2012 (12) TMI 14 - AT - Income Tax

Dis-allowance of business loss in the transaction of sale & purchases within the group companies on ground of them being non-genuine and on paper only Held that - CIT(A) has rightly observed that these transactions were not with the intention to reduce taxable income because even if the loss and profit in Soya DOC and wheat are ignored, the taxable income of all the four group companies taken together will increase only by an amount of Rs.25,979/- which will have the tax effect of Rs.13,446/- only. Also, companies are public limited companies and it would have not been possible for these companies to be a party of any non-genuine transaction. It is also not speculative loss since assessee has already furnished documentary evidence showing delivery of stocks, and transactions were recorded in the stock register and sales tax return If the transaction is held to be bogus in the hands of this company which has incurred loss on account of such transaction, it has to be held as bogus in the hands of other companies also which is showing income on account of the same transaction and hence, the total impact has to be seen which is very marginal. Therefore, deletion of dis-allowance upheld - Decided in favor of assessee Dis-allowance of godown hire charges - business expediency paper transaction Held that - CIT(A) gave clear finding that it cannot be proved by the A.O. that the agreement was bogus or not in existence. A.O. s finding that no services were availed by the assessee under the said agreement cannot be any ground to decide the business expediency. Regarding business expediency, it is noted by CIT(A) that assessee company was engaged in the business of export of SOYA DOC and oil extraction and this was the first year of export. In view of the need for warehouse and godowns, which could arise in future in the course of export business, the agreement has been executed on 22.06.1992. If that be so then it has to be accepted that hiring of godown and warehouse for the purpose of export is very much for the business purpose and even if such godown was not ultimately required to be used for the purpose of export, which were kept ready for such purpose. CIT(A) rightly deleted the dis-allowance - Decided in favor of assessee Deduction u/s 80HHC Revenue contesting order of CIT(A) to AO to recomputed deduction on account of difference between calculation of deduction and deduction claimed as per Form 10CCAC Held that - It is seen that part of deduction is clearly allowable in view of same being calculated by AO even as allowable u/s 80HHC. For the balance amount of deduction, CIT(A) has rightly directed the A.O. to recalculate deduction u/s 80HHC since the relevant transactions were held to be not bogus. Dis-allowance of business loss goods sold at lower rate - non-genuine - Held that - Clear finding is given by CIT(A) that there is no dispute about sale rates and loss were made at the price agreed upon in advance. Regarding purchase price, it is noted by him that the details of market price prevailing at the time of such transactions were also furnished which cannot be proved to be wrong by the A.O. in the remand report. It cannot be said that it is an arranged loss and that the transactions are not genuine. This finding is also given by CIT(A) that had the sale orders being not executed in stipulated time, the assessee company would have to pay damages for the breach of contract and such damage for breach of contract is an eligible deduction u/s 37(1) and therefore, such loss is also a business loss and allowable as deduction. Order of CIT(A) upheld - Decided in favor of assessee Dis-allowance of interest expenditure and prior year expenditure bank borrowing - dispute about the rate of interest - amount paid in the present year Held that - It is seen from the records that the payment of this interest was made during this year and, therefore, deduction is allowable in the present year u/s 43B. Therefore, this disallowance is deleted - Decided in favor of assessee Dis-allowance of prior year expenditure AY 93-94 Held that - This is not in dispute that this expenditure was disallowed by the A.O. in AY 1994-95 on this basis that the same pertains to the earlier year i.e. AY 1993-94. Therefore, there is no reason for not allowing this deduction in the present year - Decided in favor of assessee Dividend income and interest on debentures part of it considered as business income and part as income from other sources Held that - CIT(A) rightly held that part of income from dividend on shares and interest on debentures will pertain to shares/debentures held by the assessee as investment and would be taxable under Income from other sources and the remaining part of dividend/interest pertaining to the shares/debentures held as stock in trade would be taxed as business income of the assessee. No infirmity found in order of CIT(A) Penalty u/s 271(1)(c) - dis-allowance u/s 35D of expenditure incurred on the issue of debentures CIT(A) deleted the penalty on the ground that claim of the appellant u/s.35D in respect of debenture issue expenses is debatable - Held that - Even after confirming the dis-allowance by the Tribunal in the quantum proceedings, penalty in the present case is not justified because the issue was debatable at the time of filing of return of income and, therefore, we decline to interfere in the order of CIT(A) on this issue. Deduction u/s 10B adjustment of unabsorbed depreciation Held that -To work out the profit of 10B undertaking, only the brought forward unabsorbed deprecation of 10B undertaking should be considered and not brought forward unabsorbed deprecation of any other unit. We, therefore, set aside the order of CIT(A) on this issue and restore the matter back to the file of the A.O. for a fresh decision Renovation of D.G. set revenue expenditure or capital expenditure Held that - CIT(A) has noted that the assessee has not purchased any new genset and not enhanced the installed capacity of the existing genset. The assessee has merely changed the input requirement of DG set from HSD to furnace oil because of business expediency, since import price of HSD rose high. Therefore, expense incurred is not capital expenditure - Decided in favor of assessee Deduction u/s 80HHC Held that - Gain from foreign exchange fluctuation as eligible for deduction u/s 80HHC

Summary

Issues Involved:

1. Disallowance of loss claimed by the assessee.
2. Disallowance of godown hire charges.
3. Deduction under Section 80HHC.
4. Disallowance of loss on transactions in wheat.
5. Disallowance of interest expenditure.
6. Disallowance of prior year expenditure.
7. Addition in respect of wheat transactions.
8. Reduction of deduction under Section 80-I without deduction under Section 80HH.
9. Deletion of addition of Rs. 1.25 crores regarding dividend on shares and debentures.
10. Deletion of penalty under Section 271(1)(c).
11. Deduction under Section 10B.
12. Inclusion of excise duty and sales tax in total turnover for Section 10B.
13. Set off of unabsorbed depreciation.

Detailed Analysis:

1. Disallowance of Loss Claimed by the Assessee:
The CIT(A) deleted the disallowance of Rs. 45,60,792/- on the grounds that the transactions were genuine and not speculative. The CIT(A) noted that the transactions were recorded in the books, payments were made by account payee cheques, and these transactions were reflected in the sales tax returns. The CIT(A) also found that the transactions were not intended to reduce taxable income as the overall tax impact was negligible. The Tribunal upheld the CIT(A)'s decision, rejecting the revenue's appeal.

2. Disallowance of Godown Hire Charges:
The CIT(A) allowed the deduction of Rs. 91,46,000/- for godown hire charges, noting that the agreement for godown hire was genuine and the payments were made as per the agreement. The CIT(A) found that the business necessity and expediency were established, and the transactions were genuine. The Tribunal upheld the CIT(A)'s decision, rejecting the revenue's appeal.

3. Deduction under Section 80HHC:
The CIT(A) allowed the deduction under Section 80HHC, directing the AO to consider the transactions in wheat and SOYA DOC as genuine and include them in the total turnover. The CIT(A) also directed the AO to allow the deduction to the extent of export profits, subject to the total deduction under Chapter VIA not exceeding the gross total income. The Tribunal upheld the CIT(A)'s decision, rejecting the revenue's appeal.

4. Disallowance of Loss on Transactions in Wheat:
The CIT(A) deleted the disallowance of Rs. 23,10,255/- for loss on transactions in wheat, noting that the transactions were genuine and followed by actual delivery. The CIT(A) found that the tax effect was negligible and the transactions were not intended to reduce taxable income. The Tribunal upheld the CIT(A)'s decision, rejecting the revenue's appeal.

5. Disallowance of Interest Expenditure:
The CIT(A) allowed the deduction of Rs. 6,99,954/- for interest expenditure, noting that the interest was paid during the year and was allowable under Section 43B. The Tribunal upheld the CIT(A)'s decision, allowing the assessee's appeal.

6. Disallowance of Prior Year Expenditure:
The CIT(A) disallowed the prior year expenditure of Rs. 12,68,671/-, noting that the expenditure was not claimed in the return or during assessment proceedings. The Tribunal, however, allowed the deduction in the present year, noting that the expenditure was disallowed in the subsequent year on the grounds that it pertained to the present year.

7. Addition in Respect of Wheat Transactions:
The CIT(A) deleted the addition of Rs. 109 lacs for wheat transactions, noting that the transactions were genuine and followed by actual delivery. The Tribunal upheld the CIT(A)'s decision, rejecting the revenue's appeal.

8. Reduction of Deduction under Section 80-I without Deduction under Section 80HH:
The CIT(A) directed the AO to allow the deduction under Section 80-I without reducing the deduction under Section 80HH from the total income. The Tribunal upheld the CIT(A)'s decision, following the judgment of the Hon'ble Gujarat High Court in CIT Vs Amod Stamping.

9. Deletion of Addition of Rs. 1.25 Crores Regarding Dividend on Shares and Debentures:
The CIT(A) directed the AO to work out the part of dividend/interest income taxable as "income from other sources" and the remaining part as business income. The Tribunal upheld the CIT(A)'s decision, following the judgment of the Hon'ble Gujarat High Court in CIT Vs Sphere Stock Holdings Pvt. Ltd.

10. Deletion of Penalty under Section 271(1)(c):
The CIT(A) deleted the penalty of Rs. 66,41,871/- levied under Section 271(1)(c), noting that the claim for deduction under Section 35D was debatable and the facts were disclosed in the return. The Tribunal upheld the CIT(A)'s decision, following the judgments of the Hon'ble Gujarat High Court in CIT Vs Secure Meters Ltd. and the Hon'ble Apex Court in Reliance Petro Products Pvt. Ltd.

11. Deduction under Section 10B:
The CIT(A) allowed the exclusion of excise duty from total turnover for computation of deduction under Section 10B, following the judgment of the Hon'ble Apex Court in CIT Vs Laxmi Machine Works. The Tribunal upheld the CIT(A)'s decision, rejecting the revenue's appeal.

12. Inclusion of Excise Duty and Sales Tax in Total Turnover for Section 10B:
The Tribunal directed the AO to exclude excise duty and sales tax from total turnover for computation of deduction under Section 10B, following the judgment of the Hon'ble Apex Court in CIT Vs Laxmi Machine Works.

13. Set Off of Unabsorbed Depreciation:
The Tribunal directed the AO to ascertain whether the brought forward unabsorbed depreciation pertains to the 10B unit or other units and to allow the set off accordingly. The Tribunal restored the matter back to the AO for a fresh decision.

Conclusion:
The Tribunal upheld the decisions of the CIT(A) on most issues, allowing the deductions claimed by the assessee and deleting the additions and disallowances made by the AO. The Tribunal also directed the AO to re-examine certain issues and make fresh decisions in light of the Tribunal's findings and the applicable legal precedents.