2017 (3) TMI 1467 - AT - Income Tax

Disallowance of deduction under section 80IB(11A) - Discount amount - Held that - Discount is an item by which the assessee has reduced its cost of purchase i.e. cost of material has been saved which has resulted a little higher profit. Thus this discount has a direct nexus with activities of the assessee and it is treated as business profit. Accordingly we allow the claim of the assessee and direct the AO to consider sum as eligible for grant of deduction under section 80IB(11A) of the Act. Interest received from PGVCL - Held that - Assessee conceded that in view of the judgment in the case of CIT Vs. Nirma Ltd.(2014 (10) TMI 388 - GUJARAT HIGH COURT ) only net interest income is to be excluded for grant of deduction under section 80IB. We remit this aspect to the AO. He shall exclude net interest income from PGVCL for admissibility of deduction under section 80IB. Interest subsidy received from Govt. of Gujarat - Held that - Thus issue is squarely covered in favour of the assessee by the decision of the Hon ble Supreme Court in the case of ACG Associated Capsules P.Ltd. vs. CIT (2012 (2) TMI 101 - SUPREME COURT OF INDIA). The AO himself has not treated the interest income as income from other sources. He treated it as a business income but did not grant deduction under section 80IB(11) of the Act. Since this interest income has direct nexus with the activities of the assessee it only goes to reduce the expenditure incurred on the loans availed from the bank. The assessee could reduce the net interest expenditure. In other words if bank has charged 12% and it got subsidy of 5% then it had charged the rate of 7% on the profit & loss account then it would have enhanced its profit to this extent and therefore this interest subsidy is to be considered as eligible for grant of deduction under section 80IB(11) of the Act. Eligible profit to claim deduction under section 80IB(11) - interest payable to the partners on their capital contribution and remuneration reduction - Held that - Direct the AO not to reduce interest payable to the partners on their capital contribution and remuneration from the eligible profits for grant of deduction under section 80IB because it is the discretion of the assessee to pay interest and remuneration to partners or not.

Summary

Issues Involved:
1. Disallowance of deduction under section 80IB(11A) of the Income Tax Act, 1961 for certain items of income.
2. Exclusion of net interest income for deduction under section 80IB(11A).
3. Treatment of interest subsidy received from the Government of Gujarat.
4. Exclusion of notional interest and remuneration payable to partners from eligible profits for deduction under section 80IB(11A).

Detailed Analysis:

1. Disallowance of Deduction under Section 80IB(11A) for Certain Items of Income:
The primary issue in the appeal revolves around the disallowance of deduction under section 80IB(11A) of the Income Tax Act, 1961 for specific items of income. The items in question include Kasar (Discount), Duty Drawback claim, Interest from PGVCL, VKUY License fee, and Interest subsidy of DIC. The assessee conceded not to press claims for Duty Drawback and VKUY License fee due to their small amounts, confirming the disallowance for these items.

2. Treatment of Discount (Kasar):
The assessee contended that the discount availed on purchases should be treated as profit derived from the industrial undertaking. The Tribunal agreed, stating that the discount reduces the cost of purchase, resulting in higher profits, and thus has a direct nexus with the business activities. The Tribunal directed the AO to consider the discount amount of Rs. 1,37,012/- as eligible for deduction under section 80IB(11A).

3. Exclusion of Net Interest Income from PGVCL:
The assessee conceded that only net interest income should be excluded for the deduction under section 80IB(11A), in line with the judgment of the Hon’ble Gujarat High Court in CIT Vs. Nirma Ltd. The Tribunal remitted this aspect to the AO to exclude the net interest income from PGVCL for the admissibility of the deduction.

4. Treatment of Interest Subsidy from Government of Gujarat:
The interest subsidy provided by the Government of Gujarat through the District Industrial Centre was for setting up a new industry. The subsidy was credited to the profit & loss account, reducing the net interest expenditure. The Tribunal found that this issue was covered by the decision of the Hon’ble Supreme Court in ACG Associated Capsules P. Ltd. vs. CIT. The Tribunal held that since the interest subsidy has a direct nexus with the activities of the assessee, it should be considered eligible for deduction under section 80IB(11A).

5. Exclusion of Notional Interest and Remuneration Payable to Partners:
The AO reduced the eligible profits by notional interest and remuneration payable to partners, which the assessee argued against. The Tribunal referred to its earlier decision in Sagar Foods Vs. ITO, stating that there is no provision in the Act authorizing the AO to thrust these amounts upon the assessee. The Tribunal held that the assessee has the discretion to pay or not pay interest and remuneration to partners. Therefore, the AO was directed not to reduce these amounts from the eligible profits for the deduction under section 80IB(11A).

Conclusion:
The appeal was partly allowed. The Tribunal directed the AO to consider the discount as eligible for deduction, exclude net interest income from PGVCL, and include the interest subsidy as eligible for deduction. The Tribunal also directed the AO not to reduce notional interest and remuneration payable to partners from the eligible profits for the deduction under section 80IB(11A).