Gujarat H.C : Disallowance of deduction u/s. 80IB of the I.T Act in respect of interest income on late recovery of sale proceed from the debtors

High Court Of Gujarat

CIT–IV vs. Suzlon Energy Ltd.

Section : 37(1)

Akil Kureshi And Ms. Sonia Gokani, JJ.

Tax Appeal No. 223 Of 2013

April 3, 2013

ORDER

Akil Kureshi, J – Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal, Ahmedabad [“Tribunal” for short] dated 21st September, 2012, raising following questions for our consideration

(1) “Whether the Appellate Tribunal is right in law and on facts in confirming deletion of disallowance of Rs. 9,34,95,200/- on account of sales commission expenses u/s. 37 of the IT Act ?”

(2) “Whether the Appellate Tribunal is right in law and on facts in deleting disallowance u/s. 14A of the IT Act in respect of interest expenses incurred for investments in subsidiaries and administrative expenses such as staff salary of corporate office, audit fees, building rent and communication expenses ?”

(3) “Whether the Appellate Tribunal is right in law and on facts in deleting disallowance of deduction u/s. 80IB of the I.T Act in respect of interest income on late recovery of sale proceed from the debtors ?”

(4) “Whether the Appellate Tribunal is right in law and on facts in deleting disallowance of deduction u/s. 80-IB of the I.T Act in respect of duty drawback income of Rs. 2,66,698/- ?”

2. We may take up questions separately for consideration.

2.1 Question [1] pertains to an amount of Rs. 9.34 crore [rounded off] paid by the assessee towards sales commission. The Assessing Officer, however, made addition of the said amount primarily on the ground that the assessee failed to establish the actual services rendered by the commission agents. He was of the opinion that the question was whether the amount claimed as expenditure was laid down wholly and exclusively for the purpose of business and mere existence of the agreements between the assessee and its sales agents or payment of the amount as commission would not establish that such payment was made exclusively and wholly for the purpose of enhancing assessee’s business.

2.2 The assessee carried the matter in appeal. CIT [A] deleted disallowances on the ground that the assessee had entered into agreements for payment of commission in respect of the work done by the agents. The payments were made as per the agreements. CIT [A] also noted various services that the commission agent had to provide as per the agreements. He further noted that all payments were made through cheques and the parties were genuine. Such commission agents had in turn confirmed receipt of the payments and also of having rendered services. Such commission received were shown in their tax returns and taxes were also paid. The commission agents were individual persons and nowhere related to the assessee-company. He also opined that there was considerable increase in the sales of the company and that therefore, payment of commission was justified.

2.3 With respect to six individual parties where the CIT [A] had some material to question the payment of commission, to such an extent, disallowances was confirmed.

2.4 It was this order of CIT [A], which the Tribunal in the impugned judgment, confirmed. The Tribunal observed as under :-

“2.6 From the above para of the order of learned CIT [A], we find that a clear finding is given by learned CIT (A) that the assessee has given evidence that the recipient provided information in respect of services which helped the sales to mature and realize and therefore, payment of commission is justified except for six parties. In respect of these six parties, it is noted by learned CIT (A) that the Assessing Officer after inquiry has brought on record in respect of these six customers, the agents had no role in achieving the sales and these customers directly approached the assessee for all transactions. The income of all the units of the assessee is eligible for deduction under section 80-IB of the Income-tax Act, 1961. We also find that in the assessment order, the Assessing Officer has allowed additional deduction u/s. 80-IB in respect of various additions made by him in the assessment and hence, this contention of the assessee is supported by facts on record that there is no motive to save taxes by paying commission since the units of the assessee are eligible for deduction @ 100% u/s. 80-IB. In respect of 6 parties which are not introduced by the commission agent, it was the submission of the learned A.R that the agents had furnished other information such as report about reputation, status, financing standing, etc. Regarding these 6 parties, he also submitted that they have also helped in realization. The learned A.R was asked to file letters of these agents but the same are not filed by the learned A.R and hence, in the facts of the present case, we feel that the order of learned CIT (A) on this issue does not call for any interference from our side because part disallowance confirmed by him is on this basis of these 6 customers were not introduced by these agents whereas for the balance amount for which disallowance of commission is deleted by learned CIT [A], he has given a clear finding that these parties were introduced by the commission agents and evidence were filed regarding rendering of the services by them and these findings of learned CIT (A) could not be controverted by the learned D.R regarding the judgement of Hon’ble Apex Court on which reliance has been placed by the learned D.R, we find that this judgment is not applicable in the present case because the facts are different. In that case, this finding was recorded by the Tribunal that selling agency firm and the assessee has no genuine existence and such selling agency was found to be make believe document. The facts in the present case are not so. In the present case, a clear finding is given by learned CIT [A] that services were rendered by the commission agents and this findings of learned CIT (A) could not be controverted by the learned D.R. Hence, this judgment of Hon’ble Apex Court does not render any help to the revenue in the present case. In view of our above discussion, we do not find any reason to interfere in the order of learned CIT [A] on this issue. Accordingly, ground no.1 of the Revenue as well as ground no. 1 of the assessee’s appeal is rejected.”

2.5 From the above, it could be seen that the entire issue hinges on appreciation of material on record. The Commissioner as well as the Tribunal concurrently held that there was sufficient evidence on record of the assessee having paid commission to the agents who had rendered service as per the agreements. Such payments were made through cheques and were found to be genuine. Commission agents in no way related to the assessee-company and the payments were duly reflected in their income-tax returns.

2.6 Under the circumstances, we have no reason to interfere. This question is therefore, not entertained.

3. Question [2] pertains to disallowances made by the Assessing Officer under section 14A of the Act in respect of interest expenses incurred for investments made in subsidiaries and administrative expenses. CIT [A] deleted such disallowances, upon which, Revenue approached the Tribunal. The Tribunal rejected Revenue’s appeal, making following observations :-

“3.5 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. Regarding the grounds raised by the revenue in respect of disallowance of interest expenditure made by the A.O under section 14A and deletion made by learned CIT (A), we find that no interference is called for in the order of learned CIT (A). We hold so because we find that with regard to the investment of Rs. 5907.18 lac in foreign subsidiaries, no disallowance can be made u/s. 14A because dividend income from foreign subsidiaries is taxable in India. Regarding balance investment of Rs. 38 crore approximately in Indian subsidiaries, we find that interest free own funds of the assessee is many time more than this investment because interest free funds available with the assessee as on 31.03.2005 as per the balance sheet as on that date is of Rs. 929.57 crore. There is no finding given by the A.O regarding any direct nexus between interest bearing borrowed funds and investment in Indian subsidiaries. Hence, in our considered opinion, no disallowance u/s. 14A can be made out of interest expenditure in the facts of the present case. Accordingly, grounds no. 2 & 3 of the Revenue’s appeal are rejected.”

3.1 From the above portion, we noticed that the Tribunal has bifurcated the expenditure in two parts – first related to investment of Rs. 5907.18 lakh in foreign subsidiaries, it was held that the dividend income from such subsidiaries is taxable in India and that therefore, section 14A would have no applicability. The remaining amount pertain to investment of Rs. 38 crore [rounded off] made in Indian subsidiaries. In this respect, the Tribunal noted that the assessee had to its disposal, own interest free funds many times over the investment in question. As per the balance sheet as on 31st March, 2005, the assessee had interest free fund of Rs. 929.57 crore.

3.2 Such being the facts, the Tribunal, in our opinion, committed no error. No question of law, therefore, arises.

4. Question [3] pertains to disallowances of deduction under section 80-IB of the Act made by the Assessing Officer in respect of interest income on late recovery of sale proceeds from the debtors. The Tribunal confirmed the view of the CIT [A]. The assessee carried the matter in appeal. CIT [A] ruled in his favour. Upon which, Revenue carried the issue in appeal before the Tribunal. Tribunal dismissed the Revenue’s appeal relying on the decision of this Court in case of Nirma Industries Ltd. v. Dy. CIT [2006] 283 ITR 402 /155 Taxman 330 (Guj). The Tribunal held and observed as under

“5.1 Ld. D.R supported the assessment order whereas it was submitted by the learned A.R that this issue is now covered in favour of the assessee by the judgment of Hon’ble Gujarat High Court rendered in the case of Nirma Industries, as reported in 283 ITR 402 (Guj) and it was also submitted that SLP preferred by the department against this judgment was rejected by the Hon’ble Apex Court.

5.2 We have considered the rival submissions and we find that this issue is now squarely covered in favour of the assessee by this judgment of Hon’ble Gujarat High Court and hence, we decline to interfere in the order of learned CIT (A) on this issue. Ground No. 4 of the revenue is rejected.”

5. We are in agreement with the view of the Tribunal that the issue is covered by the decision of this Court in case of Nirma Industries Ltd. (supra). In the said decision, the Court has held and observed as under :-

“However, the parties having made elaborate submissions the matter may be examined from a slightly different angle. When the assessee enters into a contract for sale of its products it could either stipulate (a) that interest at the specified rate would be charged on the unpaid sale price and added to the outstanding till the point of time of realisation, or (b) that in case of delay the payment for sale of products worth Rs.100/- to carry the sale price of Rs.102/- for first month’s delay, Rs.104/- for second month’s delay, Rs.106/- for third month’s delay and so on. If the contention of revenue is accepted, merely because the assessee has described the additional sale proceeds as interest in case of contract as per illustration (a) above, such payment would not be profits derived from industrial undertaking, but in case of illustration (b) above, if the payment is described as sale price it would be profits derived from the industrial undertaking. This can never be, because in sum and substance these are only two modes of realising sale consideration, the object being to realise sale proceeds at the earliest and without delay. Purchaser pays higher sale price if it delays payment of sale proceeds. In other words, this is a converse situation to offering of cash discount.

Thus, in principle, in reality, the transaction remains the same and there is no distinction as to the source. It is incorrect to state that the source for interest is the outstanding sale proceeds. It is not the assessee’s business to lend funds and earn interest. The distinction drawn by revenue is artificial in nature and is neither in consonance with law nor commercial practice.

The Tribunal was therefore not justified in holding that while computing deduction under section 80-I of the Act interest received from trade debtors towards late payment of sales consideration is required to be excluded from the profits of the industrial undertaking as the same cannot be stated to have been derived from the business of the industrial undertaking.”

6. The sole surviving Question No.4 pertains to the assessee’s claim for deduction under section 80-IB of the Act on duty drawback receipts. Revenue heavily relied on the decision of Apex Court in case of Liberty India Ltd. v. CIT [2009] 317 ITR 218/183 Taxman 349 (SC). The Tribunal, however, relied on subsequent decision of Delhi High Court in case of CIT v. Dharam Pal Prem Chand Ltd. [2009] 317 ITR 353/180 Taxman 557 (Delhi) to rule in favour of the assessee. The Tribunal was of the opinion that in Liberty India Ltd. (supra), the Supreme Court has proceeded on the basis that there was no arithmetical correlation between the export made and the duty drawback receipt. In the present case, since the Tribunal noticed direct correlation, formed an opinion that the decision in case of Liberty India Ltd. (supra) would not apply.

We have a serious doubt about the correctness of the above noted conclusion. However, the amount involved is quite small, we are therefore not considering such a question in the present Tax Appeal, leaving it open for the Revenue to press such a question in appropriate case.

This Tax Appeal is, therefore, dismissed.

[Citation : 354 ITR 630]

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