2016 (1) TMI 864 - AT - Income Tax

Disallowance u/s 14A - CIT(A) deleted addition - Held that - No infirmity in the order of the CIT(A) deleting the disallowance of interest so made as where the assessee has both own funds as well as borrowed funds and the own funds are sufficient as compared to the amounts of investments, then it is to be presumed that investments have been made out of own funds. So far as the CIT (A) has upheld the disallowance of administrative expenses u/s 14A in the ratio of exempt income to the total turnover of business, the issue is covered by the decision of Tribunal in assessee s own case for assessment year 2004-05. Disallowance of interest u/s 36(1)(iii) - CIT(A) deleted the disallowance - Held that - As per the details of opening and closing balance and purchases made in last three years, it is very clear that this is not a non business advance but it is a pure business advance given in the interest of business, accordingly there is no infirmity in the order of CIT(A) appeal for deleting the disallowance of interest so made. From the record we also found that there has been no disallowance in earlier years up to assessment year 2001-02 when these advances had been given. However, in the current year, the department cannot make such a disallowance unless there is any change in the facts during the year. Accordingly, we do not find any merit in the action of the AO for disallowing the interest even in view of consistency principle laid down in the case of Radhasoami Satsang 1991 (11) TMI 2 - SUPREME Court and by Paul Brothers 1992 (10) TMI 5 - BOMBAY High Court . Accordingly, we uphold the action of CIT(A) deleting the disallowance of interest u/s 36(1)(iii) of the I.T. Act. Denial of deduction u/s 80IB in respect of new unit set up at Daman - Held that - Considering the facts and circumstances of the case vis- -vis order of the Tribunal in assessee s own case for assessment year 2004-05 and also the order of the AO giving effect to the order of Tribunal allowing assessee s claim of deduction u/s 80-IB, we do not find any merit in the action of lower authorities in declining assessee s claim for deduction u/s 80IB in respect of new unit set up at Daman during the assessment year 2005-06 and 2006-07. Accordingly, the AO is directed to allow assessee s claim for deduction u/s 80IB for assessment year 2005-06 and 2006-07. Denial of deduction u/s 80IB on interest income treating it as income from other sources instead of business income - Held that - Fixed deposits were kept for the purposes of business it partakes the character of business income. The earning of interest income is incidental to the main business of the assessee, therefore, it does not constitute a separate activity in itself for it to be taxed separately. The words used in Sec 80-IB are profit and gains derived from any business are wide enough to cover the interest income. As exactly similar issue was considered by Tribunal in assessee s own case for assessment year 1999-00, 2001-02, & 2003-04 for interest on FD kept as margin money to be considered as business income and deduction to be allowed u/s 80HHC. We found that the issue of netting of interest is squarely covered by the decision of Hon ble Supreme Court in the case of ACG Associated Capsules (P) Ltd. (2012 (2) TMI 101 - SUPREME COURT OF INDIA ). However, in view of the fact that interest being earned out of the deposit given to the bank as business compulsion, we have held that entire interest is eligible for deduction u/s 80-IB of the Income Tax Act Addition on account of excise duty to closing stock of finished goods which were not subject to duty under excise Act - Held that - Excise duty liability crystallizes on the day of clearance of excisable goods and not on the date of manufacture and, therefore, excise liability was not incurred by the assessee in respect of unsold sugar lying in the stock and cannot be included in the value of closing stock of sugar. Respectfully following the order of Jurisdictional High Court in the case of Loknet Balasaheb Desai SSK Ltd 2011 (6) TMI 48 - BOMBAY HIGH COURT we do not find any merit in the action of lower authorities for making additions on account of excise duty to closing stock of finished goods which were not subject to duty under the excise Act. Deduction u/s 80IB on the hedging profit earned in the commodity exchange - Held that - The expression used in section 80-IB i.e. profit derived from business of the industrial undertaking is much wider than the expression used in section 80-HH/80-I i.e. profits and gains derived from an industrial undertaking. We also found that the profit earned out of squaring off future contracts is profit earned on account of hedging transaction. Thus there is a direct nexus between the activity of Jammu unit and the profit earned in the hedging contracts. The hedging Mentha Oil stemmed from the activity of Jammu unit of manufacturing Menthol Products. Thus the income from hedging in Mentha oil formed an integral part of the income of the Jammu unit and was eligible for deduction u/s. 80-IB. The detailed finding recorded by the CIT(A) while concluding that when such profit was eligible for deduction u/s 80IB is as per material on record and the same has not been controverted by bringing any positive material by Ld. DR. Accordingly, we do not find any reason to interfere with the finding recorded by the CIT(A) holding that assessee is eligible for deduction u/s 80IB in respect of such profit. Disallowance of depreciation on the plea that the Daman unit had discontinued its business activity - Held that - The year under consideration is not the first year of asset acquiring, therefore, the assets of closed unit will remain part of the block of assets. The said block of assets was used for the purpose of business during the year. Under these circumstances, the assets of the said closed unit amounts to use for the purpose of business in the year under consideration. It was, therefore, held that assessee is entitled for depreciation. Similar view has been taken in the case of KJS India Pvt. Ltd. 2011 (9) TMI 667 - Delhi High Court and Pfizer Ltd. 2010 (6) TMI 433 - Bombay High Court . Respectfully following these decisions, we do not find any ground/reason for declining the assessee s claim for depreciation in respect of assets forming part of block of asset. AO is, therefore, directed to allow the assessee s claim. Reopening of assessment - disallowance u/s 14A - Held that - the assessee is exporter of Menthol products and other oils in the international market. The company had surplus funds in its balance sheet which were invested in tax free securities during the prior years. There is no fresh/ additional investment made during the year. There was only reshuffling of investments. The total investments have reduced by ₹ 11.13 crores. As per the figure of share capital and free reserves vis-a-vis investment during the years, we found that the assessee had ₹ 39.84 crores in the form of share capital and reserve surplus against which investment was merely ₹ 9.16 crores. Applying proposition of law laid down in the case of Reliance Utilities Ltd. (2009 (1) TMI 4 - BOMBAY HIGH COURT ) we do not find any merits in disallowing proportionate interest. With respect to claim of administrative expenses, we found that main administrative expenditure of the assessee was towards manufacturing activity. However, full detail of such expenses have not been furnished, therefore, we restore the issue of disallowance of administrative expenditure as per Rule 8D for deciding afresh as per law.

Summary

Issues Involved:
1. Disallowance under Section 14A.
2. Disallowance of interest under Section 36(1)(iii).
3. Denial of deduction under Section 80IB for the Daman unit.
4. Denial of deduction under Section 80IB on interest income.
5. Addition of excise duty to closing stock.
6. Deduction under Section 80IB on hedging profit.
7. Reopening of assessment under Section 147 and disallowance under Section 14A read with Rule 8D.
8. Disallowance of expenses for the Daman unit.

Detailed Analysis:

1. Disallowance under Section 14A:
The AO disallowed expenses under Section 14A, treating them as incurred for earning tax-free dividend income. The CIT(A) upheld the disallowance proportionately. The Tribunal, referencing its own prior decisions and the Bombay High Court ruling in Reliance Utilities & Power Ltd., found that the assessee had sufficient own funds for investments, thus no disallowance of interest under Section 14A was warranted. The Tribunal upheld the CIT(A)'s disallowance of administrative expenses proportionate to exempt income.

2. Disallowance of interest under Section 36(1)(iii):
The AO disallowed interest paid to the bank, alleging interest-free advances to related parties. The CIT(A) deleted this disallowance, finding no diversion of interest-bearing funds. The Tribunal, referencing its prior decisions and the Supreme Court's ruling in SA Builders, upheld the CIT(A)'s decision, confirming that advances were for business purposes and the assessee had sufficient own funds.

3. Denial of deduction under Section 80IB for the Daman unit:
The AO denied the deduction, citing insufficient employment of workmen and delayed machinery installation. The Tribunal found that the assessee had employed more than 10 workmen and installed machinery before the end of the fiscal year. The Tribunal directed the AO to allow the deduction, referencing its prior decisions and the AO's subsequent compliance in earlier years.

4. Denial of deduction under Section 80IB on interest income:
The AO treated interest income from fixed deposits as income from other sources, denying the deduction. The Tribunal found that the fixed deposits were business-related, thus the interest income should be considered business income eligible for deduction under Section 80IB. The Tribunal referenced decisions from the Delhi High Court and the Supreme Court supporting this view.

5. Addition of excise duty to closing stock:
The AO added excise duty to the closing stock of finished goods. The Tribunal, referencing the Bombay High Court's decisions in Loknet Balasaheb Desai SSK Ltd. and SPV Industries, held that excise duty liability crystallizes upon clearance, not manufacture. Thus, it should not be included in the closing stock value.

6. Deduction under Section 80IB on hedging profit:
The AO denied the deduction, treating hedging profit as non-business income. The Tribunal found that the hedging transactions were business-related, aimed at protecting against raw material price fluctuations. The Tribunal referenced the Gujarat High Court's decision in Pankaj Oil Mills and the Delhi High Court's decision in Eltek SGS, concluding that hedging profits are business profits eligible for deduction under Section 80IB.

7. Reopening of assessment under Section 147 and disallowance under Section 14A read with Rule 8D:
The AO reopened the assessment for not applying Rule 8D in the original assessment. The Tribunal upheld the reopening, finding a valid reason for belief of income escapement. On merits, the Tribunal found no basis for proportionate interest disallowance due to sufficient own funds but remanded the issue of administrative expenses disallowance for fresh consideration.

8. Disallowance of expenses for the Daman unit:
The AO disallowed expenses, claiming the Daman unit had discontinued business. The Tribunal found that the unit was temporarily closed but maintained for potential future use, and expenses were part of the block of assets. The Tribunal referenced decisions from the Bombay and Delhi High Courts, directing the AO to allow the expenses.

Conclusion:
The Tribunal allowed the assessee's appeals in part, dismissed the revenue's appeals, and allowed the cross-objections filed by the assessee. The decisions were based on prior Tribunal rulings, High Court decisions, and Supreme Court judgments, ensuring consistency and adherence to legal precedents.