2014 (1) TMI 1260 - AT - Income Tax

Tax Tribunal Grants Relief on Disallowance, Deduction, and Interest

The Tribunal partly allowed the appeals filed by the assessee for assessment years 2002-03 and 2003-04. Relief was granted regarding the disallowance ... Disallowance under section 14A - Rule 8D averaging method - deduction under section 80HHE - profits of the eligible business v. profits of all businesses - reduction of 90% of receipts - net receipts v. gross receipts - interest under section 234D - prospective application - followership of coordinate-bench precedent in the assessee's own caseDisallowance under section 14A - Rule 8D averaging method - followership of coordinate-bench precedent in the assessee's own case - Validity of the interest disallowance made by the AO under section 14A and the method of computing the disallowance - HELD THAT: - The Tribunal examined the methodology adopted by the assessee for computing the disallowance under section 14A and noted that the assessee itself had made the add-back on the basis of averaging of opening and closing applications of funds - a method consistent with the averaging approach later embodied in Rule 8D. The assessee's computation, and an alternate computation adopting the AO's method, resulted in the same quantum. The coordinate Bench in the assessee's own earlier proceedings accepted the averaging method and held that disallowance should be made with reference to net interest and by reference to average funds position. Given that the AO failed to justify a higher disallowance and in view of the coordinate-bench decision, the Tribunal found the disallowance unsustainable and deleted the excess additions. [Paras 7]Excess disallowance sustained by the AO under section 14A is deleted and the assessee's method of averaging (as aligned with Rule 8D and the coordinate-bench decision) is accepted.Deduction under section 80HHE - profits of the eligible business v. profits of all businesses - followership of coordinate-bench precedent in the assessee's own case - Whether the 'profits of the business' for computing deduction under section 80HHE mean only the profits of the eligible (export/back office) business or the profits of all businesses carried on by the assessee - HELD THAT: - Adverting to section 80HHE(1) and (3) and Explanation (d), the Tribunal followed the coordinate Bench decision in the assessee's own earlier assessment and the reasoning that sub section (3) deals with profits derived from the eligible business referred to in sub section (1). The definite article in 'the profits of the business' was read as referring to the eligible business. Explanation (d) was treated as descriptive of how profits of that eligible business are to be ascertained (i.e., as computed under 'Profits and gains of business' in the assessment) and not as expanding the expression to cover profits of all businesses. The Tribunal held that the Assessing Officer was incorrect in taking the aggregate profits of all businesses and that the profits of the back office support services alone must be taken for the purpose of the section; matters such as the exact computation of export turnover and total turnover were left to the AO on remand. [Paras 11]Deduction under section 80HHE is allowed by taking profits of the eligible back office support services for computation; the AO's inclusion of profits of all businesses is set aside.Reduction of 90% of receipts - net receipts v. gross receipts - deduction under section 80HHE - profits of the eligible business v. profits of all businesses - Whether 90% reduction (for brokerage/commission etc.) should be applied to net receipts or gross receipts for computing profits eligible under section 80HHE - HELD THAT: - The Tribunal, following the coordinate-bench decision in the assessee's earlier year and subsequent Supreme Court authority cited by the bench, held that the appropriate approach is to consider net receipts (i.e., reduce 90% from net receipts) rather than applying the reduction to gross receipts. Although this point was characterized as having academic importance because the primary relief on allowance of deduction had already been granted, the Tribunal accepted the assessee's contention and aligned with the precedents favoring net receipt treatment. [Paras 13, 15]Points 4.1 and 4.2 decided in favour of the assessee: the 90% reduction is to be applied to net receipts (accepted, although treated as academically dispositive given allowance of the main claim).Interest under section 234D - prospective application - Levy of interest under section 234D where the substantive provision was inserted with effect from a date after refund was granted - HELD THAT: - The AO levied interest under section 234D but did not record reasons. The assessee argued that section 234D was inserted with effect from a date after the refund was granted and therefore could not apply. The Tribunal noted that the issue had been deleted by the CIT(A) in the preceding year (which the revenue had not contested before the Tribunal) and, applying the principle that substantive provisions are generally prospective unless specified otherwise, allowed the assessee's claim and deleted the interest levied under section 234D. [Paras 17]Interest levied under section 234D is deleted as not exigible in the facts of the year given the retrospective application issue; ground is allowed.Final Conclusion: The appeals for Assessment Years 2002-03 and 2003-04 are partly allowed: the excess disallowance under section 14A is deleted; deduction under section 80HHE is allowed by taking profits of the eligible back office business (with net receipt treatment for the 90% reduction accepted); and interest under section 234D is deleted. Issues Involved:1. Disallowance under Section 14A2. Adhoc Addition by AO3. Deduction under Section 80HHE4. Reduction of Business Receipts for Computing Deduction under Section 80HHE5. Levy of Interest under Section 234DDetailed Analysis:1. Disallowance under Section 14A:The primary issue was the disallowance of Rs. 2,20,05,632 and Rs. 1,23,61,826 by the AO, against the disallowance computed by the assessee at Rs. 2,13,58,387 and Rs. 1,20,76,367, respectively. The assessee had already computed the disallowance using the average of opening and closing application of funds, aligning with Rule 8D of the Income Tax Rules, even before its formal introduction. The ITAT Mumbai upheld the method adopted by the assessee, stating that the disallowance should be made with reference to the net interest, as was done by the assessee. The Tribunal found no substantial grounds from the departmental authorities to discard the assessee's method and thus deleted the additional disallowance made by the AO.2. Adhoc Addition by AO:The second issue was an adhoc addition of Rs. 2,94,174 made by the AO. This ground was not pressed by the assessee's representative and was therefore dismissed by the Tribunal.3. Deduction under Section 80HHE:The third issue pertained to the computation of deduction under Section 80HHE. The AO had considered the profits of all business activities for this computation, resulting in a negative profit of business and thus disallowing the deduction claimed by the assessee. The Tribunal referred to its previous decision in the assessee's own case, where it was held that only the profits of the eligible business (back office support services) should be considered for the deduction under Section 80HHE. The Tribunal followed this precedent and allowed the deduction as claimed by the assessee.4. Reduction of Business Receipts for Computing Deduction under Section 80HHE:The fourth issue involved the reduction of 90% of various business receipts from the business profits for computing the deduction under Section 80HHE. The Tribunal noted that the AO and CIT(A) had made this addition based on the preceding year's disallowance, which was reversed by the coordinate bench. The Tribunal held that the AO should have reduced 90% of net receipts and not gross receipts, aligning with the Supreme Court's decision in ACG Associated Capsules Pvt. Ltd. v/s. CIT. Therefore, the Tribunal allowed the grounds in favor of the assessee, although it was of academic interest due to the allowance of the primary deduction claim.5. Levy of Interest under Section 234D:The fifth issue was the levy of interest under Section 234D amounting to Rs. 4,40,853/-. The AO levied this interest without providing reasons. The CIT(A) rejected the assessee's argument that Section 234D, inserted from 01-06-2003, should not apply to a refund granted on 15-02-2003. The Tribunal, considering the details and case laws, noted that the issue was deleted by the CIT(A) in the preceding year and was not contested by the Revenue. Thus, the Tribunal held that interest under Section 234D was not exigible and deleted the interest levied by the AO.Conclusion:The appeals filed by the assessee for assessment years 2002-03 and 2003-04 were partly allowed, with the Tribunal providing relief on several grounds, particularly concerning the disallowance under Section 14A, the computation of deduction under Section 80HHE, and the levy of interest under Section 234D. The order was pronounced in the open court in April 2012.