2019 (2) TMI 2018 - AT - Income Tax

Tribunal Decision on Tax Disallowances and Deductions

The Tribunal partially allowed the assessee's appeal by directing the Assessing Officer to compute 0.5% of investments yielding tax-exempt income. Various ... Disallowance u/s 14A r.w.r. 8D - HELD THAT:- As assessee submits that in the light of Special Bench decision in the case of ACIT Vs Vireet Investments Private Limited [2017 (6) TMI 1124 - ITAT DELHI] the computation of 0.5% of investments must remain confined to only such investments which have yielded tax exempt income during the relevant previous year. DR, on the other hand, relies on the judgment of Hon’ble Supreme Court in the case of Maxopp Investments [2018 (3) TMI 805 - SUPREME COURT] in support of the proposition that a reasonable disallowance in relation to exempt income must be made. That does not however dilute the principle laid down by the Special Bench in the case of Vireet Investments (supra). To this extent, we uphold the plea of the assessee and modify the orders of the authorities below by directing the Assessing Officer to compute the 0.5% of the investments yielding tax exempt income during the relevant previous year. Deduction of bad debts u/s 36(2) - HELD THAT:- As the claim of bad debt itself has been allowed in principle and the matter has been remitted to the file of the Assessing Officer only for a factual verification, the claim for business loss is infructuous at this stage and does not need to be adjudicated upon. Similarly, we are unable to see any merits in the grievance of the Assessing Officer for CIT(A)’s directing a factual verification which is so fundamental to the claim being denied as the claim for deduction was declined primarily on the ground that the assessee had not offered related income to tax. Grievances of both the parties, therefore, lack legally sustainable merits. We confirm the action of the CIT(A) on this issue as well and decline to interfere in the matter. Disallowance of 'marking to market' foreign currency forward contracts outstanding as at the end of the year - HELD THAT:- The assessee is consistently following the mercantile method of accounting, the same accounting treatment for the foreign exchange losses and gains has been given by the assessee all along, the assessee is making entries in respect of such losses and gains, and the treatment is consistent with the Accounting Standards. As a matter of fact, the AO has not even raised any issues with respect to the above. His case is confined to the loss being notional in nature and contrary to the CBDT guidelines. As for the CBDT instructions, it is only elementary that any instructions issued by the CBDT cannot bind the assessee even though the assessee is entitled to, and can legitimately ask for, any benefits granted to the assessee by such instructions or circulars. Nothing, therefore, turns on the CBDT instruction even if it is actually contrary to the claim of the assessee. As per the details filed by the assessee, the foreign exchange contracts have been entered into for genuinely restricting its bonafide risk exposure of the assessee in respect of its exports and imports transactions. These contracts cannot, therefore, be viewed on a standalone basis as speculative transactions. These transactions are integral part of the business transactions and any loss or gains arising from these transactions, for the detailed reasons set out above, are deductible in computation of profits and gains of business. We uphold the action of the CIT (A) so far as this relief in respect of deleting the disallowance on account of loss, at the end of the year, on foreign exchange contracts. We confirm the same and decline to interfere in the matter. - Decided in favour of assessee. TPA - upward adjustment on account of guarantee given by the assessee to its Associate Enterprise located at Singapore without any consideration - HELD THAT:- TPO made the addition on the ground that loans were taken from ICICI bank Limited, Singapore whereas RBI's permission refusing pledge of shares was In the case of IDBI trusteeship Ltd. TPO considered these two transactions separate and held that appellant provided guarantee to AE by pledging its Investment in shares. However after considering these letters referred earlier, it is clear that IDBI trusteeship Ltd is security trustee of ICICI bank limited, Singapore and RBI's letter refusing the permission for pledge of shares is in respect of same shares which were provided for guarantee to ICICI bank Limited, Singapore. Thus, it is clear that entire addition is based on the misconception that these two entities represented separate transactions. In view of this it is clear that appellant did not provide guarantee services by pledging shares of MPSEZ for which any adjustment of guarantee commission can be made. The addition made by the assessing officer is therefore not sustainable on facts. See ADANI ENTERPRISES LTD [2016 (8) TMI 163 - GUJARAT HIGH COURT] Addition u/s 14A despite the fact that the company had claimed an expenditure on its Treasury department which mainly dealt with investments related to earning exempt income - CIT-A deleted the addition - HELD THAT:- As adhoc allocation of expenses of treasury department, in addition to the disallowance under rule 8D(iii) for such indirect expenses, computed @ .5% of related investments earning tax exempt income, will indeed amount to double deduction of expenses under rule 8D. What can be disallowed under rule 8D(i) is only direct expenses and clearly the expenses on treasury function are not direct expenses to earn the tax exempt income. Even going by the stand of the Assessing Officer, treasury function includes many functions including, to some extent, investment function. The understanding of the Assessing Officer is clearly incorrect. There is no basis for allocation of 50% of expenses, on purely adhoc basis, either. There is nothing on record to even show that the expenses disallowed under rule 8D(iii) are lower than a reasonable share of common expenses incurred on earning the tax exempt income. In these circumstances, and bearing in mind entirety of the case, we approve the stand of the CIT(A) and decline to interfere in the matter. Disallowance of interest expense u/s 36(1)(iii) - comprehensible findings in the assessment order that the funds were diverted for non business purposes - CIT-A deleted the addition - HELD THAT:- As there was a trade relationship between the assessee and the entities to which the payments in question were made. The assessee had made huge purchases from these entities, and the fact that the amounts were not payable is not really relevant because the case of the assessee is that the payments were in the nature of business advances. What happens to these monies subsequently is not relevant so far as the treatment of advances in the hands of the assessee is concerned. That aspect is wholly irrelevant for our purposes. As long as the payments are made in the course of assessee’s business, it does not really matter, so far as interest disallowance in the hands of the assessee is concerned, as to where these monies ultimately find its way. That’s not in the control of the assessee anyway. Nothing really turns on these monies ultimately finding its way to another entity, admittedly unrelated to the assessee. The reason for making the interest disallowance is thus not sustainable in law. In any event, the availability of interest free funds is far more than interest free funds advanced to these entities. In view of these discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter. Disallowance of depreciation claimed on shares - As per AO shares are not depreciable assets - CIT-A deleted the addition - HELD THAT:-Learned representatives fairly agree that this issue is squarely covered, in favour of the assessee, by a decision in assessee’s own case for the assessment year 2007-08 [2016 (1) TMI 459 - ITAT AHMEDABAD]. A copy of the said decision was placed before us as well.. We see no reasons to take any other view of the matter than the view so taken by the coordinate bench. Respectfully following the same, we confirm the relief granted by the CIT(A) and decline to interfere in the matter. Disallowance of deduction u/s 80IA - receipts represents miscellaneous income which was not derived from the undertaking itself - CIT-A deleted the addition - HELD THAT:- We have noted that the eligible business activity of the assessee is operations and maintenance of the port, and that the miscellaneous receipts represents receipts on account of activities which pertain to operations and maintenance of port. The receipts for weighment charges and token charges, and the allied activities in question, cannot be considered in isolation with the operations and maintenance of port. In view of these discussions, and in the light of well reasoned findings of the CIT(A) with which we are in considered agreement, we uphold the relief granted by the CIT(A) and decline to interfere in the matter. TP Adjustment - whether issuance of corporate guarantees does not constitute an international transaction with the meanings of section 92B? - HELD THAT:- As for the observations of the authorities below that the assessee has not produced any evidence of not incurring any costs, this observation is incorrect inasmuch as none can be expected to prove a negative. The onus of demonstrating that the costs have been incurred can only be on the revenue authorities, and that onus has not been discharged. Even during the course of hearing when it was asked as to what are the costs incurred by the assessee, learned Departmental Representative did not have anything to say. Respectfully following the views of the coordinate benches on the issue, in the case of Micro Ink [2015 (12) TMI 143 - ITAT AHMEDABAD] we hold that issuance of guarantees, without incurring any specific costs, does not constitute an international transaction, and, accordingly, no arm’s length price adjustment can be made in respect of issuance of corporate guarantees. Once we hold so, the ALP adjustment sustained by the CIT(A) must stand deleted. Disallowance u/s 14A - HELD THAT:- One has to proceed on the basis that such interest free funds in making these investments, and no part of interest can thus be disallowed under section 14A read with rule 8D. We see no reasons to take any other view of the matter for this assessment year as well. TDS u/s 195 - Disallowance of interest expenditure invoking the provisions of section 40(a)(i) - HELD THAT:- We find that the payment has indeed been made to a non-resident and no tax has been deducted at source. The payment being in the nature of interest income which is separately covered under the respective tax treaties and, beyond any dispute or controversy, these payments have an element of income taxable in India. As regards learned counsel’s contention that the payment having been made to a bank which are specifically excluded from the scope of tax withholding obligations under section 194A, this argument overlooks the fact that this exclusion relates only to a resident taxpayer and the recipients in this case are non residents. In our considered view, the authorities below were right in holding that the payments were made to the foreign companies, and, therefore, section 195 came into play, and that section 194A was applicable only with respect to payment to residents and will not accordingly come to the rescue of the assessee. We uphold the reasoning of the authorities below, and decline to interfere in the matter. Disallowance on account of loss from foreign currency swaps - HELD THAT:- The issue is covered, in favour of the assessee, by decisions of the coordinate benches of this Tribunal, including in the case of Cadila Pharmaceuticals Ltd Vs ACIT [2017 (9) TMI 727 - ITAT AHMEDABAD] as hold inter alia that hedging contracts; in order to be out of speculative transactions, must be in respect of raw materials only in manufacturers' cases though they could be both with regard to sales and purchases, such hedging contracts need not succeed the contract for sale and actual delivery of goods manufactured, but the latter could be subsequently entered into within reasonable time not exceeding the relevant assessment year in normal circumstances and such transactions should not exceed the total stock of the raw material or merchandise on hand including existing stocks as well as that acquired under the firms contract of purchases in order to be genuine and valid hedging contract of sales; respectively. Upward adjustment on the basis of the TPO's order passed u/s.92CA(3) determining the A.L.P. in respect of transaction of export of Maize - HELD THAT:- We are not inclined to interfere in the matter. We agree with the authorities below that such an independent third party quotation, on standalone basis and without any material to establish its bonafides and without anything to show that it’s contemporaneous nature and sufficient parity with actual transaction, cannot be accepted as a valid CUP input. The plea regarding back to back transaction was also not proved before us. In view of these discussions, and bearing in mind entirety of the case, we uphold the stand of the authorities below and decline to interfere in the matter. Disallowance of business loss in respect of balances being advances for business purposes to suppliers, written off in the books of account as irrecoverable, in spite of the fact that such writing off was in the nature of legitimate business loss allowable u/s.28 - HELD THAT:- We find that as long as a loss is incurred in the course of a business, and in legitimate furtherance of its bonafide interests, the loss is deductible in computation of business income. What, therefore, needs to be examined is whether or not these advances were made in the course of the business and whether these advances have actually become bad. If the answer to both these questions are in positive, there cannot normally be a good reason to reject the claim. We, therefore, deem it fit and proper to remit the matter to the file of the Assessing Officer with a direction to decide the matter afresh by way of a speaking order in accordance, in the light of the above observations and after giving yet another opportunity of hearing to the assessee. We order accordingly. Disallowance made of depreciation on office equipment after treating the same as furniture and fittings - HELD THAT:- We find that this issue is also covered, in favour of the assessee, by a decision of the coordinate bench in the case of Cera Sanitaryware Ltd [2015 (7) TMI 174 - ITAT AHMEDABAD] - Respectfully following the same, we confirm the conclusions arrived at by the CIT(A) and decline to interfere in the matter. Disallowance of depreciation on UPS - HELD THAT:-This issue is also covered, in favour of the assessee, by Hon’ble Delhi High Court’s judgment in the case of CIT Vs BSES Yamuna Power Ltd [2010 (8) TMI 58 - DELHI HIGH COURT] even as learned Departmental Representative vehemently relied upon the stand of the Assessing Officer. There is non contrary judicial precedent pointed out to us. In this view of the matter, and respectfully following the esteemed views of Hon’ble Delhi High Court in the case of BSES Yamuna Power (supra), we confirm the order of the CIT(A) on this point as well, and decline to interfere in the matter. Disallowance being 10% of aircraft hire charges - HELD THAT:- We find that, in view of Hon’ble jurisdictional High Court’s judgment in the case of Sayaji Engg [2001 (7) TMI 70 - GUJARAT HIGH COURT] no disallowance can be made in the hands of a corporate entity for personal use of cars, and, by the same logic, of the aircrafts as well, by the directors. The CIT(A) was thus indeed quite justified in deleting the impugned disallowance. We uphold the action of the CIT(A) and decline to interfere in the matter on this count as well. Issues Involved:1. Disallowance under Section 14A read with Rule 8D.2. Deduction of bad debts under Section 36(2).3. Disallowance of loss from 'marking to market' foreign currency forward contracts.4. Transfer pricing adjustment for guarantee commission.5. Disallowance of interest expense under Section 36(1)(iii).6. Depreciation on shares.7. Deduction under Section 80IA.8. Disallowance of prior period expenses.9. Disallowance of interest expenditure under Section 40(a)(i).10. Disallowance of interest expenditure under Rule 8D(2)(ii).11. Disallowance of depreciation on office premises.12. Disallowance of depreciation on vehicles.13. Disallowance of depreciation on office equipment.14. Disallowance of depreciation on UPS.15. Disallowance of aircraft hire charges.Detailed Analysis:1. Disallowance under Section 14A read with Rule 8D:The Tribunal upheld the partial allowance of the assessee's appeal by directing the Assessing Officer to compute 0.5% of the investments yielding tax-exempt income during the relevant previous year. The Tribunal reiterated that the expenses on treasury functions are not direct expenses to earn tax-exempt income and that an ad-hoc allocation of expenses would result in double disallowance.2. Deduction of bad debts under Section 36(2):The Tribunal upheld the CIT(A)'s decision to remit the claim of bad debts to the Assessing Officer for factual verification. The claim for business loss was deemed infructuous at this stage, and the Tribunal confirmed that the CIT(A) acted correctly by directing factual verification.3. Disallowance of loss from 'marking to market' foreign currency forward contracts:The Tribunal noted that the issue was covered by previous decisions favoring the assessee, emphasizing that such losses are not notional but are recognized as per accounting standards and judicial precedents. The Tribunal directed the Assessing Officer to delete the disallowance.4. Transfer pricing adjustment for guarantee commission:The Tribunal held that issuance of corporate guarantees does not constitute an international transaction under Section 92B, following the precedent set in Micro Ink Ltd Vs ACIT. Consequently, the Tribunal deleted the ALP adjustment sustained by the CIT(A).5. Disallowance of interest expense under Section 36(1)(iii):The Tribunal upheld the CIT(A)'s decision, noting that the payments were made in the course of business and that the assessee had sufficient interest-free funds to cover the advances. The Tribunal found no basis for the disallowance and confirmed the CIT(A)'s conclusions.6. Depreciation on shares:The Tribunal noted that the issue was covered by a previous decision in the assessee's favor and upheld the CIT(A)'s decision to allow the depreciation claimed on shares.7. Deduction under Section 80IA:The Tribunal upheld the CIT(A)'s decision to allow the deduction under Section 80IA for miscellaneous receipts related to port operations, agreeing that such receipts were directly connected with the business of operating and maintaining the port.8. Disallowance of prior period expenses:The Tribunal followed the precedent set in the assessee's own case for earlier years and upheld the CIT(A)'s decision to allow the prior period expenses, directing the Assessing Officer to verify and set off the expenses against prior period income.9. Disallowance of interest expenditure under Section 40(a)(i):The Tribunal confirmed the disallowance, agreeing with the authorities below that the payments were made to foreign companies and that Section 195 applied. The Tribunal found no merit in the argument that Section 194A applied to these payments.10. Disallowance of interest expenditure under Rule 8D(2)(ii):The Tribunal upheld the CIT(A)'s decision, noting that the interest-free funds available to the assessee were far more than the funds invested in tax-exempt income securities. The Tribunal confirmed that no part of the interest could be disallowed under Section 14A read with Rule 8D.11. Disallowance of depreciation on office premises:The Tribunal upheld the CIT(A)'s decision, following the precedent set in the assessee's own case for earlier years, and confirmed the allowance of depreciation on office premises.12. Disallowance of depreciation on vehicles:The Tribunal upheld the CIT(A)'s decision, following the precedent set in the case of Voltemp Transformers Limited, and confirmed the allowance of depreciation on vehicles.13. Disallowance of depreciation on office equipment:The Tribunal upheld the CIT(A)'s decision, following judicial precedents, and confirmed that office equipment should be eligible for 15% depreciation.14. Disallowance of depreciation on UPS:The Tribunal upheld the CIT(A)'s decision, following the judgment of the Delhi High Court in BSES Yamuna Power Ltd, and confirmed the allowance of depreciation on UPS.15. Disallowance of aircraft hire charges:The Tribunal upheld the CIT(A)'s decision, following the jurisdictional High Court's judgment in Sayaji Iron & Engg Co Ltd, and confirmed that no disallowance could be made for personal use of hired aircraft by directors in the hands of a corporate entity.