2020 (3) TMI 1170 - AT - Income Tax

Tribunal grants appeal on interest expenditure & foreign tax credit, partially favors assessee.

Virmati Software And Telecommunication Limited Versus D.C.I.T, Cirle-4 (1) (2) Ahmedabad.

The Tribunal allowed the appeal on the disallowance of interest expenditure under Section 36(1)(iii) of the Income Tax Act, directing the Assessing ... Disallowance of interest expenditure u/s 36(l)(iii) - diversion of interest bearing fund - HELD THAT:- Admittedly, the own fund of the assessee as on 31st March 2012 was excess to the amount of investment as evident from the Balance Sheet of the assessee - investment was made by the assessee for ₹ 2.43 crores out of its own funds despite the fact that the payment was made by the assessee out of the HDFC OD account as discussed above. In holding so we place our reliance on the judgment of the Hon’ble Gujarat High Court in the case of CIT vs. Amod Stamping (P.) Ltd. [2014 (7) TMI 753 - GUJARAT HIGH COURT] - we direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed. Foreign Tax Credit claimed by the Appellant u/s 91 disallowed - whether rate of tax in foreign country needs to be determined after considering the gross receipts or the net receipts/profit embedded in such gross receipts? - HELD THAT:- It is revealed that the amount of tax/super tax needs to be divided by the whole amount of income to work out the rate of tax. The word used whole amount of income denotes the income which signifies after the expenses. The word gross receipts have not been used therein. Even under the normal parlance, the income denotes only to the net profit i.e. gross receipts minus the expenses. Thus in our considered view, it is the only profit which should be considered while determining the rate of tax in the foreign country and the same needs to be compared with the rate of tax in India. In the case on hand, we also note that the assessee has not given any working about the expenses incurred in the foreign country against the gross receipts. Thus in the absence of sufficient details, the AO had no alternate except to work out the proportionate amount of income eligible for relief under section 91 of the Act. Accordingly we do not find any infirmity in the order of the authorities below. We note that there is force in the alternate argument of the learned AR for the assessee claiming for the deduction of the taxes paid in the foreign country as expenditure under section 37(1) of the Act. The amount of tax paid in a foreign country which is not eligible for benefit under section 91 of the Act, is expenditure eligible for deduction under section 37(1) of the Act. It is because such tax was paid in the course of the business and the corresponding business receipts were made to tax in India. We hold that the assessee is eligible for deduction for the amount of foreign tax credit which was not allowed as tax relief under section 91 of the Act. Hence the ground of appeal of the assessee is partly allowed. Issues Involved:1. Disallowance of interest expenditure under Section 36(1)(iii) of the Income Tax Act.2. Non-granting of Foreign Tax Credit under Section 91 of the Income Tax Act.3. Appreciation of facts and submissions by lower authorities.4. Levy of interest under Section 234A/B/C of the Income Tax Act.5. Initiation of penalty under Section 271(1)(c) of the Income Tax Act.Detailed Analysis:1. Disallowance of Interest Expenditure under Section 36(1)(iii):The first issue concerns the disallowance of Rs. 5,00,000 out of the total disallowance of Rs. 9,97,000 made by the Assessing Officer (AO) under Section 36(1)(iii) of the Act. The assessee, a public limited company engaged in software development, had invested Rs. 2.43 crores in office space, funded through an HDFC OD account. The AO disbelieved the assessee's claim of having sufficient own funds and disallowed the interest expenditure, which was partly confirmed by the CIT(A).The assessee argued that it had sufficient own funds exceeding the investment amount, supported by financial statements. The Tribunal, relying on the Gujarat High Court judgment in CIT vs. Amod Stamping (P.) Ltd., held that if interest-free funds exceed the investments, it can be presumed that the investment was made from interest-free funds. Consequently, the Tribunal directed the AO to delete the addition, allowing the assessee's appeal on this ground.2. Non-granting of Foreign Tax Credit under Section 91:The second issue pertains to the disallowance of Foreign Tax Credit (FTC) amounting to Rs. 21,88,147 under Section 91 of the Act. The assessee had earned income from Afghanistan and claimed FTC for TDS deducted by foreign parties. The AO and CIT(A) held that the FTC should be calculated based on net income, not gross receipts, and disallowed the excess claim.The Tribunal upheld the view that the rate of tax in the foreign country should be determined based on net income, as per Explanation (iii) to Section 91. However, the Tribunal agreed with the assessee's alternative argument that taxes paid in the foreign country, not eligible for FTC, should be deductible as business expenditure under Section 37(1). This was supported by the Bombay High Court's judgment in Reliance Infrastructure Ltd. vs. CIT. Thus, the Tribunal partly allowed the assessee's appeal on this ground.3. Appreciation of Facts and Submissions:The assessee contended that both lower authorities failed to properly appreciate the facts and submissions. The Tribunal's detailed analysis and findings on the first two issues indicate that it considered the facts and submissions thoroughly. This ground, therefore, does not require a separate ruling as it is inherently addressed within the other issues.4. Levy of Interest under Section 234A/B/C:The fourth issue concerns the levy of interest under Sections 234A, 234B, and 234C of the Act. The Tribunal did not provide a specific ruling on this issue, implying that the interest levy stands as per the statutory provisions and the outcomes of the other issues.5. Initiation of Penalty under Section 271(1)(c):The fifth issue involves the initiation of penalty proceedings under Section 271(1)(c). The Tribunal did not explicitly address this issue, suggesting that the penalty proceedings will follow the standard process based on the revised assessment after considering the Tribunal's findings on the other issues.Conclusion:The Tribunal allowed the appeal on the disallowance of interest expenditure, directed the AO to delete the addition, and partly allowed the appeal on the FTC issue by permitting the disallowed FTC as business expenditure. The other issues were either inherently addressed or not specifically ruled upon. The overall appeal of the assessee was partly allowed.