2012 (12) TMI 403 - AT - Income Tax

Tribunal revises duty drawback, expense allocation; upholds PF contribution decision. Assessee's appeal partly allowed.

The Tribunal partially allowed the department's appeal by reversing the CIT(A)'s decisions on duty drawback and expense allocation. The CIT(A)'s decision ... Disallow the claim of deduction u/s 80IB on Duty Draw Back - AO stated that said benefit has not been derived by the assessee directly from the business of the industrial undertaking – Held that:- Following the decision in case of Sterling Food ltd. (1999 (4) TMI 1 - SUPREME COURT) that the benefit of import entitlements are granted by CG under an Export Promotion Scheme. Therefore, the source of import entitlements could not be said to be the industrial undertaking of the assessee. Appeal decides in favour of revenue Disallowance of sharing of common expenses/facilities – Assessee has two units in Mumbai and Daman maintain separate books of accounts - Claim deduction u/s.80IB in respect of Daman Unit - Mumbai Unit is in only one activity of job work of stitching garments and Daman unit is engaged in multiple activities of manufacturing readymade garments - AO stated that assessee has under-allocated expenses and thus claimed excessive deduction u/s.80IB - Held that:- Following the decision in case of Nitco Tiles Ltd (2009 (4) TMI 547 - ITAT MUMBAI) that total turnover of the eligible Daman Unit is 73.43%, it is fair and reasonable to allocate the expenses between the units on the basis of turnover in the absence of any contrary facts brought on record before us. Therefore appeal decides in favour of revenue Disallowance on account of delay in deposit of employees contribution to PF – Held that:- Employees contribution which is covered u/s 36(va) is to be allowed as deduction if the deposits are made within due date/grace period. Issue decides in favour of assessee Disallowance of interest expense - AO considered that amount is partly used for business purposes and partly used for non-business purposes – Assessee has used some money in purchasing the controlling stake in an company - Held that:- As the amount to that extent has been paid by the assessee to acquire capital assets and as such, borrowing money used to acquire controlling interest in the firm by purchase of shares and/or by acquiring assets could not be allowed as deduction and interest is to be disallowed in relation to loan which has been given to others, on which, no interest has been charged by the assessee. The assessee has not contended that the said loans to others have been given for any business purposes. Issue remand back to AO. Issues Involved:1. Deduction under Section 80IB on duty drawback.2. Allocation of common expenses between Mumbai and Daman Units.3. Disallowance of employee's contribution to PF made beyond the due date.4. Deduction of interest expenses for non-business purposes.Issue-wise Detailed Analysis:1. Deduction under Section 80IB on Duty Drawback:The department challenged the CIT(A)'s decision allowing the deduction under Section 80IB on duty drawback, citing the Supreme Court's decision in Sterling Food Ltd. The Tribunal noted that the duty drawback does not directly derive from the industrial undertaking's business and reversed the CIT(A)'s order, confirming the AO's disallowance. The Tribunal allowed the department's grounds, emphasizing the indirect nexus of duty drawback with the industrial undertaking.2. Allocation of Common Expenses Between Mumbai and Daman Units:The AO allocated common expenses between the Mumbai and Daman Units based on turnover, invoking Section 145(3) due to dissatisfaction with the accounts' completeness. The CIT(A) disagreed, stating separate books were maintained and allocation based on turnover was unjustified. However, the Tribunal upheld the AO's method, referencing the ITAT Mumbai's decision in Nitco Tiles Ltd., which supports allocation of indirect expenses based on turnover. The Tribunal reversed the CIT(A)'s order, agreeing with the AO's allocation method.3. Disallowance of Employee's Contribution to PF Made Beyond the Due Date:The CIT(A) allowed the deduction for employee's PF contributions if paid within the grace period. The Tribunal found no infirmity in this decision and upheld the CIT(A)'s order, rejecting the department's ground on this issue.4. Deduction of Interest Expenses for Non-Business Purposes:The AO disallowed 50% of the interest expenses, attributing it to non-business purposes due to significant loans and advances. The CIT(A) upheld this disallowance, citing the Bombay High Court's rulings in Amritaben R. Shan and Chinal and Co. Pvt. Ltd., which deny deductions for interest on borrowings used to acquire controlling interests in companies. The Tribunal agreed with the CIT(A) but limited the disallowance to four days of interest for payments made on 28.3.2005 and interest on loans given to others without interest. The Tribunal partially allowed the assessee's ground, directing the AO to reassess the disallowance accordingly.Conclusion:The Tribunal allowed the department's appeal in part, reversing the CIT(A)'s decisions on duty drawback and expense allocation while upholding the CIT(A)'s decision on PF contributions. The assessee's appeal was also allowed in part, with a directive to the AO to reassess the interest disallowance based on the Tribunal's guidelines.