2017 (9) TMI 182 - AT - Income Tax

Deduction u/s 80IC declined - no substantial expansion of Parwanoo unit - contention of the learned CIT(DR) that the assessee has already been allowed deduction under section 80IB for five years and therefore, it should not be allowed deduction further - Held that - As decided in assessee s own case the assessee has been able to justify the increase of plant and machinery to the tune of ₹ 18,35,423 (Rs.19,48,888 - ₹ 1,13,465) at Parwanoo unit. We are also in agreement with the conclusion that this amount of increase of plant and machinery during the year under consideration viz. ₹ 18,35,423 is more than 50% of the opening value of the plant and machinery for Parwanoo i.e. ₹ 34,63,220 (as on 1.4.2005) then the claim of expansion of Parwanoo unit was rightly held in favour of the assessee. We also note that the Director of Industries, H.P. also acknowledged the substantial expansion of Parwanoo unit as on 24.11.2005 by the certificate dated 8.2.2006 which has not been controverted by the AO which clarifies that after substantial expansion as on 24.11.2005, the investment in plant and machinery was increased from ₹ 33.32 lakh to ₹ 52.36 lakh during the year under consideration. CIT(A) also granted relief to the assessee for AY 2007-08 by following its order for AY 2006-07 which cannot be said to be an unjust or improper approach rather the CIT(A) rightly followed rule of consistency in the proceedings by following its order for immediately preceding year. As referring to subsection 6 of section 80IC which restricts deduction under section 80IB, section 80IC or section 10C for a total period of 10 years and beyond that no deduction is allowed. The arguments of Ld. CIT(DR) cannot hold ground, and the assessee is eligible for deduction under section 80IC(6) of the Act for at least 5 years. Since both the issues of substantial expansion at Parwanoo unit and the activity of the assessee as manufacturing, have already been decided in favour of the assessee by the orders of the Tribunal and no contrary decision of any higher court has been brought to our notice by the learned CIT(DR), respectfully following the decision of the Tribunal in assessee s own case , we find no infirmity in the finding of the learned CIT(A) on the issue in dispute and uphold the same. - Decided against revenue Disallowance u/s 14A on account of exempt income earned u/s 10(33)/10(34)- Held that - In the case of Joint Investment Ltd Vs. CIT 2015 (3) TMI 155 - DELHI HIGH COURT is of the view that disallowance under section 14A of the Act should not exceed the exempted income claimed by the assessee. In the present case the assessee has already made disallowance suo motu exceeding the exempted income, therefore, no further disallowance is required and the same made by the Assessing Officer is upheld by the Ld. CIT- (A), and is hereby deleted - Decided against revenue

Summary

Issues Involved:

1. Deduction under Section 80IC of the Income Tax Act.
2. Disallowance of expenses under Section 14A of the Income Tax Act invoking Rule 8D.

Issue-wise Detailed Analysis:

1. Deduction under Section 80IC of the Income Tax Act:

The Revenue's appeal (ITA No. 6500/Del/2014) contested the allowance of a deduction under Section 80IC amounting to ?10,46,93,829/- by the Commissioner of Income Tax (Appeals) [CIT(A)]. The Revenue argued that the deduction was previously disallowed in AY 2006-07 due to non-fulfillment of conditions regarding substantial expansion in the Parwanoo unit and that the assessee was not engaged in manufacturing activities. The CIT(A) had allowed the deduction by following the decision of his predecessor for AY 2006-07, which was in favor of the assessee. The Tribunal noted that similar issues had been resolved in favor of the assessee in previous years (AY 2006-07, 2007-08, and 2008-09) by the Tribunal itself, which had been upheld by higher courts, including the Supreme Court.

The Tribunal examined the CIT(A)'s detailed observations, which highlighted that the assessee's activity of producing ESRI software was considered as manufacturing, and substantial expansion was validated by the Director of Industries, H.P., certifying the increase in investment in plant and machinery. The Tribunal also referenced Section 80IC(6), which restricts deductions to a total period of 10 years, affirming that the assessee was eligible for the deduction for at least 5 years. Consequently, the Tribunal upheld the CIT(A)’s decision, dismissing the Revenue's grounds.

2. Disallowance of Expenses under Section 14A of the Income Tax Act Invoking Rule 8D:

The assessee's appeal (ITA No. 6561/Del/2014) challenged the disallowance of ?14,97,616/- under Section 14A read with Rule 8D. The Assessing Officer (AO) had not accepted the assessee's suo motu disallowance of ?2,65,537/- and instead computed a higher disallowance using Rule 8D. The CIT(A) upheld the AO's decision but allowed credit for the assessee's initial disallowance.

The Tribunal considered the assessee's argument that the AO had not properly recorded dissatisfaction with the assessee's disallowance computation, a prerequisite for invoking Rule 8D. The Tribunal also noted that the disallowance should not exceed the exempt income, referencing the Delhi High Court's decision in Joint Investment Pvt. Ltd. v. CIT, which stated that disallowance under Section 14A should not exceed the exempt income. Given that the assessee's disallowance exceeded the exempt dividend income, the Tribunal found no further disallowance necessary and deleted the additional disallowance upheld by the CIT(A).

Conclusion:

The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal, thereby upholding the CIT(A)'s decision on the Section 80IC deduction and deleting the additional disallowance under Section 14A. The decision was pronounced on 30th August 2017.