2019 (3) TMI 2086 - AT - Income Tax

Assessee wins on Section 14A disallowance, FCCB premium deduction, and foreign agent payments under Section 40(a)(ia)

M/s Vardhman Textiles Limited Versus The Addl. CIT, Range-1, Ludhiana and The ACIT, Circle-1, Ludhiana Versus M/s Vardhman Textiles Limited and M/s Vardhman Textiles Limited Versus The DCIT, Circle-1, Ludhiana and The DCIT, Circle-1, Ludhiana Versus M/s Vardhman Textiles Limited

ITAT Chandigarh allowed partial disallowance of Rs. 3 lacs under section 14A (after crediting assessee's suo motu disallowance of Rs. 2 lacs). No ... Disallowance u/s 14A read with rule 8D of the Income Tax Rules - HELD THAT:- Considering the quantum of investment made, the amount of divided earned by the assessee from its own subsidiary as well from outside / other companies, in our view, a total disallowance of Rs. 5 lacs will be justified in this case on account of administrative expenses. However, since the assessee itself has suo motu made disallowance of Rs. 2 lacs, the assessee will be given the benefit of the same. Disallowance of interest on notional basis under the provisions of section 36(i)(iii) of the Act - HELD THAT:- As in the light of the decision of Reliance Industries Ltd.’ [2019 (1) TMI 757 - SUPREME COURT] no disallowance is attracted under this head as the assessee has demonstrated that it had sufficient own funds to meet the investments / advances given etc. This issue is accordingly decided in favour of the assessee. Nature of receipt - premium paid on redemption of Foreign Currency Convertible Bonds (FCCB) - revenue or capital receipt - HELD THAT:- Assessee has invited our attention to the decision of the Tribunal in the own case of the assessee M/s Vardhman Textiles Ltd [2018 (12) TMI 1623 - ITAT CHANDIGARH] wherein, on identical facts, the Tribunal after considering the relevant facts has held that the said expenditure is to be treated as Revenue expenditure, in the year of payment. Disallowance u/s 40(a)(ia) - non-deduction of tax at source on the amount of commission paid to non-resident agents against export sales - HELD THAT:- After going through the assessment orders, we find that the Assessing officer has not disputed that the aforesaid payments were made to foreign agents who were not taxable in India. Since income, if any, received or accrued to foreign agents was not taxable in India, hence, as per the settlement law, the expenditure cannot be disallowed for non-deduction of TDS on such payments. No justification on the part of the lower authorities in disallowing the expenditure under this head. This issue is accordingly decided in favour of the assessee and the disallowance made, if any, on the issue for non-deduction of TDS is ordered to be set aside/deleted. Treating the interest received - ‘Income from other sources’ OR ‘Business and Profession’ - HELD THAT:- As undisputed fact on the file that the aforesaid amount of interest has not been received by the assessee during the course of business i.e. to say that from customers or suppliers etc., hence, the same, in our view, cannot be treated as ‘income from business or profession’. However, there is force in the alternative contention of assessee that there should be netting of the interest expenditure and the interest income received from other parties / banks etc. We accordingly direct the AO to allow the expenditure incurred by the assessee for earning of the interest income i.e., if assessee is able to bring nexus between the expenditure incurred and the interest income earned, net of the income will be taxable under the head ‘income from other sources’. This ground is accordingly partly allowed in favour of the assessee. Allowance of deduction u/s 80IB / 80IC - HELD THAT:- We direct the AO to verify whether these are independent receipts, if found so, the AO is directed to allow the income from sundry balance written back, commission / discount received and exchange rate fluctuation as the same is related to the business activity of the assessee, however, the income from rent is not allowable to be eligible u/s 80IC / 80IB of the Act. So far as the Misc. receipts is concerned, since we do not have exact details of such Misc. receipts, hence, assessee has submitted that he does not press the issue relating to Misc. Receipts under the head ‘Misc. Income’. So far as the ‘prior period income’ is concerned, the same is also not pressed. Ground is partly allowed. Allowance of sales tax subsidy is a capital receipt. Treating the line/bay charges as capital receipt instead of Revenue receipt - This issue is relating to sales tax subsidy received from M.P. government. This issue is identical to that has been taken in ground No.12 of the appeal. Accordingly, the sales tax subsidy in respect of M.P. Unit is also ordered to be treated as capital receipt. Excess expenditure claimed by the assessee on power generation - The assessee has explained the reasons for excess consumption of power etc. during the year in its manufacturing activity. In view of this, we do not find any reason to interfere with the findings of the CIT(A) on this issue. This ground of the Revenue is accordingly dismissed. The core legal questions considered by the Tribunal in these cross appeals relate primarily to the following issues:1. Whether the disallowance of expenditure under section 14A of the Income Tax Act, 1961, read with Rule 8D, was justified in respect of interest and administrative expenses related to exempt income.2. The validity of disallowance of notional interest expenditure under section 36(1)(iii) on investments.Whether such interest expenditure could alternatively be allowed under section 57 by setting it off against income from other sources.3. The nature of premium paid on redemption of Foreign Currency Convertible Bonds (FCCB) - whether it is capital or revenue expenditure, and the consequent tax treatment.4. Disallowance under section 40(a)(ia) for non-deduction of tax at source (TDS) on commission paid to non-resident agents.5. Classification of interest income received - whether it should be treated as income from business or profession or as income from other sources.6. Treatment of various receipts and expenses in units eligible for deduction under sections 80IB/80IC, including insurance claims, foreign exchange fluctuation gains, miscellaneous income, head office expenses allocation, sales tax subsidies, and line/bay charges.7. Treatment of interest reimbursement under the Technology Upgradation Fund Scheme (TUFS) as capital or revenue receipt.8. Issues raised by the Revenue concerning allowance of excess expenditure on power generation, classification of interest from customers/suppliers, and treatment of TUFS reimbursements.Issue-wise Detailed Analysis:Disallowance under Section 14A and Rule 8D: The Tribunal examined the disallowance of Rs. 1055.23 lacs (AY 2011-12) and Rs. 1719.99 lacs (AY 2012-13) on account of interest and administrative expenses related to exempt income. The assessee demonstrated that it had sufficient own funds and interest-free funds to meet investments yielding tax-exempt dividend income, supported by detailed financial data including dividend income, cash profits, and reserves and surpluses. Reliance was placed on the Punjab and Haryana High Court decision in 'CIT Vs. Kapson Associates' and the Tribunal's own recent decision in 'ACIT Vs. Janak Global Resources Pvt Ltd', which held that if own funds suffice to meet investments, the presumption is that interest-free funds were used, negating disallowance under section 14A.The Revenue cited the Supreme Court decision in 'Maxopp Investment Ltd Vs. CIT' upholding disallowance of notional interest. However, the Tribunal reconciled this with the later Supreme Court ruling in 'CIT (LTU) Vs. Reliance Industries Ltd.', which reaffirmed the presumption favoring the assessee where own funds are sufficient. Consequently, the Tribunal ruled in favor of the assessee, disallowing interest disallowance under section 14A. Regarding administrative expenses, considering prior Tribunal orders limiting disallowance to nominal amounts despite large dividend incomes, the Tribunal allowed a total disallowance of Rs. 5 lacs but granted credit for Rs. 2 lacs already disallowed by the assessee.Disallowance of Notional Interest under Section 36(1)(iii): The Tribunal, applying the same reasoning as under section 14A, held that no disallowance was warranted as the assessee had sufficient own funds to cover investments. This was consistent with the Supreme Court's ruling in 'CIT (LTU) Vs. Reliance Industries Ltd.' and prior Tribunal decisions. The alternative plea under section 57 was not pressed by the assessee and hence not considered.Premium on Redemption of FCCB: The issue was whether the premium paid on redemption of FCCBs was capital or revenue expenditure. The AO and CIT(A) had treated it as capital expenditure, disallowing the claim as revenue expenditure. The assessee relied on earlier Tribunal decisions in its own case for AYs 2006-07 and 2007-08, and the Punjab & Haryana High Court ruling in 'CIT Patiala Vs. Industrial Cables (P) Ltd', as well as the Supreme Court decision in 'Taparia Tools Ltd Vs. JCIT'. These authorities held that premium paid on redemption of debentures or bonds is revenue expenditure allowable in the year of payment. The Tribunal found no distinguishing factors and allowed the expenditure as revenue in the year of payment.Disallowance under Section 40(a)(ia) for Non-deduction of TDS on Commission to Non-resident Agents: The assessee paid commission to foreign agents for export sales. The AO disallowed the expenditure for non-deduction of TDS. However, it was undisputed that these foreign agents were not taxable in India. The Tribunal held that since the income accrued to non-resident agents was not taxable in India, non-deduction of TDS did not justify disallowance of the expenditure. Accordingly, the disallowance was set aside.Classification of Interest Income: The Tribunal examined whether interest income should be treated as income from business or from other sources. Interest received from customers and suppliers in the regular course of business was held to be business income. Interest received otherwise was treated as income from other sources. The Tribunal directed the AO to allow netting of interest expenditure against interest income where a nexus was established, taxing only the net income under the appropriate head.Treatment of Income and Expenses in Units Eligible for Deduction under Sections 80IB/80IC: The Tribunal addressed multiple sub-issues:Insurance Claims: Insurance claims received for loss of trading assets were held not to be separate income but to reduce the loss/expenditure, thus eligible for deduction under sections 80IB/80IC.Foreign Exchange Fluctuation Gains: Gains on foreign exchange fluctuations on export proceeds were held to be part of business profits and eligible for deduction under sections 80IB/80IC, consistent with prior Tribunal orders.Miscellaneous Income and Rent: Income such as rent, commission discount, sundry balance written back, and prior period income were examined. Rent income was held ineligible for deduction under sections 80IB/80IC, while other receipts related to business activity were to be verified and allowed if independent and connected to business.Head Office Expenses Allocation: The Tribunal upheld allocation of net head office expenses (not gross) to units eligible for deduction, following prior decisions.Sales Tax Subsidies: Sales tax subsidies received under various state schemes were held to be capital receipts, not revenue, based on Supreme Court authority in 'CIT-I Vs. M/s Chaphalkar Brothers' and prior Tribunal rulings.Line/Bay Charges: Such charges were held to be revenue expenditure, not capital, consistent with earlier Tribunal decisions.Interest Reimbursement under Technology Upgradation Fund Scheme (TUFS): The Tribunal noted that this issue had been restored to the file of the CIT(A) for fresh decision in prior years and accordingly restored it for fresh adjudication in the present years, without expressing a final view.Revenue's Grounds: The Revenue challenged the CIT(A)'s allowance of excess power generation expenditure, classification of interest income from customers/suppliers as business income, netting of interest receipts and expenses, and allowance of TUFS interest reimbursement for deduction under sections 80IB/80IC.The Tribunal dismissed the Revenue's challenge on power generation expenditure, noting that the Revenue had not pursued this issue in the appeal for AY 2007-08 and that the assessee had explained the excess consumption. The classification of interest from customers/suppliers as business income and netting of interest receipts and expenses were upheld as correct. The TUFS issue was restored for fresh adjudication.Application of Law to Facts and Treatment of Competing Arguments: Across issues, the Tribunal carefully examined the factual matrix, including the nature and quantum of income and expenditure, prior consistent decisions in the assessee's own case, and relevant judicial precedents. It balanced the Revenue's reliance on certain Supreme Court decisions with more recent or contextually applicable rulings favoring the assessee's position, particularly regarding the presumption of use of own funds and the treatment of premium on FCCB redemption. The Tribunal gave weight to the principle that tax provisions must be applied in consonance with established judicial principles and consistent factual findings.Significant Holdings:'If the own funds of the assessee were sufficient to meet the investments made by the assessee, then the presumption will be that the assessee has used its own funds for making the investments. Under the circumstances, no disallowance of interest expenditure is attracted.''Premium paid on redemption of debentures or optionally convertible foreign currency bonds is to be allowed as revenue expenditure in the year of payment.''Where payments are made to foreign agents not taxable in India, non-deduction of TDS does not justify disallowance of such expenditure.''Interest received from customers and suppliers in the ordinary course of business is to be treated as business income.''Insurance claims received for loss of trading assets are not separate income but reduce the loss/expenditure and are eligible for deduction under sections 80IB/80IC.''Sales tax subsidy received under government incentive schemes is a capital receipt.'The Tribunal's final determinations included allowing the assessee's appeal on disallowance under section 14A and section 36(1)(iii), allowing premium on FCCB redemption as revenue expenditure, setting aside disallowance under section 40(a)(ia) for non-deduction of TDS on commission to non-resident agents, classifying interest income appropriately, and directing appropriate treatment of various receipts and expenses for deduction under sections 80IB/80IC. The TUFS reimbursement issue was remanded for fresh consideration. The Revenue's appeal was partly allowed only to the extent of restoration of the TUFS issue; other grounds were dismissed.