2016 (8) TMI 1450 - AT - Income Tax

Tribunal allows assessee's appeal, partly allows Revenue's appeal, directs re-examination, and upholds certain disallowances

The Tribunal allowed the assessee's appeal by deleting the disallowance of interest on borrowings, disallowance of non-compete fees, and not allowing ... Attribution of interest to exempt income - availability of exemption for dividend income - deduction under section 80HHC - computation after giving effect to carry forward and set off - treatment of miscellaneous/service/incentive income for deduction under section 80HHC - remand for fresh examination by Assessing Officer - computation of book profits under section 115JB - adjustment of provisions in computation of book profits - applicability of amendment to interest provisions (section 234D) retrospectivelyAttribution of interest to exempt income - availability of exemption for dividend income - Deletion of disallowance of interest of Rs. 7,61,476/- which was attributed to earning tax free dividend income - HELD THAT: - The Tribunal found that for the year under consideration exemption under section 10(33) in respect of dividend income was not available; accordingly the dividend income was taxable for AY 2003 04. Applying that legal fact, the Tribunal agreed with the assessee's submission and deleted the entire addition of interest of Rs. 7,61,476/ which the AO had disallowed on a pro rata basis as attributable to tax free income. The Tribunal followed the parties' concessions and its own coordinate bench decisions for consistency in comparable years. [Paras 4]Disallowance of interest of Rs. 7,61,476/- deleted; ground allowed.Non compete fee - deductibility - Confirmation of disallowance of non compete fees paid to ex directors amounting to Rs. 34,58,616/- - HELD THAT: - The Tribunal, noting that the identical issue had been decided against the assessee by a co ordinate Bench in the assessee's own case for an earlier year, followed that precedent for the sake of judicial consistency and upheld the orders below which had disallowed the non compete fees. The assessee had conceded the relevance of the coordinate bench decision during arguments. [Paras 6]Disallowance of non compete fees upheld; ground dismissed.Withdrawal of grounds - dismissed as not pressed - Grounds relating to Provident Fund/ESIC contribution and a direction for deduction under section 80HHC were not pressed - HELD THAT: - The assessee's authorised representative expressly did not press Grounds III and IV at the hearing and the Revenue did not object to withdrawal. The Tribunal accordingly treated these grounds as withdrawn/not pressed and did not adjudicate them on merits. [Paras 7]Grounds III and IV dismissed as not pressed/withdrawn.Deduction under section 80HHC - effect of set off and carry forward losses - Claim to compute deduction under section 80HHC before setting off brought forward business losses and depreciation rejected - HELD THAT: - The Tribunal examined the CIT(A)'s reliance on binding High Court and Supreme Court precedent holding that profits for 80HHC must be computed after giving effect to other provisions of the Act, including carry forward and set off. The assessee did not place material to rebut those authorities. The Tribunal found no reason to interfere with the CIT(A)'s conclusion and dismissed the ground. [Paras 8, 9]Claim to allow 80HHC deduction prior to setting off brought forward losses refused; ground dismissed.Treatment of miscellaneous income for 80HHC - remand for fresh examination by Assessing Officer - Whether amounts shown as miscellaneous income qualify for computing deduction under section 80HHC remitted to AO for fresh examination - HELD THAT: - The Tribunal observed that the AO and the CIT(A) had not examined in detail the break up of the miscellaneous income placed on record by the assessee. Because the nature and nexus of those receipts to the assessee's own export operations had not been properly investigated, the Tribunal restored the issue to the file of the AO for fresh consideration after giving the assessee an opportunity to produce and substantiate the detailed documents. The remand was for examination and decision on the merits by the AO. [Paras 11]Issue remitted to Assessing Officer for fresh examination and decision.Deduction under section 80HHC - treatment of incentives and turnover threshold - constitutional validity and effect of later amendments on pre amendment years - Allowance of deduction under section 80HHC in respect of incentives/turnover treatment for AY 2003 04 reversed in favour of assessee - HELD THAT: - Applying the Supreme Court's direction in the cited Avani Exports judgment, and noting that the assessment year in issue (2003 04) predates the statutory amendments effective 1.4.2005, the Tribunal held that exporters should be treated uniformly and that the CIT(A)'s rejection of the 80HHC claim on the ground of turnover exceeding the threshold was not sustainable. The Tribunal, following the coordinate bench and apex court guidance, allowed the assessee's ground. [Paras 12, 13]CIT(A)'s disallowance on turnover/incentive grounds reversed; ground allowed.Treatment of service income for 80HHC - remand for fresh examination by Assessing Officer - Whether service income is to be reduced (90%) for computing deduction under section 80HHC remitted to AO for fresh examination - HELD THAT: - The Tribunal found that the authorities below had not properly examined the detailed breakup and nature of the service receipts relied upon by the assessee. Because the factual nexus between those service incomes and the assessee's own export activity had not been satisfactorily determined, the Tribunal set aside the CIT(A)'s order and remitted the issue to the AO to decide afresh after examining the details and granting the assessee an opportunity to be heard. [Paras 14]Issue remitted to Assessing Officer for fresh examination and decision; ground partly allowed for statistical purpose.Computation of book profits under section 115JB - interaction of disallowance under section 14A (attribution) with computation under section 115JB - remand for fresh examination by Assessing Officer - Question of reducing book profits under section 115JB by the interest disallowance remitted to AO for fresh decision - HELD THAT: - Following a coordinate bench decision in the assessee's own case for AY 2002 03, the Tribunal held that computation of book profits under section 115JB depends on the outcome of the AO's fresh adjudication on the interest disallowance. For maintenance of judicial consistency the issue was remitted to the AO with identical directions as in the earlier order for re examination. [Paras 15, 16]Computation issue remitted to Assessing Officer for fresh adjudication; ground allowed for statistical purposes.Interest under sections 234B/234C/234D and consequential interest under section 220(2) - applicability of retrospective amendment to interest provision - Interest under section 234D held applicable from 01.06.2003; other interest/penalty issues treated as consequential - HELD THAT: - Relying on the High Court decision in CIT v. IOCL, the Tribunal held that the amendment to section 234D applies from 01.06.2003 and directed the AO to recompute interest accordingly for the year under consideration. Interest under sections 234B/234C and consequential interest under section 220(2) were treated as consequential on the adjustments directed by the Tribunal. [Paras 17, 29]Interest under section 234D held chargeable (AO to recompute); other interest/penalty issues consequentially decided.Adjustment of provisions in computation of book profits - Whether book profits under section 115JB should be recomputed without adjusting provisions relating to assets (provisions for doubtful debts/advances and diminution in value of investments) - HELD THAT: - The Tribunal, after considering the legislative amendment to section 115JB and the authorities on point, disagreed with the CIT(A)'s direction and upheld the Assessing Officer's approach. It held that in the facts of the case the AO's adjustment of such provisions was justified and therefore set aside the CIT(A)'s order directing recomputation without those adjustments. [Paras 26]AO's recomputation without deleting the adjustments was upheld; Revenue's ground allowed.Final Conclusion: The assessee's appeal is partly allowed: the interest disallowance of Rs. 7,61,476/- was deleted; certain contested 80HHC issues (miscellaneous income and service income) and computation of book profits/related adjustment issues were remitted to the Assessing Officer for fresh examination; the disallowance of non compete fees and the claim to compute 80HHC deduction before set off were dismissed; the Tribunal reversed the CIT(A) on turnover/incentive treatment for 80HHC for AY 2003 04. The Revenue's cross appeal is partly allowed (recomputation of book profits with adjustments upheld; interest under section 234D held chargeable and to be recomputed); other revenue grounds were dismissed in favour of the assessee in view of coordinate bench and higher court rulings. Issues Involved:1. Disallowance of Interest on Borrowings2. Disallowance of Non-compete Fees3. Disallowance of Provident Fund and Employees State Insurance Contribution4. Direction for Deduction under Section 80HHC5. Setting off Losses While Computing Deduction under Section 80HHC6. Deduction of Miscellaneous Income and Other Items from Profit While Computing Deduction under Section 80HHC7. Not Allowing Set-off of Incentives Against Profits8. Deduction of Income from Services While Computing Profits under Section 80HHC9. Computation of Book Profits under Section 115JB10. Interest under Sections 234B, 234C, and 234D11. Levy of Interest under Section 220(2)Detailed Analysis:1. Disallowance of Interest on Borrowings:The Tribunal found that the issue of disallowance of interest on borrowings amounting to Rs. 7,61,476/- has been previously decided against the assessee and in favor of the Revenue by the Tribunal in the assessee’s own case for the previous assessment year 2002-03. However, for the current year under consideration, the Tribunal agreed with the assessee's argument that exemption under section 10(33) was not available for the year 2003-04, and thus, the entire income was taxable, resulting in no question of disallowance. Consequently, the addition made by the AO was deleted, and this ground of the assessee’s appeal was allowed.2. Disallowance of Non-compete Fees:The Tribunal upheld the disallowance of non-compete fees amounting to Rs. 34,58,616/- paid to ex-directors, following the decision of the Co-ordinate Bench of ITAT Mumbai for the previous assessment year 2002-03. The ground was dismissed, maintaining judicial consistency.3. Disallowance of Provident Fund and Employees State Insurance Contribution:The assessee withdrew this ground, and it was dismissed as not pressed/withdrawn.4. Direction for Deduction under Section 80HHC:The Tribunal did not specifically address this ground in detail as it was withdrawn by the assessee.5. Setting off Losses While Computing Deduction under Section 80HHC:The Tribunal upheld the decision of the CIT(A) that for the purpose of deduction under section 80HHC, profits must be computed after giving full effect to other provisions of the Act, including carry forward and set off of losses. This ground was dismissed.6. Deduction of Miscellaneous Income and Other Items from Profit While Computing Deduction under Section 80HHC:The Tribunal restored this ground to the file of the AO for re-examination, as the AO had not examined the issue in detail. The ground was allowed for statistical purposes.7. Not Allowing Set-off of Incentives Against Profits:The Tribunal allowed this ground in favor of the assessee, following the decision of the Hon’ble Apex Court in the case of CIT Vs. Avani Exports, which held that the amendment to section 80HHC by adding third and fourth provisos is ultra vires Article 14 of the Constitution.8. Deduction of Income from Services While Computing Profits under Section 80HHC:The Tribunal restored this issue to the AO for re-examination, as the detailed break-up of service income had not been examined by the authorities below. The ground was allowed for statistical purposes.9. Computation of Book Profits under Section 115JB:Following the decision in the assessee’s own case for the previous assessment year 2002-03, the Tribunal remitted the issue back to the AO for fresh consideration. This ground was allowed for statistical purposes.10. Interest under Sections 234B, 234C, and 234D:The Tribunal held that the interest under sections 234B, 234C, and 234D is consequential and decided accordingly.11. Levy of Interest under Section 220(2):This ground was also held to be consequential and decided accordingly.Revenue’s Appeal:1. Restriction of Disallowance to Rs. 7,61,476/-:This ground was dismissed, maintaining judicial consistency with the decision in the assessee’s appeal.2. Deletion of Disallowance of Rs. 7,92,843/-:Following the decision of the Co-ordinate Bench of the Tribunal for the previous assessment year 2002-03, this ground was dismissed.3. Deletion of Disallowance of Rs. 9,54,432/-:The Tribunal dismissed this ground, following the decision in the assessee’s own case for the previous assessment year 2002-03.4. Re-computation of Book Profits:The Tribunal upheld the AO's order and allowed this ground of the Revenue, finding no reason to sustain the findings of the CIT(A).5. Reduction of Book Profits by Quantum of Notionally Computed Deduction under Section 80HHC:Following the decision of the Special Bench of the Mumbai Tribunal, this ground was dismissed.6. Interest under Section 234D:The Tribunal allowed this ground, directing the AO to recompute the interest in view of the decision in CIT vs. IOCL.Conclusion:The appeal of the assessee was partly allowed for statistical purposes, and the appeal of the Revenue was partly allowed.