2020 (4) TMI 425 - AT - Income Tax

Eligible deduction u/s 80IC - disallowance on account of excise duty exemption subsidy and transport subsidy on the ground that excise duty exemption subsidy and transport subsidy cannot be treated as profits gains derived from the industrial undertaking of Sikkim unit - HELD THAT - When identical relief has been given by the ld. CIT (A) to the assessee on account of excise duty grant and transport subsidy for AYs 2010-11 2011-12 which has since been attained finality. CIT(A) had rightly allowed deduction on account of excise duty exemption subsidy and transport subsidy u/s 80IC of the Act having been directly related to manufacturing activities of the assessee company. Reducing the foreign exchange loss pertaining to Sikkim unit for the purpose of computing deduction u/s 80IC is Assessee company has brought on record detail of foreign exchange loss incurred on account of import of raw material used at the industrial undertaking. CIT (A) after taking into account working given by the assessee company restricted the allocation to the tune of ₹ 68.33 lakhs. No doubt, foreign exchange loss being in the nature of indirect/non-operating expenses must not be allocated to the eligible industrial undertaking. However, when the assessee company has come up with specific working/details of suffering foreign exchange loss on account of import of raw material used at the industrial undertaking, the ld. CIT (A) has rightly thrashed the issue on facts and directed the AO to reduce such allocation to ₹ 68.33 lakhs as against ₹ 1 crore estimated by the AO. So, again we find no illegality or perversity in the findings returned by the ld. CIT(A). Addition u/s 14A - computing the book profit u/s 115JB - HELD THAT - Amount respectively earned by the assessee as capital gain from debt oriented mutual funds cannot be placed in the category of exempt income u/s 14A of the Act and in these circumstances, Rule 8D(2) cannot be invoked. AO himself has excluded the investment from which non-exempt income has been earned by the assessee company in AY 2011-12 for purpose of computing average investment under Rule 8D(2)(iii) of the Rules - disallowance made by the AO and sustained by the ld. CIT (A) u/s 14A of the Act r/w Rule 8D(2)(iii) of the Rules is not sustainable, hence ordered to be deleted. Deduction claimed on account of education cess on income-tax, dividend distribution tax and fringe benefit tax - Whether it is in the nature of surcharge and the term tax includes surcharge, education cess and higher education cess? - HELD THAT - Issue decided in favour of assessee in CHAMBAL FERTILISERS AND CHEMICALS LTD., PR. COMMISSIONER OF INCOME TAX, KOTA. VERSUS JCIT, RANGE-2, KOTA., M/S. CHAMBAL FERTILIZERS AND CHEMICALS LTD., GADEPAN, DISTT. KOTA. 2018 (10) TMI 589 - RAJASTHAN HIGH COURT - education cess is not a disallowable expenditure u/s 40(a)(ii) of the Act having been expressly excluded from section 40(a)(ii) of the Act. Moreover, cess is not in the nature of tax as has been held in case of Smith Kline Amp; French (India) Ltd. and Ors. vs. CIT 1996 (4) TMI 2 - SUPREME COURT So, we are of the considered view that AO/CIT(A) have erred in disallowing the deduction for education cess on income-tax, dividend distribution tax and fringe benefit tax for AYs 2009-10, 2010-11 2011-12 in computing the total income under normal provisions of the Act, consequently ordered to be deleted. Allowability of business promotion expenses u/s 37 - HELD THAT - Hon ble Delhi High Court in case of National Industrial Corporation Ltd. vs. CIT 2002 (8) TMI 93 - DELHI HIGH COURT held that when there are no findings that part of the expenditure on sales/ business promotion was for non-business purposes, part of the expenditure not to be disallowed u/s 37 of the Act. So, we are of the considered view that AO/CIT(A) have purely disallowed 50% 15% respectively of the sales promotion expenses on ad hoc basis without pointing out if any part of the business promotion expenses claimed by the assessee company have not been incurred. So, we delete the addition being 15% of the business promotion expenses disallowed by the ld. CIT (A). Computing disallowance under Rule 8D - HELD THAT - undisputedly strategic investment has been made by the assessee company in its subsidiary company to have control over it, the same has to be excluded for the purpose of computing disallowance under Rule 8D. When undisputedly there is no exempt income no disallowance u/s 14A can be made. Revenue itself has allowed the identical relief to the assessee company in AY 2011-12 which has not been contested before the Tribunal. So, we are of the considered view that ld. CIT (A) has rightly directed to exclude the amount of investment made by the assessee company in its subsidiary for the purpose of computation of disallowance made u/s 14A r/w Rule 8D, hence ground of Revenue s appeal for AY 2009-10 is dismissed. Exclusion of excise duty exemption in computing book profit u/s 115JB confirmed as relying on M/S. ESSAR TELEHOLDINGS LTD. VERSUS THE DCIT, MUMBAI 2013 (5) TMI 116 - ITAT MUMBAI Disallowance u/s 14A read with Rule 8D while computing the book profit u/s 115JB to be deleted Exclusion of other income viz. income earned by way of scrap sales, misc. income, freight income, transport subsidy and cash discount not eligible for deduction u/s 80IC - HELD THAT - There is direct nexus between profit and business and transport subsidy given by the Government being reimbursement of cost in production of goods as has been held by Hon ble Supreme Court in CIT vs. Meghalaya Steels Ltd. 2016 (3) TMI 375 - SUPREME COURT . So, we are of the considered view that transport subsidy certainly reduced the cost of production would amount to profits derived to industrial undertaking, hence eligible for deduction u/s 80IC of the Act. Misc. income and amount on account of written back amount is also eligible for deduction u/s 80IC being directly inter-linked and derived from the business as has been held by Hon ble Supreme court in Liberty India vs. CIT 2009 (8) TMI 63 - SUPREME COURT . Moreover, identical issue has been decided in favour of the assessee by the Revenue itself in AY 2007-08 which has been accepted by the Revenue and no new facts or law has been brought on record by the ld. DR for the Revenue as to why the Revenue has departed from the earlier binding precedent. Proportionment of Head Office expenses to the unit eligible for deduction u/s 80IC to be deleted. Income eligible for deduction u/s 80IC - Gain qua transaction of entering into forward contracts for hedging the risk associated with payment of foreign currency trade payables as speculation income u/s 43 (5) - HELD THAT - When forward trading contract was arrived at by the assessee company merely to safeguard against loss arising out of foreign exchange in foreign currency, the same cannot be treated as speculation transaction as business income eligible for deduction u/s 80IC, so we find no ground to interfere the findings returned by the ld. CIT (A) - See M/S. LGW LIMITED 2015 (11) TMI 1070 - ITAT KOLKATA

Summary

Issues Involved:
1. Allocation of foreign exchange fluctuation loss.
2. Deduction of leave encashment on a provision basis.
3. Disallowance under Section 14A read with Rule 8D.
4. Deduction for Education Cess on Income Tax, Dividend Distribution Tax, and Fringe Benefit Tax.
5. Eligibility of transport and excise duty subsidies for deduction under Section 80IC.
6. Proportionate disallowance of business promotion expenses.
7. Inclusion of excise duty exemption in computing book profit under Section 115JB.
8. Addition of disallowance under Section 14A to book profit under Section 115JB.
9. Exclusion of other income not eligible for deduction under Section 80IC.
10. Proportionment of indirect head office expenses.
11. Treatment of forward contract gain as business income.

Detailed Analysis:

1. Allocation of Foreign Exchange Fluctuation Loss:
The AO allocated ?1 crore of foreign exchange loss to the Sikkim unit for calculating the eligible deduction under Section 80IC. The CIT(A) reduced this allocation to ?68,33,228/-. The Tribunal upheld the CIT(A)'s decision, finding no illegality or perversity in the allocation reduction, as the foreign exchange loss was related to the import of raw materials used at the industrial undertaking.

2. Deduction of Leave Encashment on a Provision Basis:
The assessee did not press this ground during the hearing for AYs 2009-10, 2010-11, and 2011-12, leading to its dismissal.

3. Disallowance under Section 14A read with Rule 8D:
The AO/CIT(A) made disallowances for AYs 2009-10, 2010-11, and 2011-12. The Tribunal found that the AO did not record proper satisfaction before invoking Rule 8D and noted that the assessee had invested in debt-oriented mutual funds, earning taxable income. Consequently, the disallowance under Section 14A was not sustainable and was ordered to be deleted.

4. Deduction for Education Cess on Income Tax, Dividend Distribution Tax, and Fringe Benefit Tax:
The AO/CIT(A) disallowed these deductions, considering them as surcharge. The Tribunal, referring to the CBDT Circular and the Rajasthan High Court's decision in Chambal Fertilizers, concluded that education cess is not a disallowable expenditure under Section 40(a)(ii). The disallowance was ordered to be deleted.

5. Eligibility of Transport and Excise Duty Subsidies for Deduction under Section 80IC:
The AO excluded these subsidies from the computation of deduction under Section 80IC. The CIT(A) included them, considering them directly related to manufacturing activities. The Tribunal upheld this view, citing the Supreme Court's decision in CIT vs. Meghalaya Steels Ltd., which held that such subsidies are revenue receipts directly related to manufacturing activities.

6. Proportionate Disallowance of Business Promotion Expenses:
The AO disallowed 50% of the business promotion expenses, which the CIT(A) reduced to 15%. The Tribunal found that ad hoc disallowances without disputing the details submitted by the assessee were not justified and deleted the disallowance.

7. Inclusion of Excise Duty Exemption in Computing Book Profit under Section 115JB:
The AO included the excise duty exemption in the book profit calculation. The CIT(A) excluded it, following the Tribunal's earlier decision in the assessee's case for AY 2007-08. The Tribunal upheld this exclusion, noting that the subsidies in question are not in the nature of income.

8. Addition of Disallowance under Section 14A to Book Profit under Section 115JB:
The AO added the disallowance under Section 14A to the book profit. The CIT(A) deleted this addition, following the Tribunal's earlier decision. The Tribunal upheld this deletion, noting that Section 115JB does not have an overriding effect on other provisions of the Act.

9. Exclusion of Other Income Not Eligible for Deduction under Section 80IC:
The AO excluded certain incomes, such as transport receipts and miscellaneous income, from the deduction under Section 80IC. The CIT(A) restricted the exclusion. The Tribunal upheld the CIT(A)'s decision, noting the direct nexus between these incomes and the business activities.

10. Proportionment of Indirect Head Office Expenses:
The AO proportioned indirect head office expenses to the Sikkim unit. The CIT(A) deleted this proportionment, following the Tribunal's decision in the assessee's case for AY 2006-07. The Tribunal upheld this deletion, noting that such expenses do not have a first-degree connection with the eligible unit.

11. Treatment of Forward Contract Gain as Business Income:
The AO treated the forward contract gain as speculation income. The CIT(A) treated it as business income eligible for deduction under Section 80IC, relying on the Tribunal's decision in ITO vs. LGW Ltd. The Tribunal upheld this treatment, noting that the forward contracts were entered to hedge against foreign currency fluctuations.

Conclusion:
The Tribunal allowed the appeals filed by the assessee for AYs 2009-10, 2010-11, and 2011-12, and dismissed the appeals filed by the Revenue for AYs 2009-10 and 2011-12.