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TMI Blog2013 (8) TMI 298X X X X Extracts X X X X X X X X Extracts X X X X ..... est - Interest paid at higher rate to person u/s 40A(2)(b) - CIT deleted addition - Held that:- funds borrowed from bank and financial institutions are subject to number of restrictions and are more than secure whereas money borrowed from the relatives was unsecured and generally interest rate is more in case of unsecured loans - Decided against Revenue. Disallowance of expenses u/s 14A - Held that:- the disallowance u/s 14A is based on Rule 8D which has been noted was applicable during the year under consideration and which is in consonance with the decision of Hon'ble Bombay High Court. - Decided in favor of revenue. Disallowance of interest on advances given for capital assets - Held that:- after 1.4.2004 if the interest expenditure has been incurred for the purpose of acquisition of capital asset then the same is not allowable. Since the advances have been made admittedly for the purpose of acquisition of capital asset i.e. land, building etc. interest incurred for acquisition of such asset is not allowable. - Decided in favor of revenue. - ITA No. 803/Chd/2011, ITA No. 1059/Chd/2011 - - - Dated:- 17-5-2012 - Shri H. L. Karwa, V.P. And Shri T. R. Sood, AM,JJ. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during Assessment Year 2006-07 and therefore, the assessee was not entitled to deduction u/s 80IB because according to him the new increased limit of Rs. 5.00 crore was applicable to the new units. Since the assessee unit was old and once have lost the status of SSI, could not regain the same status in view of the latest notification. Accordingly a show cause notice was issued why the deduction u/s 80IB should not be allowed. 4. In response to the show cause notice it was mainly submitted that deduction u/s 80IB was allowable if the unit was eligible and not formed after splitting the same. It was further submitted that definition of SSI was specified in sub-section 14 of Section 80IB clause (g) and once the assessee is covered by that definition the assessee was entitled to deduction. However, the Assessing Officer did not accept this contention and observed vide para 4.8 and declined the deduction as under: 4.8 It has further already invested more than Rs. One crore in plant and machinery during Assessment Year 2006-07 by considiering plant and machinery under installation expenses amounted to Rs. 99,36,655/-. As per the books of the assessee, out of Rs. 99,36,655/- under i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neither mentioned in letters and nor it is the spirit of the provisions. The Legislative intent is clear that it has to be given to a new plant unit as an incentive only. The provisions of section 80IB are overriding on the Industries (Development and Regulation) Act, 1951 and Micro Small and Medium Enterprises Development Act, 2006. The harmonious interpretation of section 80IB and the legislation on the status of granting SSI to a unit is that the same as discussed above. 5. Before the ld. CIT(A), it was mainly submitted that once the undertaking was not formed by splitting or reconstruction of the business then deduction was allowable. 6. The ld. CIT(A) found force in the submissions and decided the issue vide para 4 in favour of the assessee: 4 I have considered the rival view points on the issue. The Assessing Officer s basis of disallowing the clam is on the ground that once the status of SSI is lost, the same can not be re4vived for the purposes of claim of deduction u/s 80IB. The AO has opined that the revival of SSI unit under the relevant industries Act is not meant to satisfy the conditions as specified u/s 80IB. According to Assessing Officer the deduction can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an Rs. 5.00 crores the assessee again claimed the deduction because the assessee s status became of SSI. There is no allegation that the assessee has formed the unit by splitting the unit which was already in existence. In fact the same unit continues to be there because of the change in the limit of investment of SSI which was again increased by the Government. He pointed out that definition of SSI has been given in clause (g) of Sub-section 14 of Section 80IB which clearly mentions that investment has to be seen on the last date of previous year and the Notification increasing the limit to Rs. 5.00 crore was effective from October, 2006. He also filed copies of relevant notification. 9. We have heard the rival submissions carefully and find force in the submissions of the ld. counsel of the assessee. We have perused the notification No. 1642(E) dated 29.9.29006 and find that there is no condition that new definition is applicable to the new units only. In fact, Section 80IB(14)(g) reads as under: small-scale industrial undertaking means an industrial undertaking which is, as on the last day of the previous year, regarded as a small scale industrial undertaking under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an Hammers (copy of which is placed at page 25) showing that it is only a part. 14. After considering the rival submissions we find that Rattan Hammers had already certified as under: This is to certify that TUP is a wearable and Breakable part and it require replacement is case of excess wear and breakage. It has got no link in the increase of capacity of Drop Hammer. No other material has been brought before us to show by the revenue that the TUP is not a spare part. Therefore, in the absence of any other material, we are of the view that certificate issued by the supplier of spare part has to be accepted. Accordingly we find merit in the order of the ld. CIT(A) and confirm the same. 15. Ground No. 4 After hearing both the parties we find that during assessment proceedings the Assessing Officer noticed that the assessee has obtained certain unsecured loans from various persons who were relatives of the assessee and covered u/s 40A(2)(b) of the Act. The assessee had paid interest @ 15% to such persons. The Assessing Officer noted that the assessee had paid interest of 12% to Financial Institutions and banks, therefore, higher interest was given to the relatives just to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... always going to fetch certain higher rate of interest and therefore, rate of 15% as against 12% charged by the bank can not be seen as excessive/unreasonable. Therefore, I don t see that the payment of interest @ 15% by the appellant firm to specified persons is any way meant to reduce the tax liability of the appellant firm. As such disallowance made by the Assessing Officer is deleted. The ld. CIT(A) has correctly adjudicated the issue because the funds borrowed from bank and financial institutions are subject to number of restrictions and are more than secure whereas money borrowed from the relatives was unsecured and generally interest rate is more in case of unsecured loans. Therefore, we find nothing wrong with the order of ld. CIT(A) and confirm the same. 21 In the result, appeal filed by the revenue is dismissed. I.T.A. No. 1059/Chd/2011: Revenue s Appeal In this appeal the Revenue has raised the following grounds of appeal: 1 That the ld. CIT(A) erred in law and on the facts in allowing deduction u/s 80IB at Rs. 68,58,645/- by relying upon its own decision for the Assessment Year 2007-08 whereas the Revenue has filed appeal against the same before the Hon'ble I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer has not established any direct connection between the interest paid and exempt earned to proceed to the machinery for working of disallowance under rule 8D. The Assessing Officer has only observed that the assessee has not provided any evidence in support of his claim that funds had been invested from the surplus available. I do not agree with this observation of the Assessing Officer as the assessee during the assessment proceedings has clearly submitted that the investment was out of the current A/c of the company from which no interest has been paid. This submission of the assessee has not been controverted by the Assessing Officer and therefore, his conclusion on the issue is apparently erroneous. The Hon'ble Punjab Haryana High Court in the case of CIT V. Hero Cycles Ltd., 323 ITR 518 has clearly held that: In view of this finding of fact, disallowance u/s 14A was not sustainable. Whether, in a given situation, any expenditure was incurred which was to be disallowed, is a question of fact. The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowance u/s 14A and the impact of expenditure so incurred cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) The payment by a domestic company under section 115-O(1) of additional income-tax on profits declared, distributed or paid is a charge on a component of the profits of the company. The company is chargeable to tax on its profits as a distinct taxable entity and it pays tax in discharge of its own liability and not on behalf of or as an agent for its shareholders. In the hands of the shareholder as the recipient of dividend, income by way of dividend does not form part of the total income by virtue of the provisions of section 10(33). Income from mutual funds stands on the same basis ; (iii) The provisions of sub-sections (2) and "(3) of section 14A of the Income-tax Act 1961 are constitutionally valid ; (iv) The provisions of rule 8D of the Income-tax Rules as inserted by the Income-tax (Fifth Amendment) Rules, 2008, are not ultra vires the provisions of section 14A, more particularly sub-section (2) and do not offend article 14 of the Constitution ; (v) The provisions of rule 8D of the Income-tax Rules which have been notified with effect from March 24, 2008, shall apply with effect from the assessment year 2008-09 ; (vi) Even prior to the assessment year 2008-09, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning the provisions of finance bill reads as under: Certain income are not includible while computating the total income as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is again the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. It is proposed to insert a new section 14A so as to clarify the intention of the Legislature since the inception of the Income-tax Act, 1961, that no deduction shall be made in respect of any expenditure incurred bythe assessee in relation to income which does not form part of the total income under the Income-tax Act. The proposed amendment will take effect r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be the aggregate of following amounts, namely:- (i) the amount of expenditure directly relating to income which does not form part of total income; (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely:- A X B/C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year; B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; C = the average of total asset as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; (iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. (3) For the purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Abhishek Industries, 286 ITR 1. 35. The ld. CIT(A) agreed with the submissions and deleted the addition. 36. Before us the ld. DR for the revenue strongly supported the order of Assessing Officer. 37. On the other hand, the ld. counsel of the assessee supported the appellate order. 38. We have heard the rival submissions carefully and we find that the Assessing Officer has correctly made an addition. Before insertion proviso to of clause (iii) of Section 36(1), the interest incurred for the purpose of business even if it was incurred for creating capital assets was held to be allowable. However, later on Section 36(1)(iii) was amended and after the amendment w.e.f. 1.4.2004 Section reads as under: 36(1)(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession; (Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asst was first ..... X X X X Extracts X X X X X X X X Extracts X X X X
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