2018 (5) TMI 1640 - AT - Income Tax

TPO's TNMM rejection overturned; related-party amounts treated as adjustments not loans, s.2(22)(e) not attracted; s.40(a)(ia) deleted; s.14A partly sustained

ITAT upheld that the TPO's rejection of the assessee's TNMM was unsound as applicability was not discussed and prior ITAT orders favored the assessee; ... Addition on account of TPO order u/s 92CA(3) by rejecting the TNMM selected by the assessee - Held that:- TNMM is not applicable on the given set of facts has nowhere been discussed by the TPO in the impugned order. Therefore, the ld.DR cannot improve the case of the TPO at this level. More so when, consistently from the Asstt.Year 2002-03, it has been held that method adopted by the assessee is an appropriate method. In the assessee’s own case, this aspect has been accepted upto the level of ITAT. There is no justification for disturbing of that method by taking different opinion from order of the ITAT passed in similar facts of the same assessees. Taking into consideration earlier orders of ITAT passed in assessee’s case for the Asstt.Year 2002-03 to 2004-05, we are of the opinion that the ld.CIT(A) has based his finding on the orders of predecessor. There is no independent discussion in this order. Thus, the findings have been upheld by the ITAT, and therefore, we do not see any reasons to deviate ourselves from those finding. Misc. expenses to be written off - Held that:-After taking into consideration the finding of the ld.CIT(A), we are of the view that lump-sum addition confirmed by the ld.CIT(A) is little on the higher side, because the assessee has contended that if written off is not allowable, then actual expenses incurred during the year ought to be allowed. In other words, case of the assessee is that by following mercantile system of accounting, it has incurred various expenses, which has been written off in this year. Therefore, to meet ends of justice, assessee deserves a further relief of ₹ 5,00,000/-. In other words, addition confirmed by the ld.CIT(A) of ₹ 15,00,000/- is restricted to ₹ 10,00,000/- (Ten Lakhs) only, and thus the assessee gets a further part relief. Accordingly, this interconnected ground raised in the appeal of the Revenue and CO of the assessee is partly allowed. Deemed dividend u/s 22(22)(e) - Held that:- When the CIT(Appeals) as well as Tribunal concurrently held that looking to large number of adjustment entries in the accounts between two entities, the amounts were not in the nature of loan or deposit, but merely adjustments, application of section 2(22)(e) of the Act would not arise. Consequently, no question of law arises. Disallowance under section 40(a)(ia) - Held that:- If TDS has been deposited prior to the due date of filing of return, then no disallowance has to be made. The ld.CIT(A) has rightly deleted the disallowance, and we do not find any error in this ground of appeal. It is rejected. Gratuity provision - Held that:- While filing return of income the assessee has included an amount for additions in the total income. When it realized the provision made for gratuity for the year under consideration, then it had filed an application and submitted to the AO that current year’s claim only ₹ 20,69,905/-. This amount could be disallowed. The ld.CIT(A) has rightly appreciated the controversy and has rightly directed that AO that only for the provision made in the current year could be disallowed and not opening balance. Therefore, after looking into the finding of the ld.CIT(A), we do not find any error in it. This ground of appeal is rejected Correct figure of depreciation - Held that:- CIT(A) has rightly observed that the claim of the depreciation as made by the assessee, and it was for the AO to compute the correct figure of depreciation admissible to the assessee. The ld.CIT(A) has directed the AO to grant correct amount of depreciation. There could not be any fault to this finding, hence this ground of appeal is rejected. Direct the AO to include other income in the eligible profit for the purpose of grant of deduction under section 10B of the Act. Allow set off prior period expenditure against prior period income and only net income is to be added to the total income of the assessee. Addition u/s 14A - Held that:- We are of the view that the ld.CIT(A) though changed reasoning, but confirmed disallowance of same amount. Once investment was made by the assessee, then it was not required to be continuously monitor it and administrative expenditure could not be estimated at this magnitude which has been worked out by the AO with help of Rule 8D. To our mind, ends of justice would be met, if an adhoc disallowance of ₹ 3,00,000/- be sustained for earning of tax free income. We allow this ground of appeal partly and confirm the addition to the extent of ₹ 3,00,000/-. Issues Involved:1. Deletion of addition made on account of TPO order under section 92CA(3) of the IT Act.2. Deletion of addition made on account of miscellaneous expenses.3. Addition under section 2(22)(e) of the IT Act.4. Disallowance under section 40(a)(ia) of the IT Act.5. Computation of deduction under section 10B of the IT Act.6. Disallowance of prior period expenses.7. Disallowance under section 14A of the IT Act.8. Addition due to non-reconciliation of TDS and income.9. Disallowance under section 43B of the IT Act.10. Disallowance of depreciation on electrical installation.11. Penalty under section 271(1)(c) of the IT Act.Detailed Analysis:1. Deletion of Addition Made on Account of TPO Order under Section 92CA(3) of the IT Act:The Tribunal held that the Transfer Pricing Officer (TPO) did not point out defects in the Transactional Net Margin Method (TNMM) applied by the assessee for determining the Arm’s Length Price (ALP) of its international transactions. The TPO had changed the method to Comparable Uncontrolled Price (CUP) without valid reasons. The Tribunal upheld the use of TNMM, as accepted in previous years, and found no merit in the Revenue's appeal.2. Deletion of Addition Made on Account of Miscellaneous Expenses:The Tribunal noted that the Assessing Officer (AO) had disallowed a sum of Rs. 18,45,974/- claimed by the assessee as miscellaneous expenses. The CIT(A) had confirmed a lump-sum disallowance of Rs. 15 lakhs. The Tribunal found the lump-sum addition on the higher side and restricted the disallowance to Rs. 10 lakhs, granting partial relief to the assessee.3. Addition under Section 2(22)(e) of the IT Act:The AO had treated loans received by the assessee from Schutz Dishman Biotech P.Ltd. and B.R. Labs P.Ltd. as deemed dividends under section 2(22)(e). The Tribunal, following earlier decisions and the Hon’ble High Court's ruling, held that these transactions were in the nature of current accounts and not loans, thus not attracting section 2(22)(e). The addition was deleted.4. Disallowance under Section 40(a)(ia) of the IT Act:The AO disallowed expenses due to late payment of TDS. The CIT(A) allowed the expenses, considering the amendment by Finance Act, 2010, which allowed TDS payment before the due date of filing the return. The Tribunal upheld the CIT(A)’s decision, citing the Hon’ble Gujarat High Court's ruling in M/s. Farson Fibres.5. Computation of Deduction under Section 10B of the IT Act:The AO made adjustments reducing the deduction under section 10B. The Tribunal directed the AO to exclude unrealized exports from both export turnover and total turnover and to include other income in the eligible profit for deduction under section 10B, following the Special Bench decision in Maral Overseas Ltd. and the ITAT's decision in Sonic Technology P.Ltd. The Tribunal upheld the CIT(A)’s decision on other adjustments.6. Disallowance of Prior Period Expenses:The AO had assessed prior period income but disallowed prior period expenses. The Tribunal allowed the set-off of prior period expenses against prior period income, directing the AO to assess only the net income.7. Disallowance under Section 14A of the IT Act:The AO made a disallowance under section 14A using Rule 8D. The CIT(A) confirmed the disallowance. The Tribunal, considering the facts and the Hon’ble High Court's rulings, reduced the disallowance to Rs. 3,00,000/- on an ad hoc basis.8. Addition Due to Non-Reconciliation of TDS and Income:The AO made an addition of Rs. 3,17,294/- based on reconciliation of income reflected in TDS certificates. The Tribunal upheld the addition, noting that the assessee had admitted the income.9. Disallowance under Section 43B of the IT Act:The AO disallowed Rs. 2,40,940/- under section 43B due to discrepancies in ESIC outstanding amounts. The Tribunal upheld the disallowance, noting the lack of specific information from the assessee.10. Disallowance of Depreciation on Electrical Installation:The assessee did not press this ground of appeal, and it was rejected.11. Penalty under Section 271(1)(c) of the IT Act:The AO imposed a penalty for various additions. The CIT(A) partly deleted the penalty. The Tribunal upheld the deletion of penalty on items where the addition was not sustained or was based on debatable issues. The Tribunal allowed the appeal of the assessee, deleting the penalty on other items, and dismissed the Revenue's appeal.Conclusion:The Tribunal provided detailed reasoning for each issue, upholding the CIT(A)’s decisions where appropriate and granting partial relief to the assessee on various grounds. The appeals of the Revenue were dismissed, and the assessee's appeals were partly allowed.