2015 (9) TMI 1115 - AT - Income Tax

Disallowance u/s.14A as per Rule 8D - Held that - With regard to disallowance of interest expenditure made by Assessing Officer u/s.14A specially to invest in Indian subsidiaries. We find that interest free own funds of the assessee is many times more than this investment because interest free funds available with assessee as on March 31, 2006. There is nothing on record to suggest that any direct nexus between interest bearing borrowed funds and investment in Indian subsidiaries. In such facts and circumstances, according to us, no disallowance under Section 14A can be made out on interest expenditure. Assessing Officer is directed accordingly. Regarding direction to Assessing Officer to allocate directors remuneration fee and traveling allowance towards earning dividend and to make proportionate disallowance under section 14A of the Income-tax Act, 1961, we are of the view that Assessing Officer should make proportionate disallowance only in respect of dividend income from Indian subsidiaries. We do not find any merit in the contention of assessee that no disallowance is called for out of administrative expenditure because dividend income is exempt and hence, proportionate disallowance out of administrative expenses is justified. Accordingly, we do not find any reason to interfere in the order of CIT(A) to that extent. Same is upheld. Allowability of deduction u/s.80IB on interest on FDR and ICD - Held that - Net interest only should be considered for reducing from profits of business for computing deduction u/s.80-IB and for the purpose of computing net interest, only these expenditure, which are incurred for earning interest income should be considered and reduced from interest income. As a result, main ground is rejected, however assessee s alternative netting interest for the purpose of claiming deduction u/s. 80IB is allowed for statistical purpose as indicated above. Disallowance of sales commission - CIT(A) deleted the addition - Held that - We find that CIT(A) has given clear finding on the issue that assessee has given evidence that the recipient provided information in respect of services which helped the sales to mature and realise and, therefore, payment of commission was justified and income of all units of assessee is eligible for deduction u/s. 80IB. Therefore, there is no motive to save taxes by paying commission. Thus, we are not inclined to interfere in the finding of CIT(A) who has deleted the addition on account of disallowance of sales commissions paid u/s. 37. Benefit on deduction u/s.80IB on duty drawback - CIT(A) allowed claim - Held that - t while deciding the appeal for A.Y. 2006-07, the co-ordinate Bench of Tribunal has noted that the duty paid by the assessee and the duty draw back received by it has direct and arithmetic correlation but, in the year under appeal, there is no such finding of either of the lower authorities. In view of the aforesaid facts, we restore the issue back to the file of Assessing Officer to decide the issue afresh in the light of the decision of Tribunal in assessee s own case for earlier years and in accordance with law. The Assessing Officer shall grant adequate opportunity of hearing to the assessee. Thus, this ground of Revenue is allowed for statistical purposes. Levy of penalty u/s. 271(1)(c) - Held that - Without prejudice to the quantum addition sustained by ITAT, we find that full details of sales commission paid to remissiers alongwith names of corresponding customers to whom windmills were sold and basis of payment of commission were furnished. Assessee has engaged certain prominent parties as remissiers. Further, customers might not be aware that some commission was paid to such remissiers and non awareness of the customer does not fall back of assessee as far as penalty is concerned. In view of this, we find that assessee has furnished all the details. Assessee has neither consciously concealed any income nor has evaded any tax. Hence, in such circumstances, CIT(A) was justified in deleting penalty in question. This view is fortified by the decision of Hon ble Supreme Court in case of Reliance Petroproducts Pvt. Ltd. reported at (2010 (3) TMI 80 - SUPREME COURT) . In view of above, we are not inclined to interfere with the order of CIT(A) on this point. Penalty on disallowance of claim u/s.80IB in respect of interest on FDR and ICD - Held that - Tribunal on the issue in the year under consideration, in quantum appeal, held that only net interest should be considered for reduction from profits of business for computing deduction u/s 80IB. With such a direction, the matter has been remitted as discussed above. Since the matter has been remitted, penalty on this ground doesn t survive. In view of above, CIT(A)(A) was justified in deleting penalty. Penalty on account of disallowance u/s.14A - Held that - CIT(A) has granted partial relief. ITAT has confirmed proportionate disallowance u/s. 14A out of administrative expenses on which penalty has been levied. In view of above, we find that assessee has furnished all the details. Assessee has neither consciously concealed any income nor has evaded any tax. In such circumstances, penalty was rightly deleted by CIT(A) on this account. Further mere disallowance u/s 14A out of administrative expenses cannot be justified penalty u/s 271(1)(c). Same has been rightly deleted by CIT(A). We uphold the same. Lianility to deduct tax at source u/s.196C r.w.s. 115AC on the interest payable on FCCBs - Held that - interest paid by assessee to nonresident investor is specifically excluded from the deeming provisions as per S.9(1)(v)(b), and therefore, such interest payment cannot be covered in definition of income deemed to accrue or arise in India. It was thus held that since the income in question is falling within the ambit of this exclusion clause of income deemed to accrue or arise in India as per S.9(1)(v)(b), it cannot fall within the ambit of income accrued and arisen in India, and hence, same cannot be said to be covered u/s 5(2) of the Act. Therefore, there was no occasion to deduct tax at source on such remittance. Respectfully following the decision of the coordinate bench of the Tribunal in the case of the Adani (2013 (1) TMI 518 - ITAT AHMEDABAD), which is identical both in terms of the facts and laws relied upon by the Assessing Officer, we hold that since income in question is squarely falling under the exclusion clause of income deemed to accrue or arise in India u/s 9(1)(v)(b) of the Act, it cannot fall within the ambit of income accrued and arisen in India, and hence, the same cannot be said to be covered u/s 5(2) of the Act. Since the recipient non-resident are not taxable on this income in India, there was no obligation to deduct tax at source on such remittance. Hence, assessee cannot be held liable u/s. 201(1)/(1A) of the Act. In view of this legal discussion, this ground of Revenue is dismissed

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Deduction under Section 80IB on interest from Fixed Deposit Receipts (FDR) and Inter-Corporate Deposits (ICD).
3. Disallowance of sales commission expenses.
4. Deduction under Section 80IB on duty drawback.
5. Penalty under Section 271(1)(c) of the Income Tax Act.
6. Tax Deduction at Source (TDS) on interest payments on Foreign Currency Convertible Bonds (FCCBs).

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The assessee's appeal for AY 2007-08 involved a disallowance of Rs. 2,66,38,938 by invoking Section 14A. The Assessing Officer (AO) found that the assessee had made significant investments in subsidiary companies using borrowed funds, necessitating a disallowance of interest expenses. The AO applied Rule 8D, which was contested by the assessee on the grounds that Rule 8D was not applicable for assessment years prior to AY 2008-09. The ITAT concluded that no disallowance under Section 14A could be made out of interest expenditure due to the absence of a direct nexus between borrowed funds and investments. However, a proportionate disallowance out of administrative expenses was justified.

2. Deduction under Section 80IB on interest from Fixed Deposit Receipts (FDR) and Inter-Corporate Deposits (ICD):
The assessee claimed a deduction under Section 80IB for interest on FDR and ICD amounting to Rs. 18,15,43,011, which was disallowed by the AO based on previous ITAT decisions and the Supreme Court ruling in Pandian Chemicals Ltd. The CIT(A) allowed the alternative ground for netting interest, directing the AO to exclude net interest income after verifying the nexus. The ITAT upheld this, stating that only net interest should be considered for reducing from profits of business for computing deduction under Section 80IB.

3. Disallowance of sales commission expenses:
The AO disallowed sales commission expenses of Rs. 18,04,87,694, questioning the genuineness of the services rendered by agents. The CIT(A) deleted the disallowance, noting that the agreements and payments were genuine and supported by evidence. The ITAT upheld the CIT(A)'s decision, confirming that the payments were made for genuine services that helped in realizing sales.

4. Deduction under Section 80IB on duty drawback:
The AO denied the benefit of deduction under Section 80IB on duty drawback of Rs. 17,02,03,470, referring to previous assessment orders. The CIT(A) allowed the deduction, following earlier orders. The ITAT restored the issue to the AO for fresh decision, emphasizing the need to verify the direct and arithmetic correlation between duty paid and duty drawback received, as established in previous years.

5. Penalty under Section 271(1)(c) of the Income Tax Act:
The AO levied a penalty of Rs. 1,51,36,069 on three additions: disallowance of sales commission, disallowance of deduction under Section 80IB on interest, and disallowance under Section 14A. The CIT(A) deleted the penalty, noting that the assessee had disclosed all relevant details and there was no conscious concealment of income. The ITAT upheld the CIT(A)'s decision, citing the Supreme Court ruling in Reliance Petroproducts Pvt. Ltd., which held that mere disallowance of a claim does not warrant penalty under Section 271(1)(c).

6. Tax Deduction at Source (TDS) on interest payments on Foreign Currency Convertible Bonds (FCCBs):
The AO held that the assessee was liable to deduct tax at source under Section 196C read with Section 115AC on interest payments on FCCBs, treating the interest as income accrued in India. The CIT(A) granted relief to the assessee, holding that the interest paid on FCCBs was covered by the exception in Section 9(1)(v)(b) and did not accrue or arise in India. The ITAT upheld the CIT(A)'s decision, following the precedent set in the case of Adani Enterprise Ltd., where it was held that such interest payments fall within the exclusion clause of income deemed to accrue or arise in India.

Conclusion:
The ITAT's judgment addressed multiple issues related to disallowances, deductions, and penalties under the Income Tax Act, providing detailed reasoning for each decision. The tribunal upheld the CIT(A)'s findings in most cases, emphasizing the importance of proper documentation and genuine business transactions in tax assessments. The decision also highlighted the applicability of specific provisions and exceptions under the Income Tax Act, ensuring a fair and just resolution of the disputes.