2013 (8) TMI 278 - AT - Income Tax

Tribunal confirms tax deductions & interest rates, dismisses appeals under Income-tax Act

The tribunal upheld the disallowance under Section 14A of the Income-tax Act, confirming the deduction under Section 80IB, and maintaining the interest ... Disallowance u/s 14A - Investments in the mutual fund - Expenses in relation to income not forming part of total income – Held that:- No deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of the total income under the Act, by virtue of the provisions of Section 14A(1) - 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 - The provisions of sub sections (2) and (3) of Section 14A of the Income Tax Act 1961 are constitutionally valid - 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 - the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record - Following decision of Commissioner of Income Tax-II Versus M/s Hero Cycles Ltd [2009 (11) TMI 33 - PUNJAB AND HARYANA HIGH COURT] and GODREJ AND BOYCE MFG. CO. LTD. Versus DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER [2010 (8) TMI 77 - BOMBAY HIGH COURT] - Decided against assessee. Deduction u/s 80IB - Small scale industry - Held that:- There is no condition that new definition of small scale industry is applicable to the new units only - Amount of investment has to be seen as on the last date of previous year - during assessment proceedings the AO noticed that the assessee had raised certain unsecured loans. The Assessing Officer was of the opinion that interest paid was excessive and therefore, restricted the allowance of interest to 12% - However, On appeal the claim of interest was accepted at15% - Following decision of Sunder Forging, Ludhiana v. Department Of Income Tax [2013 (8) TMI 298 - ITAT CHANDIGARH] - Decided in favour of assessee. Issues Involved:1. Disallowance under Section 14A of the Income-tax Act.2. Deduction under Section 80IB of the Income-tax Act.3. Addition under Section 40A(2)(b) of the Income-tax Act.Issue-wise Detailed Analysis:1. Disallowance under Section 14A of the Income-tax Act:The assessee filed an appeal against the disallowance of Rs. 13,27,503/- under Section 14A. The Assessing Officer (AO) noticed that the assessee had made investments in mutual funds and invoked Section 14A read with Rule 8D to work out the disallowance. The CIT(A) confirmed this disallowance. The assessee's counsel acknowledged that the issue was previously decided against the assessee in earlier tribunal orders. The tribunal referred to the Hon'ble Bombay High Court's decision in Godrej and Boyce Manufacturing Co. Ltd V. DCIT, which upheld the constitutional validity and applicability of Rule 8D from the assessment year 2008-09. The tribunal noted that the assessee did not demonstrate that interest-free funds were available for investment in mutual funds. The tribunal upheld the AO's application of Rule 8D, confirming the disallowance under Section 14A, and dismissed the assessee's appeal.2. Deduction under Section 80IB of the Income-tax Act:The Revenue appealed against the CIT(A)'s decision to allow the assessee's claim for deduction under Section 80IB, which the AO had denied on the grounds that the assessee's investments exceeded Rs. 1 crore, disqualifying it as a small-scale industry. The tribunal referred to a previous decision where it was determined that the new definition of a small-scale industrial undertaking, which increased the investment limit to Rs. 5 crore, applied to the assessee as of the last day of the previous year (31.3.2007). The tribunal found that the CIT(A) correctly adjudicated the issue, confirming the assessee's eligibility for the deduction under Section 80IB, and decided this issue against the Revenue.3. Addition under Section 40A(2)(b) of the Income-tax Act:The Revenue also challenged the CIT(A)'s decision to delete the addition of Rs. 9,98,060/- made by the AO under Section 40A(2)(b). The AO had restricted the allowance of interest on unsecured loans to 12%, deeming the interest paid by the assessee as excessive. The CIT(A) accepted the claim at 15%. The tribunal noted that this issue was previously decided in favor of the assessee in the assessment year 2007-08, where the tribunal had accepted the interest rate of 15%. Consequently, the tribunal decided this issue against the Revenue.Conclusion:In conclusion, the tribunal dismissed both the assessee's and the Revenue's appeals, upholding the disallowance under Section 14A, confirming the deduction under Section 80IB, and maintaining the interest rate under Section 40A(2)(b) as adjudicated by the CIT(A).Order pronounced in the open court on 2.8.2013.