Case Law Details

Case Name : Rane Brake Lining Ltd Vs ITO (ITAT Chennai)
Appeal Number : I.T.A. No. 104/Mds/2009
Date of Judgement/Order : 21/04/2011
Related Assessment Year : 2003- 04
Courts : All ITAT (4420) ITAT Chennai (220)

Rane Brake Lining Ltd Vs ITO (ITAT Chennai)- A perusal of the assessment order clearly shows that the Assessing Officer has not invoked the provisions of sec. 14A. In fact the Assessing Officer has pointed out that the total investment in shares as on 31.03.2003 was Rs. 26,00,31,694/- which included a sum of Rs. 5,28,82,350/- invested during the year. No dividend income has also been admitted during the relevant assessment year. A peRs.rusal of the order of the learned CIT(A) clearly shows that the assessee had put forward the plea that it had surplus and reserves sufficient to cover such investment in purchase of shares.

This is found in para 3 of the order of the learned CIT(A). The learned CIT(A) has further in para 3 of the order has given a finding that the payment for purchase of shares was made out of OD/CC accounts with the bankers of the assessee company. A perusal of the Balance Sheet of the assessee as on 31.3.2003 shows that the assessee has a reserve and surplus as on 31.3.2003 at Rs. 70.71 crores. Further a perusal of the Balance Sheet shows that the reserves and surpluses during the year ended 31.3.2002 was to anb extent of Rs. 59.36 crores which has increased to Rs. 70.71 crores during the year ended 31.3.2003. The secured loans during the year ended 31.3.2002 was Rs. 19.62 crores which came down as on 31.3.2003 to Rs. 17.92 crores whereas the unsecured loans as on 31.3.2002 stood at Rs. 6.73 crores which also came down to Rs. 5.68 crores as on 31-3-2003. Thus the claim of the assessee before the lower authorities that the assessee did have sufficient funds in the form of surpluses and reserves to cover the investment in the purchase of shares stands supported. In the circumstances, we are of the view that no dis allowance out of the interest expenditure as made by the Assessing Officer and as confirmed by the learned CIT(A) is sustainable. In the circumstances, the said misalliance stands deleted. We are not going into the issue of applicability of sec. 14A at this stage as the dis allowance has not been made by invoking the provisions of sec. 14A of the Act.

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘A’, CHENNAI
I.T.A. No. 104/Mds/2009
Assessment Year: 2003-04
M/s. Rane Brake Lining Ltd. v. The Income Tax Officer (OSD),

ORDER

PER GEORGE MATHAN, JUDICIAL MEMBER :

This is an appeal filed by the assessee against the order of the learned CIT (Appeals)-V, Chennai in appeal No. 173/2006-07 dated 04-06-2008 for the assessment year 2003-04.

2. Shri R. Vijayaraghavan, Advocate represented on behalf of the assessee and Shri Shaji P. Jacob, learned Sr. DR represented on behalf of the Revenue.

3. In regard to grounds No. 2(a) to 2(e) and 3 it was submitted by the learned authorized representative that the issue was against the action of the learned CIT(A) in confirming the order of the Assessing Officer in regard to the dis allowance made u/s. 14A of the Income Tax Act, 1961. It was the submission that in the course of assessment, the Assessing Officer had disallowed an amount of Rs. 1,86,26,364/- on the ground that borrowed funds had been diverted for non business purposes for investment in shares and consequently the said dis allowance was made out of the interest payment. It was the submission that the learned CIT(A) had also upheld the dis allowance but he took recourse to the provisions of section 14A. It was the submission that the amount was not taxable during the assessment year 2003-04 as the provisions of sec. 115-O was not applicable during the relevant assessment year.

4. In reply the learned DR vehemently supported the orders of the Assessing Officer and the learned CIT(A).

5. We have considered the rival submissions. A perusal of the assessment order clearly shows that the Assessing Officer has not invoked the provisions of sec. 14A. In fact the Assessing Officer has pointed out that the total investment in shares as on 31.03.2003 was Rs. 26,00,31,694/- which included a sum of Rs. 5,28,82,350/- invested during the year. No dividend income has also been admitted during the relevant assessment year. A peRs.rusal of the order of the learned CIT(A) clearly shows that the assessee had put forward the plea that it had surplus and reserves sufficient to cover such investment in purchase of shares. This is found in para 3 of the order of the learned CIT(A). The learned CIT(A) has further in para 3 of the order has given a finding that the payment for purchase of shares was made out of OD/CC accounts with the bankers of the assessee company. A perusal of the Balance Sheet of the assessee as on 31.3.2003 shows that the assessee has a reserve and surplus as on 31.3.2003 at Rs. 70.71 crores. Further a perusal of the Balance Sheet shows that the reserves and surpluses during the year ended 31.3.2002 was to anb extent of Rs. 59.36 crores which has increased to Rs. 70.71 crores during the year ended 31.3.2003. The secured loans during the year ended 31.3.2002 was Rs. 19.62 crores which came down as on 31.3.2003 to Rs. 17.92 crores whereas the unsecured loans as on 31.3.2002 stood at Rs. 6.73 crores which also came down to Rs. 5.68 crores as on 31-3-2003. Thus the claim of the assessee before the lower authorities that the assessee did have sufficient funds in the form of surpluses and reserves to cover the investment in the purchase of shares stands supported. In the circumstances, we are of the view that no dis allowance out of the interest expenditure as made by the Assessing Officer and as confirmed by the learned CIT(A) is sustainable. In the circumstances, the said misalliance stands deleted. We are not going into the issue of applicability of sec. 14A at this stage as the dis allowance has not been made by invoking the provisions of sec. 14A of the Act.

6. In regard to grounds 4(a) to 4(d) and 5(a) and 5(b) it was submitted by the learned authorized representative that the issue was against the action of the learned CIT(A) in confirming the order of the Assessing Officer in restricting the relief granted to the assessee under sec. 80HHC of the Act. The learned authorized representative did not place any specific argument in regard to grounds 4(a), 4(b) and 4(d) as also grounds 5(a) and 5(b). It was submitted by the learned authorized representative that in regard to ground No.4(c) the Assessing Officer had when computing the deduction u/s 80HHC excluded 90% of the share of expenses and cash discount. It was the submission that the share of expenses was in relation to the expenses recovered by the assessee being the rent recovered by the assessee from the assessee’s group companies who was also using the warehouse taken on lease by the assessee. It was the submission that the assessee had taken on lease the warehouse and the assessee was paying rent on the warehouse and as portions of the warehouse had been used by the group companies of the assessee the expenses in relation to the warehouse representing the rent as also the manpower had been recovered from the group companies. It was the submission that this had been shown as an income in the Profit & Loss account. It was the submission that the discount represented the discount received by the assessee which was also shown by the assessee in the income side of the Profit & Loss account. It was the submission that the same was not liable to be considered for exclusion when computing the deduction u/s. 80HHC.

7. In reply, the learned DR submitted that in regard to the issue of discount no specific ground had been raised and consequently the same could not be considered. In regard to the issue of the share of expenses it was the submission that the share of expenses which was claimed was in fact the rentals and rent itself was a specific item which was specified to be reduced by 90% as per the provisions of clause (baa) of Explanation to section 80HHC. It was the submission that it was the gross rent which was liable to be excluded and this was exactly what the Assessing Officer had done. He relied upon the decision of the Hon’ble jurisdictional High Court in the case of Ambattur Clothing Co. Ltd. v. Assistant Commissioner of Income-tax reported in 326 IYTR 245. It was the submission that the said decision related to the computation of deduction u/s 80HHC with regard to the exclusion of the interest and the Hon’ble jurisdictional High Court had categorically held that 90% of the gross interest received was liable to be reduced. It was the submission that the rent also fell within the same category and consequently the order of the learned CIT(A) was liable to be upheld. He also placed reliance upon the decision of the Hon’ble Supreme Court in the case of CIT v. K. Ravindranathan Nair reported in 295 ITR 228.

8. We have considered the rival submissions. A perusal of the order of the learned CIT(A) shows that such a ground has not been raised before him in regard to the discount. In fact in page 3 of the order of the learned CIT(A) the amount of Rs. 34,25,043/- has also been mentioned as receipts being depot expenses recovered from dealers. Thus it is noticed that before the learned CIT(A) the claim is that the receipts are depot expenses recovered from the dealers and before the Tribunal the claim is that the said receipts are warehouse rentals recovered from the group companies who have used the warehouse which has been taken on rent by the assessee. There is no mention of any portion of the same to be discounts nor has the break up of the said amount between the rentals recovered and the discounts been placed before us. Admittedly, the said amount is the rentals in relation to the warehouse. Whether it is from the dealers or from the group companies the recoveries are nothing but rentals. The same having been shown in the income side it would have to be deemed that these are subletting charges received by the assessee and consequently in view of the specific provisions of clause (baa) of the Explanation to section 80HHC, we are of the view that the exclusion of the 90% of the same is on the right footing and does not call for any interference.

9. In regard to grounds 6(a) to 6(d) it was submitted that the issue was against the action of the learned CIT(A) in confirming the action of the Assessing Officer in computing the deduction under section 80HHC after reducing the deduction under section 80-IB of the Act. It was submitted that the issue was squarely covered by the decision of the Hon’ble jurisdictional High Court in the case of CIT v. M/s. MRF Ltd. in Tax Case (Appeal) No. 1020 of 2009 dated 27-10-2009 wherein the Hon’ble jurisdictional High Court has held as follows :

“5 It is submitted across the bar by the learned counsel appearing for either side that the very issue has been considered and held against the  revenue by the Madhya Pradesh High Court in the case of J.P. Tobacco Products P. Ltd. vs. Commissioner of Income Tax reported in (1998) 229 ITR 123. It has also been further submitted that the Bombay High Court also has taken the same view in the case of Commissioner of Income-tax vs. Nima Specific Family Trust reported in (2001) 248 ITR 29. The judgment of the Madhya Pradesh High Court has been taken to the Supreme Court and the Supreme Court in Joint Commissioner of Income-tax vs. Mandideep Engineering And Packaging Industries P. Ltd., (2007) 292 IYTR 1, has rejected the S.L.P., by giving the following reasons:

“…2. The Madhya Pradesh High Court in J.P. Tobacco Products P. Ltd. v. CIT reported in (1998) 229 ITR 123 took the view that both the sections are independent and, therefore, the deductions could be claimed both under sections 80HH and 80-I on the gross total income. Against this judgment, a special leave petition maws filed in this Court which was dismissed on the ground of delay on July 21, 2000 245 ITR (St.) 71). The decision in J.P. Tobacco Products P. Ltd. (1998) 229 ITR 123 was followed by the same High Court in the case of CIT v. Alpine Solvex P. Ltd. in ITA No.92 of 1999 decided on May 2, 2000. Special leave petition against this was dismissed by this court on January 12,2001, (see (2201) 247 ITR (St.) 36). This view has been followed repeatedly by different High Courts in a number of cases against which no special leave petitions were filed meaning thereby that the Department has accepted the view taken in these judgments. See CIT v. Nima Specific Family Trust reported in (2001) 248 ITR 29 (Bom); CIT v. Chokshi Contacts P. Ltd. (2001) 251 ITR 587 (Raj); CIT v. Amod Stamping (2005) 274 ITR 176 (Guj); CIT v. Mittal Appliances P. Ltd. (2004) 270 ITR 65 (MP); CIT v. Rochiram and Sons (2004) 271ITR444 (Raj); CIT v. Prakash Chandra Basant Kumar (2005) 276 ITR 664 (MP); CIT v. S.B. Oil Industries P. Ltd. (2005) 274 ITR 495 (P&H); CIT v. SKG Engineering P. Ltd. (2005) 119 DLT 673 = (2006) 285 ITR 423 (Delhi) and CIT v. Lucky Laboratories Ltd. (2006) 200 CTR 305 (All).

Since the special leave petitions filed against the judgment of the Madhya Pradesh High Court have been dismissed and the Department has not filed the special leave petitions against the judgments of different High Courts following the view taken by the Madhya Pradesh High Court, we do not find any merit in this appeal. The Department having accepted the view taken in those judgments cannot be permitted to take a contrary view in the present case involving the samepoint. Accordingly, the civil appeal is dismissed. No costs.”

10. In reply, the learned DR vehemently supported the orders of the Assessing Officer and the learned CIT(A).

11. We have considered the rival submissions. As it is noticed that the issue is squarely covered by the decision of the Hon’ble jurisdictional High Court in the case of M/s. MRF Ltd., referred to supra, respectfully following the decision of the Hon’ble jurisdictional High Court in the said case, the order of the learned CIT(A) stands reversed and the Assessing Officer is directed to grant deduction under section 80HHC without reducing the deduction u/s. 80IB of the Act.

12. In regard to grounds 7(a) to 7(e) it was submitted by the learned authorized representative that the issue was against the action of the learned CIT(A) in confirming the order of the Assessing Officer in restricting the deduction u/s. 80-IB. It was fairly agreed by both the sides that the issue was squarely covered by the decision of the co-ordinate Bench of this Tribunal in the assessee’s own case in ITA No. 1294/Mds/05 and ITA No. 1480/Mds/05 dated 27-07-2009 wherein in para 8 of the said order the co-ordinate Bench of this Tribunal has held as follows :

“8. The last issue raised on behalf of the assessee is that Commissioner (A) erred in upholding the order of the AO that proportionate management fees attributable to Pondicherry Unit has to be reduced in computing the profits of eligible business under sec.80IB. This issue has to be restored to the file of AO to consider the actual expenses in view of the order of the Tribunal in the case of Food Specialities Ltd. vs. ACIT reported in 54 ITD 352 wherein it is held as follows:

“The basis adopted bv the AO for working out the overhead expenses attributed to the new industrial unit had not given reasonable results. The basis of turnover would be one of the factors for working out the reasonable amount of over head expenses attributable t the new unit. The other important factor that had to be considered was the increase in the overhead expenses incurred by the assessee after the setting up of the new unit. The increased expenditure could be apportioned between the old units and the new units on the basis of turnover.”

In this view of the matter, the issue is set aside and restored to the file of the A O to consider the actual expenses.”

As it is noticed that the issue is squarely covered by the decision of the coordinate Bench of this Tribunal in the assessee’s own case for the assessment year 2001-02 in ITA Nos. 1294/Mds/05 and 1480/Mds/05 dated 27-07-2009, respectfully following the decision of the co-ordinate Bench of this Tribunal in the assessee’s own case, the issue is restored to the file of the Assessing Officer with identical directions as mentioned in the above order of the co-ordinate Bench of this Tribunal.

13. In regard to ground No.8 it was submitted by the learned authorized representative that the issue was against the action of the learned CIT(A) in confirming the order of the Assessing Officer in regard to the inclusion of the scrap sales in the total turnover while computing the deduction u/s 80HHC. The learned authorized representative submitted that the scrap sales were not liable to be included in the total turnover as the same was not the business turnover of the assessee.

14. In reply, the learned DR relied upon the decision of the Hon’ble Supreme Court in the case of K. Ravindranathan Nair, reported in 295 ITR 228 to support his claim that the scrap sales formed part of the gross total income and as per the provisions of clause (baa) of the Explanation to section 80HHC, 90% of the same is to be deducted from the business profits.

15. We have considered the rival submissions. Undisputedly, the scrap sales are part of the business income of the assessee. Once this amount forms part of the business income, 90% of such receipts are to be excluded in view of the specific provisions of clause (baa) of the Explanation to section 80HHC. In the circumstances as this issue is squarely covered by the principles laid down in the decision of the Hon’ble Supreme Court in the case of K. Ravindranathan Nair, referred to supra, the finding of the learned CIT(A) on this issue stands confirmed.

16. In the result, the appeal of the assessee is partly allowed for statistical purposes.

17. The order was pronounced in the court on 21/04/2011.

Dated the 21st April, 2011.

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