2023 (3) TMI 714 - AT - Income Tax

Department's Appeal Dismissed, Assessee's Cross Objection Partly Allowed. Tribunal Upheld CIT(A)'s Findings.

The Department's appeal was dismissed, and the assessee's cross objection was partly allowed. The Tribunal upheld the CIT(A)'s findings on the qualitative ... Arm's length price - transfer pricing adjustment - comparability and quality adjustment - burden of proof on assessee - depreciation on capitalised share issue expenses - mercantile system of accounting - taxation on accrual - condonation of delay for COVID periodArm's length price - transfer pricing adjustment - comparability and quality adjustment - burden of proof on assessee - Deletion of downward purchase price adjustment of Rs.2,05,23,752/- made by TPO for purchases of MS ingots from the associated enterprise for January 2014. - HELD THAT: - The Tribunal upheld the CIT(A)'s deletion of the TPO's downward adjustment because the assessee produced contemporaneous and substantive evidence showing a qualitative difference between MS ingots purchased by the assessee and those sold by the AE to unrelated parties. The evidence accepted by the authorities included third party confirmations attributing price variation to higher carbon content and random sizes, chemical analysis and factory test reports, and consultant certificates describing sub standard ingots sold at discounts. The TPO had accepted the assessee's quality contention for December 2013, February 2014 and March 2014 and made adjustment only for January 2014 on the sole ground of higher third party sales that month; no material was placed on record to show transactions of January 2014 were different in nature from other months. In these circumstances the Tribunal found no reason to disturb the CIT(A)'s finding that the downward adjustment was unsustainable, since the assessees bore the evidentiary burden and had produced credible, uncontroverted material supporting non comparability of the third party purchases. The Tribunal therefore dismissed the Department's appeal on this ground. [Paras 6, 7, 8, 9, 10]Dismissal of the Department's appeal against deletion of the transfer pricing downward adjustment; the addition is deleted.Depreciation on capitalised share issue expenses - Whether depreciation is allowable on expenditure incurred for increase in authorised capital which the assessee had capitalised. - HELD THAT: - The Tribunal affirmed the CIT(A)'s conclusion that while the AO could not compel the assessee to treat the expenditure as revenue, depreciation on capitalised expenses incurred in connection with increase in authorised capital is not allowable. The Tribunal relied on established judicial precedents to the effect that such capitalised share issue or authorised capital related expenses do not qualify for depreciation and fall within the non allowable category. Consequently, the CIT(A)'s direction to disallow depreciation claimed on the capitalised amount was upheld. [Paras 11, 12, 13, 14]Assessee's ground dismissed; depreciation on the capitalised authorised capital expenses disallowed.Mercantile system of accounting - taxation on accrual - Whether interest income reflected in Form 26AS but taxed in the subsequent year can be excluded from income of assessment year 2014 15 to avoid double taxation. - HELD THAT: - The Tribunal agreed with the CIT(A) that, under the mercantile system of accounting followed by the assessee, interest income accrues and is taxable in the year of accrual; therefore offering the same amount to tax in the subsequent year does not by itself justify exclusion in the earlier year. The assessee had accepted the addition before the AO; however, the Tribunal noted that if the amount is ultimately taxed in the subsequent year, Revenue may grant consequential relief after carrying out necessary verifications. Accordingly the assessee's appeal was partly allowed limited to permitting the Revenue to provide relief in the subsequent year upon appropriate verification. [Paras 15, 16, 17]Addition on account of interest upheld for AY 2014 15; partly allowed insofar as consequential relief may be given in AY 2015 16 after verification.Final Conclusion: The Department's appeal is dismissed in respect of the transfer pricing downward adjustment; the assessee's cross objection is partly allowed - depreciation claimed on capitalised authorised capital expenses is disallowed, and the interest addition is sustained for AY 2014 15 subject to possible consequential relief in AY 2015 16 after verification. A 21 day delay in filing the revenue appeal was condoned on account of the COVID period. Issues Involved:1. Deletion of adjustment/addition of Rs. 2,05,23,752 on account of purchase of MS ingots.2. Depreciation on expenses incurred for increase in share capital for Rs. 5,24,023.3. Addition of Rs. 2,16,920 on account of interest based on Form 26AS offered for tax in the subsequent year.Summary:Issue 1: Deletion of adjustment/addition of Rs. 2,05,23,752 on account of purchase of MS ingotsThe Department's appeal contested the deletion of the adjustment/addition of Rs. 2,05,23,752 on account of the purchase of MS ingots from the assessee's associated enterprise (AE). The assessee argued that the higher prices paid were due to the superior quality of MS ingots compared to those sold to non-related parties. The Transfer Pricing Officer (TPO) had accepted this explanation for all months except January 2014, leading to a downward adjustment for that month. The CIT(A) allowed the appeal of the assessee, noting that substantial evidence, including third-party confirmations, factory test reports, and chemical analysis, substantiated the quality difference. The Tribunal found no infirmity in the CIT(A)'s order, affirming that the qualitative difference justified the price variation and dismissed the Department's appeal.Issue 2: Depreciation on expenses incurred for increase in share capital for Rs. 5,24,023The assessee's appeal challenged the disallowance of depreciation on expenses related to the increase in authorized capital. The CIT(A) held that while the AO could not compel the assessee to treat such expenses as revenue expenditure, the depreciation claim on capitalized expenses was not allowable. The Tribunal upheld the CIT(A)'s decision, referencing precedents that denied depreciation on capitalized share issue expenses, and dismissed the assessee's appeal on this ground.Issue 3: Addition of Rs. 2,16,920 on account of interest based on Form 26AS offered for tax in the subsequent yearThe assessee's appeal also contested the addition of Rs. 2,16,920 for interest income not offered in the return but reflected in Form 26AS. The CIT(A) upheld the AO's addition, emphasizing that under the mercantile system of accounting, interest income should be taxed on accrual. The Tribunal agreed but directed that if the interest income was taxed in the subsequent year, the Revenue should grant consequential relief after verification. Thus, the ground was partly allowed.Conclusion:The Department's appeal was dismissed, and the assessee's cross objection was partly allowed. The Tribunal upheld the CIT(A)'s findings on the qualitative difference in MS ingots, disallowed depreciation on capitalized share issue expenses, and directed potential relief for double taxation of interest income.