2012 (11) TMI 706 - AT - Income Tax

Disallowance on account of Guarantee Commissions guarantee commissions paid to directors on account of guarantee given by them to the bank. - Following the decision of court in CIT v. Metalizing Equipment Co. (P) Ltd. (2008) as reported 8 DTR 12 (Raj)Held that - since no difference in facts could be pointed out by DR of the Revenue, there is no reason to take a contrary view in the present year and hence, by respectfully following the precedent, issue is decided in favour of assessee in this year also - assessee s appeal is allowed. Interest Income and Service Charges Interest income is to be assessable as income from business or income from other sources and whether neeting should be allowed or not - Following the decision of court in case of CIT v. Shri Ram Honda Power Equip 2007 (1) TMI 86 - HIGH COURT, DELHI held that - even if interest is earned on fixed deposits for the purpose of availing of credit facilities from the bank, it does not have a nexus with the export business and therefore, has to necessarily be treated as income from other sources and not business income. They have also added a cavet as per which, if in a given case, the Assessing Officer has held that interest income is business income and this aspect has not been challenged by the Department, then that question can not to be permitted to be re-opened and then the only question will be if netting should be allowed. Since this aspect is squarely covered in favour of Revenue and against the assessee by the judgment of Hon ble Delhi High Court, this aspect is decided against the assessee and Ground of netting off of the assessee is rejected because in the present case, AO has treated the interest income as income from other sources. On netting aspect,it is held by Hon ble Delhi High Court in this very case that to the extent the assessee can establish the nexus between interest payment and interest income by showing that interest expense was incurred for the purpose of earning interest income then to that extent netting should be allowed and only such net interest income should be considered for exclusion to the extent 90% from business profit as per clause (baa) of the Explanation to u/s 80HHC.- Decided in favor of assessee. Processing charges - deduction u/s 80HHC - held that - such processing charges are hit by clause (baa) of Explanation to Section 80HHC and therefore 90% of the same should be excluded from the business profit and such receipts should also be included in total turnover for the purpose of computing deduction allowable to the assessee u/s.80HHC. - decided against the assessee. Disallowance of Expenses Gift to employees - Held that - Expenditure incurred under the welfare scheme for its employees to promote employer employee relationship is held to have been incurred in the interest of business promotion. The disallowance made is, therefore, cancelled. Disallowance on current repairs of machinery.- Held that - repairs and overhauling of the machines is in the nature of current repairs aimed at preserving and maintaining the already existing machines. No new assets have come into existence nor is this the proposition of the Assessing Officer. Under the circumstances, the expenditure incurred by the appellant is held to be revenue in nature. The disallowance made is cancelled. The Assessing Officer is directed to withdraw depreciation already allowed while giving effect to this order. Deduction u/s 80HHC - Appellant is accounting income on account of credit for self generated power separately as income and not reducing it from the GEB bills since the GE shows it separately as a credit. Under the circumstances, this cannot be covered under any of the items in Explanation (baa). Under the circumstances, the exclusion of 90% of the said amount from the profits of the business for the purposes of deduction u/s.80HHC is cancelled. Similarly, the warranty provision written back as income is also held to be not covered under Explanation (baa) to sec. 80HHC. Under the circumstances, the action of the Assessing Officer in excluding the said amount from the profits of the business for the purposes deduction u/s.80HHC is also cancelled. The Assessing Officer is directed to re-compute the deduction u/s.80HHC accordingly - appeal of Revenue is dismissed - In combine result, appeal of assessee is partly allowed whereas Revenue s appeal is dismissed.

Summary

Issues:
1. Disallowance of guarantee commissions paid to directors.
2. Assessment of interest income as income from other sources and netting of interest income.
3. Exclusion of service charges income and after sales service charges from total turnover for deduction u/s.80HHC.
4. Disallowance of distribution of food grains and gifts to employees.
5. Disallowance of current repairs of machinery.
6. Exclusion of income from self-generated electricity and write back of warranty provision from business profit under Section 80HHC.

Analysis:
1. The first issue pertains to the disallowance of guarantee commissions paid to directors. The Tribunal decided in favor of the assessee, following the precedent set by the Hon'ble Rajasthan High Court and allowed the appeal, citing no difference in facts from the previous year.

2. The second issue involves the assessment of interest income as income from other sources and netting of interest income. The Tribunal upheld the decision against the assessee based on the judgment of the Hon'ble Delhi High Court, ruling that interest income not related to the export business should be treated as income from other sources. However, netting was allowed if a nexus between interest payment and income could be established.

3. The third issue concerns the exclusion of service charges income and after sales service charges from total turnover for deduction u/s.80HHC. The Tribunal rejected the assessee's claims based on the judgment of the Hon'ble apex court, which held that certain receipts should be excluded from business profit under Section 80HHC.

4. Moving on to the fourth issue, the Tribunal addressed the disallowance of distribution of food grains and gifts to employees. The Ld. CIT(A) canceled the disallowance, stating that the expenses were incurred for business promotion and welfare schemes, promoting employer-employee relationships.

5. The fifth issue relates to the disallowance of current repairs of machinery. The Tribunal upheld the decision of the Ld. CIT(A), ruling that the expenditure was revenue in nature as it aimed at preserving and maintaining existing assets.

6. The final issue involves the exclusion of income from self-generated electricity and write back of warranty provision from business profit under Section 80HHC. The Ld. CIT(A) held that these receipts were not covered under the relevant clauses and canceled the exclusion, a decision upheld by the Tribunal.

In summary, the Tribunal partly allowed the assessee's appeal and dismissed the Revenue's appeal, based on detailed analysis and legal precedents for each issue involved in the case.