2019 (10) TMI 995 - AT - Income Tax

Tribunal decision on revenue and assessee appeals: TP adjustment, Section 14A disallowance, Section 50C capital gains

The Tribunal dismissed the revenue's appeals for both years, partly allowing the assessee's appeals. It directed the AO to re-examine the disallowance ... Disallowance u/s 14A - HELD THAT:- We are not convinced with the plea that Ld. AO has not recorded the requisite satisfaction before proceeding to apply Rule 8D(2)(iii). It is evident from the discussion made by Ld. AO in para 6.2 that the assessee did not furnish the basis of allocation of the expenses suo-moto disallowed by him. It was also observed that the part of salary and expenses attributed towards earning of dividend income bear no co-relation with the earning of the dividend income or the man-hours allotted to the activities resulting into the earning of dividend. Therefore, we are unable to concur with Ld. AR’s argument, on this point. So far as the merits of the case are concerned, we find that this issue was restored by Tribunal to the file of learned AO in AY 2008-09 vide para wherein learned AO was directed to examine the sufficiency or correctness of suomoto disallowance made by the assessee having regards to assessee’s accounts and explanations and proceed further after recording speaking reasons for non-satisfaction. We note that, in this AY, learned AO has already rejected the assessee’s working. With a view to enable revenue to take consistent stand in the matter, we restore the matter back to the file of learned AO on similar lines. The learned AO is directed to reappreciate the disallowance made by the assessee and invoke Rule 8D only if not satisfied with assessee’s working of disallowance. It is made clear that if the disallowance is computed in terms of Rule 8D(2)(iii) then apart from the directions of CIT(A) to exclude certain investments, those investments which have not yielded any exempt income during the year under consideration would also be excluded as per the decision of Delhi Tribunal (Special Bench) rendered in ACIT Vs. Vireet Investment (P.) Ltd. [2017 (6) TMI 1124 - ITAT DELHI] . Accordingly, Ground No.1 of assessee’s appeal may be treated as partly allowed for statistical purposes. Capital gains u/s 50C - HELD THAT:- We find that CIT(A) has clinched the issue in correct perspective. Undisputedly, the property was not free from encumbrances. The original agreement was made in the year 2000 and there was inordinate delay on account of lack of approvals from concerned authorities and the property was subject matter of litigation. The property had negative covenants as to its use which would reduce its value. Further, the assessee had disputed the valuation before Ld. AO, but no reference was made to Valuation Officer u/s 50C(2). The factual submissions made by the assessee were not controverted by Ld. AO. Therefore, the action of Ld. AO in adopting the Stamp Duty Value could not be held to be justified. Transfer Pricing [TP] adjustment on account of Share Application Money - HELD THAT:- Re-characterization of this transaction as advance / loan by revenue authorities, in our considered opinion, was not correct approach and this transaction could not be equated with loan transactions. The Ld. DR has contended that the transactions have not been re-characterized as loan but the same has been benchmarked since certain benefits have accrued to AE by infusion of fund which must be shared with the assessee. However, we find that ALP of the transaction has been computed in similar manner as it would be computed for a loan transaction. As already noted, assessee’s AE ultimately became wholly owned subsidiary of the assessee and therefore, whatever benefit would accrue to AE, the same would indirectly accrue to the assessee. Therefore, not convinced with the approach of lower authorities, we hold that no addition would be warranted on this account. To arrive at aforesaid conclusion, we draw strength from the observation of Hon’ble Bombay High Court in Pr. CIT V/s Aegis Limited [2019 (4) TMI 858 - BOMBAY HIGH COURT] has observed that in the absence of finding that the transaction was sham, the TPO could not have treated such transaction as a loan and charge interest thereon on notional basis. Section u/s 50C applicability - sale of Nala Land at Thane, Maharashtra - HELD THAT:- We are of the opinion that Ld. CIT(A) has clinched the issue in the right perspective. The Ld. AO has ignored the fact that developer had to bear the burden of payment of unearned revenue to the Government. After adding the said burden to sale consideration received by the assessee, the aggregate would be more than reckoner value. Secondly, the matter was not referred to valuation officer since the assessee had contested the reckoner value and furnished valuation report. Thirdly, it is observed that the transaction under consideration is mere development agreement and not a transaction of outright sale of land. Therefore, the provisions of Section 50C, in our opinion, were not applicable to such transactions since there was no transfer of capital assets rather it was a case of transfer of few rights out of bundle of rights available with the assessee. Therefore, concurring with the stand of Ld. first appellate authority, we dismiss Ground No.1 of revenue’s appeal. The revenue’s appeal stands dismissed. Issues Involved:1. Disallowance under Section 14A2. Capital gains under Section 50C of the Income Tax Act3. Transfer Pricing adjustment on Share Application MoneyIssue-Wise Detailed Analysis:1. Disallowance under Section 14A:The assessee earned exempt dividend income of Rs. 15.82 Crores and offered a suo-moto disallowance of Rs. 13.50 Lacs. The Assessing Officer (AO) invoked Rule 8D and computed an additional disallowance of Rs. 117.90 Lacs. The CIT(A) partially accepted the assessee's plea, excluding investments in foreign companies and companies under liquidation. However, the CIT(A) upheld the AO's application of Rule 8D. The Tribunal restored the issue to the AO to re-examine the sufficiency of the suo-moto disallowance and to exclude investments that did not yield exempt income, following the decision in ACIT Vs. Vireet Investment (P.) Ltd. [82 Taxmann.com 415].2. Capital Gains under Section 50C of the Income Tax Act:The assessee sold land and building for Rs. 325 Lacs, but the AO adopted the stamp duty value of Rs. 667.23 Lacs under Section 50C, resulting in additional capital gains of Rs. 342.23 Lacs. The CIT(A) noted that the property had encumbrances and litigation issues, and the AO did not refer the matter to the Valuation Officer as required under Section 50C(2). The CIT(A) directed the AO to adopt a value of Rs. 330 Lacs based on a valuation report. The Tribunal upheld the CIT(A)'s decision, noting the property’s encumbrances and the AO's failure to refer the matter to the Valuation Officer.3. Transfer Pricing Adjustment on Share Application Money:The assessee advanced Rs. 11.41 Crores as share application money to its AE, Saudi Ensas, but the shares were not allotted until December 2015. The TPO treated the delay as a loan and proposed a TP adjustment of Rs. 152.23 Lacs, adopting an interest rate of 17.78%. The CIT(A) partially upheld the adjustment but directed the AO to apply a LIBOR-based rate of 5.76%. The Tribunal deleted the TP adjustment, holding that the transaction was for genuine business purposes and could not be re-characterized as a loan. The Tribunal relied on the decision in Pr. CIT V/s Aegis Limited and Bharti Airtel Limited V/s Addl. CIT, which held that share application money could not be treated as a loan for TP purposes.Cross Appeals for AY 2010-11:The issues and facts for AY 2010-11 were similar to AY 2009-10. The Tribunal's observations and conclusions for AY 2009-10 were applied mutatis mutandis to AY 2010-11. The issue of disallowance under Section 14A was restored to the AO, and the TP adjustment on share application money was deleted. The revenue's appeal regarding the relief granted under Section 50C was dismissed, as the development agreement involved negative covenants affecting the market value, and the AO failed to refer the matter to the Valuation Officer.Conclusion:The revenue's appeals for both years were dismissed, and the assessee's appeals were partly allowed. The Tribunal directed the AO to re-examine the disallowance under Section 14A and to adopt a LIBOR-based rate for the TP adjustment on share application money. The Tribunal upheld the CIT(A)'s decision regarding the capital gains under Section 50C, considering the property’s encumbrances and the AO's procedural lapses.