TaxTMI 
TaxTMI 
2013 (8) TMI 298
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....ed in clause (g) of sub-section 14 of the section 80IB that the Value of plant and machinery has to be considered on the last day of the previous year. 3. That the ld. CIT(A) erred in law and facts in deleting the addition of Rs. 3,44,772/- made by the Assessing Officer on account of expenditure incurred by the assessee on machines treating it as capital expenditure. 4. That the ld. CIT(A) erred in law and facts in deleting the addition of Rs. 8,58,822/- on account of interest paid to the persons specified in section 40A(2)(b) of the Act @ 15% whereas the average rate of interest paid to the financial institutions is not more than 12% including the Banks." 2. Ground Nos. 1 and 2 - After hearing both the parties we find that during assessment proceedings the Assessing Officer noticed that the assessee had claimed deduction u/s 80IB of the Act. 3. The Assessing Officer further noted that since the investment made by the assessee has exceeded the limit of Rs. 1.00 crore prescribed for Small Scale Industries (in short 'SSI'), therefore, the assessee was not eligible for deduction u/s 80IB. He further noted that though the limit for SSI units was increased to Rs. 5.00 crore ....
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....nder installation after the amount of Rs. 90,36,655/- was transferred on 1.4.2006 to Machinery account was Rs. 40,13,517. 4.10 Therefore, as on 1.4.2006 even the investment in plant and machinery was more than Rs. One crore and it has lost its status as SSI on 1.4.2006. It cannot be revised again by coming of a new law into force on subsequent date as it has already lost its status as SSI. 4.11 The main issue is whether for the purpose of computation of deduction u/s 80IB the above mentioned incomes are to be included in profits and gains derived from industrial undertaking or not. Section 80IB of the I.T. Act Reads: (1) Where the gross total income of an assessee include any profits and gains derived from any business referred to in sub-sections (3) to (11) and (11A) (such business being hereinafter referred to as the eligible business) there shall in accordance with and subject to the provisions of this section, be allowed in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of Assessment Years as specified in this section. 4.12 The deduction u/s 80IB can be granted only to a new ....
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.... of the previous year and it had complied with every other provisions of section 80IB, the deduction clam can not be disallowed. The addition made by the Assessing Officer is therefore, deleted." 7. Before us, the ld. DR for the revenue strongly supported the order of the Assessing Officer and submitted that once the assessee itself was not claiming deduction for Assessment Year 2006-07 that means the assessee ceased to be SSI unit and therefore, the assessee could not have the claim to deduction when the limit of investment was increased to Rs. 5.00 crores later on. 8. On the other hand, the ld. counsel of the assessee reiterated the submissions made before the lower authorities and contended that originally the limit of investment was Rs. 3.00 crores fixed vide Notification No. SO 857(E) dated 10.12.1997. Since the investment of the assessee was less than this limit, therefore, the assessee was eligible for deduction u/s 80IB. Since all other conditions were complied the assessee claimed deduction during Assessment Year 2002-03,2005-06. The said limit was subsequently reduced to Rs. 1.00 crore vide Notification No. SO 1288(E) dated 24.12.1999. Since the investment of the as....
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....as in the form of spare parts and does not have a separate identity. The Assessing Officer after examining the submissions observed that the assessee had purchased new 'TUP' which has been shown as repair and maintenance. Thereafter, he discussed the definition of repair in various case laws and observed that these are two new machines and the expenditure was disallowed. 11. Before the ld. CIT(A) the submissions made before the Assessing Officer were reiterated. The ld. CIT(A) found force in the submissions and decided the issue in favour of the assessee vide para 6 as under: "6 I have considered this issue and it is apparent that the Assessing Officer's conclusion is not based upon any specialized knowledge of the production process or any thing to suggest that he spare parts were actually a machine by itself. As against this the A.R had field evidence in the form of letter from the machinery manufacturer certifying that the items in question were part of the machinery. Therefore, the case laws relied upon by the A.O are not of any help as the facts of the case a re entirely different. Therefore, the claim of the appellant deserves to be allowed." 12. Before us, the ld. D....
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.... the addition. 18. Before us, the ld. DR for the revenue relied on the order of the Assessing Officer. 19. On the other hand, the ld. counsel of the assessee supported the impugned appellate order. 20. After considering the rival submissions we find that the ld. CIT(A) has adjudicated the issue vide para 9 which is as under: "9 I have considered the basis of disallowance made by the Assessing Officer which is primarily focused on the observation that interest @ 9% had been paid to one Ms. Kaushalya Wanti whereas @ 15% to other family members. The Assessing Officer observed that the funds were available from banks @ 12% and therefore, any interest paid in excess of this rate was unreasonable and excessive especially when the borrowing has been done from the specified persons as provided in section 40A(2). However, it is matter of record that the assessee has been paying interest @ 15% for several years and the same has been accepted as fair and reasonable as per order passed u/s 143(3). The A.R has claimed that funds borrowed from the bank are subject to a number of restrictions and require the appellant to comply with a lot of procedures is correct. The funds available ....
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....herefore, this issue is being decided in favour of the assessee. 23. Ground No. 2 - Identical issue has been decided against the revenue while adjudicating the revenue's appeal for Assessment Year 2007-08 vide para 20. Following that order, we decide this issue against the revenue. 24. Ground No. 3 - After hearing both the parties we find that during assessment proceedings the Assessing Officer noticed that the assessee has invested a sum of RS. 45.00 lakhs in Reliance Diversified Funds and Rs. 5.00 lakhs in Standard Chartered Premier Equity fund and earned dividend income of Rs. 3,10,337/- which is exempt from tax. Therefore, the provisions of section 14A read with Rule 8D were invoked following the decision of Hon'ble Bombay High Court in the case of Godrej and Boyce Manufacturing Co. Ltd V. DCIT, 328 ITR 81 (Bom). The Assessing Officer worked out the disallowance as per Rule 8D and disallowed a sum of Rs. 5,38,360/-. 25. Before the ld. CIT(A), it was mainly stated that there was no direct link between the expenditure and the investment, therefore, Section 14A could not be applied. In this regard reliance was placed on the decision of CIT V. Hero Cycles Ltd, 323 ITR 518 ....
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..... CIT(A) has wrongly held that once the funds were interest free which were invested to earn exempted income then no disallowance u/s 14A can be made. 28. On the other hand, the ld. counsel of the assessee reiterated the submissions made before the first appellate authority and submitted that no disallowance can be made possibly in view of the decision of Hon'ble Jurisdictional High Court in the case of CIT V. Hero Cycles Ltd, 323 ITR 518. 29. We have heard the rival submissions carefully. We find that the decision of Hon'ble Jurisdictional High Court in the case of CIT V. Hero Cycles Ltd, 323 ITR 518 was rendered for Assessment Year 2004-05. Later on Hon'ble Bombay High Court in case of Godrej and Boyce Manufacturing Co. Ltd V. DCIT, 328 ITR 81 has considered the implications of Section 14A even the constitutional validity and applicability of Rule 8D in great detail ultimately Hon'ble High Court has given the following conclusion: "88 Our conclusion in t his judgment are as follows : (i) Dividend income and income from mutual funds falling within the ambit of section 10(33) of the Income-tax Act, 1961, as was applicable for the assessment year 2002-03 is not includibl....
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....adopt a reasonable basis for effecting the apportionment. While making that determination, the Assessing Officer shall provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case." 30. The above decision has been rendered after considering the decision of Hon'ble Supreme Court in case of CIT v. Walfort Share and Stock Brokers P Ltd (2010) 326 ITR 1 (S.C), therefore, in our opinion, the ratio of this decision is applicable to the case of the assessee and rule 8D would be applicable in the present case which relates to Assessment Year 2008-09. 31. Though the ld. CIT(A) deleted the addition by observing that investment in mutual fund is out of current account but it was not denied before us that all the receipts are being credited to the current account which means current account is dealing with the combined fund of the assessee-company. The assessee has nowhere shown that the interest free funds were available for investment in mutual fund. In fact before the provision of Section 14A the assessee had the right to claim all the expenses if such expenses could not be bifur....
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....relatable to the earning of taxable income. Only those expenses which are in respect of the earning of taxable income can be allowed. The section 14A broadens the theory of apportionment of expenditure between taxable and non-taxable income is evident from the following observations of the Hon'ble Supreme Court: "The theory of apportionment of expenditure between taxable and nontaxable has, in principle, been now widened u/s 14A. Reading section 14 in juxtaposition with sections 15 to 59, it is clear that the words 'expenditure incurred' in section 14A refers to expenditure on rent, taxes, salaries, interest, etc., in respect of which allowances are provided for (see sections 30 to 37)." Thus on the basis of above, it was held that after introduction of Section 14A, it was possible to apportioned the expenditure between taxable income and exempted income. Rule 8D reads as under: "(1) Where the Assessing Officer having regard to the account of the assessee of a previous year, is not satisfied with - (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred in relation to income ....
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....tore that of the Assessing Officer by confirming the disallowance u/s 14A. 32. Ground No. 4 - After hearing both the parties we find that during assessment proceedings the Assessing Officer noticed that the assessee has given advances on account of capital expenses as under: 1 Advance for purchase of plot Rs. 24,000/- 2 Advance to Surinder Singh against building Rs. 5,88,613/- 3 Advance against machinery Rs. 10,00,000/- 4 Advance to Sukhwinder Singh Rs. 2,00,000/- 5 Advance to Yogesh Khosla Rs. 20,00,000/- 6 Advance against machinery Rs. 3,29,419/- Total Rs. 41,42,032/- The assessee was asked to show why interest should not be disallowed in view of the proviso to Section 36(1)(iii). In response it was explained that all the advances have been given for business purposes and therefore, interest should be allowed. However, the Assessing Officer noted that after the amendment by Finance Act, 2003 by which expenditure for expansion of the existing business could not be allowed and accordingly he disallowed the interest expenses. 34. On appeal before the ld. CIT(A) it was mainly stated that all the advances w....