2019 (4) TMI 1302 - AT - Income Tax

Claim of deduction u/s 80IC - contention of the assessee has been that the claim of assessee u/s. 80IC included interest subsidy, insurance subsidy and similar incomes which are inextricably linked to the business of the assessee - HELD THAT - A perusal of the assessment order, as also contended on behalf of the assessee, we find that the Assessing Officer has not examined these incomes as detailed above. In presence of all these facts, and in view of our aforesaid discussion, we think it appropriate to restore this issue to the file of AO to decide the same afresh after examining all the details of income and in the light of recent decision of Hon ble Supreme Court in the case of CIT vs. Meghalaya Steels Ltd. 2016 (3) TMI 375 - SUPREME COURT . Needless to say, the assessee shall be given reasonable opportunity of being heard. Disallowance u/s. 14A r.w.r. 8D - HELD THAT - The share of profit from firm falls u/s. 10 and exempt from tax. This fact has not been considered by the CIT(A) while examining the contention of the assessee that he had earned exempt income only to the extent of ₹ 2,725/-. However, the assessee has not declared in his written submission before the CIT(A) nor before us whether said exempt income was received by the assessee in A.Y. 2010-11 or not. Once, the assessee had earned substantial exempt income out of investments made in the partnership firm, the contention of the assessee that he had earned exempt income of ₹ 2725/- is nothing but misleading one. Adverting to the calculations made u/r. 8D(2)(ii), we find that the assessee had substantial mixed funds comprising of internal and external funds to take care of the impugned investments. Therefore, the ld. CIT(A) was justified to delete the disallowances made as per Rule 8D(2)(ii). However, while going through the calculation of disallowance made u/r. 8D(2)(iii) by the AO, it is not clear whether average value of investment taken pertains to such investment, from which the assessee had earned exempt income or not. Whether the investment made in the partnership firm for earning exempt income is considered in it or not. In presence of these facts, this issue also deserves to be remitted back to the Assessing Officer for deciding the same afresh after examining true facts and figures of investments, as narrated above and after considering the decision in the case of Joint Investment vs. CIT, 2015 (3) TMI 155 - DELHI HIGH COURT . While deciding this issue, the AO shall also consider the alternative plea of the assessee that in case disallowance out of expenses incurred relating to the eligible unit for deduction u/s. 80IC is sustained, the assessee is entitled to deduction u/s. 80IC with regard to the enhanced profit as per CBDT Circular 37/2016 dated 2nd November, 2016. Accordingly, grounds allowed for statistical purposes. Disallowance of interest on FNCR - HELD THAT - We find that as per assessee the interest on FCNR was paid on 09.08.2010 before filing the return of income (date of filing of return mentioned in asst. order as 31.03.2012) and as such, this amount is allowable u/s. 43B of the Act. This fact requires verification at the stage of AO. In case the contention of the assessee is found correct, then this amount would be allowable u/s. 43B of the Act and in case it is found otherwise, the AO shall examine the disallowance on the anvil of CBDT Circular No. 37/2016 dated 02.11.2016, as contended by the assessee also in alternate. Accordingly, this issue is also restored to the file of AO to decide it afresh after giving reasonable opportunity of hearing to the assessee. Additions made on account of Sales Promotion Expenses - deduction u/s. 80IC - HELD THAT - nowhere demonstrate that the impugned expenditure were verified by the CIT(A) from bills/vouchers alleged to have been produced before him or any remand report was called for from the Assessing Officer so as to get them verified. This was incumbent upon the CIT(A) to call for the remand report of the AO, particularly when the AO had observed non-production of complete bills/vouchers in the assessment proceedings. Deletion of addition made by the ld. CIT(A) does not appear justified for want of verification. We, accordingly, remit this issue back to the file of AO for deciding it afresh after making proper and thorough verification of the expenditure from the books of assessee as well as from bills and supporting vouchers thereof. The assessee is required to furnish complete books of account and bills/vouchers before the AO for verification. AO is also directed to examine the alternative contention of assessee that in case disallowance out of expenses incurred relating to the unit eligible for deduction u/s. 80IC is sustained, then the deduction u/s. 80IC may be considered with regard to enhanced profit as per Circular No. 37/2016 dated 02.11.2016. Excess depreciation claimed @ 60% by the assessee on computer UPS - HELD THAT - This issue stand already decided by Hon ble Jurisdictional High Court in the case CIT vs. BSES Rajdhani Powers Ltd. 2010 (8) TMI 58 - DELHI HIGH COURT . Respectfully following the decision of Hon ble Court, we do not find any justification to interfere with the order of CIT(A) on this count. Foreign traveling expenditure incurred by Managing director Shri S.C. Sehgal along with Mr. Praveen Kumar Ms. Neeta, employee of the company - AO disallowed these expenditures on the premise that the assessee failed to establish any business exigency in this regard - HELD THAT - We find substance in the contention of assessee. It is not the case of the AO that the impugned expenditure were not supported by any evidence or were not open for verification. Secondly, the submissions made before the CIT(A) were also that the assessee had invested in M/s. Ozone Research Frontier Ltd. in USA, in which research in respect of protein sequence was being carried out and also visited China to attend the Trade Fair. These submissions of assessee do not stand controverted by the DR. Therefore, it cannot be said that the aforesaid visits were made for the purpose other than business. We, therefore, reject this ground. Deduction u/s. 80IC - purchase of Aurvedic medicines were not manufactured by the assessee s undertaking, but were made as a result of trading activities, on which no deduction is available u/s. 80IC - HELD THAT - AO while disallowing the deduction u/s. 80IC, has wrongly treated the above purchases and sales of manufactured medicines by the eligible unit of Guwahati, whereas the fact is that the aforesaid purchase and sales were made in the trading unit of assessee and not in the account of eligible unit of assessee. This fact needs verification at the stage of AO. In case the above purchase and sales of manufactured medicine is found to have been made by assessee s trading unit, no disallowance can be made on the profit of eligible unit on this count, but if it is found otherwise, the AO shall be at liberty to decide the issue in accordance with law, as it is an admitted fact that the impugned purchases and sale pertain to the Ayurvedic Medicines which were not manufactured by assessee, but by its sister concern M/s. Ozone Ayurvedics. Accordingly, this issue is remitted back to the AO for deciding it afresh in the light of above verification. Sales Promotion Expenses in the name of sister concern - addition u/s 40A(2)(b) - HELD THAT - AO has failed to bring any material on record to prove that such expenditure made by the assessee are excessive or unreasonable as contemplated u/s. 40A(2)(b) of the Act. The assessee had produced complete details with respect to these payments before the AO, as noted by the ld. CIT(A) in the impugned order. We, therefore, do not find any justification to interfere with the decision of ld. CIT(A) while deleting this addition u/s. 40A(2)(b). The payments made by assessee to its associate concerns worth ₹ 5,22,05,896/- were included in the total sales promotion expenses of ₹ 16,18,96,408/- claimed by the assessee, of which 7.5% has already been disallowed by the AO for want of proper bills/vouchers etc. and that issue has been remitted back by us to the AO for fresh decision. Therefore, while deciding that issue, the AO is directed to reduce this payment of ₹ 5,22,05,896/- from the total Sales Promotion expenses of ₹ 16,18,96,408/- and then if any disallowance is made with respect to the eligible unit of assessee, the resultant enhanced profit of such eligible unit may be considered for deduction u/s. 80IC - Appeals of assessee are allowed for statistical purposes and those of Revenue are partly allowed for statistical purposes.

Summary

Issues Involved:
1. Deduction under Section 80IC
2. Disallowance under Section 14A
3. Disallowance of interest on FCNR
4. Sales Promotion Expenses
5. Excess Depreciation on UPS
6. Foreign Travel Expenses
7. Sales Promotion Expenses in the name of sister concern

Detailed Analysis:

1. Deduction under Section 80IC:
The primary issue was the disallowance of deductions claimed under Section 80IC for the Guwahati Unit for the assessment years 2008-09, 2009-10, and 2010-11. The Assessing Officer (AO) disallowed portions of the deductions claimed, arguing that certain incomes (interest subsidy, insurance subsidy, etc.) were not derived from manufacturing activities. The CIT(A) upheld the AO's decision. However, the Tribunal found merit in the assessee's argument that these subsidies were inextricably linked to the business and should be considered for deduction under Section 80IC, referencing the Supreme Court decision in CIT vs. Meghalaya Steels Ltd. The Tribunal remitted the issue back to the AO for fresh examination in light of this decision.

2. Disallowance under Section 14A:
For the assessment years 2009-10 and 2010-11, the AO disallowed expenses related to exempt income under Section 14A, applying Rule 8D. The CIT(A) provided partial relief by deleting disallowances under Rule 8D(2)(ii) but upheld those under Rule 8D(2)(iii). The Tribunal noted that the assessee had substantial mixed funds and remitted the issue back to the AO to re-examine the details of investments and consider the Delhi High Court decision in Joint Investment vs. CIT. The Tribunal also directed the AO to consider the enhanced profit for deduction under Section 80IC as per CBDT Circular No. 37/2016.

3. Disallowance of interest on FCNR:
For the assessment year 2010-11, the AO disallowed interest on FCNR loans. The Tribunal noted the assessee's claim that the interest was paid before the due date for filing the return and should be allowed under Section 43B. The Tribunal remitted the issue back to the AO for verification of payment dates and to consider the CBDT Circular No. 37/2016 for any disallowance related to the eligible unit.

4. Sales Promotion Expenses:
The AO disallowed a portion of sales promotion expenses for the assessment years 2008-09, 2009-10, and 2010-11, citing incomplete bills/vouchers. The CIT(A) deleted the disallowance, but the Tribunal found that the CIT(A) did not verify the expenses properly. The Tribunal remitted the issue back to the AO for thorough verification and directed consideration of enhanced profit for deduction under Section 80IC as per CBDT Circular No. 37/2016.

5. Excess Depreciation on UPS:
For the assessment year 2008-09, the AO disallowed excess depreciation claimed on UPS at 60%, treating it as 'plant and machinery'. The CIT(A) deleted the disallowance, and the Tribunal upheld the CIT(A)'s decision, referencing the jurisdictional High Court's decision in CIT vs. BSES Rajdhani Powers Ltd.

6. Foreign Travel Expenses:
For the assessment year 2008-09, the AO disallowed foreign travel expenses, questioning the business purpose. The CIT(A) deleted the disallowance, and the Tribunal upheld the CIT(A)'s decision, noting that the travel was for business purposes and the expenses were supported by evidence.

7. Sales Promotion Expenses in the name of sister concern:
For the assessment year 2010-11, the AO disallowed a portion of sales promotion expenses paid to sister concerns under Section 40A(2)(b), questioning the arm's length nature of the transactions. The CIT(A) deleted the disallowance, and the Tribunal upheld the CIT(A)'s decision, noting that the AO failed to prove the expenses were excessive or unreasonable. The Tribunal directed the AO to exclude these payments from the total sales promotion expenses while reconsidering any disallowance for the eligible unit under Section 80IC.

Conclusion:
The Tribunal allowed the appeals of the assessee for statistical purposes, remitting several issues back to the AO for fresh examination and verification. The appeals of the Revenue were partly allowed for statistical purposes, with directions for the AO to re-examine specific disallowances and consider the enhanced profit for deduction under Section 80IC as per CBDT Circular No. 37/2016.