2017 (3) TMI 1237 - AT - Income Tax

Tribunal decision: Appeal partly allowed, deductions for Kasar and Interest Subsidy granted

The Tribunal partly allowed the appeal, confirming the disallowance on Duty Drawback and PGVCL License fee. However, it allowed the deduction for Kasar ... Disallowance of deduction under section 80IB(11A) - Discount - Held that:- Discount is an item by which the assessee has reduced its cost of purchase, i.e. cost of material has been saved which has resulted a little higher profit. Thus, this discount has a direct nexus with activities of the assessee and it is treated as business profit. It deserves to be considered for grant of deduction under section 80IB Interest received from PGVCL - Held that:- The ld.counsel for the assessee conceded that in view of the judgment of the Hon’ble Gujarat High Court in the case of CIT Vs. Nirma Ltd (2014 (10) TMI 388 - GUJARAT HIGH COURT ) only net interest income is to be excluded for grant of deduction under section 80IB. We remit this aspect to the AO. He shall exclude net interest income from PGVCL for admissibility of deduction under section 80IB. Interest subsidy received from Govt. of Gujarat. - Held that:- AO himself has not treated the interest income as income from other sources. He treated it as a business income, but did not grant deduction under section 80IB(11) of the Act. Since this interest income has direct nexus with the activities of the assessee, it only goes to reduce the expenditure incurred on the loans availed from the bank. The assessee could reduce the net interest expenditure. In other words, if bank has charged 12% and it got subsidy of 5%, then it had charged the rate of 7% on the profit & loss account, then it would have enhanced its profit to this extent, and therefore, this interest subsidy is to be considered as eligible for grant of deduction under section 80IB(11) of the Act. See ACG Associated Capsules P.Ltd. vs. CIT [ 2012 (2) TMI 101 - SUPREME COURT OF INDIA ] Notional interest payment on the capital contribution and remuneration paid to the partners - Held that:- Direct the AO not to reduce interest payable to the partners on their capital contribution and remuneration from the eligible profits for grant of deduction under section 80IB because, it is the discretion of the assessee to pay interest and remuneration to partners or not. See Sagar Foods case [2017 (3) TMI 1297 - ITAT AHMEDABAD ] Issues Involved:1. Disallowance of deduction under section 80IB(11A) of the Income Tax Act, 1961.2. Exclusion of certain items of income from the grant of deduction.3. Notional interest payment on partners' capital and remuneration.Issue-wise Detailed Analysis:1. Disallowance of Deduction under Section 80IB(11A):The primary issue in the appeal was the disallowance of deduction under section 80IB(11A) of the Income Tax Act, 1961. The assessee contested the exclusion of specific items of income from the deduction.2. Exclusion of Certain Items of Income:The Assessing Officer (AO) excluded several items from the grant of deduction under section 80IB(11A), including Kasar (Discount), Duty Drawback claim, Interest from PGVCL, VKUY License fee, and Interest subsidy of DIC. The assessee chose not to press the claims related to Duty Drawback and PGVCL License fee due to their small amounts, and the disallowance on these items was confirmed.- Kasar (Discount):The assessee argued that the discount on purchases should be treated as profit derived from the industrial undertaking. The Tribunal agreed, stating that the discount reduced the cost of purchase, thereby increasing profit, and had a direct nexus with the business activities. The Tribunal allowed the deduction for the discount amounting to Rs. 1,37,012.- Interest from PGVCL:The assessee conceded that only net interest income should be excluded for the deduction, as per the Gujarat High Court judgment in CIT Vs. Nirma Ltd. The Tribunal remitted this aspect to the AO to exclude net interest income from PGVCL for the deduction.- Interest Subsidy from DIC:The interest subsidy received from the Government of Gujarat was provided for setting up a new industry. The Tribunal cited the Supreme Court decision in ACG Associated Capsules P.Ltd. vs. CIT, which supported the assessee's claim. The Tribunal held that the interest subsidy, having a direct nexus with the industrial activities and reducing loan expenditure, should be eligible for the deduction under section 80IB(11A).3. Notional Interest Payment on Partners' Capital and Remuneration:The AO reduced the eligible profits by notional interest and remuneration payable to partners, which the assessee had not actually paid. The Tribunal referenced its previous decision in Sagar Foods Vs. ITO, stating that there is no provision in the Act that authorizes the AO to impose notional amounts for interest and remuneration. It was emphasized that the partnership deed allowed modification of remuneration and interest, and the AO could not compel the assessee to charge these amounts. The Tribunal concluded that the AO's action was unjustified and directed not to reduce the eligible profits for the deduction.Conclusion:The Tribunal partly allowed the appeal, confirming the AO's disallowance on Duty Drawback and PGVCL License fee, but allowing the deduction for Kasar (Discount) and Interest Subsidy. The Tribunal also directed the AO not to reduce eligible profits by notional interest and remuneration to partners.