2017 (4) TMI 1032 - HC - Income Tax

Disallowance of deduction u/s. 80IB of the Act on account of Central Excise Refund - Held that - Apex Court in the case of Commissioner of Income-Tax v. Meghalaya Steel Limited 2016 (3) TMI 375 - SUPREME COURT approved the decision of Delhi High Court rendered in case of CIT v. Dharam Pal Prem Chand Limited 2008 (11) TMI 231 - DELHI HIGH COURT in which, it is held that the refund of excise duty should not be excluded in arriving at the profit derived from business for the purpose of claiming deduction under Section 80-IB of the Act Deduction u/s 80IB on account of disallowance of remuneration under Section 40 (b) and disallownace under Section 43B - Held that - The present Tax Appeal deserves to be dismissed qua the same in light of the recent CBDT Circular No. 37/2016 F. No. 279/MISC/ 140/2015/ITJ dated 2nd November 2016 wherein the Board has accepted the settled position that the disallowances made under sections 32, 40(a) (ia), 40A(3), 43B, etc. of the Act and other specific disallowances, related to the business activity against which the Chapter VI-A deduction has been claimed, result in enhancement of the profits of the eligible business, and that deduction under Chapter VIA is admissible on the profits so enhanced by the disallowance. Accordingly, henceforth, appeals may not be filed on this ground by officers of the Department and appeals already filed in Courts/Tribunals may be withdrawn/not pressed upon Deduction under Section 80IB on account of disallowance of R&D expenses - Held that - A.O. Has made this disallowance holding that the profits of the appellant were overstated on account of no expenses being debited for R&D facilities. The appellant has submitted that the reimbursement expenses were made to cover a host of facilities and services that were availed of from SPIL and that the expenses on account R&D for products developed and launched were included in that. As find that the notional disallowance on account of R&D expenses has been made on similar lines as the disallowances made for royalty, management fees and selling and distribution expenses. As discussed above, the said notional disallowances were found untenable by the Tribunal and were deleted in its order dated 12.06.2012. No additional facts have been brought on record to support the notional disallowance on account of R&D expenditure. Accordingly, following the rational behind the Tribunal s decision on the disallowances of royalty etc., the disallowance on R&D expenses is deleted and the ground raised by the appellant is allowed

Summary

Issues:
- Interpretation of Section 80IB of the Income Tax Act for deduction eligibility
- Disallowance of deduction under Section 80IB for various expenses
- Treatment of Central Excise Refund for deduction under Section 80IB
- Disallowance of deduction for interest on delayed payment
- Disallowance of deduction for remuneration and expenses under Sections 40 and 43B
- Disallowance of deduction for R&D expenses

Interpretation of Section 80IB:
The High Court analyzed whether the Industrial Undertaking at Dadra was formed by splitting or reconstruction of an existing business and if the assessee firm was entitled to deduction under Section 80IB. They considered CBDT Circulars and previous decisions to determine the eligibility of the undertaking formed by a major partner. The Court dismissed the appeal based on the facts and circumstances presented.

Disallowance of Various Expenses:
The Court reviewed the ITAT's decision to delete the disallowance of deduction under Section 80IB for selling and distribution expenses, royalty, notional management fees, and interest on delayed payments. They upheld the ITAT's decision based on the relationship of the disallowed expenses to the business activity against which the deduction was claimed.

Treatment of Central Excise Refund:
Regarding the disallowance of deduction for Central Excise Refund, the Court referred to a recent Supreme Court decision and held that the refund of excise duty should not be excluded in calculating profits for claiming deduction under Section 80IB. They dismissed the appeal based on the Apex Court's approval of the Delhi High Court's decision.

Disallowed Deductions for Remuneration and Expenses:
The Court considered the disallowance of deduction under Section 80IB for remuneration under Section 40(b) and expenses under Section 43B. They referred to a recent CBDT Circular and concluded that disallowances related to business activities enhance profits eligible for deduction under Chapter VI-A. As a result, the Court dismissed the appeal based on the settled position accepted by the Board.

Disallowed Deductions for R&D Expenses:
The Court examined the disallowance of deduction under Section 80IB for R&D expenses. They reviewed the Assessing Officer's and CIT's findings, confirming the Tribunal's decision to delete the disallowance. The Court considered it a question of fact and upheld the decisions of the lower authorities, dismissing the appeal.

In conclusion, the High Court addressed various issues related to the interpretation and application of Section 80IB of the Income Tax Act, analyzing each aspect in detail and providing reasons for dismissing the appeals based on the facts, relevant circulars, and previous judicial decisions.