2011 (3) TMI 1028 - AT - Income Tax

Tribunal Decision: Appeal Partially Allowed, Disallowances Reduced, Remanded for Reassessment

Paharpur Cooling Towers Ltd. Versus ACIT

The Tribunal partially allowed the appeal, reducing disallowances on interest for tax-free securities and investment allowance, and remanding issues like ... Interest paid on loan to purchase tax free securities disallowed - Held that:- As it is a fact that the assessee made investment out of the borrowed funds, that the assessee utilized borrowed funds/cash credit facilities for the purpose of investment in shares, Bonds and Units, the income of which is not chargeable to tax under the Act and, therefore, there is no infirmity in the orders of the authorities below to apply provisions of section 14A to make disallowance of the interest paid by the assessee on the loans and/or cash credit facility availed from Bank. Whether the disallowance of Rs.50,05,239.82 made by AO which includes the interest of Rs.33,40,493.14 stated to have been paid for borrowing from Peerless General Finance and Investment Co. Ltd. as against the sum of Rs.27,38,627/- stated to be only paid by the assessee to M/s. Peerless General Finance and Investment Co. Ltd. - Held that:- Substance in the submission of the assessee and hold that the disallowance cannot exceed the amount of interest paid by the assessee. Thus the disallowance should be of Rs.44,03,373.68 (Rs.27,38,627/- plus Rs.16,64,746.68) as against Rs.50,05,239.82 made by the authorities below. Regarding investment allowance & foreign exchange fluctuation - assessee debited in the Profit and Loss A/c. under the head 'Miscellaneous Expenses' a sum of Rs.17,77,269 - In the return filed by the assessee, the assessee did not claim investment allowance as per section 32AB of the Act as the assessee claimed the said loss under the head 'Revenue Expenditure' - Held that:- As relying on Century Enka Limited -vs.- ACIT [2009 (1) TMI 427 - CALCUTTA HIGH COURT] wherein held that additional liability due to exchange rate fluctuation to pay foreign currency loan taken for purchase of plant and machinery is a capital loss and the assessee is entitled to depreciation and investment allowance on the increased cost of the plant and machinery resulting from increase in the liability to repay the foreign currency loan incurred - thus the assessee is entitled for investment allowance under section 32AB of the Act on the increased liability due to exchange rate fluctuation. Re computation of the claim for depreciation - Held that:- Merits in the contention of the A.R. that the Assessing Officer was not justified not to consider the claim of enhanced depreciation of the assessee, which had arisen on account of giving effect to appeal proceedings and related matters from preceding assessment years 1983-84 to 1989-90. The said action of the authorities below is not justified. Hence, we direct that the Assessing Officer while giving appeal effect to our order will consider the revised claim of the assessee on the basis of the documents as may be furnished by the assessee before him and give due opportunity of hearing. Disallowance of loss on purchase and sale of units of UTI - Held that:- As agree with the A.R. that the provisions of section 43(5) are not applicable in respect of transactions of Units of U.T.I. Following the decision of Apollo Tyres Ltd. -vs.- CIT [2002 (5) TMI 5 - SUPREME Court] Units are neither stocks nor shares nor commodities as contemplated under section 43(5) of the Act. Further the D.R. also could not contradict the submission of the A.R. that the transactions on account of purchase from VCK Share and Stock Broking Service (P) Ltd. and sale to AMAX Bank. It could be effective by actual delivery of Units. As the AO had disallowed the claim of loss by doubting the genuineness of the transactions and whereas the CIT(Appeals) has denied the claim of the assessee by considering the loss as speculative in nature this issue be restored to the AO with a direction to re-decide the same after giving due opportunity of hearing to the assessee. Interest on deposits, interest on fixed deposits and speculation income - upholding as income from other sources and excluding them from the profits of the business, resulting in reduced deduction claimed under section. 80HHC' - Held that:- Issue is squarely covered by the decision of Bio Pharma -vs.- DCIT [2002 (3) TMI 200 - ITAT AHMEDABAD-A] and also Shams Tabrez Vanti, In re [2005 (1) TMI 16 - AUTHORITY FOR ADVANCE RULINGS], wherein it was held that interest accrued on the FDRs have no direct nexus with the export business and such interest income is to be assessed under the head 'income from other sources'. It was further held that even if the interest on Fixed Deposit is to be treated as business income, it will not automatically establish that the interest income is derived from Industrial Undertaking. It was further held that even if the fixed deposit has been used by way of securities by the assessee, it would not alter the position. Against assessee. Issues Involved:1. Disallowance of interest on loans for tax-free securities.2. Disallowance of investment allowance under section 32AB for foreign exchange fluctuation.3. Addition of profit on sale of fixed assets to business income.4. Disallowance of initial contribution to approved Pension Fund.5. Re-computation of depreciation due to appeal orders of earlier years.6. Disallowance of loss on purchase and sale of UTI units.7. Disallowance of ex-gratia payments.8. Disallowance under Rule 6B for articles presented exceeding Rs.50.9. Disallowance of payments made to Clubs.10. Disallowance of prior period expenses.11. Disallowance of interest charged by American Express Bank.12. Deduction of interest from dividend income affecting section 80M deduction.13. Classification of interest and speculation income as income from other sources.14. Disallowance under section 40A(9) for contributions to Pension Fund.15. Imposition of interest under sections 234A, 234C, and 201(1A).Detailed Analysis:1. Disallowance of Interest on Loans for Tax-Free Securities:The assessee contested the disallowance of Rs.50,05,249/- for interest paid on loans used to purchase tax-free securities. The Tribunal noted that the assessee failed to provide alternative computations or detailed errors in the Assessing Officer's calculations. The Tribunal held that the disallowance should not exceed the actual interest paid, thus reducing the disallowance to Rs.44,03,373.68.2. Disallowance of Investment Allowance Under Section 32AB:The assessee claimed investment allowance for foreign exchange fluctuation on a loan for plant and machinery. The Tribunal referenced the Kolkata High Court's decision in Century Enka Limited, which supports the assessee's claim. The Tribunal allowed the investment allowance, subject to the assessee meeting section 32AB conditions.3. Addition of Profit on Sale of Fixed Assets:The Tribunal found the Assessing Officer's exclusion of Rs.30,22,361/- from business income unjustified due to lack of evidence. The issue was remanded to the Assessing Officer for reconsideration with proper documentation.4. Disallowance of Initial Contribution to Approved Pension Fund:The Tribunal restored the issue to the Assessing Officer, directing reconsideration of the Rs.1,00,000/- contribution claim, as the assessee provided approval documentation not previously submitted.5. Re-computation of Depreciation:The Tribunal directed the Assessing Officer to reconsider the revised depreciation claim due to appeal effects from earlier years, ensuring proper documentation and opportunity for the assessee to present their case.6. Disallowance of Loss on Purchase and Sale of UTI Units:The Tribunal disagreed with the CIT(A)'s classification of the loss as speculative, referencing ITAT Bangalore's decision that UTI units are neither shares nor commodities. The issue was remanded for the Assessing Officer to reassess with proper evidence.7. Disallowance of Ex-Gratia Payments:The Tribunal upheld the disallowance of Rs.5,11,293/- due to the assessee's failure to provide supporting details, despite a favorable decision in a previous year.8. Disallowance Under Rule 6B:The Tribunal upheld the disallowance of Rs.44,005/- for articles presented exceeding Rs.50/- due to lack of evidence that the articles did not have advertisement value.9. Disallowance of Payments Made to Clubs:The Tribunal upheld the disallowance of Rs.46,675/- for club payments, citing the assessee's failure to provide details proving business-related expenses.10. Disallowance of Prior Period Expenses:The Tribunal upheld the disallowance of Rs.1,86,917/- due to the assessee's failure to substantiate that the expenses crystallized in the assessment year.11. Disallowance of Interest Charged by American Express Bank:The Tribunal upheld the disallowance of Rs.7,232/- due to lack of details on the transaction.12. Deduction of Interest from Dividend Income (Section 80M):The Tribunal confirmed that interest linked to tax-free investments should be deducted from dividend income, affecting the section 80M deduction.13. Classification of Interest and Speculation Income:The Tribunal upheld the classification of interest on deposits and speculation income as income from other sources, referencing ITAT Ahmedabad and AAR decisions.14. Disallowance Under Section 40A(9):The Tribunal restored the issue to the Assessing Officer for reconsideration, given the newly submitted approval letter for the Pension Fund.15. Imposition of Interest Under Sections 234A, 234C, and 201(1A):The Tribunal held that interest under sections 234A and 234C is consequential, while interest under section 201(1A) requires a separate order and appeal.Conclusion:The appeal was allowed in part, with several issues remanded for reconsideration by the Assessing Officer and others upheld due to lack of evidence or proper documentation.