2014 (1) TMI 1412 - AT - Income Tax

Tribunal Decides on Assessee's Interest Calculation Method and Business Deduction

The Tribunal allowed the assessee's method of net interest calculation under section 14A, finding it appropriate and recognizing the averaging method. ... Disallowance under section 14A - method of computing disallowable interest (net interest and averaging of funds) - duty on assessee to prove services for professional fees - deduction under section 80HHE - profits of the eligible business - interpretation of 'profits of the business' in sub section (3) read with Explanation (d) - remand for determination of export turnover and total turnover - disallowance of expenses relating to discontinued businessDisallowance under section 14A - method of computing disallowable interest (net interest and averaging of funds) - Validity of the assessee's computation of disallowable interest under section 14A for AY 2001-02 - HELD THAT: - The Tribunal accepted the assessee's method of computing the section 14A disallowance. It held that where interest charged to profit and loss account is on a net basis, the disallowance under section 14A should likewise be computed with reference to net interest. The Tribunal also found it appropriate to apply an average of funds (positions as on 31.03.2000 and 31.03.2001) rather than considering only the funds as on the last day of the year, observing that interest is paid on funds utilized during the entire year and that Sub rule (2) of Rule 8D recognises an averaging concept. Consequently no further disallowance was warranted beyond the amount taken by the assessee. [Paras 4, 5, 7]Assessee's computation of disallowable interest under section 14A upheld; ground allowed.Duty on assessee to prove services for professional fees - Allowability of Rs. 34,00,000 paid as professional fees to Ms Naina Lal Kidwai for AY 2001-02 - HELD THAT: - The Tribunal upheld the disallowance. Although an agreement existed, its clauses were vague as to specific services, and the assessee failed to produce evidence that the services were actually rendered or to disclose the confidential advice it purportedly received. Relying on the principle that the mere existence of an agreement is not conclusive and that the burden lies on the assessee to prove that fees were for services connected with business and actually rendered, the Tribunal agreed with the departmental authorities and the CIT(A) that the assessee did not discharge its burden. [Paras 9, 10, 11]Disallowance of professional fees upheld; ground dismissed.Deduction under section 80HHE - profits of the eligible business - interpretation of 'profits of the business' in sub section (3) read with Explanation (d) - remand for determination of export turnover and total turnover - Whether 'profits of the business' in sub section (3) of section 80HHE refers to profits of the eligible (export) business or to profits of all businesses carried on by the assessee (AYs 2001-02 and 2004-05) - HELD THAT: - The Tribunal held that sub section (3) exists for the purpose of sub section (1) and that the definite article 'the' indicates that 'profits of the business' refers to the profits of the eligible business (i.e., the export of computer software / back office support services) and not to aggregate profits of all businesses. Explanation (d) merely describes how such profits are to be ascertained (as computed under the head 'Profits and gains of business') and does not expand the expression to include profits of unrelated businesses. The Tribunal therefore directed that the profits of the eligible business be taken at the figure pleaded by the assessee and allowed the ground. The question of what constitutes export turnover and total turnover for applying sub section (3) was left to the Assessing Officer to determine in accordance with law after giving the assessee opportunity - that aspect was remanded for determination. [Paras 15, 16, 17, 19, 20]Profits of the eligible business alone are to be taken for section 80HHE; matter of export turnover/total turnover remanded to Assessing Officer for adjudication.Disallowance of expenses relating to discontinued business - Allowability of bad debts and Provident Fund payment relating to discontinued stock broking business for AY 2001-02 - HELD THAT: - The Tribunal affirmed the disallowance. It held that expenditure relating to a business not carried on during the relevant previous year is not allowable against profits of other businesses unless the various activities constitute a single intertwined business - a fact the assessee failed to establish. Further, recoveries brought to tax under section 41(1)(a) do not permit corresponding deduction of expenses of the discontinued business; following the Bombay High Court authority, the fiction in section 41 is limited to bringing the recovery to tax and does not render the discontinued business operative for claiming related expenditures. The Tribunal also found no contractual or business basis requiring the assessee to top up Provident Fund returns. [Paras 22, 23, 24, 25, 26]Disallowance of bad debts and Provident Fund payment upheld; ground dismissed.Admissibility of evidence and disallowance of depreciation - Claim for depreciation on purchase of Figutsu scanner for AY 2001-02 - HELD THAT: - The Tribunal upheld the CIT(A)'s conclusion to disallow depreciation because the assessee failed to furnish evidence before the Assessing Officer; the CIT(A) refused to admit late evidence on the ground that the Assessing Officer had been given ample opportunity. The Tribunal sustained that approach and dismissed the ground. [Paras 27]Depreciation disallowance upheld; ground dismissed.Deduction under section 80HHE - profits of the eligible business - Identification that the decision on section 80HHE for AY 2004-05 follows the ratio applied for AY 2001-02 - HELD THAT: - The Tribunal applied the same conclusion reached for AY 2001-02 to AY 2004-05, allowing the assessee's ground that only profits of the eligible business are to be considered for computing deduction under section 80HHE, subject to the same remarks and remit for determination of turnover components by the Assessing Officer. [Paras 30, 31]Ground on section 80HHE allowed for AY 2004-05 in line with AY 2001-02; Assessing Officer to give effect with same remarks.Final Conclusion: Both appeals were partly allowed. For AY 2001-02 the Tribunal: upheld the assessee's method of computing the section 14A disallowance; dismissed the claim for professional fees and several other deductions (bad debts, Provident Fund payment, depreciation); and held that for section 80HHE only profits of the eligible export business are to be taken, leaving determination of export and total turnover to the Assessing Officer. The decision in respect of section 80HHE for AY 2004-05 was upheld on the same basis; other grounds for that year were academic or not pressed. Issues Involved:1. Disallowance of interest under section 14A of the Income Tax Act.2. Adhoc disallowance of administrative and other expenses under section 14A.3. Disallowance of professional fees.4. Deduction allowable under section 80HHE.5. Reduction of 90% of various receipts from the figure of profits.6. Disallowance of expenses relating to stock broking activities.7. Disallowance of depreciation on the purchase of Figutsu scanner.Issue-wise Detailed Analysis:1. Disallowance of Interest under Section 14A:The first issue pertains to the disallowance of interest under section 14A for the assessment year 2001-02. The assessee had disallowed interest on a net basis, reducing the interest received from the interest paid. The Assessing Officer objected to this method and recalculated the disallowance based on the total assets as on 31.03.2001, resulting in a higher disallowance. The CIT(A) upheld this method. However, the Tribunal found that the assessee's method of net interest calculation was appropriate, as it considered the funds utilized throughout the year. The Tribunal also noted that Rule 8D of the Income Tax Rules recognized the averaging method. Thus, the Tribunal held that the disallowance made by the assessee was adequate and appropriate, allowing the assessee's ground.2. Adhoc Disallowance of Administrative and Other Expenses under Section 14A:The second issue relates to an adhoc disallowance of administrative and other expenses amounting to Rs. 2,00,000/- under section 14A for the assessment year 2001-02. This ground was dismissed as not pressed by the assessee.3. Disallowance of Professional Fees:The third issue involves the disallowance of professional fees paid to Ms. Naina Lal Kidwai amounting to Rs. 34,00,000/-. The Assessing Officer disallowed the fees due to the lack of evidence of services rendered. The CIT(A) upheld this disallowance, noting the absence of evidence despite the agreement between the parties. The Tribunal agreed with the CIT(A), emphasizing that the burden of proof was on the assessee to show that the services were rendered and connected to the business. The Tribunal upheld the disallowance and dismissed the ground.4. Deduction Allowable under Section 80HHE:The fourth issue concerns the deduction allowable under section 80HHE for the assessment year 2001-02. The assessee argued that only the profits from the back office support services should be considered for the deduction. The Assessing Officer and CIT(A) included the profits of all businesses carried on by the assessee, resulting in a negative figure and no deduction. The Tribunal found that the expression 'profits of the business' in sub-section (3) of section 80HHE refers only to the profits of the eligible business (back office support services). The Tribunal allowed the ground, directing the Assessing Officer to consider only the profits of the eligible business for the deduction.5. Reduction of 90% of Various Receipts from the Figure of Profits:The fifth issue involves the reduction of 90% of various receipts such as commission, brokerage, etc., from the figure of profits. The assessee contended that only the net receipts should be reduced. Since the Tribunal upheld the assessee's claim regarding the profits of the back office support services, these grounds were considered academic and were not decided.6. Disallowance of Expenses Relating to Stock Broking Activities:The sixth issue relates to the disallowance of expenses related to stock broking activities, including bad debts and Provident Fund payments. The Assessing Officer disallowed these expenses as the stock broking business was discontinued. The CIT(A) upheld this view. The Tribunal agreed, noting that expenses related to a discontinued business cannot be allowed against profits of other businesses unless they constitute a single business. The Tribunal found no evidence of interconnection between the businesses and upheld the disallowance.7. Disallowance of Depreciation on Purchase of Figutsu Scanner:The seventh issue pertains to the disallowance of depreciation on the purchase of a Figutsu scanner. The evidence for purchase was not furnished before the Assessing Officer but was presented before the CIT(A), who did not admit it. The Tribunal upheld the disallowance due to the lack of evidence.Assessment Year 2004-05:1. Adhoc Disallowance of Administrative and Other Expenses under Section 14A:The first ground for the assessment year 2004-05, which is against the adhoc disallowance of administrative and other expenses amounting to Rs. 2,98,930/- under section 14A, was dismissed as not pressed.2. Deduction under Section 80HHE:Ground No: 2 for the assessment year 2004-05 is identical to Ground No: 4 for the assessment year 2001-02. The Tribunal allowed the ground in line with its decision for the earlier year.3. Reduction of 90% of Various Receipts from the Figure of Profits:Ground Nos: 3.1 and 3.2 for the assessment year 2004-05 are identical to Ground Nos: 5.1 and 5.2 for the assessment year 2001-02. These grounds were considered academic and were rejected.Conclusion:Both appeals filed by the assessee were partly allowed with no order as to costs. The Tribunal pronounced the order in the Open Court on 13th April 2011.