2013 (9) TMI 673 - AT - Income Tax

Disallowance of deduction under section 80HHC - The assessee for the relevant year had earned profit of Rs. 11.12 crores from trading export and there was loss of Rs. 68.80 crores from manufacturing export. The assessee had claimed deduction under section 80HHC ignoring loss from manufacturing export Held that - deduction has to be allowed only from net profit from both activities and since there was net loss, therefore, no deduction u/s 80HHC has been allowed Reliance has been placed upon the judgment of the Hon ble Supreme Court in the case of IPCA Laboratory Ltd. v. Deputy CIT 2004 (3) TMI 9 - SUPREME Court Decided against the Assessee. Adjustment in book profit on account of any expenditure relatable to income which does not form part of total income - Under the provisions of clause (f) of the Explanation to section 115JA adjustment to book profit is required Held that - Quantum of adjustment will depend upon the actual interest disallowed Restored to the file of A.O. for computation of quantum of adjustment. Adjustment to book profit on account of profit eligible for deduction under section 80HHC in terms of provision (viii) of the Explanation to section 115JA Held that - The Special Bench of the Tribunal in case of Deputy CIT v. Syncome Formulations (I) Ltd. 2007 (3) TMI 288 - ITAT BOMBAY-H has held that the profit eligible for deduction under section 80HHC for the purpose of adjustment under section 115JA has to be computed on the basis of adjusted book profit under section 115JA and not on the basis of profit computed under regular provisions of the Act. The said decision of the Special Bench of the Tribunal has been upheld by the Hon ble Supreme Court in the case of CIT v. Bhari Information Tech. Sys. P. Ltd. 2011 (10) TMI 19 - Supreme Court of India - In view of this position, the Assessing Officer is directed to compute profit eligible for deduction under section 80HHC on the basis of adjusted book profit and not on the basis of profit computed under normal provisions of the Act. Disallowance of interest in relation to interest free advance to 100 per cent. subsidiary, i.e., Bespoke Finvest Ltd - Internal accrual were sufficient to advance the amount to the subsidiary Held that - In this year, the disallowance is mostly on account of opening balance which has already been deleted by the Tribunal in the assessment year 1998-99. In the current year, the advance given is only Rs. 8 lakhs which are easily explained from the current profit of Rs. 25.92 crores Disallowance is deleted Decided in favor of Assessee. Disallowance of professional fee paid to Mckinsey and Co - Assessee had made payment of Rs. 315.26 lakhs to Mckinsey and Co - Professional fees for upgradation of management information system (MIS) and project management system Held that - Company had been appointed consultant for upgradation of the MIS in connection with the existing business of supply and erection of transmission towers - Expenditure is obviously of the nature of revenue expenditure as assessee derived no advantage in the capital field. Expenditure neither resulted into creation of new asset or new source of income. The expenditure is thus allowable as revenue expenditure. The expenditure cannot be disallowed only on the ground that there was no formal agreement Claim is allowed - From perusal of invoices, total of the amount claimed as per invoices does not match with the total claim of expenditure - Assessing Officer has been directed to allow the claim after necessary verification of bills and quantum expenditure Decided in favor of Assessee. Allowability of voluntary retirement scheme expenditure - The assessee had claimed a sum of Rs. 2.62 crores on account of voluntary retirement scheme (VRS) Held that - Following the judgment in the case of CIT v. Bhor Industries Ltd. 2003 (2) TMI 20 - BOMBAY High Court , the claim of assessee is allowed The VRS expenditure is treated as Revenue expenditure Decided in favor of Assessee.

Issues Involved:
1. Disallowance of interest paid on borrowings.
2. Disallowance of deduction under section 80HHC.
3. Exclusion of excise duty, scrap sales, and turnover of overseas branches from total turnover.
4. Disallowance of interest on borrowings under section 115JA.
5. Disallowance of deduction on account of reversal of provision for leave encashment.
6. Disallowance of deduction under section 80HHC in terms of clause (a) of the Explanation.
7. Disallowance of interest attributable to debit balance of subsidiary company.
8. Disallowance of license fee paid to RPG Enterprises Ltd.
9. Disallowance of professional fee paid to McKinsey and Co.
10. Depreciation allowance.
11. Disallowance of provision for bad and doubtful debts.
12. Granting of minimum alternate tax credit.
13. Disallowance of expenditure incurred in relation to the project yet to be commenced.
14. Disallowance of voluntary retirement scheme expenditure.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Paid on Borrowings:
The Assessing Officer (AO) disallowed interest related to investments in shares/mutual funds, treating 63.66% of investments as made from borrowed funds. The Commissioner of Income-tax (Appeals) [CIT(A)] provided partial relief, confirming disallowance for Rs.1,383.22 lakhs. The Tribunal restored the issue to the AO for fresh examination, noting the need for compliance with section 14A and allowing the assessee an opportunity for a hearing.

2. Disallowance of Deduction Under Section 80HHC:
The AO disallowed the deduction under section 80HHC due to net losses from manufacturing export. The CIT(A) upheld this decision, following the Bombay High Court's judgment in IPCA Laboratories Ltd. This decision was confirmed by the Tribunal, referencing the Supreme Court's ruling in IPCA Laboratory Ltd. v. Deputy CIT.

3. Exclusion of Excise Duty, Scrap Sales, and Turnover of Overseas Branches from Total Turnover:
The CIT(A) dismissed these grounds as academic, given the assessee's net losses and ineligibility for deduction under section 80HHC. The Tribunal agreed, deeming the issues infructuous.

4. Disallowance of Interest on Borrowings Under Section 115JA:
The AO adjusted the book profit under section 115JA due to disallowed interest expenditure. The Tribunal restored the issue to the AO, aligning it with the decision on the interest disallowance.

5. Disallowance of Deduction on Account of Reversal of Provision for Leave Encashment:
The assessee did not press this issue due to the small amount involved. The Tribunal dismissed this ground as not pressed.

6. Disallowance of Deduction Under Section 80HHC in Terms of Clause (a) of the Explanation:
The AO and CIT(A) denied adjustment to book profit due to net losses. The Tribunal directed the AO to compute profit eligible for deduction under section 80HHC based on adjusted book profit, following the Special Bench decision in Deputy CIT v. Syncome Formulations (I) Ltd. and the Supreme Court's ruling in CIT v. Bhari Information Tech. Sys. P. Ltd.

7. Disallowance of Interest Attributable to Debit Balance of Subsidiary Company:
The AO disallowed interest on loans to Bespoke Finvest Ltd., citing lack of evidence for interest-free funds. The CIT(A) upheld the disallowance but reduced the interest rate. The Tribunal deleted the disallowance, noting sufficient internal accruals and following its previous decision in the assessee's case for 1998-99.

8. Disallowance of License Fee Paid to RPG Enterprises Ltd.:
The AO disallowed the license fee due to lack of evidence of services rendered. The CIT(A) confirmed the disallowance. The Tribunal restored the issue to the AO for fresh examination, following its decision in the assessee's case for 1998-99.

9. Disallowance of Professional Fee Paid to McKinsey and Co.:
The AO disallowed the fee, citing incomplete contracts. The CIT(A) upheld the disallowance due to lack of agreement and final report. The Tribunal allowed the claim, recognizing the expenditure as revenue in nature and directing the AO to verify the bills and quantum of expenditure.

10. Depreciation Allowance:
The AO added depreciation to total income, contrary to the Supreme Court's decision in CIT v. Mahendra Mills Ltd. The CIT(A) confirmed this, following the Bombay High Court's ruling in Indian Rayon Corporation Ltd. v. CIT. The Tribunal upheld the CIT(A)'s decision, referencing the Full Bench judgment in Plastiblends India Ltd. v. Asst. CIT.

11. Disallowance of Provision for Bad and Doubtful Debts:
The AO disallowed the provision, citing non-compliance with section 36(1)(vii). The CIT(A) confirmed this. The Tribunal allowed the claim, following the Supreme Court's ruling in Vijaya Bank v. CIT, which accepted lump-sum reduction from debtors' balance.

12. Granting of Minimum Alternate Tax Credit:
The Tribunal directed the AO to verify and allow the credit for minimum alternate tax paid in the earlier year, as per law.

13. Disallowance of Expenditure Incurred in Relation to the Project Yet to be Commenced:
The AO disallowed pre-operative expenses for unawarded projects. The CIT(A) allowed the claim, following the decision for 1998-99. The Tribunal confirmed this, referencing its previous decision.

14. Disallowance of Voluntary Retirement Scheme Expenditure:
The AO treated VRS expenditure as capital in nature. The CIT(A) allowed the claim, following the Supreme Court's ruling in CIT v. Ashok Leyland Ltd. and the Bombay High Court's decision in CIT v. Bhor Industries Ltd. The Tribunal upheld the CIT(A)'s decision, following its previous ruling.

Conclusion:
Both appeals were partly allowed, with several issues restored to the AO for fresh examination and others decided based on precedent cases and legal principles. The Tribunal's order was pronounced on October 17, 2012.

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