2019 (2) TMI 790 - AT - Income Tax

Exclusion of Other Income for deduction u/s 80IC - income from sale of scrap - Held that - Assessee has filed certain details of sale of scrap, discount from suppliers, excess provision written back, credit balance written back and miscellaneous income before us which required verification by the authorities below as to its direct nexus of being derived from undertaking on which deduction u/s 80IC was claimed is required to be proved. There is no quarrel with this proposition of the assessee that sale of scrap is to be considered for deduction u/s 80IC but however we are of the view that the assessee has to show that this income from sale of scrap has direct nexus and was derived from the industrial undertaking on which deduction u/s. 80IC was claimed to get benefit of deduction u/s 80IC. This is a factual matter and requires verification of fact and the facts may differ from year to year. Hence for verification purposes, we are restoring the matter back to the file of the AO wherein the assessee will be required to prove through cogent evidences that these incomes from sale of scrap was derived from the industrial undertaking on which deduction u/s. 80IC was claimed, as is contemplated and required under Section 80IC. Similar is for the other incomes viz. discount from supplies, excess provision written back, credit balances written back and miscellaneous income, we are of the view that the assessee has to show that these incomes from discount from supplies , excess provision written back, credit balances written back and miscellaneous income have direct nexus and were derived from the industrial undertaking on which deduction u/s. 80IC was claimed by the assessee to get benefit of deduction u/s 80IC. Hence for verification purposes, we are restoring the matter back to the file of the AO wherein the assessee will be required to prove through cogent evidences that these incomes from discount from supplies, excess provision written back, credit balances written back and miscellaneous income were derived from the industrial undertaking on which deduction u/s. 80IC was claimed, as is contemplated and required under the provisions of Section 80IC of the Act. Ad-hoc disallowance of 2% of total Miscellaneous Expenditure booked by the assessee under the head Miscellaneous Expenses in its books of accounts - Held that - No incriminating material has been brought on record by the AO and by the CIT(A) to prove that these are not business expenses and these were not incurred wholly and exclusively for the purposes of business of the assessee. The authorities below have merely disallowed 2% of these miscellaneous expenses on ad-hoc basis without brining any incriminating material on record merely on the presumption that these expenses may not be verifiable. The contention of the authorities below that TDS might not have been deducted on some of these expenses also lacks merit as the assessee has brought on record tax audit report to prove that there was no default in compliance of TDS. The complete details of these expenses were furnished by the assessee before the authorities below. Disallowance of these miscellaneous expenses on adhoc basis @ 2% of miscellaneous expenses was made by authorities below merely on conjectures and surmises without bring any incriminating material on record and such disallowances on adhoc basis in the manner done by the authorities below keeping in view facts and material on record before the authorities below is not permissible. Thus, the assessee succeeds on this issue and the entire disallowance of miscellaneous expenses as was made by the AO and as confirmed by learned CIT(A) stood deleted.

Issues Involved:
1. Exclusion of Other Income for deduction under Section 80IC.
2. Disallowance of miscellaneous expenses amounting to INR 7,13,304.
3. Initiation of penalty under Section 271(1)(c).
4. Charge of interest under Section 234C.

Issue-wise Detailed Analysis:

1. Exclusion of Other Income for Deduction under Section 80IC:

The assessee claimed a deduction under Section 80IC amounting to ?11,03,71,511. The Assessing Officer (AO) observed that certain items of income, including interest, rent, DEPB income, and others, were included under 'Other Sources' and apportioned from the head office to the units claiming the deduction. The AO, relying on Supreme Court decisions (CIT v. Sterling Foods, Pandian Chemicals Ltd. v. CIT, and Liberty India v. CIT), disallowed these incomes for deduction under Section 80IC, stating they had no direct nexus with the business operations of the industrial undertaking.

The CIT(A) upheld the AO's decision, noting the lack of evidence proving a direct nexus between these incomes and the industrial undertaking. The assessee conceded that interest income (?17,136), rent income (?4,17,732), and DEPB income (?4,76,975) should be excluded from the deduction calculation under Section 80IC, following the tribunal's decisions in prior years.

For other incomes like discounts from supplies, excess provision written back, credit balances written back, miscellaneous income, and sale of scrap, the tribunal found that the assessee had not provided sufficient evidence to prove a direct nexus with the industrial undertaking. The tribunal remanded these issues back to the AO for verification, requiring the assessee to furnish cogent evidence to establish the direct nexus.

2. Disallowance of Miscellaneous Expenses Amounting to INR 7,13,304:

The AO disallowed 2% of the total miscellaneous expenses (?3,56,65,622), amounting to ?7,13,304, on the grounds that the veracity of these expenses could not be verified due to the lack of proper bills and vouchers. The CIT(A) upheld this disallowance.

The tribunal, however, observed that no incriminating material was provided by the AO or CIT(A) to prove that these expenses were not incurred for business purposes. The tribunal noted that the disallowance was made on an ad-hoc basis without any substantial evidence. The assessee had provided a tax audit report and detailed expense records, which were not contested by the authorities. Consequently, the tribunal deleted the disallowance, allowing the assessee's appeal on this issue.

3. Initiation of Penalty under Section 271(1)(c):

The CIT(A) dismissed the ground related to the initiation of penalty under Section 271(1)(c) on the presumption that it was premature. The tribunal did not address this issue further as it was not pressed by the assessee.

4. Charge of Interest under Section 234C:

The CIT(A) did not adjudicate the ground related to the charge of interest under Section 234C. The tribunal noted that this ground was not pressed by the assessee and dismissed it accordingly.

Conclusion:

The tribunal partly allowed the appeal, remanding the issue of other incomes back to the AO for verification and deleting the ad-hoc disallowance of miscellaneous expenses. The grounds related to the initiation of penalty and charge of interest were dismissed as they were not pressed by the assessee. The order was pronounced in the open court on 08.02.2019.

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