2020 (1) TMI 858 - AT - Income Tax

Tribunal reverses AO's decisions, deletes disallowances & additions. Stress on proper transaction characterization.

The Tribunal partly allowed the appeal, deleting various disallowances and additions. It held that the AO's actions were not in line with legal principles ... Disallowance of interest u/s 14A - HELD THAT:- Provisions contained u/s 14A of the Act, AO has not recorded his satisfaction as required u/s 14A(2) that the working given by the assessee is not correct. Hon’ble High Court of Delhi in case of Maxopp Investment Ltd. vs. CIT [2011 (11) TMI 267 - DELHI HIGH COURT] held that, “it is incumbent upon the AO to record satisfaction as to the working given by the assessee that no expenses have been incurred by it to earn the dividend income”. In view of the matter, we are of the considered view that addition made by the AO and confirmed by the ld. CIT (A) u/s 14A is not sustainable, hence ordered to be deleted. Addition u/s 36(1)(iii) - disallowance of interest - disallowance has been confirmed rejecting the contention of the assessee that the impugned advances have been made out of business expediency - HELDTHAT:- In view of the financials brought on record by the assessee company discussed in the preceding para, we are of the considered view that since transactions are pertaining of business of shares/future/option of securities & advances having been given on account of commercial expediency of the group companies, disallowance made by the AO and confirmed by the ld. CIT (A) u/s 36(1)(iii) is not sustainable, hence ordered to be deleted Disallowance on account of foreign tour and travel expenses - expenses incurred by Director of assessee company which are pertaining to his travel to Australia and New Zealand on the ground that Shri Saurav Arora is neither Director nor employee of the assessee company and assessee company has not conducted any transactions with Australia and New Zealand Stock Exchanges - HELD THAT:- From the perusal of the reply filed by the assessee company before the ld. CIT (A), extracted in para 7.2 of the impugned order, assessee company has failed to prove the purpose for which foreign tours have been carried out by Shri Saurav Arora. Emails brought on record by the assessee company also failed to explain the purpose of foreign visits. Perusal of the foreign detail given by the assessee company, available at page 50 of the paper book, also does not disclose the purpose and result of the foreign visits. We are of the considered view that expenses Incurred by Shri Saurav Arora, Director of the assessee company when not proved to be incurred for business purpose of the assessee company, its addition cannot be made against assessee company rather its addition can be made against Shri Saurav Arora in his individual capacity. In these circumstances, addition of ₹ 4,48,911/- made in the name of assessee company is not sustainable, hence ordered to be deleted. TP Adjustment - addition on account of arm’s length price value of the interest receivable on loans outstanding in the name of Jaypee Singapore Pte Ltd. against which the assessee has shown nil interest - HELD THAT:- AO has no authority to re-characterize the transaction of making investment by the assessee company in equity shares of subsidiaries as a loan; secondly, OECD Guidelines also discourage restricting of legitimate business transaction; thirdly, when the AO has not come up with specific finding that the transaction in question is a sham transaction, he cannot treat the transaction of “capital infusion” by the assessee company as a loan and to charge the interest thereon on notional basis; and fourthly, in the absence of any specific finding by the AO that any income has arisen from international transaction, TP provisions contained in Chapter-X of the Act do not apply. Section 92(1) of the act says that income arisen from international transaction is a condition precedent for application of Chapter-X of the Act. Consequently, we are of the considered view that addition made by the AO and confirmed by the ld. CIT(A) on account of arm’s length price of value of interest receivable on loans outstanding in the name of Jaypee Singapore Pte Ltd. is not sustainable, hence ordered to be deleted - Decided in favour of the assessee. Issues Involved:1. General nature of the order.2. Disallowance under Section 14A read with Rule 8D.3. Disallowance of interest under Section 36(1)(iii).4. Disallowance of foreign tours and travel expenses.5. Addition on account of difference in arm's length price on interest on equity provided to the foreign subsidiary.6. Treatment of the amount standing in the name of the assessee as a loan to the subsidiary.7. Calculation of disallowance of interest under Section 36(1)(iii).8. Appropriate rate of interest for transactions in foreign currency.Issue-wise Detailed Analysis:GROUND NO.1: General Nature of the OrderThe first ground was general in nature and did not require adjudication.GROUNDS NO.2, 3 & 4: Disallowance under Section 14A read with Rule 8DThese grounds were not pressed during the arguments and thus were dismissed.GROUNDS NO.5, 6, 7 & 8: Disallowance of Interest under Section 36(1)(iii)The assessee contended that the investments were made from its own funds, supported by the balance sheet showing sufficient paid-up share capital and reserves. The Tribunal noted that the AO did not record satisfaction as required under Section 14A(2) that the working given by the assessee was incorrect. Citing precedents from the Supreme Court and High Courts, the Tribunal held that the addition made under Section 14A was unsustainable and ordered its deletion.Regarding the disallowance of Rs. 24,15,000 under Section 36(1)(iii), the Tribunal found that the transactions with Futurz Next Services Pvt. Ltd. were regular business transactions and not loans. The advances were given out of the assessee’s own funds for commercial expediency. Therefore, the disallowance was deemed unsustainable and ordered to be deleted.GROUND NO.9: Disallowance of Foreign Tours and Travel ExpensesThe AO disallowed Rs. 4,48,911 on the grounds that the expenses were not for business purposes. The Tribunal noted that although Saurav Arora was a director, the assessee failed to prove the business purpose of the foreign tours. However, the Tribunal held that the addition should be made against Saurav Arora in his individual capacity, not against the assessee company. Consequently, the disallowance was deleted.GROUNDS NO.10, 11, 12 & 13: Addition on Account of Arm's Length Price on InterestThe AO treated capital infusion into foreign subsidiaries as deemed loans and made an addition based on arm's length price of interest. The Tribunal found that the investment was made as per RBI guidelines and was not a sham transaction. Citing various judgments, the Tribunal held that the AO could not recharacterize the transaction as a loan and charge interest on a notional basis. The addition was deemed unsustainable and ordered to be deleted.Conclusion:The appeal was partly allowed, with several disallowances and additions being deleted based on the Tribunal's findings that the AO's actions were not in accordance with legal principles and precedents. The Tribunal emphasized the importance of proper characterization of transactions and the necessity of recording satisfaction before making disallowances.