2016 (5) TMI 950 - AT - Income Tax

Tribunal upholds deduction limit under Section 80-IC, remands 'Other Income' disallowance for verification.

M/s Hycron Electronics Versus The ITO, Baddi

The Tribunal upheld the CIT(A)'s decision to restrict the deduction under Section 80-IC to 25% for the sixth year and disallow the deduction on 'Other ... Claim of deduction u/s 80IC - Assessing officer restricted the claim of deduction u/s 80IC @ 25% as against 100% claimed by the assessee - Held that:- As relying on Hycron Electronics case [2015 (6) TMI 725 - ITAT CHANDIGARH ] assessee is entitled to only 25% of deduction during the present year because the assessee has already availed the period of full deduction @ 100% in the earlier five years - Decided against assessee Claim of Other Income being eligible for deduction U/s 80IC - Held that:- Interest received on margin money is not entitled for deduction u/s 80IC and Accordingly we uphold the order of CIT(A) to this extent. We may also observe here that the issue relating to Misc. receipts and sundry credit balances returned back -was not seriously argued and pressed before us. Accordingly, to the above extent, we uphold the order of C IT(A). As regards the issue of foreign exchange fluctuation, we are following the order of the Tribunal passed in assessment year 2010-11 and set aside the order of C IT(A) and remand the issue to the file of the Assessing officer to decide the issue as per the directions and guidelines given by the Tribunal in assessee's case in assessment year 2010-11. As regards the dividend we agree with the findings of the CIT(A) that dividend has to be specificall y charged under the head 'income from other sources' u/s 56 of the Act. Furthermore, in view of the decision of the Hon'ble Supreme Court in the case of Pandian Chemicals Ltd Vs. CIT (2003 (11) TMI 23 - MADRAS High Court ), and Liberty India Ltd. Vs. C IT (2009 (8) TMI 63 - SUPREME COURT ), the dividend received by the assessee has no direct nexus with the profits and gains derived from the manufacturing activity and industrial undertaking. Hence, this amount is not allowable for computation of profits for claiming deduction u/s 80IC of the Act. Disallowance u/s 14A - Held that:- Hon'ble Punjab & Haryana High Court in the case of C IT v Deepak Mittal (2013 (9) TMI 764 - PUNJAB & HARYANA HIGH COURT)held that the disallowance u/s 14A requires findings of incurring of expenditure where it is found that for earning exempt income, no expenditure has been incurred, disallowance u/s 14A cannot stand. When the assessee claims that he had not made any expenditure on earning exempt income, the Assessing officer in terms of sub section (2) of section 14A is required to collect such material evidence to determine, expenditure if any, incurred by the assessee in relation to earning of exempt income.In view of the above discussion, we think it appropriate to set aside the findings of the CIT(A) on this issue and remand the matter to the Assessing officer with a direction to decide the issue afresh in accordance with law after affording due and reasonable opportunity of being heard to the assessee. Issues Involved:1. Deduction under Section 80-IC of the Income Tax Act, 1961.2. Eligibility of 'Other Income' for deduction under Section 80-IC.3. Disallowance under Section 14-A read with Rule 8D.4. Levy of interest under Section 234-B of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Deduction under Section 80-IC of the Income Tax Act, 1961:The primary issue was whether the assessee was entitled to a 100% deduction under Section 80-IC for the sixth year of operation after substantial expansion. The assessee claimed 100% deduction for the sixth year, treating the year of substantial expansion as the initial year. The Tribunal referred to the case of Hycron Electronics Vs. ITO, where it was held that the deduction under Section 80-IC is available at 100% for the first five years and at 25% for the subsequent five years, even if substantial expansion is undertaken. The Tribunal emphasized that the language of the statute must be interpreted literally unless it leads to absurdity. The Tribunal concluded that the assessee was entitled to only 25% deduction for the sixth year and upheld the CIT(A)'s order.2. Eligibility of 'Other Income' for deduction under Section 80-IC:The assessee claimed deduction under Section 80-IC on 'Other Income' amounting to Rs. 21,84,505/-, which included interest on margin money, dividend, foreign exchange fluctuation, miscellaneous receipts, and sundry credit balances written back. The Assessing Officer disallowed the deduction, citing that the income did not have a first-degree nexus with the manufacturing activities. The CIT(A) upheld the disallowance, referencing the Supreme Court decisions in Pandian Chemical v CIT and Liberty India Ltd. v CIT, which held that the expression 'derived from' implies a direct nexus with the manufacturing activity. The Tribunal followed its earlier decision in the assessee's case for the assessment year 2010-11, disallowing the deduction for interest on margin money and dividend while remanding the issue of foreign exchange fluctuation to the Assessing Officer for verification of its nexus with business transactions.3. Disallowance under Section 14-A read with Rule 8D:The Assessing Officer made a disallowance of Rs. 5,55,241/- under Section 14-A read with Rule 8D, which was upheld by the CIT(A). The assessee contended that it had sufficient own funds to cover the investments and no borrowings were undertaken for making the investments. The Tribunal observed that if the assessee's own funds and reserves are sufficient to cover the investments, it can be presumed that the investments were made out of own funds. The Tribunal referred to the Punjab & Haryana High Court's decision in Bright Enterprises Pvt. Ltd. v CIT and the Delhi High Court's decision in Cheminvest Ltd. v CIT, which supported the assessee's contention. The Tribunal remanded the matter to the Assessing Officer to verify the assessee's claim and decide afresh.4. Levy of interest under Section 234-B of the Income Tax Act, 1961:The assessee challenged the levy of interest under Section 234-B, claiming it to be consequential in nature. The Tribunal directed the Assessing Officer to give consequential relief as per law.Conclusion:The Tribunal upheld the CIT(A)'s order regarding the restriction of deduction under Section 80-IC to 25% for the sixth year and the disallowance of deduction on 'Other Income' except for the foreign exchange fluctuation, which was remanded for verification. The disallowance under Section 14-A was also remanded for fresh consideration. The levy of interest under Section 234-B was held to be consequential. The appeal was partly allowed for statistical purposes.