2016 (7) TMI 247 - AT - Income Tax

Tax Tribunal: Appeals allowed for 2006-2012 assessments, adjustments on foreign loans, disallowances restricted

The Tribunal allowed the appeals for the assessment years 2006-07, 2007-08, and 2008-09, finding that additions made under Section 153A were unjustified ... Interest on advances to subsidiaries - whether advance made was out of the EEFC account which carries no interest? - Held that:- AO is directed to verify the interest rate and recompute the adjustment on account of interest by applying the rate of interest of the relevant currency in the AY 2009-10 & 2010-11. Accordingly this ground of the assessee is partly allowed for AY 2009-10 & 2010-11. As regards the addition on this account in assessment year 2011-12, the advance given to its subsidiary companies stand converted into share application money. Once the loan has been converted into share application money, for the issue of the share capital, then such amount cannot be considered as loan. The TPO is not permitted under the law to re-characterize the transaction and accordingly we are of the view that no interest on such share application money can be charged. The above view is supported by the judgment of the Coordinate Bench of the ITAT in the case of Bharti Airtel Ltd. vs. ACIT [2014 (3) TMI 495 - ITAT DELHI ]. Thus the AO is directed to verify the date of conversion of loan to share application money and not to make any adjustment on account of interest post conversion of loan to share application money and accordingly this ground of the assessee is allowed for statistical purpose. Disallowance under section 14A - Held that:- As regards first contention that no satisfaction has been recorded we note from the assessment order that the AO has considered the explanation of the assessee and after taking into consideration the explanation he has invoked Rule 8D. Having done so, it cannot be said that the AO has not taken into consideration the explanation of the assessee. However, as regards the second contention of the learned AR that the disallowance cannot exceed the exempt income, we are in agreement with this contention. This view is supported by the judgment of the Hon’ble jurisdictional Delhi High Court in the case of Joint Investments Pvt. Ltd. versus Commissioner of Income Tax [2015 (3) TMI 155 - DELHI HIGH COURT ]. Accordingly we direct the AO to restrict the addition to the exempt income.- Decided partly in favour of the assessee. Issues Involved:1. Validity of assessment framed under Section 153A.2. Addition of notional interest on foreign currency loans to subsidiaries.3. Addition under Section 14A of the Income Tax Act.Issue-wise Detailed Analysis:1. Validity of Assessment Framed Under Section 153A:The assessee challenged the validity of assessments for the years 2006-07, 2007-08, and 2008-09, arguing that these assessments had not abated following a search conducted on January 21, 2011, and no incriminating material was found. The Tribunal referred to the Delhi High Court's judgment in CIT (Central) – III vs. Kabul Chawla, which held that in the absence of incriminating material, additions cannot be made under Section 153A. The Tribunal concluded that the AO was not justified in making additions for these years, and thus, the appeals for these assessment years were allowed.2. Addition of Notional Interest on Foreign Currency Loans to Subsidiaries:For the assessment years 2009-10 and 2010-11, the Tribunal addressed the issue of notional interest on loans given to foreign subsidiaries. The AO had added interest based on the Prime Lending Rate of the State Bank of India, which was modified by the DRP to the base rate plus 150 basis points. The Tribunal disagreed with the AO's approach, stating that the interest rate should be based on the currency in which the loans were advanced. The Tribunal cited the Delhi High Court's judgment in CIT vs. Cotton Naturals (P) P Ltd., which emphasized that the interest rate should align with the currency of the loan. The Tribunal directed the AO to recompute the adjustment using the relevant foreign currency interest rates (LIBOR).For the assessment year 2011-12, the Tribunal noted that the loans had been converted into share application money. It held that post-conversion, the transaction could not be treated as a loan, and hence, no interest could be charged. This view was supported by the ITAT's judgment in Bharti Airtel Ltd. vs. ACIT.3. Addition Under Section 14A of the Income Tax Act:The Tribunal addressed the disallowance under Section 14A for the assessment years 2009-10 to 2011-12. The assessee argued that the AO made disallowances without recording satisfaction and that the disallowance should not exceed the exempt income. The Tribunal found that the AO had considered the assessee's explanation before invoking Rule 8D, implying satisfaction was recorded. However, it agreed with the assessee that disallowance should not exceed the exempt income, citing the Delhi High Court's judgment in Joint Investments Pvt. Ltd. vs. CIT. The Tribunal directed the AO to restrict the disallowance to the exempt income.Conclusion:The Tribunal allowed the appeals for the assessment years 2006-07, 2007-08, and 2008-09, while the appeals for the assessment years 2009-10, 2010-11, and 2011-12 were partly allowed. The AO was directed to recompute the adjustments on account of interest using the relevant foreign currency rates and to restrict the disallowance under Section 14A to the amount of exempt income.