2023 (8) TMI 1649 - AT - Income Tax

ITAT allows Section 80IC deduction, rejects Section 14A disallowance, permits foreign travel and ESIC expenses

M/s. C & S Electric Ltd Versus ACIT, LTU, New Delhi

M/s. C & S Electric Ltd Versus ACIT, LTU, New Delhi - TMI ISSUES: Whether deduction claimed under Section 80IC of the Income Tax Act can be reduced on the ground that transfer from Non-80IC to 80IC units was not made at market value.Whether allocation of head office expenses to 80IC units is necessary for claiming deduction under Section 80IC.Whether deduction under Section 10A can be denied on the ground that export proceeds were not received within the prescribed time under subsection (3) of Section 10A.Whether disallowance of deduction under Section 10B on account of alleged double consideration of amounts written off is justified.Whether disallowance of foreign travel expenses on the ground of personal expenses is sustainable when Fringe Benefit Tax (FBT) has been paid.Whether claim of Employees State Insurance Corporation (ESIC) amount paid, but wrongly debited as penalty, is allowable as business expenditure.Whether disallowance under Section 14A based on the 'hotch potch fund theory' is sustainable where interest-free own funds are available. RULINGS / HOLDINGS: Deduction under Section 80IC cannot be reduced merely because transfer from Non-80IC to 80IC units was not at market value; the onus lies on the Assessing Officer (AO) to prove market value, and in absence of comparative instances, the AO should adopt market value as determined by the Government of India, Excise Department (cost plus 10%).Only direct expenditure is to be considered for computing profits eligible for deduction under Section 80IC; indirect or head office expenses need not be allocated to 80IC units for claiming deduction.Deduction under Section 10A cannot be denied for non-realization of export proceeds within prescribed time where the unit is located in a Special Economic Zone (SEZ), as Section 10AA applies without any time limit for inward remittance; Master Circular of Reserve Bank of India (RBI) dated 01.07.2008 (effective for relevant assessment year) supports no time limit for SEZ units.Disallowance under Section 10B on account of double consideration of amounts written off is erroneous where one amount is included in the other; only the aggregate amount should be considered.Foreign travel expenses disallowance on account of personal expenses is not sustainable where Fringe Benefit Tax has been paid, as per Section 115W and consistent Tribunal precedents.Amounts paid to ESIC representing additional demand due to short deposits, wrongly debited as penalty, are allowable business expenditure as they do not arise out of any offence or prohibited act under law and are not hit by Explanation 1 to Section 37.Disallowance under Section 14A based on the 'hotch potch fund theory' is not sustainable where interest-free own funds exceed investments; proportionate disallowance is not warranted in such cases. RATIONALE: The Court applied the provisions of Sections 80IC, 10A, 10B, 14A, and relevant RBI Master Circulars, interpreting Section 10AA as applicable to SEZ units without time limits for realization of export proceeds, thereby excluding them from Section 10A(3) requirements.Precedents from coordinate Benches and authoritative judgments, including those on the treatment of direct versus indirect expenses for Section 80IC and the impact of Fringe Benefit Tax on disallowance of personal expenses, were followed to maintain consistency and uphold settled legal principles.The Court emphasized the AO's burden to establish market value for inter-unit transfers under Section 80IC and rejected arbitrary reductions without evidentiary support.The decision reaffirmed the principle that penalties or demands not arising from illegal acts or offences are allowable as business expenses under Section 37, clarifying the scope of Explanation 1.A doctrinal shift away from the 'hotch potch fund theory' for disallowance under Section 14A was confirmed, aligning with Supreme Court and High Court rulings that interest-free own funds negate the need for proportionate disallowance.