2016 (6) TMI 559 - AT - Income Tax

Disallowance of interest u/s 36(1)(iii) - assessee had advanced the amount to its sister concerns - Held that - The impugned advance has been made out of interest free funds available with the assessee and there was no question of whatsoever for disallowing interest 36(1)(iii) of the Act. Accordingly, we hold that the disallowance of interest u/s 36(1)(iii) pertaining to the sister concerns upheld by the ld. CIT(A) is not justified, hence, the same is deleted. Thus, the appeal of the assessee is allowed. Deduction of profit u/s 80IC - allegation of the revenue is that assessee did not have sufficient infrastructure and man power to manufacture the entire products on its own in its exempt unit and got it done as job work from units outside specified areas. - Held that - We are of the considered view that the issue in dispute is squarely covered by the decision of this Bench of the Tribunal, in assessee s own case for the assessment years 2005-06 to 2009-10 wherein held that no discrepancy in the books of account has been pointed out by the authorities below and each and every purchase has been backed by the vouchers and there is evidence in the shape of GRs and delivery challans for finished products of Gagret which is duly authenticated on the border of Punjab & Himachal Pradesh and this documentary evidence has been admitted by the AO and simply copies were placed. Regarding electricity charges, which have been proved by the assessee beyond any doubt and how it can be assumed that electricity charges in H.P. are far less than electricity charges in Punjab and that finding has not been rebutted by the ld. CIT(A). - Decided in favour of assessee

Issues Involved:
1. Disallowance of interest expenditure under section 36(1)(iii) of the Income Tax Act.
2. Deduction of profit under section 80IC of the Income Tax Act.

Detailed Analysis:

Disallowance of Interest Expenditure:
Background:
The assessee appealed against the disallowance of interest expenditure amounting to ?1,22,51,965/- under section 36(1)(iii) by the Assessing Officer (AO) and upheld by the CIT(A). The disallowance was based on the premise that the assessee had advanced interest-free loans to its sister concerns, which were not for business purposes.

Assessee’s Arguments:
1. The investments in sister concerns were made from the assessee's own funds, not borrowed funds.
2. The assessee had sufficient interest-free funds available, amounting to ?99,85,30,907.99, against the advances of ?23,23,31,000/-.
3. The interest on term loans should not be disallowed as these loans were used for acquiring fixed assets.
4. The assessee had disclosed significant interest income from fixed deposits, which exceeded the interest on the cash credit limit.

CIT(A) and AO’s Stand:
Both authorities relied on the judgment in the case of Abhishek Industries and Bright Enterprises to justify the disallowance, arguing that the funds were diverted for non-business purposes.

Tribunal’s Findings:
1. The reliance on the judgments of Abhishek Industries and Bright Enterprises was misplaced as these judgments had been overruled by higher courts.
2. The Supreme Court in Hero Cycles and the Punjab & Haryana High Court in Bright Enterprises had clarified that advances to sister concerns for commercial expediency are allowable.
3. The Tribunal concluded that the advance was made out of interest-free funds available with the assessee, and there was no justification for disallowing the interest under section 36(1)(iii).

Conclusion:
The Tribunal deleted the disallowance of interest expenditure, allowing the assessee's appeal.

Deduction of Profit under Section 80IC:
Background:
The Revenue appealed against the CIT(A)'s decision to allow the deduction of profit under section 80IC, arguing that the assessee did not have sufficient infrastructure and manpower to manufacture the entire products in its exempt unit and got it done as job work from units outside specified areas.

Revenue’s Arguments:
1. The income from the sale of paper should be treated as trading income and not eligible for deduction under section 80IC.
2. The assessee did not have the necessary infrastructure to manufacture the products on its own.

CIT(A)’s Decision:
The CIT(A) deleted the disallowance, relying on the Tribunal’s decision in the assessee's case for previous assessment years, where similar disallowances were deleted.

Tribunal’s Findings:
1. The Tribunal noted that the issue was already covered by its previous decisions in the assessee’s case for assessment years 2005-06 to 2009-10, where the deduction under section 80IC was allowed.
2. The Tribunal found no discrepancy in the books of account and sufficient evidence supporting the assessee's claim of manufacturing activity.
3. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to allow the deduction of profit under section 80IC.

Final Order:
The appeal of the assessee was allowed, and the appeal of the Revenue was dismissed. The Tribunal pronounced the order in the open court on 13/06/2016.

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