2013 (3) TMI 122 - AT - Income Tax

Disallowance of notional interest - AO noted that the assessee had borrowed heavy loans on which substantial interest running into crores had been paid. However, it was also noted by him that the assessee had given loans/deposits to certain parties on which no interest was charged. - It has been submitted by the assessee that loans and deposits had been given out of own funds and therefore, even if there was no connection with business, no disallowance could be made out of interest paid on borrowings. - held that - three is no dispute that loans/deposits had been given from own funds as AO himself in para 4.3 of the order has noted that the assessee had used surplus funds for non business purposes. Once the loans/deposits have been given out of own funds, disallowance of interest paid on borrowings will not be justified. - Decided in favor of assessee. Deduction u/s 80IB - industrial undertaking - held that - deduction under section 80IB will be allowable in respect of sales tax set off and excise duty rebate but not in relation to the rental and interest income. - partly in favor of assessee. Penalty u/s 271(1)(c) - held that - Considering the smallness of the amount and this being the first year of amended provisions, in our view the claim of depreciation at a higher rate has to be considered due to bonafide mistake. Therefore, in our view it is not a fit case for levy of penalty for concealment of income when all necessary details had been filed with the return of income. - Penalty deleted.

Issues Involved:

1. Disallowance of notional interest.
2. Disallowance of claim of deduction under section 80IB.
3. Inclusion of excise duty and sales tax in total turnover while computing deduction under section 80HHC.
4. Exclusion of certain sale proceeds from turnover due to non-realization in convertible foreign exchange within the specified period.
5. Set-off of loss from trading activities against profit from manufacturing activities while computing deduction under section 80HHC.
6. Nature of certain receipts while computing deduction under section 80HHC.
7. Applicability of provisions of section 80IA(9).
8. Levy of penalty under section 271(1)(c) for the assessment year 2003-04.

Detailed Analysis:

1. Disallowance of Notional Interest:

The AO disallowed notional interest on the grounds that loans/deposits were given without charging interest, which were not for business purposes. The assessee argued that loans were given from own funds, citing the case of CIT Vs. Reliance Utilities and Power Ltd. The Tribunal found that the loans were indeed given from surplus funds and thus, disallowance of interest paid on borrowings was not justified. The Tribunal set aside the CIT(A)'s order and deleted the additions.

2. Disallowance of Claim of Deduction under Section 80IB:

The AO excluded items like excise duty rebate, sales tax set off, house rent received, and interest income from the deduction under section 80IB, stating they were not derived from industrial undertakings. The Tribunal referred to its decision in the assessee's case for the assessment year 2001-02, which followed the Supreme Court ruling in Liberty India Ltd. The Tribunal ruled that sales tax set off and excise duty rebate were eligible for deduction under section 80IB, but rental and interest income were not. The ground was partly allowed.

3. Inclusion of Excise Duty and Sales Tax in Total Turnover:

The AO included excise duty and sales tax in total turnover for deduction under section 80HHC. CIT(A) directed the AO to exclude these following the judgment in Sudershan Chemicals, affirmed by the Supreme Court in Laxmi Machine Works. The Tribunal upheld CIT(A)'s decision, dismissing the assessee's ground.

4. Exclusion of Certain Sale Proceeds from Turnover:

The AO excluded export proceeds not realized within the specified period. The assessee claimed RBI had extended the time, and proceeds were received within this period. The Tribunal restored the issue to the AO for verification of RBI's extension and subsequent realization of proceeds.

5. Set-off of Loss from Trading Activities:

The AO set off trading losses against manufacturing profits for deduction under section 80HHC. The Tribunal noted the absence of separate accounts for trading activities and upheld the AO's decision, referencing the Supreme Court ruling in IPCA Laboratories Ltd., which mandates considering net profit/loss for deduction eligibility.

6. Nature of Certain Receipts while Computing Deduction under Section 80HHC:

The AO reduced 90% of receipts like excise duty rebate, sales tax set off, house rent, and interest income from business profits as per Explanation (baa). The Tribunal, following its earlier decision, ruled that excise duty rebate and sales tax set off were not covered under Explanation (baa), but rent and interest were. Thus, 90% of gross interest and rent were to be deducted, but not sales tax set off and excise duty rebate.

7. Applicability of Provisions of Section 80IA(9):

The AO reduced the deduction under section 80IA from the deduction allowable under section 80HHC. The Tribunal directed the AO to compute deductions in light of the Bombay High Court judgment in Associated Capsules P. Ltd., which states that the total deduction under sections 80IA and 80HHC should not exceed the business profits of the undertaking.

8. Levy of Penalty under Section 271(1)(c):

The AO levied a penalty for claiming higher depreciation on electrical fittings. The Tribunal accepted the assessee's contention of a bonafide mistake due to a transitional year and the small amount involved. The penalty was deleted, considering it a bonafide mistake.

Conclusion:

The appeal in ITA No.5913/M/09 for the assessment year 2003-04 was allowed, and those in ITA Nos. 2972/M/06 and 4476/M/06 were partly allowed.

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