2015 (8) TMI 605 - AT - Income Tax

Tribunal decision: Revenue appeal dismissed, assessee appeal partly allowed. Interest disallowance remanded for verification.

M/s. Sterling Developers Pvt. Ltd. Versus Joint Commissioner of Income-Tax (OSD), Circle-12 (3), Bangalore

The Tribunal dismissed the Revenue's appeal on the set-off of losses and partly allowed the assessee's appeal by deleting the disallowance under Section ... Disallowance u/s 14A - Held that:- It is not disputed that there was no dividend or exempt income claimed by assessee during the relevant previous year. Other income shown by the assessee in its Schedule 15 shows dividend income as nil. No doubt there is a sum of ₹ 160,701,177/- appearing as miscellaneous income in the P & L account. However, this was the subject of an analysis by the AO wherein the AO himself has given a finding that ₹ 16 crores was remuneration received by the assessee for development of properties and not any income considered as exempt. In any case, computation of income of the assessee which appear at page 12 of the assessment order start with the figure of ₹ 2,44,62,794/- in the negative, which is the same figure appearing in the audited profit and loss account as profit (loss) before taxation. Thus, the whole of the other income was a part of the net working results and contention of the assessee that it had not made any claim of exempt income is found to be correct. We are of the view that a disallowance u/s.14A could not have been made when there was no claim for exempt income during the relevant previous year. Such disallowance stands deleted. - Decided in favour of assessee. Disallowance u/s.57 in respect of the interest paid on borrowed funds - Held that:- t. None of the Authorities below have examined the purpose for which loan was borrowed from HDFC. U/s.57(iii) of the Act, expenditure should be incurred wholly and exclusively for the purpose of making or earning the income. The claim of the assessee is that interest earned on debentures is 'income from other sources'. Therefore the test for allowing deduction of expenses against 'interest income' laid down in Sec.57(iii) of the Act has to be satisfied. We are therefore of the view that it would be just and appropriate to set aside the order of CIT (A) on this issue and remand the issue to the AO for the limited purpose of verifying the purpose for which loans were borrowed by the assessee from HDFC Ltd, and which were utilised in making investment in debentures. If the borrowing is for working investments then the deduction u/s.57(iii) of the Act has to be allowed. - Decided in favour of assessee for statistical purposes. Set off of losses suffered in the eligible 80IB unit against the income from non eligible unit - Held that:- he contention that under section 80-I(6) the profits derived from one industrial undertaking cannot be set off against loss suffered from another and the profit is required to be computed as if profit making industrial undertaking was the only source of income, has no merits. Section 80-I(1) lays down that where the gross total income of the assessee includes any profits derived from the priority undertaking / unit / division, then in computing the total income of the assessee, a deduction from such profits of an amount equal to 20 per cent has to be made. Section 80-I(1) lays down the broad parameters indicating circumstances under which an assessee would be entitled to claim deduction. On the other hand section 80-I(6) deals with determination of the quantum of deduction - section 80- I(6) lays down the manner in which the quantum of deduction has to be worked out. After such computation of the quantum of deduction, one has to go back to section 80-I(1) which categorically states that where the gross total income includes any profits and gains derived from an industrial undertaking to which section 80-I applies then there shall be a deduction from such profits and gains of an amount equal to 20 per cent. The words 'includes any profits' used by the legislature in section 80-I(1) are very important which indicate that the gross total income of an assessee shall include profits from a priority undertaking. While computing the quantum of deduction under section 80-I(6) the Assessing Officer, no doubt, has to treat the profits derived from an industrial undertaking as the only source of income in order to arrive at the deduction under Chapter VI-A. However, this court finds that the non obstante clause appearing in section 80-I(6) of the Act, is applicable only to the quantum of deduction, whereas, the gross total income under section 80B(5) which is also referred to in section 80-I(1) is required to be computed in the manner provided under the Act which presupposes that the gross total income shall be arrived at after adjusting the losses of the other division against the profits derived from an industrial undertaking. See M/s Synco Industries Ltd Versus Assessing Officer [2008 (3) TMI 13 - Supreme court] - Decided against revenue. Issues Involved:1. Sustaining the disallowance under Section 14A of the Income-tax Act, 1961.2. Disallowance of interest claimed under Section 57 of the Income-tax Act, 1961.3. Set off of losses suffered in the eligible 80IB unit against the income from non-eligible units.Detailed Analysis:1. Sustaining the Disallowance under Section 14A:The assessee contested the disallowance of Rs. 3,81,18,472 out of the total disallowance of Rs. 5,20,69,680 under Section 14A of the Income-tax Act, 1961. The AO had noted that the assessee had significant investments yielding exempt income and applied Rule 8D of the IT Rules to disallow part of the interest expenditure. The CIT (A) partly agreed with the assessee, reducing the disallowance to Rs. 3,81,18,472. However, the Tribunal held that no disallowance could be made under Section 14A when there was no claim of exempt income during the relevant previous year, referencing the decision in M/s. ASK Brothers Ltd v. DCIT. The Tribunal found that the assessee did not earn any exempt income and thus deleted the disallowance.2. Disallowance of Interest Claimed under Section 57:The assessee claimed a deduction of Rs. 1,64,97,300 under Section 57 for interest paid on borrowed funds used to invest in debentures. The AO disallowed this claim, arguing that the interest expenditure could not be allowed under Section 57 if it was not allowable under Section 37. The CIT (A) upheld this disallowance, considering the reduction of interest rate on debentures from 10% to 1% by SUDPL as a colorable device. However, the Tribunal found that the debentures were a legitimate investment and the interest paid on borrowed funds used for such investment should be allowed under Section 57(iii). The Tribunal remanded the issue to the AO to verify the purpose of the loan from HDFC and determine if it was for working investments, in which case the deduction under Section 57(iii) should be allowed.3. Set off of Losses Suffered in the Eligible 80IB Unit Against Income from Non-Eligible Units:The Revenue challenged the CIT (A)'s direction to allow the set-off of losses from the 80IB unit against income from non-80IB units. The Tribunal noted that this issue had already been decided in favor of the assessee in the previous assessment year 2008-09, referencing the decision in ITA.487/Bang/2012. The Tribunal reiterated that the provisions of Section 80IA(5) did not restrict the set-off of losses under Section 70(1) of the Act. The Tribunal held that the CIT (A) rightly applied the decision of the Hon'ble Apex Court in Synco Industries Ltd v. AO, allowing the set-off of losses from the 80IB unit against profits from non-80IB units.Conclusion:The Tribunal dismissed the Revenue's appeal regarding the set-off of losses and partly allowed the assessee's appeal by deleting the disallowance under Section 14A and remanding the issue of interest disallowance under Section 57 for further verification by the AO. The Tribunal's decision was pronounced in the open court on 23.6.2015.