2020 (12) TMI 55 - AT - Income Tax

Revenue's Appeal Dismissed: CIT(A)'s Decisions Upheld

DCIT, Circle-2, LTU, Kolkata Versus M/s Century Plyboards (I) Ltd. And (Vice-Versa)

DCIT, Circle-2, LTU, Kolkata Versus M/s Century Plyboards (I) Ltd. And (Vice-Versa) - TMI Issues Involved:1. Disallowance under Section 14A read with Rule 8D.2. Adjustment under Section 14A while computing book profit under Section 115JB.3. Disallowance of deduction under Section 80-IE.4. Deductibility of education cess and Secondary and Higher Education cess.5. Treatment of government incentives as capital receipts and their exclusion from book profit under Section 115JB.Issue-wise Detailed Analysis:1. Disallowance under Section 14A read with Rule 8D:The Revenue challenged the deletion of Rs. 34,29,000/- disallowed by the AO under Section 14A read with Rule 8D. The assessee argued that its own funds were sufficient to cover the investments, negating the need for interest-bearing borrowed funds. The Tribunal upheld the CIT(A)'s decision, citing the Bombay High Court's ruling in Reliance Utilities & Power Limited, which established that if an assessee's interest-free funds exceed its investments, it can be presumed that the investments were made from these funds. The Tribunal also noted that similar disallowances were deleted in the assessee's previous assessment years.2. Adjustment under Section 14A while computing book profit under Section 115JB:The Revenue's appeal against the CIT(A)'s decision to disallow adjustments under Section 14A while computing book profit under Section 115JB was dismissed. The Tribunal noted that there is no provision in clause (f) of Explanation 1 to Section 115JB for adjustments based on Rule 8D. This position was supported by the Special Bench decision in ACIT vs. Vireet Investment Pvt. Ltd., which held that Rule 8D's computation mechanism cannot be applied to book profit calculations under Section 115JB.3. Disallowance of deduction under Section 80-IE:The AO had disallowed Rs. 22,47,63,955/- of the deduction claimed under Section 80-IE, suspecting profit shifting from non-eligible to eligible units. The CIT(A) deleted this disallowance, and the Tribunal upheld this decision. The Tribunal found that the AO's estimation was based on flawed comparisons and lacked tangible evidence of any 'arrangement' to shift profits. It was noted that the assessee's profitability was consistent with previous years, and no defects were found in the books of accounts. The Tribunal emphasized that the AO could not estimate profits without rejecting the books of accounts under Section 145(3).4. Deductibility of education cess and Secondary and Higher Education cess:The Tribunal allowed the assessee's claim for deducting education cess and Secondary and Higher Education cess, citing the Bombay High Court's decision in Sesa Goa Ltd. and the Rajasthan High Court's decision in Chambal Fertilizers & Chemicals Ltd. The Tribunal also referenced similar favorable decisions by coordinate benches, concluding that education cess is deductible while computing business profits.5. Treatment of government incentives as capital receipts and their exclusion from book profit under Section 115JB:The assessee received subsidies from the Central and State Governments for setting up new units, which were treated as capital receipts. The Tribunal agreed with the assessee's claim that these subsidies should be excluded from book profit under Section 115JB, following the Supreme Court's decision in CIT Vs Chaphalkar Brothers and the Calcutta High Court's decision in Pr. CIT vs Ankit Metal & Power Ltd. The Tribunal emphasized that subsidies aimed at industrial development and employment generation are capital in nature and should not be included in book profits.Conclusion:The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objections, affirming the CIT(A)'s decisions on all issues, including the disallowances under Section 14A, adjustments under Section 115JB, and the treatment of government incentives as capital receipts. The Tribunal also upheld the deductibility of education cess and Secondary and Higher Education cess.