Dharampal Premchand Ltd., Delhi vs. ACIT, Central Circle-29: Case Filed for 2016-17 Assessment Year – Exemption Dispute

Dharampal Premchand Ltd., Delhi vs. ACIT, Central Circle-29: Case Filed for 2016-17 Assessment Year – Exemption Dispute

Case Number: ITA 6014/DEL/2019

Appellant: Dharampal Premchand Ltd., Delhi

Respondent: ACIT, Central Circle-29, New Delhi

Assessment Year: 2016-17

Case Filed On: 12th July 2019

Order Type: Final Tribunal Order

Date of Order: 31st March 2023

Pronounced On: 31st March 2023

Background of the Case

This case involves an appeal filed by Dharampal Premchand Ltd., a company engaged in the manufacturing of flavored chewing tobacco and Kiwam under the brand name “BABA,” against the Assistant Commissioner of Income Tax (ACIT), Central Circle-29, New Delhi. The appeal pertains to the assessment year 2016-17 and focuses on disputes regarding the computation of the exemption claimed under Section 10AA of the Income Tax Act.

The company filed its return of income for the assessment year 2016-17 on 23rd September 2016, declaring a business loss of Rs. 2,68,66,417/-. The case was selected for scrutiny, and the assessment was completed under Section 143(3) of the Income Tax Act. The assessing officer (AO) assessed the income of the company, making several adjustments and disallowances, including the reduction of the claimed exemption under Section 10AA.

Key Issues in the Case

The primary issues in this case revolved around several key disallowances and adjustments made by the AO, which included:

• The treatment of losses in future trading and dealings of shares as speculative losses.
• The disallowance of expenses under Section 14A of the Income Tax Act related to earning tax-exempt income.
• The disallowance of the loss on account of the revaluation of shares of M/s Radiant Chemtech (P) Ltd.
• The reduction in the exemption claimed under Section 10AA due to the allocation of head office expenses and interest expenses to the Special Economic Zone (SEZ) unit.

The appellant challenged these disallowances before the Commissioner of Income Tax (Appeals) [CIT(A)], who provided partial relief, leading to the filing of the current appeal before the Income Tax Appellate Tribunal (ITAT).

Proceedings in the Tribunal

The appeal was heard by the Delhi Bench ‘B’ of the ITAT, consisting of Shri Anil Chaturvedi, Accountant Member, and Shri Narender Kumar Choudhary, Judicial Member. The final order was pronounced on 31st March 2023.

During the proceedings, the appellant’s counsel submitted that they did not wish to press certain grounds related to speculative losses. However, they strongly contested the disallowance under Section 14A, the treatment of the loss on shares, and the reduction in the exemption claimed under Section 10AA.

Tribunal’s Analysis and Decision

Disallowance under Section 14A: The Tribunal noted that the AO had invoked the provisions of Rule 8D for disallowance under Section 14A without considering whether the interest-free funds available with the assessee exceeded the investments made. The Tribunal observed that in earlier years, a similar issue had arisen, and the matter was remitted back to the AO for proper verification. The Tribunal decided to follow the same approach for the assessment year 2016-17, remitting the issue back to the AO for re-evaluation.

Disallowance of Loss on Revaluation of Shares: The Tribunal upheld the CIT(A)’s decision that the loss on revaluation of shares was not a business loss but a capital loss, and hence not allowable as a business expenditure. The appellant’s contention that the loss should be allowed was dismissed, with the Tribunal confirming that the loss was indeed of a capital nature.

Exemption under Section 10AA: One of the central issues in the appeal was the reduction of the exemption claimed under Section 10AA by the AO, who had allocated certain head office expenses and interest expenses to the SEZ unit. The appellant argued that such allocations were unwarranted and that similar allocations had been overturned in previous years. The Tribunal, acknowledging the consistency in its earlier rulings, remitted the issue back to the AO to verify whether the head office was indeed funding the SEZ unit and whether the allocation of expenses was justified.

The Tribunal emphasized that any allocation of expenses to the SEZ unit should be done in accordance with the law, and the AO was directed to allow the appellant to furnish additional documentation and explanations to support their claim. The AO was also instructed to ensure that only those expenses directly benefiting the SEZ unit were allocated and that the correct computation of exemption was made.

Conclusion

The case of Dharampal Premchand Ltd., Delhi vs. ACIT, Central Circle-29, New Delhi, highlights the complexities involved in the computation of exemptions under Section 10AA and the treatment of various business and capital expenses. The Tribunal’s decision to remit the key issues back to the AO underscores the need for a thorough and detailed examination of the facts, especially in cases involving substantial exemptions and allocations.

This case also reinforces the importance of consistency in judicial rulings, as the Tribunal relied heavily on decisions made in the appellant’s earlier cases for similar issues. The final order, pronounced on 31st March 2023, reflects the Tribunal’s commitment to ensuring that tax assessments are conducted fairly and in accordance with the law.

Order Pronounced By: Shri Anil Chaturvedi, Accountant Member, and Shri Narender Kumar Choudhary, Judicial Member

Final Order: Appeal Partly Allowed, with Directions for Re-evaluation by the AO

Dharampal Premchand Ltd., Delhi vs. ACIT, Central Circle-29: Case Filed for 2016-17 Assessment Year – Exemption Dispute