2023 (8) TMI 1649 - AT - Income Tax

Deduction u/s 80IC denied - allocation of head office expenses had not been made to benefit claiming 80IC units - HELD THAT -As decided in assessee s own case 2017 (9) TMI 1408 - ITAT DELHI for A.Y. 2008-09 issue is covered in favour of the assessee as held AO had made the adjustment due to the market value of the inter unit transfer but could not discharge the onus which in our opinion lie on him to ascertain the market value in respect of the component which were transferred by the assessee from one unit to the other unit. The onus lies on the AO to bring the comparative instance if the AO was not able to bring any comparative instance he should adopted the market value on the basis of the value as determined by the Government of India Excise Department i.e cost plus 10%. Ignoring this value in our opinion will tantamount to that provision of section 80IA(a) of the Act has not been correctly applied by the AO and therefore on the basis itself ignoring the alternate contentions of the assessee that if any deduction has to be reduced u/s 80IC in respect of Panel Division that has to be reduced only by Rs.28, 405/ -. We allow Ground No. 1 taken by the assessee and set aside the order of the Ld. CIT(A) confirming the reduction of the deduction claimed u/s 80IC - Decided in favour of assessee. Deduction u/s 80IC denied - allocation of head office expenses had not been made to benefit claiming 80IC units - HELD THAT - AR has pointed out that 2017 (9) TMI 1408 - ITAT DELHI the issue has been discussed in favour of the assessee purpose of section 80IA that indirect expenses cannot be reckoned in the computation of determining the profits of the eligible undertaking. Ld. DR even though vehemently referred to the order of the AO but could not brought to our knowledge any contrary decision. We therefore confirm the order of Ld. CIT(A) in deleting the reduction made by the AO in the deduction u/s 10B. Unrealized export proceeds in respect of unit in SEZ and the consequent reduction - AO has made the reduction alleging that the export proceeds have not been received with in prescribed time limit laid under sub section 3(A) of Section 10A - HELD THAT - The copy of Master Circular available at page no. 414 of the paper book shows that the 1st July 2008 Master Circular no. 09/2008-09 of the RBI provides that in case of units in the Special Economic Zone there is no specific time period for realization and repatriation of export proceeds. Ld. CIT(A) has not followed the same with observation in para 4.4.2 that the Master Circular is effective from 01.07.2009 therefore the same is applicable for the exports made on or after 01.07.2009. The same are not applicable to export made by the SEZ unit in the financial year 2008-09. It appears that Ld. CIT(A) has taken into consideration Master Circular dated 01.07.2009 which is available at page no. 210 to 219 with relevant page at 218 while the Circular dated 1st July 2008 was applicable in regard to present assessment year. As the Bench goes through two circulars it comes up that both had a sunset clause of one year and after 1st July 2008 Circular on similar basis and extending benefit the circular of 1st July 2009 was issued. Thus Ld. CIT(A) has fallen in error not following the circular dated 01.07.2008 as was applicable. AR is justified with argument that in regard to relevant assessment year after coming into force of Special Economic Zone Act 2005 with effect from 10.02.2006 provisions of Section 10AA of the Act are applicable and unlike Section 10A(3) which provides time limit of inward remittance of 6 months from the end of previous year is not applicable to Section 10AA. Similar has been the view of the case of BT e- Serve ( India ) Private Limited 2017 (11) TMI 64 - ITAT DELHI wherein as observed that provisions of Section 10AA does not provide any time limit of bringing such consideration into Section 10A(3). Thus the Bench is inclined to decide this ground in favour of the assessee. Addition made by reducing the deduction u/s 10B - HELD THAT -CIT(A) not relying the RBI Circular dated 01.07.2009 had sustained the disallowance of deduction u/s 10B. The Master Circular provided that in respect of exports made by EOU units the realization of export proceeds has to be within 12 months from the respective date of exports and the fact which was required to be verify by Ld. AO in fact stood established and no inquiry was accordingly required. Accordingly this ground is decided in favour of assessee. Disallowance of 20% of the foreign travel expenses by categorizing that as personal expenses - CIT(A) allowed expenses of air tickets and of hotels but confirmed personal at 30% of expenses against foreign currency and credit cards - AO pointed out that as the provisions of fringe benefit tax are applicable there can be no disallowance on account of personal expenses - HELD THAT - The matter is covered in favour of the assessee in A. Y. 2008-09 2017 (9) TMI 1408 - ITAT DELHI wherein held disallowance was made by the AO and sustained by the Ld. CIT(A) partly on the basis of the expenses incurred for personal purposes. It is not denied that the assessee has paid fringe benefit tax on these expenses. Since fringe benefit tax has been paid therefore no disallowance can be made on account of the personal expenses. Disallowance of the claim amount paid Employees State Insurance Corporation - AR pointed out that it was wrongly debited as penalty - HELD THAT - The Bench is of considered view that the demand was raised by ESIC on account of short deposits made by the company. The same does not arise out of any breach of law or anything which was prohibited under law. The ground is sustained in favour of assessee. Disallowance u/s 14A - sufficiency of own funds - HELD THAT - The settled proposition of law is that the hotch potch fund theory relied by Ld. CIT(A) is no more relevant and if interest free own funds are available with assessee it is presumed that investments were made out of the same and proportionate disallowance is not warranted u/s 14A of the Act. Reliance can be placed on the judgment of South Indian Bank Ltd. 2021 (9) TMI 566 - SUPREME COURT and Reliance Utilities Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT Hence the findings of Ld. CIT(A) about this ground cannot be sustained and the ground is decided in favour of assessee.

Summary

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.