2013 (8) TMI 369 - AT - Income Tax

Administrative expenses for earning dividend income from mutual fund Disallowance under Section 14A of the Income tax act Investment in units of mutual funds made by the assessee stood at Rs. 6.03 crores as on 31-03-2001 which was increased to Rs. 18.32 crores as on 03-03-2002 Held that - Although the investment in mutual funds had been made by the assessee out of its own funds and there was no interest expenditure incurred in relation to the earning of dividend income, the portion of administrative expenses incurred by the assessee was certainly attributable to the earning of the said income - Since no working whatsoever was given by the assessee showing the expenses attributable to the earning of dividend income, estimation of such expenses on proportionate basis to quantify the disallowance u/s 14A of the Act was very much called for - 2% of the dividend income has been held to be reasonable consistently by the Tribunal in various cases - Restrict the disallowance u/s 14A of the Act at 2% of the dividend income. Eligibility of expenses for deduction in under section 80IB Held that - There has to be a direct or first degree connection of the income and the business of the eligible undertaking in order to be eligible for deduction u/s 80IB of the Act - Three items of other income are such that the immediate source thereof cannot be said to be the business of eligible undertaking and this being so, all these items of income cannot be said to be eligible for deduction u/s 80IB of the Act Decided against the Assessee. Reducing the amount eligible for deduction u/s 80IB of the Act while computing profits of the business for the purposes of deduction u/s 80HHC of the Act Relying upon the decision in the case of Hon ble Bombay High Court in the case of Associated Capsules (P.) Ltd. vs. DCIT 2011 (1) TMI 787 - BOMBAY HIGH COURT , it was held that profits of business for computation of deduction u/s 80HHC of the Act are not to be reduced by the profits of business allowed u/s 80IA of the Act Decided in favor of Assessee. Deduction under section 80IB - Assessee is engaged in the business of manufacturing of agro chemical products and seeds and processing charges received by the assessee Held that - Nature of processing charges received by the assessee is not very clear as neither the A.O. nor the ld. CIT(A) has given any finding in this regard so as to ascertain as to whether the processing charges were received by the assessee for manufacture of agro chemical products and seeds on job work basis with material supplied by the customers - Claimed by the ld. Counsel for the assessee - While arguing a similar issue in earlier years that the recovery of processing charges was nothing but reimbursement of expenses - Contention raised by the ld. Counsel for the assessee relying on the decision of Hon ble Madras High Court in the case of Taj Fire Works Industries 2006 (6) TMI 60 - MADRAS HIGH COURT which involved different facts. Accordingly, it is held that all the four items in question of other income are such that they cannot be said to be profit derived from the eligible undertaking of the assessee eligible for deduction u/s 80IB Decided against the Assessee.

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Deduction under Section 80IB of the Income Tax Act.
3. Deduction under Section 80HHC of the Income Tax Act.
4. Transfer Pricing Adjustments.
5. Calculation mistakes in interest charged under Section 234-C.
6. Levy of interest under Section 234D.
7. Deduction under Section 35(1)(iv) of the Income Tax Act.
8. Book profit adjustments under Section 115JB.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A:
The issue pertains to the disallowance of Rs. 5,14,328/- made by the Assessing Officer (A.O.) under Section 14A for expenses incurred in earning exempt dividend income. The A.O. estimated such expenses at 5% of the exempt dividend income. The Tribunal found merit in the alternative contention of the assessee that the disallowance was excessive and unreasonable. It was modified to 2% of the dividend income, considering consistent Tribunal decisions in various cases.

2. Deduction under Section 80IB:
The assessee claimed deductions under Section 80IB for various income items. The Tribunal analyzed each item:
- Sale of raw materials and packing materials: Allowed as it was recovery of costs without profit.
- Interest on employee loans, sale of mango, wood, coconuts, and write-back of retention money: Disallowed as they were not derived from the eligible undertaking.
- Service charges from Ciba Specialty Chemicals: Disallowed due to lack of substantiation that it was merely expense recovery.
The Tribunal directed the A.O. to consider only net income after allowing related expenses for disallowed items.

3. Deduction under Section 80HHC:
The A.O. excluded certain items of other income from "profits of business" for computing deduction under Section 80HHC. The Tribunal directed the A.O. to exclude only the net amount after verifying expenses incurred for earning the income. Specific items like excise duty refund and sale of raw materials were directed to be included in business profits based on previous Tribunal decisions.

4. Transfer Pricing Adjustments:
The A.O. made adjustments for royalty payments to associated enterprises (AEs), claiming they were higher than industry norms without sufficient justification. The Tribunal found the Comparable Uncontrolled Price (CUP) method to be the most appropriate for evaluating royalty transactions and directed the A.O. to redo the analysis using the CUP method.

5. Calculation Mistakes in Interest Charged under Section 234-C:
The assessee contended there was a calculation mistake in interest charged under Section 234-C. The Tribunal directed the A.O. to verify and rectify the mistake if any.

6. Levy of Interest under Section 234D:
The issue of levy of interest under Section 234D was dismissed, following the decision of the Hon'ble Bombay High Court, which held that Section 234D is applicable retrospectively even to periods before 2004-05.

7. Deduction under Section 35(1)(iv):
The A.O. disallowed the claim for deduction under Section 35(1)(iv) for capital expenditure on scientific research, questioning the evidence provided. The Tribunal restored the issue to the A.O. for verification of the certificate from the Ministry of Science & Technology and the exact nature of the expenditure.

8. Book Profit Adjustments under Section 115JB:
The issue of disallowance under Section 14A while computing book profit under Section 115JB was directed to be restricted to 2% of the dividend income, consistent with the main issue's decision.

Conclusion:
- Appeals of the assessee for Assessment years 2002-03, 2003-04, and 2004-05 were partly allowed.
- Appeal of the Revenue for A.Y. 2003-04 was dismissed.
- Appeal of the Revenue for A.Y. 2004-05 was partly allowed for statistical purposes.

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