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Income Tax Appellate Tribunal, DELHI BENCH „B‟, NEW DELHI
PER PRASHANT MAHARISHI, AM:
1. 1. These are the cross appeals filed by the assessee and revenue against the order of the ld CIT(A)-44, New Delhi dated 06.10.2015 for Assessment Year 2004-05.
2. The assessee has raised the following grounds of appeal:-
1. That on the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeals) ('„CIT(A)”) erred in upholding the action of the assessing officer in excluding interest income of Rs. 1,35,27,971 from the profits of the business for computing deduction under section 80HHC of the Income Tax Act, 1961 (“the Act”).
2. That the CIT(A) erred on facts and in law in sustaining the ad-hoc disallowance of Rs. 55,76,844 made by the assessing officer under section 14A of the Act, being 25% of the tax free dividend income earned by the appellant, on the alleged basis that some expenditure was incurred by the appellant for earning dividend income. 2.1 That the CIT(A) erred on facts and in law in not appreciating that the appellant did not incur any expenditure on the earning of tax- free dividend income. 2.2 That the CIT(A) erred on facts and in law in holding that, considering the size of the portfolio of investment in shares and mutual fund, there was nexus for incurring some expenditure for earning exempt income. 2.3 That the CIT(A) erred on facts and in law in observing that in absence of details of the total expenses of Rs. 165.19 crores relatable to manufacturing activity, it is apparent that some expenditure was incurred to earn exempt income.”
The revenue has raised the following grounds of appeal:- “1. On the facts and circumstances of the case, whether Ld. CIT(A) was correct in directing the AO not to consider sales tax and excise duty as part of the total turnover while computing the deduction u/s. 80 HHC?
2. Whether on the facts and circumstances of the case, Ld. CIT(A) was correct in deleting the addition of Rs.76,04,979/- on account of disallowance of royalty?
3. Whether on the facts and circumstances of the case, Ld. CIT(A) was correct in deleting the addition of Rs.2,50,349/- on account of disallowance of technical guidance fee?
4. The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of the hearing.”
4. Brief facts of the case shows that the assessee is a company engaged in the business of manufacturing portable generators sets, IC Engines, water pumping sets and manufacture and processing of pressure die- casting parts. It files its return of income on 29.10.2004 at Rs. 8,55,38,347/-. The assessment u/s 143(3) of the Act was made on 26.12.2006 determining total income of the assessee at Rs. 16,41,94,835/-. The assessee preferred an appeal before the ld CIT(A) who passed order on 06.10.2015 where the appeal of the assessee is partly allowed. Therefore, both the parties are in appeal before us.
5. We first take up the appeal of the revenue.
The first ground of appeal
is against the order of the ld CIT(A) in directing the ld AO to exclude sales and excise duty as part of the total turnover for computing the deduction u/s 80HHC of the Act.
7. The assessee has sales tax of Rs. 124470737/- and excise duty of Rs. 183583593/-. The assessee did not exclude the same in total turnover for computing the deduction u/s 80HHC of the Act for the reason that these amounts are excluded by assessee and deposited with the Govt account and does not have any element of income in it. The ld AO rejected the contention of the assessee and included the above sum in the total turnover and computed the deduction u/s 80HHC of the Act. Accordingly, the total turnover computed by the assessee of Rs. 1791594027/- was computed at Rs. 2099648357/-. Consequently, the deduction u/s 80HHC was also computed at Rs. 7637927/-. The assessee challenged the same before the ld CIT(A) who vide para No. 6 of his order following the decision of the Hon'ble Delhi High Court in assessee‟s own case in 289 ITR 475 allowed the claim of the assessee. Thus, the ld CIT(A) excluded from turnover the amount of sales tax and excise duty. Therefore, the ld AO is in appeal before us.
8. We have heard the rival parties. The above issue is squarely covered in favour of the assessee by the decision of the coordinate bench in assessee‟s own case for Assessment Year 1995-96, 1997-98, 2000-01 and 2001-02 onwards wherein, the coordinate bench has directed the ld AO to not to consider the sales tax and excise duty in total turnover for computing the deduction u/s 80HHC of the Act. Further, the above issue is also squarely covered in favour of the assessee by the decision of the Hon'ble Supreme Court in CIT Vs. Laxmi Machine Works 209 ITR 667. In the result ground No. 1 of the appeal is dismissed.
9. Ground no. 2 relates to the additions of Rs. 76,04,979 /- on account of disallowance of royalty. The above issue is squarely covered in favour of the assessee by the decision of the Hon'ble Delhi High Court in and 538/2015 dated 04.01.2016, wherein, the appeal filed by the revenue against the order of the coordinate bench for Assessment Year 2007-08 to 2009-10 has not been admitted. The coordinate bench in that order has held that the expenditure of royalty and technical guidance fees is revenue in nature. In view of this ground No. 2 of the appeal of the revenue is dismissed. 10. In the result, filed by the revenue for Assessment Year 2004-05 is dismissed. 11. Now we come to the appeal of the assessee. 12. The first ground of appeal is with respect to taxing the interest income of Rs. 1,35,27,971/- as “profit of the business” for computation of deduction u/s 80HHC of the Act. The ld AO noted that this income was considered by the assessee as business income claimed deduction u/s 80HHC thereon. The assessee submitted that interest earned by it is intrinsically related to the business of the assessee and funds invested are generated from the business operations and hence it should be treated as business income. The ld AO held that immediate source of interest receipt is fixed deposit with the bank and not from the business of the assessee. Hence, same was considered as income from other sources and it cannot be derived from the business of the assessee. It was considered as income from other sources. The assessee challenged it before the ld CIT(A). The ld CIT(A) vide para 6.3(d) decided the issue against the assessee.
13. The assessee submits that it seeks direction from ITAT to set off the interest income and such net interest income should be excluded from the business income eligible for deduction u/s 80HHC of the Act. The assessee submits that it has paid interest of Rs. 41,18,141/-. The assessee also referred to the decision of the Hon'ble Delhi High Court in 289 ITR 475.
14. The ld DR also submitted that interest income on FDR derived form Bank deposit cannot be netted off by the interest income related to the business. It was further stated that assessee does not challenge that above income us not “income from other sources” but a “business income”. It was further countered that the decision of the Hon'ble Delhi High Court is in fact in favour of the revenue wherein, it has been held that surplus funds are parked with the bank and interest earned thereon, it has to be categorized as “income from other sources”. It goes out of income derived for the “business” u/s 80HHC of the Act.
15. We have carefully considered the rival contentions. It is undisputed that the assessee has eared interest income on fixed deposit has not been challenged as being taxed under the head “income from other sources”. Only in the case where the interest income is “business income” then only netting off can be allowed. In the present case the ld AO has held it to be the “income from other sources” and no argument were advanced before us that it is a “business income”, the decision of the Hon'ble Delhi High Court in 289 ITR 475 does not apply to the facts of the case. In the result, ground No. 1 of the appeal is dismissed and orders of the lower authorities are confirmed.
16. Ground No. 2 of the appeal is with respect to the disallowance made by the ld AO u/s 14A of the Act amounting to Rs. 5576844/- being 25% of the tax free dividend income earned by the appellant. The fact shows that the assessee has earned dividend income of Rs. 22307377/- claimed as exempt. Therefore, the ld AO asked the assessee to give the details of expenditure incurred by the assessee for earning this exempt income. The AO recorded the finding that the assessee has submitted that it has not incurred any expenditure for earning the dividend income. The ld AO rejected above contention and computed disallowance by estimating 25% of the above expenditure as disallowable u/s 14A of the Act. The assessee challenged the same before the ld CIT(A). The ld CIT(A) vide para No. 8 dealt with the issue and confirmed the above addition.
17. The ld AR challenged the same stating that when the assessee has submitted that it has not incurred any expenditure for earning of exempt income, ld AO may record a satisfaction having regard to the books of account and then prove that the explanation of the assessee is false/ incorrect. In the present case, no such satisfaction has been recorded. The ld AR relied upon the decision of the Hon'ble Supreme Court in 402 ITR 640.
18. The ld DR vehemently submitted that the ld AO after examination has disallowed all the expenditure. The orders of the lower authorities were