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2013 (9) TMI 233 - AT - Income TaxDisallowance u/s 14A of I.T.Act read with Rule 8D of IT Rules - Assessee invested in debts mutual funds. Assessee computed disallowance u/s 14A(2) at ₹ 25,78,156/- and disallowed same, while computing its total income - Held that - AO merely observed that the administrative expenses disallowed by the assessee is very less but how they are less and how the other expenses incurred by the assessee related to dividend income has not been brought on record. AO has not pointed out expenses excluded by assessee for disallowance has proximate connection with dividend income - Assessing officer before rejecting disallowance computed by assessee must give a clear cut finding having regard to accounts of assessee how other expenditure claimed by assessee out of non exempt income related with exempt income. No discrepancy in claim of assessee was pointed out Onus of proof lies on Assessing officer Reliance has been placed upon various judgments s.a. DCIT Vs. Jindal Photo Ltd 2010 (12) TMI 521 - ITAT, New Delhi ; CIT Vs. Hero Cycles 2009 (11) TMI 33 - PUNJAB AND HARYANA HIGH COURT , wherein it has been held that disallowance u/s 14A of Act requires a clear finding of incurring of expenditure and that no disallowance can be made on basis of presumptions Decided in favor of Assessee. Payment of sales commission - payment to third parties - Genuineness - Disallowance u/s 37 - Requirement of TDS u/s 195 Held that - Reliance has been placed upon judgment in case of CIT Vs Chandulal Keshavlal and Co. 1960 (2) TMI 1 - SUPREME Court , wherein held that if expense incurred for fostering business of another only or for some improper or oblique purpose outside course of business then expense not deductible. In deciding whether a payment of money a deductible expenditure one has to take into consideration questions of commercial expediency and principles of ordinary commercial trading. If payment or expenditure incurred for purpose of trade of assessee it does not matter that payment may incur to benefit of a third party. Another test whether transaction properly entered into as a part of assessee s legitimate commercial undertaking in order to facilitate carrying on of its business; and it immaterial that a third party also benefits thereby. But in every case it a question of fact whether expenditure was expended wholly and exclusively for purpose of trade or business of assessee. In instant case, buyers had been introduced by said agents in past. Emails exhibit that agents were deeply involved with buyers vis-a-vis assessee in actual transportation of goods and securing payments to assessee, confirming vessel nomination, request to agents for opening of LC, amendment to the LC, advising changes in sale contract etc. Thus, easily inferred that non-resident agents were actually rendering services as middlemen in terms of their respective agreements with assessee and, accordingly, commission was genuinely paid by assessee for those services only, i.e., wholly and exclusively for purpose of business of assessee Decided in favor of Assessee. TDS on demurrage reimbursed by the assessee to the foreign buyer to compensate the foreign buyer for paying demurrage to the ship owner - Held that - In case of a non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to purchase of goods in India for purpose of export. Non-resident buyer got compensation towards demurrage incurred through operation which are confined to purchase of goods, i.e. in relation to ship which it had arrange for taking delivery of goods from assessee/seller from India - Income cannot be deemed to accrue or arise in India in hands of foreign buyer and therefore it cannot be taxable in India and not liable to tax deduction at source - No disallowance can be made u/s 40(a)(ia) Decided in favor of Assessee. TDS on demurrage paid to ship owner - Held that - In view of the circular the assessee was not obliged to deduct tax at source on the demurrage paid to the shipping owners during the year. Since the provision of TDS were not applicable, therefore no disallowance can be sustained u/s 40(a)(ia). - Decided in favor of assessee. Allowance of education and higher education cess as business expenditure Held that - Education cess and secondary higher education cess levied by assessee has been collected as part of income-tax and provisions of section 40(a)(ic) & (ii) are clearly applicable and assessee not entitled for deduction. Said payment not a fee but a tax Decided against Assessee. Eligibility of deduction u/s 10B for 100% EOU - By Finance Act, 2000, definition of manufacture which included processing contained in section 10B of Act was deleted w.e.f. 01.04.2001 Held that - Reliance has been place upon judgment in case of Commissioner of Income-Tax Versus Tara Agencies 2007 (7) TMI 4 - SUPREME COURT OF INDIA , wherein it has been held that blending of tea does not amount to manufacture or production of an article, but only processing In present case, assessee was exclusively engaged in blending and packing of tea for export and was not manufacturing or producing any other article or thing. It was recognised as a 100% EOU division - Assessee s unit engaged in export of tea bags and tea packets was a 100% EOU Reliance has also been placed upon judgment in case of Madhu Jayanti case 2012 (7) TMI 531 - ITAT KOLKATA Exemption u/s 10B allowed. Whether assessee has set new units or has merely reconstructed business which was already in existence Held that - CIT(A) had referred to only a few correspondence exchanged with Panchayat to make a case that it was only some repairs or at best a renovation work undertaken at Amona, whereas several other pieces of correspondence were ignored by him which prove that appellant had factually undertaken a major dismantling and demolition of existing plant as well as erection and installation of new plant in its place there Newspaper clipping clearly bring out fact that a complete destruction of old unit was done and altogether new plant was set-up at Amona, albeit, with aid of some old machinery and parts thereof Further, for determination of eligibility of a particular unit u/s 10B, value of old plant and machinery installed in that very unit will be considered for determining threshold limit of 20% - Decided in favor of Assessee. Additional depreciation u/s 32(1)(iia) of Income Tax Act Held that - Assessee must be engaged in business of manufacture or production of any article or thing and new plant and machinery must be acquired and installed - Assessee has extracted iron ore and also processed it - Case of assessee duly covered by decision of Hon ble Supreme Court in assessee s own case reported in 2004 (11) TMI 14 - SUPREME Court Allowed additional depreciation Decided in favor of Assessee.
Issues Involved:
1. Disallowance under Section 14A read with Rule 8D. 2. Disallowance of sales commission to non-resident agents under Section 40(a)(i). 3. Disallowance of demurrage charges under Section 40(a)(i). 4. Disallowance of education cess and secondary and higher secondary cess. 5. Eligibility for deduction under Section 10B for different units. 6. Disallowance of additional depreciation under Section 32(1)(iia). 7. Disallowance of expenditure on research and development. 8. Disallowance of foreign exchange loss on forward contracts. 9. Disallowance of expenditure incurred for issuing bonus shares. Detailed Analysis: 1. Disallowance under Section 14A read with Rule 8D: The assessee received substantial dividend income exempt from tax. The AO invoked Section 14A read with Rule 8D, disallowing Rs. 12,29,25,049/-. The CIT(A) upheld this disallowance, noting the magnitude of investments and the administrative expenses involved. The Tribunal, however, found the AO did not record sufficient satisfaction regarding the correctness of the assessee's claim and deleted the disallowance, citing the necessity for a clear finding of incurrence of expenses related to exempt income. 2. Disallowance of sales commission to non-resident agents under Section 40(a)(i): The AO disallowed Rs. 9,88,29,729/- paid to non-resident agents for non-deduction of TDS. The CIT(A) confirmed the disallowance under Section 37. The Tribunal, however, found that the commission was genuinely paid for services rendered, evidenced by agreements and email correspondences, and deleted the disallowance. 3. Disallowance of demurrage charges under Section 40(a)(i): The AO disallowed Rs. 36,05,767/- paid to buyers and Rs. 1,19,70,782/- paid to shipping companies for non-deduction of TDS. The CIT(A) confirmed the disallowance. The Tribunal, however, found that these payments were not liable for TDS under Section 195, as demurrage is covered under Section 172, and deleted the disallowance. 4. Disallowance of education cess and secondary and higher secondary cess: The AO disallowed Rs. 19,72,00,814/- as it formed part of income tax. The CIT(A) confirmed this disallowance. The Tribunal upheld the disallowance, noting that education cess is part of income tax and not deductible as business expenditure. 5. Eligibility for deduction under Section 10B for different units: The AO disallowed deductions for units at Amona, Chitradurga, and Codli, arguing they were not new units and did not engage in manufacture or production. The CIT(A) upheld this view. The Tribunal, however, found that these units were substantially renovated and engaged in production, thus eligible for Section 10B deductions. The Tribunal directed the AO to recompute profits considering the market value of crude ore and tailings. 6. Disallowance of additional depreciation under Section 32(1)(iia): The AO disallowed additional depreciation on the grounds that the assessee was not engaged in manufacture or production. The CIT(A) confirmed this. The Tribunal, relying on the Supreme Court's decision in the assessee's own case, allowed the additional depreciation, recognizing the assessee's engagement in production. 7. Disallowance of expenditure on research and development: The AO disallowed Rs. 1,94,55,376/- as capital expenditure. The CIT(A) found that the expenditure was not claimed as scientific research and deleted the disallowance. The Tribunal upheld this deletion, noting the AO's own finding that the expenditure did not qualify as scientific research. 8. Disallowance of foreign exchange loss on forward contracts: The AO treated the loss as speculative. The CIT(A) deleted the disallowance, citing the jurisdictional High Court's decision. The Tribunal upheld this deletion, noting the loss was incidental to the assessee's export activities. 9. Disallowance of expenditure incurred for issuing bonus shares: The AO disallowed Rs. 61,35,482/-, treating it as capital expenditure. The CIT(A) deleted the disallowance, following the Supreme Court's decision. The Tribunal upheld this deletion, aligning with the Supreme Court's ruling. Conclusion: The Tribunal allowed the assessee's appeal partly, granting relief on several disallowances, while dismissing the revenue's appeal entirely. The Tribunal's decisions were guided by precedents from higher judicial authorities and a detailed examination of the facts and applicable laws.
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