2016 (10) TMI 196 - AT - Income Tax

Tax Appeals Outcome: Cess as Expenditure, Interest Subsidy as Income, Section 14A Disallowance Partially Upheld

D.C.I.T., Circle-4 Versus M/s. Joonktollee Tea and Industries Ltd. and Vica-Versa

The Revenue's appeals in ITA Nos.170/Kol/2014 & 172/Kol/2014 were dismissed, while ITA No.171/Kol/2014 was partly allowed. The Tribunal upheld the ... Cess on green leaf - whether it is allowable expenditure or not? - Held that:- As decided in CIT-vs- AFT Industries Ltd. [2004 (7) TMI 81 - CALCUTTA High Court] the assessee should have been allowed cess on green leaf by the AO - Decided against revenue Subsidy received - whether taxable as income of the Assessee u/s 41(1) or income from other sources - Held that:- There is no dispute of the amount on subsidy received, is taxable as income of the assessee under section 41(1) of the Act. The subsidy under consideration is a operative expenses/ direct expense of the business, therefore, it should be shown under the head ‘income from business or profession’ only. It is always open for the assessee to raise new ground which was not raised by the assessee before the AO. Addition u/s 14A - Held that:- As the assessee had sufficient own funds to finance its investment and the AO failed to establish the linkage and the nexus between exempt income and the expenditure incurred by the assessee. Apart from this, the AO has not recorded any satisfaction with regard to provision of section 14A read with rule 8D. Therefore, we are of the view that the addition made by the AO under rule 8D (2)(ii) ₹ 44,85,098/- should be deleted. So far the addition by the ld. AO under rule 8D(2)(iii) at ₹ 12,30,089/- is concerned, it is towards general and administrative expenses which normally a company incurs while making investment decision. In the investment decisions, the Board of Directors of the companies are involved and the finance department is also involved therefore, there should be some expenditure. Therefore, there are certainly some expenses which the company might have incurred to earn the exempt income. Therefore, the disallowance made by the ld. AO under rule 8D (2) (i) ₹ 100,000/- and Under Rule 8D(2)(iii) at ₹ 12,30,089/- is confirmed by us and the addition made under rule 8D(2)(ii) amounting to ₹ 44,85,098/- is deleted. Issues Involved:1. Cess on green leaf - whether it is allowable expenditure or not.2. Interest subsidy - whether it should be considered as income derived from manufacturing and production of tea or income from other sources.3. Disallowance under section 14A read with Rule 8D.4. Deduction under section 80IC of the Income Tax Act.Issue-wise Detailed Analysis:1. Cess on Green Leaf:The primary issue revolves around whether the cess on green leaf is an allowable expenditure. The assessee, a private limited company engaged in manufacturing and production of green leaf tea, claimed the cess as an expenditure. The Assessing Officer (AO) disallowed this claim, arguing that the cess is payable only up to the plucking stage of green leaf, making it a 100% agricultural expense and thus not allowable under Central Income Tax. The Commissioner of Income Tax (Appeals) [CIT(A)] reversed this decision, citing the Hon’ble Calcutta High Court’s ruling in CIT vs. AFT Industries Ltd., which allowed such cess as a deductible expense. The Tribunal upheld the CIT(A)’s decision, noting that the pending Special Leave Petition (SLP) in the Supreme Court does not affect the current applicability of the High Court’s ruling. Consequently, the Revenue’s appeal on this ground was dismissed.2. Interest Subsidy:The second issue concerns whether the interest subsidy received by the assessee should be treated as income from other sources or as income derived from the manufacturing and production of tea. The AO did not address this issue in the assessment order, but the CIT(A) ruled in favor of the assessee, stating that the subsidy, linked with the cultivation and manufacturing of tea, should be considered as part of the business income. The Tribunal agreed with the CIT(A), emphasizing that the purpose of assessment proceedings is to correctly determine the tax liability. The Tribunal found merit in the assessee’s argument that the subsidy was a direct business expense and should be treated as such. Therefore, the Revenue’s appeal on this ground was dismissed.3. Disallowance under Section 14A Read with Rule 8D:The third issue involves the disallowance made under section 14A read with Rule 8D for the assessment year 2008-09. The AO disallowed an amount of Rs. 58,15,187, arguing that the company must have incurred some expenditure for holding investments and earning exempt income. The CIT(A) deleted the addition, stating that the AO failed to establish a nexus between the exempt income and the expenses incurred, and did not record any satisfaction as required under section 14A. The Tribunal noted a calculation error in the average value of assets and found merit in the CIT(A)’s reasoning. However, it confirmed the disallowance of Rs. 12,30,089 under Rule 8D(2)(iii) for general and administrative expenses, while deleting the disallowance of Rs. 44,85,098 under Rule 8D(2)(ii). Thus, the Revenue’s appeal on this issue was partly allowed.4. Deduction under Section 80IC:The final issue pertains to the assessee’s claim for deduction under section 80IC, which was not discussed by the AO for the assessment year 2007-08 but was rejected for 2008-09 based on previous disallowances. The CIT(A) upheld the AO’s rejection. The assessee argued that it is entitled to the deduction and that new issues can be raised before appellate authorities. The Tribunal, citing the Supreme Court’s decision in Jute Corporation of India Ltd. vs. CIT, agreed that appellate authorities have the power to entertain new grounds. Therefore, the Tribunal set aside this issue to the AO for reconsideration, allowing the assessee’s cross-objections for statistical purposes.Conclusion:The appeals of the Revenue in ITA Nos.170/Kol/2014 & 172/Kol/2014 were dismissed, ITA No.171/Kol/2014 was partly allowed, and the Cross Objections filed by the assessee were allowed for statistical purposes. The Tribunal's order was pronounced in the open court on 19-08-2016.