PRINCIPAL COMMISSIONER OF INCOME TAX-I vs. M/S BBF INDUSTRIES LIMITED

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ITA/145/2015HC Punjab & HaryanaPHHC01109770201506 September 2016Author: MR. JUSTICE M.M. AGGARWAL,MR. JUSTICE AVNEESH JHINGAN6 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that questions 1 and 4 did not raise substantial questions of law. Regarding questions 1 and 4, concerning inter-unit investments and interest expenditure allocation, the Court found the approach of the CIT(A) and ITAT to be neither perverse, irrational, nor absurd. The Court noted the settled principle that an assessee is presumed to invest interest-free funds first, but acknowledged the appellate authority's decision to apportion based on the ratio of interest-free reserves (43%) and borrowed funds (57%) as reasonable appreciation of evidence. For question 2, regarding advances to sister concerns, the Court found that the appellate authority accepting the assessee's interest rate of 10% over the AO's 12% was not perverse. For question 3, concerning the enhanced Section 80-IB deduction for Unit-II, Samba, the Court held the issue was covered against the department by its own judgment in CIT vs. M/s Ramco International (ITA No.417 of 2008 dated 08.12.2008). Consequently, the appeal was dismissed.

What were the facts?

This appeal by the Principal Commissioner of Income Tax-I, Ludhiana (Revenue) is against the Income Tax Appellate Tribunal's (ITAT) order for Assessment Year 2008-09, which had dismissed the Revenue's appeal. The assessee, M/s B.B.F. Industries Ltd., had not challenged the ITAT's order. The core dispute involved deductions under Section 80-IB. The Assessing Officer (AO) disallowed deductions on inter-unit investments, citing inflated profits and improper fund allocation. The Commissioner of Income Tax (Appeals) [CIT(A)] modified the AO's disallowances. The ITAT upheld the CIT(A)'s decision. The Revenue's appeal to the High Court raised four substantial questions of law concerning these disallowances and additions.

What were the issues?

The High Court had to decide the following substantial questions of law: 1. Whether the ITAT was correct in upholding the CIT(A)'s reduction of disallowance of deduction under Section 80-IB on inter-unit investments, where the AO disallowed it after calculations, alleging the assessee transferred funds to eligible units to inflate profits for more Section 80-IB deduction. 2. Whether the ITAT was correct in upholding the CIT(A)'s deletion of an addition of Rs.14,34,018/- on account of advances to sister concerns, considering the assessee paid more interest on borrowed funds, and if CIT vs. M/s Abhishek Industries Ltd. (286 ITR 1 P&H) was applicable. 3. Whether the ITAT was correct in upholding the CIT(A)'s allowance of Section 80-IB deduction at Rs.45,35,176/- for Unit-II, Samba, which was initially claimed at Rs.3,64,303/-, when the AO rejected the enhanced claim based on Goetze (India) Ltd. Vs. CIT (284 ITR 323) due to the assessee failing to file a revised return. 4. Whether the ITAT was correct in upholding the CIT(A)'s allocation of interest expenditure of the Ludhiana unit for funds invested in Samba units based on the ratio of own capital to borrowed funds, when the assessee failed to provide evidence of self-generated funds being used. Assessee's arguments were not explicitly recorded for each issue, but the judgment implies the assessee contended that the transfers were from self-generated funds and that the CIT(A)'s apportionment was reasonable. The Revenue argued that the AO's disallowances and additions were legally sound and that the appellate authorities erred in deleting or reducing them.

Which sections of the Income-tax Act were involved?

Section 80-IB

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Income Tax Appeal No.145 of 2015(O&M) DATE OF DECISION: 06.09.2016 Pr. Commissioner of Income Tax-I, Ludhiana …..Appellant versus M/s B.B.F. Industries Ltd. .....Respondents CORAM:- HON'BLE MR.JUSTICE S.J.VAZIFDAR, CHIEF JUSTICE HON’BLE MR. JUSTICE DEEPAK SIBAL Present: Mr. Rajesh Katoch, Advocate for the appellant Ms. Radhika Suri, Sr. Advocate with Ms. Rinku Dahiya, Advocate for the respondents .. S.J. VAZIFDAR, CHIEF JUSTICE (Oral): This is an appeal against the order of the ITAT dismissing the appeal of the Revenue in respect of the Assessment Year 2008-09. The cross appeals were filed before the Tribunal. The respondent-assessee, however, has not challenged the order of the Tribunal.

2.

According to the appellant, the following substantial questions of law arise in this appeal:- “(i) Whether on the facts and circumstances of the case, the Hon’ble Income Tax Appellate decision of ld. CIT(A) reducing the disallowance of deduction u/s 80 IB on the issue of inter-unit investments while the Assessing Officer had Parkash Chand 2016.09.07 17:33 integrity of this document

ITA-145-2015 disallowed the deduction after making calculations as per law and facts of the case as the Assessee had transferred followed funds to the eligible units for the purpose of inflating profits to avail more deduction u/s 80-IB in these units? (ii) Whether on the facts and circumstances of the case, the Hon’ble Income Tax Appellate decision of ld. CIT(A) deleting the addition of Rs.14,34,018/- made by the AO on account of advances to sister concerns while the Assessee is paying more interest on borrowed funds and hence the judgment of Hon’ble Punjab & Haryana High Court in the case of CIT vs. M/s Abhishek Industries Ltd. 286 ITR1 (P&H) is fully applicable in this case? (iii)Whether on the facts and circumstances of the case, the Hon’ble Income Tax Appellate decision of ld. CIT(A) allowing deduction u/s 80- IB at Rs.45,35,176/- in respect of Unit-II, Samba which was earlier claimed at Rs.3,64,303/-, while the claim of the Assessee was rightly, rejected by the Assessing Officer by applying the judgment of Hon’ble Supreme Court in the case of Goetze (India) Ltd. Vs. CIT 284 ITR 323 as the assessee Parkash Chand 2016.09.07 17:33 integrity of this document

ITA-145-2015 had failed to file revised return for claiming enhanced deduction? (iv) Whether on the facts and circumstances of the case, the Hon’ble Income Tax Appellate decision of ld. CIT(A) in allocating interest expenditure of Ludhiana unit for the funds invested in Unit-I, Unit-II and Unit-III at Samba (J&K) based on ration between own capital and borrowed funds when the assessee has himself failed to file any evidence of self generated funds being used in these units, thus, the order of ITAT is perverse on this issue?” Re: Question Nos.1 and 4:

3.

The Ludhiana unit of the respondent had transferred amounts to its three units at Samba aggregating to Rs.15,40,85,638/-. The three units at Samba had claimed the benefits under Section 80-IB of the Income Tax Act, 1961. The Assessing Officer held that profits of Unit-I, Samba to the tune of Rs.65,18,254/- and that of Unit-II, Samba, to the tune of Rs.72,00,576/- were not eligible for deduction under Section 80-IB. The Assessing Officer did not deal with the assessee’s further contention that the Ludhiana Unit from which the funds have been transferred to the Samba Unit had sufficient interest-free funds and reserve funds for the purpose of investing in the three Samba Units. The Assessing Officer applied a rate of 12% towards interest Parkash Chand 2016.09.07 17:33 integrity of this document

ITA-145-2015 on the funds advanced by the Ludhiana Unit to the three Samba Units and computed the amount accordingly.

4.

The CIT (Appeals), however, agreed with the Assessing Officer to the extent that if funds borrowed on interest by the Ludhiana Unit have been transferred to Samba Units, the interest on the same should be debited to the Profit and Loss Account of the Samba Units only. Having said so, however, the CIT (Appeals) held that the assessee could only make a claim that such transfers were from self-generated funds which did not carry any interest. In this regard, it was further noted that as per the balance-sheet of the Ludhiana Unit, interest-free funds were available and that the funds had also been borrowed by the Ludhiana Unit from financial institutions on interest. The CIT (Appeals), accordingly, adopted the approach of finding out the ratio of the borrowed funds to the interest-free funds. It was found that as per the balance-sheet as on 31.03.2008, about 43 per cent of the capital constituted the interest-free reserves amounting to about Rs.48.6768 crores, whereas, the borrowed funds constituted 57 per cent of the available funds aggregating to about Rs.65.35 crores. He, accordingly, apportioned the amounts in respect of the three units depending on the amounts advanced by the Ludhiana Unit to each of them. The ITAT upheld this decision. The approach of the CIT (Appeals) and the ITAT cannot be said to be perverse, irrational or absurd. In fact, it is settled now that when there are interest-bearing funds and interest-free funds, the presumption is that an assessee would invest the amount yielding exempt income from the interest-free Parkash Chand 2016.09.07 17:33 integrity of this document

ITA-145-2015 funds in the first instance. However, keeping all the facts and circumstances of the case in mind, the appellate authority decided to apportion the amount.

5.

Question Nos.1 and 4, therefore, do not raise a substantial question of law. The authorities merely appreciated the available evidence. Re: Question No.2:

6.

The respondent-assessee had advanced the amounts to its subsidiary companies on interest @ 10 per cent per annum. The Assessing Officer had considered the rate of interest to be 12 per cent per annum. The appellate authority having accepted the figure of 10 per cent per annum cannot be said to be perverse or absurd either. The issue does not raise a substantial question of law. Re: Question No.3: 7 The issue is covered against the department in view of the judgment of this Court dated 08.12.2008 in the case of The Commissioner of Income Tax, Jalandhar I, Jalandhar vs. M/s Ramco International, ITA No.417 of 2008. 8. The appeal is accordingly dismissed. (S.J. VAZIFDAR) CHIEF JUSTICE 06.09.2016 (DEEPAK SIBAL) parkash* JUDGE Note: Whether non-speaking/reasoned√ Whether reportable: YES/NO Parkash Chand 2016.09.07 17:33 integrity of this document

ITA-145-2015 Parkash Chand 2016.09.07 17:33 integrity of this document

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