with the assessee as on 31.03.2005 as per the balance sheet as on that date is of Rs. 929.57 crores. There is no finding given by the A.O. regarding any direct nexus between interest bearing borrowed funds and investment in Indian subsidiaries. Hence in our considered opinion no disallowance u/s 14A can be made out of interest expenditure in the facts of the present case - in favour of assessee. Allocation of directors remuneration fee and traveling allowance toward earning dividend and to make proportionate disallowance u/s 14A - Held that - A.O. should make proportionate disallowance only in respect of dividend income from Indian subsidiaries. No merit in the submissions of the assessee that no disallowance is called for out of administrative expenditure because dividend income is exempt and hence proportionate disallowance out of administrative expenses is justified - against assessee. Disallowance of deduction u/s 80-IB on FDR and ICD - assessee plea that only net interest income can be reduced form the business profit - Held that - Interest income cannot be said to be an income derived from an industrial undertaking and therefore Section 80-IB deduction is not allowable in respect of interest income - against assessee. Computation of deduction u/s 80HHC - 90% exclusion of net interest/rent or gross interest/rent - Held that - As decided in M/s ACG Associated Capsules Pvt. Ltd. (Formerly M/s Associated Capsules Pvt. Ltd.) & Others Versus The Commissioner of Income Tax Central-IV Mumbai & Others 2012 (2) TMI 101 - SUPREME COURT OF INDIA Ninety per cent of not the gross interest/rent but only the net interest/rent which has been included in the profits of the business of the assessee as computed under the heads PGBP is to be deducted under clause (1) of Explanation (baa) to Section 80HHC for determining the profits of the business - in favour of assessee. Deduction u/s 80-IB on interest of late payment of sale proceeds from debtors - Held that - This issue is squarely covered in favour of the assessee by the judgement of Nirma Industries Limited Versus Deputy Commissioner of Income-Tax 2006 (2) TMI 92 - GUJARAT HIGH COURT - against revenue. Deduction u/s 80-IB in respect of duty drawback - Held that - As decided in M/s Liberty India Versus Commissioner of Income Tax 2009 (8) TMI 63 - SUPREME COURT duty drawback DEPB benefits rebates etc. cannot be credited against the cost of manufacture of goods debited in the Profit & Loss account for purposes of Sections 80-IA/80-IB as such remissions (credits) would constitute independent source of income beyond the first degree nexus between profits and the industrial undertaking - Duty drawback receipt/DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purposes of Sections 80I/80-IA/80-IB - it is established by the assessee that the duty drawback received by the assessee is arithmetically equal to the duty paid by the assessee and therefore in the facts of the present case that duty drawback in the present case is nothing but refund of duty paid by the assessee - in favour of assessee. Disallowance of Employees contribution to PF & ESI - Held that - Since the entire amount was paid prior to the due date of filing of return of income the amount so claimed cannot be disallowed - in favour of assessee. Reduction of conditional additional amount added in computation of income to cover any error omission etc - Held that - The additional declaration made by the assessee cannot be added to the total income because in the present case there is no iota of evidence which suggests that there is unaccounted or undisclosed income emerging out of incriminating documents impounded during the course of survey and the addition was made by the A.O. solely on the basis of the statement in the course of survey - in favour of assessee. Sett off of loss of Dhuneta unit against the profits of other eligible units - CIT(A) allowed the claim - Held that - The amount of loss for which set off is in dispute is the same in assessment year 2005-06 and assessment year 2006-07. In assessment year 2005-06 this ground was not pressed and accordingly rejected as not pressed. Hence the loss of Dhuneta unit stands set off against profit of other eligible units in that year and therefore there is no question of further set off in the present year if the entire amount of loss is set off in that year. This is not coming out form the record as to what was the actual amount of loss of Dhuneta unit and how much out of this was set off in assessment year 2005-06. Hence the order of CIT(A) is set aside on this issue and restore the matter back to the file of the A.O. for a fresh decision - in favour of revenue for statistical purposes.

Summary

Issues Involved:
1. Disallowance of Sales Commission
2. Disallowance under Section 14A
3. Deduction under Section 80-IB for Interest on FDR and ICD
4. Deduction under Section 80-IB for Duty Drawback
5. Deduction under Section 80-IB for Interest on Late Payment of Sale Proceeds
6. Allowability of Employees' Contribution to PF & ESI under Section 43B
7. Set-off of Losses of Dhuneta Unit Against Profits of Other Eligible Units

Detailed Analysis:

1. Disallowance of Sales Commission:
Issue: The department's grievance was the deletion of disallowance of Rs. 9,34,95,200/- made by the A.O. on account of sales commission paid under Section 37 of the Income Tax Act, 1961. The assessee's grievance was the confirmation of part disallowance of Rs. 42,81,600/-.

Findings: The CIT(A) deleted the disallowance except for Rs. 42,81,600/-, which was confirmed. The tribunal upheld the CIT(A)'s decision, noting that the assessee provided evidence that the commission agents rendered services that helped mature sales, except for six transactions where the agents played no role.

Conclusion: The tribunal found no reason to interfere with the CIT(A)'s order, rejecting both the revenue's and the assessee's appeals on this issue.

2. Disallowance under Section 14A:
Issue: Disallowance made by the A.O. under Section 14A, amounting to Rs. 3,06,48,988/-.

Findings: The CIT(A) confirmed part of the disallowance and deleted the rest. The tribunal upheld the CIT(A)'s decision, noting that the investment in foreign subsidiaries should not be considered for disallowance under Section 14A as the dividend income from such investments is taxable. The tribunal also found that the assessee's own funds were sufficient to cover the investments in Indian subsidiaries, negating the need for disallowance of interest expenditure.

Conclusion: The tribunal rejected the revenue's and the assessee's appeals, maintaining the CIT(A)'s order.

3. Deduction under Section 80-IB for Interest on FDR and ICD:
Issue: Non-granting of deduction under Section 80-IB for interest on FDR and ICD amounting to Rs. 5,07,48,207/-.

Findings: The tribunal held that interest income cannot be considered as income derived from an industrial undertaking and thus is not eligible for deduction under Section 80-IB. However, the tribunal allowed the alternative claim that only net interest income should be reduced from business profits for computing the deduction.

Conclusion: The tribunal rejected the assessee's primary claim but allowed the alternative claim for statistical purposes.

4. Deduction under Section 80-IB for Duty Drawback:
Issue: Granting of deduction under Section 80-IB for duty drawback amounting to Rs. 2,66,698/-.

Findings: The CIT(A) allowed the deduction, following the decision of the Gujarat High Court in the case of India Gelatine & Chemicals Ltd. The tribunal upheld this decision, noting that the duty drawback received by the assessee had a direct and arithmetic correlation with the customs duty paid, distinguishing it from the case of Liberty India Ltd.

Conclusion: The tribunal upheld the CIT(A)'s decision, rejecting the revenue's appeal.

5. Deduction under Section 80-IB for Interest on Late Payment of Sale Proceeds:
Issue: Granting of deduction under Section 80-IB for interest on late payment of sale proceeds from debtors amounting to Rs. 1,95,79,481/-.

Findings: The tribunal noted that this issue was covered in favor of the assessee by the Gujarat High Court's decision in the case of Nirma Industries, which was upheld by the Supreme Court.

Conclusion: The tribunal upheld the CIT(A)'s decision, rejecting the revenue's appeal.

6. Allowability of Employees' Contribution to PF & ESI under Section 43B:
Issue: Allowability of deduction for employees' contribution to PF & ESI.

Findings: The tribunal noted that the entire amount was paid before the due date of filing the return of income and followed the decision in the case of Shri Om Singh Vs ITO.

Conclusion: The tribunal decided in favor of the assessee, rejecting the revenue's appeal and allowing the assessee's appeal.

7. Set-off of Losses of Dhuneta Unit Against Profits of Other Eligible Units:
Issue: Set-off of loss of Rs. 4,68,34,166/- of Dhuneta Unit against profits of other eligible units.

Findings: The tribunal noted that this issue was raised in the previous year and was not pressed by the assessee, implying the loss was set off in that year.

Conclusion: The tribunal set aside the CIT(A)'s order and remanded the matter back to the A.O. for verification and fresh decision.

Combined Result:
- Assessment Year 2005-06: Revenue's appeal dismissed; Assessee's appeal partly allowed.
- Assessment Year 2006-07: Revenue's appeal partly allowed for statistical purposes; Assessee's appeal partly allowed.