2017 (3) TMI 1173 - AT - Income Tax

Tribunal ruling: Assessee's appeal partly allowed, revenue's appeal dismissed on various tax issues

The Tribunal partly allowed the assessee's appeal for statistical purposes, allowed the cross-objection for statistical purposes, and dismissed the ... Disallowance made on account of provision for leave encashment - Held that:- We find that though the Hon’ble Calcutta High Court in the case of Exide Industries Ltd vs Union of India (2007 (6) TMI 175 - CALCUTTA High Court) had struck down the provisions of section 43B(f) of the Act as unconstitutional, the revenue had carried the matter further to the Hon’ble Supreme Court [2008 (9) TMI 921 - SUPREME COURT ].Hence from the aforesaid Supreme Court judgement, it could be inferred that the Hon’ble Supreme Court had not stayed the judgement of the Calcutta High Court during Leave proceedings. But the Hon’ble Supreme Court had only passed an interim order on the impugned issue. Hence we deem it fit and appropriate , in the interest of justice and fair play, to set aside this issue to the file of the Learned AO to pass orders based on the outcome of the main appeal on merits by the Hon’ble Supreme Court as stated supra. - Decided in favour of assessee for statistical purposes. Disallowance u/s 14A - Held that:- No disallowance under Rule 8D(2)(ii) of the Rules towards proportionate interest is warranted in the instant case.In respect of disallowance made towards administrative expenses under Rule 8D(2)(iii) of the Rules, we hold that the co-ordinate bench of this tribunal in the case of REI Agro Ltd [2013 (9) TMI 156 - ITAT KOLKATA] had held that only dividend bearing investments should be taken into account for the purpose of working out the disallowance under Rule 8D(2)(iii) of the Rules. We direct the ld AO accordingly. Hence the Ground raised by the assessee partly allowed for statistical purposes. Disallowing the expenditure invoking Explanation to Section 37(1) - Held that:- We find that the issue under dispute had emanated from the sales tax assessment. The appeal against the levy of penalty had been preferred by the assessee dealer before the appellate authority under Sales tax act and the same is pending disposal. Hence, in these circumstances, we deem it fit and appropriate, to set aside this issue to the file of the ld AO, to decide the disallowance of expenditure, based on the outcome of the appeal by the first appellate authority under Sales Tax Act. The assessee is directed to expedite the sales tax appeal at the earliest and inform the outcome of the same to the ld AO for his expeditious disposal of this set aside proceeding. Accordingly, the cross objection of the assessee is allowed for statistical purposes. Allowing exemption u/s 10B - Held that:- The details of other income to the tune of ₹ 18,20,101/- as detailed hereinabove pertains to 100% EOU as could be evident from the segmental profit and loss account of 100% EOU furnished by the assessee before the lower authorities. Hence the entire other income becomes the profits of the business of the undertaking (i.e 100% EOU) . Then automatically the assessee is entitled for deduction as per the computation mechanism provided in section 10B(4) of the Act. Disallowance of additional depreciation - asset put to use for less than 180 days - Held that:- Additional depreciation allowed under Section 32(i)(iia) of the Act is a one time benefit to encourage industrialization, and the provisions related to it have to be construed reasonably, liberally and purposively, to make the provision meaningful while granting additional allowance. See The Commissioner of Income-Tax, LTU, The Asst. Commissioner of Income-Tax (LTU) Versus M/s Rittal India Pvt. Ltd. (No. 1) [2016 (1) TMI 81 - KARNATAKA HIGH COURT] Disallowance for provision made for mark to market loss - Held that:- We find that the ld AO had placed heavy reliance on Instruction No. 3/2010 dated 23.3.2010. From the perusal of the said Instruction, we find that the same was issued in respect of loss on account of trading in foreign exchange derivatives. The assessee had entered into forward contracts in order to hedge its exchange risk in respect of export proceeds receivable by it in foreign exchange. The assessee’s forward contracts were not by way of trading as such in foreign exchange derivatives. Hence, Instruction No. 3/2010 cannot be made applicable to the facts of the instant case. Addition of provision on account of VAT - Held that:- The provision made by the appellant for the previous year relevant to the assessment year 2008-09 was an ascertained liability. According to the notification issued on February 25, 2008, Guar Gum was exempt from VAT with effect from April 1, 2006. Accordingly, no VAT was payable on the said commodity with effect from April 1, 2006. The VAT paid by the appellant as part of the purchase price of the commodity and deposited by the seller with the Government did not have the character of tax since no tax was in fact leviable. In such circumstances, the appellant was not entitled to refund on account of VAT paid on raw materials. The appellant had to return the sum to the Government and made a provision for the same treating it as an ascertained liability. The refund which the appellant was obliged to return cannot be treated as any sum payable by the appellant by way of tax within the meaning of clause (a) of section 43B of the Act. In opinion, the appellant has correctly reversed the provision in the next year consequent to issue of notification dated August 29, 2008 and offered the amount for taxation in the assessment year 2009-10. Issues Involved:1. Disallowance of provision for leave encashment.2. Disallowance under Section 14A of the Income Tax Act.3. Disallowance of expenditure under Explanation to Section 37(1).4. Exemption under Section 10B for other income.5. Allowance of additional depreciation.6. Provision for mark-to-market loss.7. Provision on account of VAT.Issue-wise Detailed Analysis:1. Disallowance of Provision for Leave Encashment:The first issue was whether the CIT(A) was justified in upholding the disallowance of Rs. 17,63,884/- for leave encashment provision under Section 43B(f) of the Act. The assessee argued that the provision should be deductible based on the Calcutta High Court's decision in Exide Industries Ltd., which struck down Section 43B(f). However, the Supreme Court had stayed this judgment, meaning the provision remained effective. The Tribunal set aside this issue to the AO to decide based on the Supreme Court's final decision, thus allowing the assessee's ground for statistical purposes.2. Disallowance under Section 14A of the Income Tax Act:The second issue was the disallowance of Rs. 2,66,665/- under Section 14A read with Rule 8D. The AO disallowed this amount, arguing that expenses were incurred to earn exempt dividend income. The Tribunal noted that the investments were made from the assessee's own funds and not borrowed funds. It directed the AO to consider only dividend-bearing investments for disallowance under Rule 8D(2)(iii), partially allowing the assessee's appeal for statistical purposes.3. Disallowance of Expenditure under Explanation to Section 37(1):The third issue was the disallowance of Rs. 2,45,835/- as penalty under the Gujarat Sales Tax Act. The AO disallowed the amount, considering it a penalty for law infraction. The Tribunal set aside the issue to the AO to decide based on the outcome of the pending appeal before the Sales Tax appellate authority, thus allowing the cross-objection for statistical purposes.4. Exemption under Section 10B for Other Income:The fourth issue was whether the CIT(A) was justified in allowing exemption under Section 10B for other income of Rs. 18,20,101/-. The AO denied the exemption, arguing that the income was not derived from the export of articles. The Tribunal upheld the CIT(A)'s decision, referencing the Calcutta High Court's ruling in the assessee's favor, which included all business income of the 100% EOU under Section 10B(4). The Tribunal dismissed the revenue's appeal on this ground.5. Allowance of Additional Depreciation:The fifth issue was the disallowance of additional depreciation claimed in the subsequent year for assets used for less than 180 days in the previous year. The Tribunal referenced the Karnataka High Court's decision in Rittal India Pvt. Ltd., which allowed such additional depreciation in the subsequent year. The Tribunal dismissed the revenue's appeal on this ground.6. Provision for Mark-to-Market Loss:The sixth issue was the disallowance of Rs. 82,32,966/- for mark-to-market loss on forward contracts. The AO considered it a notional and contingent loss. The Tribunal disagreed, citing several decisions, including the Bombay High Court's ruling in D. Chetan & Co., which allowed such losses as business expenses. The Tribunal dismissed the revenue's appeal on this ground.7. Provision on Account of VAT:The seventh issue was the disallowance of Rs. 1,88,88,720/- as a provision for VAT. The AO considered it a statutory liability disallowable under Section 43B. The CIT(A) found it to be an ascertained liability due to a retrospective exemption notification and allowed the provision. The Tribunal upheld the CIT(A)'s decision, noting that the provision was reversed in the subsequent year, thus dismissing the revenue's appeal on this ground.Conclusion:The Tribunal partly allowed the assessee's appeal for statistical purposes, allowed the cross-objection for statistical purposes, and dismissed the revenue's appeal.