2019 (2) TMI 800 - 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.

Detailed Analysis:

1. Exclusion of Other Income for Deduction under Section 80IC:
The assessee claimed a deduction under Section 80IC amounting to INR 11,03,71,511. The Assessing Officer (AO) noted that the assessee included various items of 'Other Income' such as interest, rent, DEPB income, etc., in the profit computation for the deduction, which were apportioned from the head office and not directly derived from the business operations of the industrial undertaking. Citing decisions from the Supreme Court in cases like CIT v. Sterling Foods and Liberty India v. CIT, the AO disallowed the deduction for these incomes.

The CIT(A) upheld the AO's decision, noting that the assessee failed to prove a direct nexus between these incomes and the industrial undertaking. The tribunal, referencing its own previous decisions and the Supreme Court's ruling in Liberty India, upheld the exclusion of interest income, rent income, and DEPB income from the deduction under Section 80IC.

However, for other items such as discounts from supplies, excess provision written back, credit balances written back, miscellaneous income, and sale of scrap, the tribunal found that the AO and CIT(A) had not verified whether these incomes had a direct nexus with the industrial undertaking. Therefore, the tribunal remanded the matter back to the AO for verification.

2. Disallowance of Miscellaneous Expenses:
The AO observed that the assessee debited INR 3,56,65,622 under miscellaneous expenses, including items like repairs, labor charges, and software AMC. The AO made an ad-hoc disallowance of 2% (INR 7,13,304) on the grounds that the veracity of these expenses could not be verified due to a lack of proper vouchers and potential non-compliance with TDS provisions.

The CIT(A) confirmed the AO's disallowance. However, the tribunal noted that no incriminating material was brought on record to prove that these expenses were not business-related or were not incurred wholly and exclusively for business purposes. The tribunal found the ad-hoc disallowance unjustified and deleted the disallowance, relying on previous tribunal decisions that disallowed such ad-hoc disallowances without substantial evidence.

3. Initiation of Penalty under Section 271(1)(c):
The CIT(A) dismissed the ground of appeal regarding the initiation of penalty under Section 271(1)(c) on the presumption that the ground was premature. The tribunal noted that this ground was not pressed by the assessee and dismissed it accordingly.

4. Charge of Interest under Section 234C:
The CIT(A) did not adjudicate the ground relating to the charge of interest under Section 234C. The tribunal noted that this ground was also not pressed by the assessee and dismissed it.

Conclusion:
The tribunal partly allowed the appeal, directing the AO to verify the direct nexus of certain 'Other Incomes' with the industrial undertaking for deduction under Section 80IC and deleted the ad-hoc disallowance of miscellaneous expenses. Grounds related to penalty initiation and interest charge were dismissed as they were not pressed by the assessee.

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