2021 (3) TMI 1230 - AT - Income Tax

Computation of deduction u/s 80HHC - as per CIT-A while arriving at business income for the purpose of deduction u/s 80HHC 90% of other income should be excluded under clause (baa) of the explanation below Section 80 HHC which includes receipts like rental income commission notice pay income from cancelled orders and miscellaneous/sundry income etc - CIT-A directing the AO to exclude 90% of the net interest income instead of gross interest receipts from the profits and gains of business or profession to arrive at business profit under clause (baa) for the purpose of computation of deduction u/s 80HHC particularly in view of use of expression -receipt- and not income in the said clause - HELD THAT - Taking a consistent view we direct accordingly as directed in the Tribunal order for the AY 2000-01. However we make it clear that while considering the income the AO shall take net income after setting off the expenditure incurred to earn that income. Thus the ground by the assessee is allowed while the grounds of the revenue on this issue are dismissed. Head office expenses as required to be allocated while arriving at the profit of the industrial undertaking for the purpose of allowing deduction u/s 80-I / 80-IA - HELD THAT - As all expenses whether they are direct or indirect or fixed semi-fixed or variable must be adjusted to determine the profits derived from the industrial undertaking. Of course any component of Head Office expenses which has been incurred exclusively for the purposes of the business of any particular unit/ undertaking/division will have to be adjusted against the receipts of that particular unit/undertaking/division only. Similarly Head Office expenses or expenses which are common to all the units/undertakings/divisions expenses will have to be spread over and charged against the receipts of all the units/ undertakings/divisions. If this course is not followed then what would stand allowed u/s 80IA would be inflated profits and not the net profits derived from the industrial undertaking in terms of the provisions of sections 29 to 43. In this view of the matter and in the absence of any better alternative the CIT(A) is justified in holding assessee is entitled to deduction of the eligible amounts in respect of the profits derived from the eligible undertakings after the allocation of head office expenses in the ratio of turnover - Decided against assessee. Deduction claimed u/s 80-0 at 50% of fees received for supply of engineering designs and drawings - as submitted that the claim is for fees received for developing and providing designs and drawings - HELD THAT - Merely raising invoices for the purpose of having provided engineering designs cannot be a yardstick to determine the exact amounts received by the assessee for the services rendered by it. Mere raising of invoices and on the basis of which claiming deduction u/s 80-0 of the Act running into crores of rupees can neither be justified nor allowed without any sheer of documentary proof. In view of the above facts and circumstances of the issue we inclined to agree with the reasoning of the CIT (A) which does not require our intervention. Expenditure being amount spend towards Repairs and renovation of Leasehold premises - Revenue or capital expenditure - HELD THAT - CIT (A) has not erred in holding that expenditure being amount spend towards Repairs and renovation of Leasehold premises is capital expenditure. Disallowance of reversal of provision made for the obsolete stock in earlier years - CIT(A) was of the view that the only issue to be seen is whether any fresh provision was made towards obsolescence in the accounts for the year under consideration - HELD THAT - Before the CIT(A) it was explained that the provision is normally made based on the accounting standards. On subsequent verification the CIT(A) found that excess provision had been made in Nasik and Peenya units. Therefore the excess provision was reversed. Since no fresh provision was made towards obsolescence the addition deleted by the CIT(A). Now the contention of the ld. AR is net reversal of Rs. 5, 72, 796 has to be allowed as a deduction in the assessment year under consideration. In our opinion this amount of Rs. 5, 72, 796 was allowed as a deduction in the earlier years when the provision was created. Now non-taxing of the same amounts to allowing double relief. Hence reversal of provision of Rs. 5, 72, 796 has to be brought to tax in the assessment year under consideration. As such we confirm the order of CIT(Appeals) on this issue and dismiss this ground of appeal by the assessee. Disallowance u/s 14A - expenses incurred for earning the dividend from the investment made out of the interest bearing funds - HELD THAT - As decided in own case it is clear that own funds of the assessee were much more than the investments that yielded tax-free dividend income. In such circumstances we are of the view that the revenue authorities were not right in concluding that the borrowed funds on which interest was paid was used for the purpose of making investments that yielded tax-free dividend income. In that view of the matter we are of the view that the addition made by the revenue authorities cannot be sustained. The same is directed to be deleted. Disallowance being provision made for loss order on the ground that same is contingent in nature and there is no scope for allowance of any liability that is unascertainable - HELD THAT - AO says that the loss in question is contingent he is deemed to have questioned the basis on which the Assessee has quantified the loss. Without assigning a basis on which the loss is said to be accrued loss the Assessee cannot claim deduction on account of foreseeable loss. We deem it fit and proper to remand the issue to the AO for fresh consideration with a direction that the Assessee will furnish the basis on which he claims that there would be loss in the three contracts the details of which are given above. The AO will consider the same and decide the issue afresh in accordance with law after affording Assessee opportunity of being heard. Disallowance of bad debts written off - HELD THAT - The issue is remitted to the assessing officer to ascertain twin questions viz. ( i ) whether debt which was written off during the relevant year was offered to income in Previous year or earlier years ( ii ) whether the assessee has debited the amount of doubtful debt to profit and loss account and has reduced the same from the asset side of the balance sheet. The matter is remitted to the AO for de novo consideration of the aforementioned aspect. Deduction u/s 80HHB when no separate books in respect of foreign project were maintained - HELD THAT - If we examine the nature of work done by the assessee in the foreign country we fully subscribe to the factual finding recorded by the CIT (A). It has to be borne in mind that Section 80HHB of the Act is a provision which grants incentive to the assessee for growth and development and as held by the Hon ble Supreme Court in several decisions such provision should be liberally construed as it will promote economic growth of the country. We therefore uphold the order of CIT(A) and find no merits in the relevant ground of appeal (iii) raised by the revenue. Nature of expenditure - Club membership fee paid by the company is an admissible business and cannot be regarded as capital expenditure. Allowance of R D expenditure u/s 35(I)(iv) when the activity claimed to be the R D activity is part of normal business of the assessee - HELD THAT - As decided in own case identical issue was decided by the Hon ble Karnataka High Court in the case of Tejas Network Ltd. 2015 (4) TMI 1064 - KARNATAKA HIGH COURT and it was held that where assessee claimed deduction under section 35(2AB) pursuant to certificate issued by prescribed authority i.e. Department of Scientific Industrial Research (DSIR) approving such claim Assessing Officer could not have denied weighted deduction under section 35(2AB) in respect of scientific expenditure. It was held that Assessing Officer cannot sit in judgment over report submitted by prescribed authority . It was held that where Assessing Officer does not accept claim of assessee made under section 35(2AB) he should refer the matter to Board which will then refer question to the prescribed authority. Expenses on the basis of purchase of packing materials loose tools and consumables in the year of purchase - HELD THAT - As decided in own case Assessee submitted before Assessing Officer that; (i) packing material shown as purchases as on 31-3-2005 was actually purchased in earlier months and such packing material was consumed during process; (ii) on account of some computer problem bills were posted on 31-3-2005 and (iii) entire packing material left after end of year became obsolete and therefore it was not shown in closing stock. Assessing Officer rejected account books of assessee and made certain addition to his income. The Tribunal held that - (i) it was not case of revenue that purchases as debited as on 31-3-2005 were not genuine and (ii) assessee was following a consistent method of valuing closing stock by including packing material as consumed at time of purchase. Rejection of account books of assessee and addition to his income was held to be not justified.

Summary

Issues Involved:
1. Deduction under Section 80HHC.
2. Allocation of head office expenses for deduction under Sections 80-I/80-IA.
3. Deduction under Section 80-O.
4. Capital expenditure on repairs and renovation of leasehold premises.
5. Reversal of provision for obsolete stock.
6. Disallowance under Section 14A.
7. Provision for loss orders.
8. Bad debts written off.
9. Deduction under Section 80HHB.
10. Club membership fees as business expenditure.
11. R&D expenditure under Section 35(1)(iv).
12. Expenses on packing materials, loose tools, and consumables.

Detailed Analysis:

1. Deduction under Section 80HHC:
The assessee contested the exclusion of 90% of various incomes from business profits for deduction under Section 80HHC. The Tribunal upheld the CIT(A)’s decision that 90% of net interest income should be excluded, not gross interest. The Tribunal also upheld the CIT(A)'s decision not to exclude 90% of certain incomes like scrap sales, cash discount, excise duty, etc., from business profits. The Tribunal followed its previous decisions in similar cases, emphasizing that only net income after setting off related expenses should be considered.

2. Allocation of head office expenses for deduction under Sections 80-I/80-IA:
The assessee argued against allocating head office expenses to the profit of the industrial undertaking for deductions under Sections 80-I/80-IA. The Tribunal upheld the CIT(A)’s decision that such expenses should be allocated, following the principle that all expenses attributable to the business of the industrial undertaking must be considered.

3. Deduction under Section 80-O:
The assessee claimed deduction under Section 80-O for fees received for supplying engineering designs and drawings. The Tribunal, following its previous decision, rejected the claim, noting that the assessee failed to provide sufficient evidence that the designs were used outside India by a foreign enterprise.

4. Capital expenditure on repairs and renovation of leasehold premises:
The Tribunal upheld the CIT(A)’s decision that the expenditure on repairs and renovation of leasehold premises was capital in nature and therefore not deductible as revenue expenditure.

5. Reversal of provision for obsolete stock:
The Tribunal confirmed the CIT(A)’s decision to disallow the deduction for the reversal of provision for obsolete stock, noting that allowing the reversal would result in double relief, as the provision was already allowed in earlier years.

6. Disallowance under Section 14A:
The Tribunal deleted the disallowance made under Section 14A for expenses incurred to earn dividend income, noting that the assessee’s own funds were more than the investments yielding tax-free income, and thus the borrowed funds were not used for such investments.

7. Provision for loss orders:
The Tribunal remanded the issue back to the AO for fresh consideration, directing the AO to verify the basis on which the assessee claimed the provision for loss orders, following the principle that anticipated losses should be recognized as expenses if reliably estimated.

8. Bad debts written off:
The Tribunal remitted the issue back to the AO to ascertain whether the bad debts written off were offered to income in previous years and whether the amount was debited to the profit and loss account and reduced from the asset side of the balance sheet, following the Supreme Court’s guidelines.

9. Deduction under Section 80HHB:
The Tribunal upheld the CIT(A)’s decision to allow the deduction under Section 80HHB, noting that the assessee maintained separate accounts for each project and provided the necessary audit certificates.

10. Club membership fees as business expenditure:
The Tribunal upheld the CIT(A)’s decision to allow the deduction of club membership fees as business expenditure, following the Supreme Court’s decision that such fees are admissible business expenses.

11. R&D expenditure under Section 35(1)(iv):
The Tribunal upheld the CIT(A)’s decision to allow the deduction for capital expenditure on R&D activities, noting that the R&D division was approved by the Department of Scientific Industrial Research and the expenditure was properly documented.

12. Expenses on packing materials, loose tools, and consumables:
The Tribunal upheld the CIT(A)’s decision to allow the deduction for expenses on packing materials, loose tools, and consumables in the year of purchase, noting that the assessee consistently followed this method and it was accepted in the past by revenue authorities.

Conclusion:
The appeal by the assessee was partly allowed, while the appeal by the revenue was dismissed. The Tribunal's decisions were based on consistent application of legal principles and previous rulings, ensuring that the deductions and disallowances were in accordance with the law and supported by proper documentation and evidence.