2021 (10) TMI 398 - AT - Income Tax

Deduction u/s 80 HHC - reduction of 90% of rental income, insurance claim, cash subsidy, refund of sales tax, commission, income from profit on sale of fixed assets etc. - HELD THAT - The coordinate bench of this Tribunal on identical facts in Assessee s own case for AY 2001-2002 2021 (3) TMI 1230 - ITAT BANGALORE considering the income, the AO shall take net income after setting off the expenditure incurred to earn that income. Thus, the ground by the assessee is allowed, while the grounds of the revenue on this issue are dismissed. Deduction u/s 80 HHE - HELD THAT - As decided in own case 2021 (7) TMI 1019 - ITAT BANGALORE CIT(A) held that the excise duty and sales tax should not be included in total turnover and accordingly directed the A.O. to recompute deduction u/s 80HHE of the Act. Thus, we notice that there is no discussion about the other income by Ld. CIT(A). Similar is the case with AY 2003-04 also. Accordingly, we are of the view that the impugned ground of the assessee raised in assessment year 2002-03 as well as in 2003-04 does not emanate from the order passed by Ld. CIT(A). Accordingly, we reject the grounds raised by the assessee relating to deduction u/s 80HHE. Allocation of head office expenses u/s 80I / 80IA - HELD THAT - As decided in own case 2021 (7) TMI 1019 - ITAT BANGALORE decision rests on the facts of that case, where it was found that common head office expenses were simple administrative expenses for running the business. - Decided against assessee. Disallowance u/s 14A - Sufficiency of own funds - HELD THAT - As decided in own case 2021 (7) TMI 1019 - ITAT BANGALORE the own funds available with the assessee in both the years are in far excess of the value of investments. Accordingly, as per the decision rendered by Hon ble Karnataka High Court in the case of Micro Labs Ltd. 2016 (4) TMI 219 - KARNATAKA HIGH COURT , no disallowance out of interest expenditure is called for. Accordingly, we set aside the order passed by Ld. CIT(A) on this issue in both the years under consideration and direct the A.O. to delete disallowance made u/s 14A. Disallowance of sum being technical and professional fees paid to M/s Kotawala - no services has been received by the assessee - HELD THAT - Even before us the Ld.Counsel could not counter the statement given by the Director of Kotawala. Further nothing was placed on record before us to establish that services have been rendered. We therefore do not find any infirmity in the view taken by Ld.CIT(A) and the same is upheld. Deduction u/s 80 HHB - separate books of accounts were not maintained for the foreign projects - HELD THAT - As decided in own case 2021 (7) TMI 1019 - ITAT BANGALORE though separate books of accounts were not maintained separate accounts were maintained in respect of each foreign project and audit certificates in Form No.10CCAH have also been furnished in respect of each project. In these circumstances, we are of the view that the decision rendered by the Tribunal in assessee s own case for the earlier Assessment Years on identical ground would apply and therefore the assessee cannot be denied the benefit of deduction under section 80HHA of the Act on the ground that separate books of accounts were not maintained for the foreign projects. Allowable business expenditure - Entrance and subscription fees paid to the club - HELD THAT - As decided in own case 2021 (7) TMI 1019 - ITAT BANGALORE entrance fee and membership fees paid where the employees become members is allowable as a business expenditure and was allowed as deduction in Assessee s own case in AY 1999-2000. Entrance fees paid towards corporate membership of the club is an expenditure incurred wholly and exclusively for the purpose of business and not towards capital account as it only facilitates smooth and efficient running of a business enterprise and does not add to the profit earning apparatus of a business enterprises and accordingly CIT (A) was justified in deleting the disallowances - Decided in favour of assessee. Expenses on the basis of purchase of packing material, loose tools etc., in the year of purchase - HELD THAT - As decided in own case 2021 (7) TMI 1019 - ITAT BANGALORE Assessing Officer rejected account books of assessee and made certain addition to his income. The Tribunal held that - (i) it was not case of revenue that purchases as debited were not genuine, and (ii) assessee was following a consistent method of valuing closing stock by including packing material as consumed at time of purchase. Rejection of account books of assessee and addition to his income was held to be not justified. - Decided against revenue. Excise duty and sales tax to be excluded from the total turnover for the purpose of deduction u/s 80HHC 80HHE - HELD THAT - As decided in own case 2021 (7) TMI 1019 - ITAT BANGALORE sales tax and central excise duty should not be included as a part of the total turnover while computing deduction under section 80HHC. Gross interest receipt or net interest income to be reduced for computing business profit under clause (baa) of Section 80HHC - HELD THAT - As decided in own case 2021 (7) TMI 1019 - ITAT BANGALORE principle of netting has been recognized by the various decisions of Hon ble High Courts and has also been affirmed by the Hon ble Supreme Court in the case of ACG Associated Capsules 2012 (2) TMI 101 - SUPREME COURT The principle of netting is however applicable only on the assessee establishing nexus between the interest paid and the interest earned. If such nexus is proved, it is only the net interest that has to be excluded under explanation baa to section 80HHC. Deduction u/s 80HHC in respect of cash discount, excise duty recovered, scrap sales and exchange rate variation - HELD THAT - As decided in own case 2021 (7) TMI 1019 - ITAT BANGALORE where assessee claimed deduction under section 35(2AB) pursuant to certificate issued by prescribed authority, i.e., Department of Scientific Industrial Research (DSIR), approving such claim, Assessing Officer could not have denied weighted deduction under section 35(2AB) in respect of scientific expenditure. It was held that Assessing Officer cannot sit in judgment over report submitted by prescribed authority . It was held that where Assessing Officer does not accept claim of assessee made under section 35(2AB), he should refer the matter to Board, which will then refer question to the prescribed authority.

Summary

Issues Involved:
1. Deduction under Section 80HHC
2. Deduction under Section 80HHE
3. Allocation of head office expenses under Sections 80I/80IA
4. Repairs and renovation expenses
5. Disallowance under Section 14A
6. Disallowance of technical and professional fees
7. Deduction under Section 80HHB
8. Allowability of entrance and subscription fees paid to the club
9. Treatment of packing material, loose tools, etc.
10. Inclusion of excise duty and sales tax in total turnover for Sections 80HHC and 80HHE
11. Netting of interest income for Section 80HHC
12. Treatment of cash discount, excise duty recovered, scrap sales, and exchange rate variation for Section 80HHC

Detailed Analysis:

1. Deduction under Section 80HHC:
The Tribunal upheld the reduction of 90% of rental income, insurance claim, cash subsidy, refund of sales tax, commission, and income from profit on the sale of fixed assets from the business profits for the purpose of deduction under Section 80HHC. This decision was based on the precedent set in the assessee's own case for AY 2001-2002, AY 2000-01, and other previous years where similar issues were decided against the assessee.

2. Deduction under Section 80HHE:
The Tribunal dismissed the assessee's grounds regarding the computation of deduction under Section 80HHE, following the decision in the assessee's own case for AY 2002-2003 and 2003-04. The Tribunal noted that excise duty and sales tax should not be included in the total turnover while computing the deduction.

3. Allocation of Head Office Expenses under Sections 80I/80IA:
The Tribunal upheld the allocation of head office expenses while arriving at the profit of the industrial undertaking for the purpose of deduction under Sections 80I/80IA. This decision followed the precedent set in the assessee's own case for AY 2000-01 and earlier years, where it was held that all expenses, whether direct or indirect, must be adjusted to determine the profits derived from the industrial undertaking.

4. Repairs and Renovation Expenses:
This ground was not pressed by the assessee and was thus dismissed.

5. Disallowance under Section 14A:
The Tribunal allowed the assessee's grounds regarding the disallowance under Section 14A, following the decision in the assessee's own case for AY 2002-2003 and 2003-04. It was noted that the own funds available with the assessee were far in excess of the value of investments, and hence no disallowance out of interest expenditure was warranted.

6. Disallowance of Technical and Professional Fees:
The Tribunal upheld the disallowance of ?82,00,000 being payment of technical and professional fees to M/s Kotawala (India) Ltd. The Tribunal noted that the assessee could not counter the statement given by the Director of Kotawala, and no evidence was provided to establish that services had been rendered.

7. Deduction under Section 80HHB:
The Tribunal dismissed the revenue's grounds regarding the deduction under Section 80HHB, following the decision in the assessee's own case for AY 2002-2003 and 2003-04. It was held that the assessee cannot be denied the benefit of deduction on the ground that separate books of accounts were not maintained for foreign projects.

8. Allowability of Entrance and Subscription Fees Paid to the Club:
The Tribunal dismissed the revenue's grounds regarding the disallowance of entrance and subscription fees paid to the club, following the decision in the assessee's own case for AY 2002-2003 and 2003-04. It was held that such fees are allowable as business expenditure.

9. Treatment of Packing Material, Loose Tools, etc.:
The Tribunal dismissed the revenue's grounds regarding the addition made on account of closing stock of packing materials, loose tools, and consumables, following the decision in the assessee's own case for AY 2000-01 and 2001-02. It was held that the method of accounting followed by the assessee was consistent and accepted in the past.

10. Inclusion of Excise Duty and Sales Tax in Total Turnover for Sections 80HHC and 80HHE:
The Tribunal dismissed the revenue's grounds regarding the inclusion of excise duty and sales tax in the total turnover for the purpose of deduction under Sections 80HHC and 80HHE, following the decision in the assessee's own case for AY 2002-2003 and 2003-04. It was held that these should not be included as part of the total turnover.

11. Netting of Interest Income for Section 80HHC:
The Tribunal dismissed the revenue's grounds regarding the netting of interest income for the purpose of deduction under Section 80HHC, following the decision in the assessee's own case for AY 2002-2003 and 2003-04. It was held that only the net interest, after establishing the nexus between interest paid and earned, should be excluded under explanation baa to Section 80HHC.

12. Treatment of Cash Discount, Excise Duty Recovered, Scrap Sales, and Exchange Rate Variation for Section 80HHC:
The Tribunal dismissed the revenue's grounds regarding the treatment of cash discount, excise duty recovered, scrap sales, and exchange rate variation for the purpose of deduction under Section 80HHC, following the decision in the assessee's own case for AY 2002-2003 and 2003-04. It was held that the AO cannot deny the weighted deduction under Section 35(2AB) in respect of scientific expenditure approved by the prescribed authority.

Conclusion:
The appeal filed by the assessee was partly allowed, and the appeal filed by the revenue was dismissed. The Tribunal followed the precedents set in the assessee's own case for previous assessment years on identical issues.