M/S. FORBES GOKAK LTD,MUMBAI vs. THE JCIT OSD RG 1(1), MUMBAI

the Revenue against the order of the learned CIT(A)-I, Mumbai dated 23- 08-2007 passed in appeal No.CIT(A)-I/IT/126/06-07 for assessment year 2003-04 on the following respective grounds:-

Assessee’s appeal in (AY- 2003-04) Ground No. I: Disallowance of Interest on borrowings of Rs.7,61,476/- “1. On he facts and in the circumstances f the case and in law, the CIT (A) erred in partly confirming the disallowance made by the Assessing Officer (“AO”) of interest of Rs.7,61,476/- on prorata basis on the ground that borrowed funds are utilized for making investment in tax-free securities.

2. He failed to appreciate and ought to have held that:

i) the interest was not a direct expense for earning tax free income and no disallowance can be made on proportionate basis by attributing the same towards tax free income; ii) the expenses which could be attributed under section 14A of the are only those which are incurred “in relation” to earning tax-free income and no disallowance could be made based on presumption on proportionate basis; iii) the investments were made out of own funds i.e. capital and reserves and not out of borrowed funds as such no disallowance is called for; iv) where no expenditure has been actually incurred , no estimation can be made to disallow expenditure for earning exempt income; v) borrowings were made for the purpose of business and as such the conditions envisaged by s. 36(1) (iii) have been fulfilled, entire interest should have been allowed as deduction. 3. Without prejudice to the above, it is submitted that since dividend tax is payable u/s 115O of the Act, it is incorrect to hold that dividend is tax-free and hence the question of application of section 14A cannot arise.

4. Without prejudice to the above, we submit that profits on sale of shares are in any event taxable and hence application of section 14A to cases of purchase of shares is misapplication of law.

5. The Appellant prays that the disallowance of Rs.7,61,476/- being alleged interest –attributed for earning tax-free income be deleted.

6. Without prejudice to above, the cost of interest be allowed to be capitalized by adding to the cost of investments and be taken into consideration in the year of sale of shares etc. while computing the capital gain. Ground II: Disallowance of non-compete Fees paid to ex-directors of Rs.34,58,616/-

1. On the facts and in circumstances of the case and in law, the CIT (A) erred in confirming the action of the AO of disallowing non- compete fees of Rs.34,58,616/- paid to the ex-director of the Appellant.

2. The Appellant prays that the said disallowance of Rs.34,58,616/- be deleted or appropriately reduced. Ground III: Disallowance of Provident Fund and Employees State Insurance Contribution of Rs.14,818/-

1. On the facts and in circumstances of the case and in law, the CIT (A) erred in confirming the action of the AO of disallowing Rs.14,818/- being PF and ESIC contribution on the ground that the payments were made beyond due date specified under the relevant law.

2. The Appellant prays that the disallowance of Rs.14,818/- be deleted.

Ground IV: Direction given to AO for deduction u/s 80HHC

Ground V: Setting off losses while computing deduction u/s 80HHC.

1. On the facts and in circumstances of the case and in law, the CIT (A) erred in confirming the action of the AO of setting off brought forward loses of earlier years from business profits for the purpose of allowing deduction u/s 80HHC of the Act.

2. The Appellant prays that the deduction u/s 80HHC be allowed from the business profits before setting off brought forward business loss.

Ground VI: Deduction of Miscellaneous Income and Other Items From The Profit While Computing The Deduction U/S 80HHC.

1. On the facts and in circumstances of the case and in law, the CIT (A) erred in confirming the action o the AO of deducting the amount of Rs.8,39,51,299/- being the amount of Miscellaneous Income from the business profits for the purpose of calculation of deduction of under section 80HHC of the Act.

2. He failed to appreciate and ought to have held that:

a. miscellaneous income and other items is business income arising out of the business operations of the company; and b. the miscellaneous income has arisen during the course of business and they by their very nature are business income.

Also, they are taxed as business income only. Hence, there is no reason why a separate treatment (of not considering them as part of business profits) be accorded to them while working out of proportionate profit eligible for deduction u/s 80HHC.

3. The Appellant prays that it be held that 90% of amount of Rs.8,39,51,299/- not to be deducted from the “business profit” while computing deduction under section 80HHC of the Act.

Ground VII: Not allowing to set-off the incentives against the profits

1. On the facts and in circumstances of the case and in law, the CIT (A) erred in confirming the action of the AO of not allowing the set-off of incentives against the business income for the purpose of section 80HHC of the Act.

Ground VIII: Deduction of income from services while computing profits u/s 80HHC of the Act.

1. On the facts and in circumstances of the case and in law, the CIT (A) erred in confirming the action of the AO of reducing 90% of the income from services instead of treating the same as business income.

2. Without prejudice to above, if at all the action of the CIT (A) is confirmed then in that case, 90% of the net service income be reduced from business profits for the purpose of deduction u/s 80HHC of the Act.

Ground IX: Computation of book profits u/s. 15JB of the Act.

1. On the facts and in circumstances of the case and in law, the CIT (A) erred in confirming the action of the AO of computing book profit u/s. 115JB of the Act by reducing expenses of Rs.7,61,476/- on the alleged ground that the same were incurred for earning the same the tax free income.

2. The Appellant prays that the AO be directed to accept the book profit as computed by the Appellant.

Ground X: Interest u/s. 234B, 234C and 234D of the Act.

1. On the facts and in circumstances of the case and in law, the CIT (A) erred in confirming the action of the AO of levying interest u/s 234B, 234C and 234D of the Act.

Ground XI: Levy of interest u/s 220(2) of the Act.

1. On the facts and in circumstances of the case and in law, the CIT (A) erred in confirming the action of the AO of levying interest u/s 220(2) of the Act.

Ground XII:

The Appellant craves leave to add to/amend and/or alter all or any of the foregoing grounds of appeal.” Revenue’s appeal in (AY-2003-04)

1. “On the facts and in the circumstances of the case and in law, the ld. CIT (A) erred in directing the AO to restrict the disallowance to Rs.7,61,476/- as attributable to investment in investments yielding dividend, for computing business income and shall grant credit of this interest for computing dividend income under the head “income from Other Sources”.

2. On the facts and in the circumstances of the case and in law, the ld. CIT (A) erred in deleting the disallowance of Rs.7,92,843/- being 2% of gross dividend on estimate basis out of general and administrative expenditure.”

3. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs.9,54,432/- out of interest on the ground that interest bearing funds which have been diverted for non business purposes as advances to subsidiaries.”

4. “On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in directing the AO to recomputed the book profits without making adjustment in the respective provisions, including provisions for doubtful debts and advances and provision for diminution in the value of investments.

5. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to reduce the book profits by the quantum of notionally computed deduction u/s. 80 HHC.”

6. “On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in holding that interest u/s. 234D cannot be charged for the assessment year 2003-04.

The appellant prays that the order of CIT (A) on the above grounds be set aside and that of the A. O. be restored. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.” 2. The brief facts of the case are that the assessee company engaged in the business of manufacturing of yarn, engineering goods, shipping and other businesses filed its return of income for the assessment year 2003- 04on 28-11-2003 declaring taxable income of Rs.57,75,410/- after claiming set off of brought forward unabsorbed depreciation. The income u/s 115JB of the IT Act was declared at Rs.7,54,01,024/-. The case was selected for scrutiny and after issuing certain statutory notices seeking reply from the assessee company and receiving the respective replies, the AO passed the assessment order making certain disallowances and consequent additions to the total income of the assessee company. Being aggrieved, the assessee carried the matter in appeal before the learned CIT (A). The learned CIT (A) after considering the facts & circumstances of the case partly allowed the appeal of the assessee by upholding certain disallowances/additions made by the AO. Being aggrieved by the order of the learned CIT (A), the assessee is now in appeal before us.

4. Ground No. I of the assessee’s appeal relates to disallowance of interest on borrowings amounting to Rs.7,61,476/-. On perusal of the records, it is found that this issue has already been decided by the AO and the learned CIT (A) by following their respective orders in the assessee’s own case for the previous assessment year 2002-03. At the very outset, the learned AR of the assessee submitted before us that the said issue has been decided against the assessee and in favour of the Revenue by the Tribunal in assessee’s own case in for assessment year 2002-03 vide order dated 12th June, 2013 passed by ITAT Mumbai ‘F’ Bench by upholding the orders of the authorities below and thereby restricting the disallowance. The learned DR while supporting the orders of the authorities below conceded to the submissions made by the learned AR.

However, in respect of Ground I (4), during the year under consideration, as per the arguments of the learned AR exemption u/s 10 (33) of the Act was not available in respect of income earned from dividend for accounting year 2003-04 only and later on, from 2004-05, the said exemption was available. But, for this particular year under consideration exemption u/s 10(33) of the Act was not available. Since, the entire income was taxable, therefore no question of disallowance accrued. Therefore, keeping in view the said legal proposition we agree with the contention of the learned AR and delete the entire addition made by the AO of 7,61,476/-. Resultantly, ground No. I of the assesee’s appeal stands allowed.

On perusal of the records, it is found that this issue has been decided against the assessee by the Co-ordinate ‘F’ Bench of ITAT Mumbai vide order dated 12th June, 2013 for assessment year 2002-03, the relevant portion of which reads as under:-

“9. Ground No.2 is about disallowance of non-compete fees paid to EX-Directors amounting to Rs.6,41,600/-. Before us, AR fairly conceded that the issue had been decided against the assessee by the Tribunal vide its order dated 25-09-2006, while deciding the appeal for AY 2000-01. Respectfully following the said order of the Mumbai Bench of the Tribunal we decide Ground No.2 against the assessee.”

While at the time of hearing of the present appeal of the assessee for assessment year 2003-04, both the sides conceded to the aforementioned fact, we respectfully following the above mentioned order of the Co-ordinate Bench and with a view of maintenance of judicial consistency, uphold the orders of the authorities below. As a result, this ground of assessee’s appeal stands dismissed.

Therefore, we restore this ground back to the file of the AO in order to examine the details of the documents filed by the assessee and then to decide the same regarding applicability of the claim of deduction as raised by the assessee u/s 80HHC of the Act after affording adequate opportunity of being heard to the assessee. Consequently, this ground of appeal is allowed for statistically purpose.

12. Ground No.VII of the appeal relates to not allowing set off of incentives against profits. The assessee claimed set off of miscellaneous income for an amount of Rs.8,39,51,299/-. However, the AO treated the above amount as sundry creditors and hence are not eligible for deduction u/s 80 HHC and has to be reduced to 90%. Further, the AO also held that this amount includes the sale of DEPB licence of Rs.2,68,47,494/- and duty draw back of Rs.1,32,91,296/- and as such these have no direct nexus with the export activity of the assessee company and is not eligible for deduction. While the assessee carried the matter in appeal, the learned CIT (A) has also held that the turnover of the appellant is more than Rs.10 crores and hence, the assessee is not eligible for deduction as claimed by the assessee in view of the amended provisions of the Act and accordingly, the learned CIT (A) rejected the claim of the assessee. Hence, the assessee is in appeal before the Tribunal.

Ltd. Vs. UOI [2013] 349 ITR 566 (Bom. HC) and (iii) CIT Vs Avani Exports [2015] 58 taxmann.com 100 (SC) submitted that amendment to section 80HHC by way of adding third and fourth provisos is ultra vires Article 14 of the Constitution. On careful perusal of the aforesaid decisions it is noticed that the Hon’ble Apex Court in the case of CIT Vs Avani Exports has however, to make the position crystal clear, substituted the direction of the Hon’ble High Court with the following direction:

“Having seen the twin conditions and since 80HHC benefit is not available after 1.4.05, we are satisfied that cases of exporters having a turn over below and those above 10 cr. should be treated similarly. This order is in substitution of the judgment in Appeal.”

The learned DR could not controvert the aforesaid decision of the Hon’ble Apex Court by placing on record any relevant material. We have even noticed that the assessee’s claim of deduction u/s 80HHC relates to assessment year 2003-04 i.e. prior to the date of amendment of the provisions with effect from 1st April, 2005. In view of the above, we respectfully following the decision of the Hon’ble Apex Court in the case of CIT Vs Avani Exports cited supra, hold that the order of the learned CIT (A) is not sustainable and accordingly we reverse the same. Resultantly, this ground of appeal of the assessee stands allowed.

14. Ground No. VIII of the assessee’s appeal relates to deduction of income from service while computing profits u/s 80HHC of the Act. After hearing the parties and perusal of the records as well as the orders passed by the lower authorities we have noticed that the learned CIT (A) has dealt with the issue at Para 16, 16.1 and 16.2 at Pages 6 and 7 of his order. The same is reproduced herein below:-

“16. The ground No.15 is against reduction of income received from services while computing profits under section 80HHC of the Income-tax Act.

16.1 According to the appellant, service income of Rs.23,03,85,764/- has been earned during the financial year under consideration. The appellant has treated the entire service income as business income and has accordingly calculated the deduction under section 80HHC. In contrast, the AO has reduced 90% of the service income while computing business profits for the purpose of deduction under section 80HHC. According to the AO explanation (baa) requires reduction to the extent of 90% of receipts which do not have element of turnover but are included in the profit & loss account. In contrast, the ld. Counsel of the appellant has argued that they are agents of various shipping lines. They are also in the business of cargo booking on behalf of the importers and exporters. They are also clearing and forwarding agents, and are engaged in warehousing of the goods, container booking, inland container services, feeder services, cargo handling and crew recruitment etc. It is claimed that all the activities are one of the main activities of the business. It is further claimed that these are categorized as service charges only for the sake of presentation of accounts. Therefore, it is contended that explanation (baa) is not applicable to these receipts.

16.2 I have perused the facts of the case and I find that the various activities narrated by the appellant as falling under income from services, are not directly related to its own export activities. For the purpose of deduction under section 80HHC what is relevant is appellant’s own export and not income arising from the activities, which assist exports of others. In the instant case, the incomes under consideration are assisting others business houses in their exports but are not directly attributable to the exports of the appellant. In such a situation the view taken by the AO appears correct and 90% of these incomes have to be reduced for calculating deduction under section 80HHC. Accordingly, this ground of appeal is also rejected.”

The above issue was summarily rejected by the AO on the ground that the assessee had not filed any break-up of the income from services. The learned AR has drawn our attention to page 126 of the paper book wherein claim of deduction u/s 80HHC of the Act in the STI has been provided. The learned AR also drew our attention to pages 91 to 94 and page 96 of the paper book wherein working of deduction u/s 80HHC has been given and at page 96 the break-up/details of service income have been provided and submitted that service income is not included in the total turnover u/s 10CCAC report while computing deduction u/s 80HHC of the Act. On this basis the learned AR submitted that 90% of the net service income be reduced from the business profits for the purpose of deduction u/s 80 HHC of the Act.

The learned DR on the other hand supported the orders of the authorities below.

In view of the above, we find that the order of the learned CIT (A) on this ground is not sustainable since the detailed break up has not been examined by the authorities below. We, therefore, set aside the order of ld. CIT(A) and restore back the issue to the file of the AO for deciding the same afresh in accordance with law after examining the details of service income provided by the assessee after granting the assessee adequate opportunity of being heard in order to substantiate its claim. Resultantly, this ground of appeal of the assessee stands partly allowed for statistical purpose.

15. Ground No. IX relates to computation of book profits u/s 115JB / disallowance u/s 14AA of the Act of Rs.7,61,476/-. This issue has already been decided in assessee’s own case for assessment year 2002-03 in by ITAT Mumbai ‘F’ Bench vide order that 12th June, 2013 whereby the matter has been restored back to the file of the AO for deciding afresh. The relevant portion of the above order is reproduced herein below for the sake of reference:-

“11. Next ground of appeal filed by the AO pertains to Computation of book profits u/s. 115JB of the Act. During the assessment proceedings AO held that expenses amounting to Rs.7,61,476/- were incurred for earning tax free income. He further held that while computing the book profit u/s. 115JB of the Act same should be reduced. FAA confirmed the action of the AO of reducing the said amount for working the computation of book profits as per the provisions of section 115JB of the Act. Before the FAA, AR of the assessee had agreed in principle that if relief on the quantum of interest disallowance was given, the assessee should be given corresponding relief.

11.2 Before us, Authorized Representative (AR) submitted that FAA should not have confirmed the order of the AO, in part. DR supported the orders of the AO and the FAA. We have heard the rival submissions and perused the material before us. While deciding the issue of disallowance of interest on the borrowings for both the AYs we have remitted back the matter to the file of the AO in paragraphs nos. 3 to 3.2 and 8 of our order. Computation of income as per the provisions of the section 115JB of the Act would depend on the decision taken by the AO. Therefore, Ground no.4 of the appeal filed by the assessee is treated as disposed off for statistical purposes.”

17. Ground Nos. X and XI relating to interest u/s 234B, 234C and 234D as well as interest u/s 220(2) of the Act are consequential and are decided as such.

18. Ground No.XII of the assessee’s appeal is general in nature and hence, requires no specific adjudication.

22. Ground No. 2 relating to deletion of disallowance of Rs.7,92,843/- being 2% of gross dividend on estimate basis out of general and administrative expenses has already been decided against the revenue by the coordinate Bench of the Tribunal while adjudicating the assessee’s own case for assessment year 2002-03 in vide order dated 12th June 2013 vide Para 4.1.1. to 4.1.2. The relevant portion of the above order is reproduced herein under for reference:-

“4.1.1 Second limb of the issue of disallowance is about disallowance of administrative expenses of Rs.31.83 lakhs, being 2% of gross dividend income on account of general and administrative expenses attributable to earn exempt income assessee had challenged the addition made by the AO before FAA. He found that Tribunal had decided the issue in favour of the assessee while deciding the appeal for the AY 2000-01 (ITA/5896/M/2004). Following the order of the ITAT he deleted the addition made by the AO.

4.2.2 Before us, DR agreed that matter was decided against the department. AR relied upon the order of the Tribunal. Respectfully following the order of the Tribunal for AY 2000-01i we confirm the order of the FAA.

Ground No.2 filed by the AO is decided against him.”

24. Ground No.3 of the appeal relating to deletion of disallowance of Rs.9,54,432/- out of interest on the ground that interest bearing funds which have been diverted for non-business purposes as advances to subsidiaries has already been decided by ITAT Mumbai ‘F’ Bench in assessee’s own case for assessment year 2002-03 in vide order dated 12th June, 2013 in Para 5 to 5.3.

The relevant portion is reproduced herein under for reference:-

“5. Next ground of appeal filed by the AO pertains to disallowance of interest on loans given to subsidiaries as per the provisions of section 36 of the Act. During the assessment proceedings AO found that the assessee had advanced loan of Rs.4.31 Crores to its subsidiaries. He directed the assessee to furnish explanation with regard to the said transaction. After considering the reply filed by the assessee AO disallowed an amount of Rs.13.19 lakhs out of the interest paid by the assessee. Disallowance was worked out on pro rata basis in the ratio of borrowed funds to total funds.

5.1 Assessee preferred an appeal before the First Appellate Authority (FAA). After considering the assessment order and the submissions of the assessee FAA held that matter of the assessee was directly covered by the decision of Hon’ble Supreme Court delivered in the case of S A Builders that all the transactions with subsidiaries were in the current account, that commercial expediency was evident in the case under consideration, that disallowance of interest on account of diversion of interest bearing funds to a subsidiary company was not justified. He deleted the addition made by the AO.

5.2 Before us, DR supported the order of the AO. AR submitted that loans advanced to the subsidiary companies was in the current account, that the assessee had sufficient surplus, reserves and share capital to advance loans to the subsidiary company. He replied upon the case of S. A. Builders (supra) and Reliance Utilities (supra).

5.3 We have heard rival submissions and perused the material placed before us. We find that the FAA has given categorical findings of fact about the transactions carried out by the assessee company with its subsidiary company. As per the FAA, the transactions in the year under consideration with the subsidiary company were in the current account and there was commercial expediency in the said transactions. In our opinion, these two factors are sufficient to allow the interest expenditure claimed by the assessee. Respectfully following the judgments in the case of S. A. Builder and Reliance Utilities (supra) delivered by the Hon’ble Apex Court and the Jurisdictional High Court we uphold the order of the FAA.

Ground No.3 is decided against the AO.”

26. Ground No.4 relates to re-computation of book profits without making adjustment in respective provisions. The AO had adjusted the provisions on the ground that these were mere provisions and that the assessee had been writing back these provisions in various years which implies that these were unascertainable provisions and therefore required to be adjusted for computation of book profits. The assessee argued before the AO relying upon the decision of the Special Bench of ITAT Calcutta in the case of Usha Martin Industries, 105 TTJ 543 and the decision in the case of SCL Connect System reported in 292 ITR 294 that section 115JB of the Act envisages adjustment for provisions for liability whereas in the case of the assessee the provisions were not for liability but for the assets and in such a situation adjustment was not called for.

The learned CIT (A) considering the facts of the case and the submissions of the assessee directed the AO to recomputed the book profits without making adjustment in the respective provisions which are on assets of the assessee including provisions for doubtful and advances and provisions for diminution in the value of investments. In view of the amendment of the provisions of section 115JB of the Act being retrospective, we find no reason to sustain the findings of the learned CIT (A). Hence, we uphold the order of AO and while setting aside the order of CIT this ground of appeal of the Revenue is allowed.

27. Ground No.5 of the appeal of the Revenue relating to reduction of book profits by the quantum of notionally computed deduction u/s 80HHC has been decided in favour of the assessee and against the Revenue by ITAT Mumbai “F” Bench while adjudicating the assessee’s appeal in for assessment year 2002-03 vide Para 7 at page 9 order is reproduced herein below for reference:-

“7. The last ground of the appeal filed by the AO is about the direction issued by the FAA to reduce the book profit by the quantum of notionally computed deduction u/s 80HHC of the Act. During the assessment proceedings, AO found that the assessee claimed deduction u/s. 80HHC at Rs.NIL, whereas as per the income computed u/s 115JB the same was arrived at Rs.78.85 lakhs. AO called for the explanation from the assessee as to why deduction should not be computed in line with department’s stand in assessment year 2001-02. After considering the reply, AO held that since no deduction could be allowed in computation because of the loss in the business as claimed by the assessee, that contention of the assessee was not acceptable, that the assessee had not submitted any computation for deduction u/s 80HHC. Finally, he held that no deduction u/s 80HHC was to be allowed to the working u/s 115JB of the Act.

7.1 The assessee preferred an appeal before the FAA. After considering the submissions of the assessee he held that the issue was covered by the decision of the Special Bench of the Mumbai Tribunal in the case of Syncome Formulations (292 ITR (AT) 144 (SB).

7.2 Before us, DR relied upon the order of the AO. AR submitted that issue was fully covered in favour of the assessee. We have heard the rival submissions. We find that the Special Bench of Mumbai Tribunal, in the case of Syncome Formulations (supra) has held that notional computation of deduction u/s 80HHC on the book profit would have to be made and reduced from the book profit for computing tax payable under section 115JB of the Act. Respectfully following the order of the Special Bench of the Mumbai Tribunal (supra), we uphold the order of the FAA.

Ground No.5 is decided against the AO.”

29. Ground No.6 of the Revenue’s appeal relating to interest u/s 234D of the Act. The ld. CIT while holding that the amendment is not retrospective in nature, therefore, it was held that interest u/s 234D cannot be charged. We have perused the judgment CIT vs. IOCL (2012)

25 taxman 284, and after hearing both the parties, we respectfully following the orders of Hon’ble High Court in the case CIT vs. IOCL (supra) where it was held that amendment to section 234D is from 01.06.2003 and is applicable even to period prior to assessment year 2004-05, therefore we order accordingly and AO is directed to recompute the interest in view of our decision. Accordingly this ground of appeal of revenue is allowed.