2026 (1) TMI 1408 - AT - Income Tax

Tax disputes on depreciation, warranty provisions, rental classification, share premium consideration and TDS verification resolved with directed deletions and remands

Dispute concerns multiple income-tax issues: AO disallowed depreciation for newly purchased fixed assets for lack of source explanation notwithstanding ... Depreciation pertaining to the new assets purchased - depreciation is disallowed by the Assessing Officer as Assessee has not explained the source of purchase of fixed assets - HELD THAT:- The purchases of the fixed assets are made through banking channels, recorded in the books of accounts which are audited under the Companies Act as well as under the Income Tax Act. It is not the case of AO that purchase of assets are bogus because of the reason that the original addition made u/s. 68 of the Act was deleted and depreciation was disallowed. The depreciation disallowance was not on account of user of the assets but only for the reason that Assessee did not explain to the satisfaction of AO the sources of fund for purchase of assets of Rs. 17.80 crores. As there is no doubt about the actual cost of the assets, user of the assets and ownership of the assets, we do not find any reason to sustain the disallowance of depreciation as claimed by the Assessee. AO is directed to delete the same. Further, the observation of the AO to not allow the pending WDV of these assets for the subsequent years is also not correct. The Assessee deserves to be allowed the depreciation according to the provisions of the Act. Disallowance of provision of the warranty expenditure - claim of the AO is that provision under head for warrants utilized during the year is not added back of the other income of the Assessee. However, according to him it is a contingent liability and same is disallowable - HELD THAT:- perused the computation of total income where the Assessee has increased the losses by claiming the provision for warranties as per note no 11 of the audited financial statements claiming deduction at Rs. 4,51,07,257/-. According to us, the correct deduction allowable to the Assessee is Rs. 26,53,18,804/-. We are duty bound to direct the Assessing Officer to compute the correct income of the Assessee, If the issue is before us and no further facts are required to be investigated, here note no. 11 is available before the Ld. Assessing Officer, Ld. DRP as well as before us along with the computation of total income. Therefore, we restore the whole issue back to the file of the Ld. Assessing Officer with a direction to grant the correct deduction to the Assessee. The direction of the Ld. DRP and the findings of the Ld. Assessing Officer are not sustainable. In view of the facts and further the claim of deduction of the Assessee of Rs. 4,51,07,257/- is not allowable but a different deduction is allowable to the Assessee., The LD AO may compute the correct deduction allowable being the amount of warranty provision made during the year. Correct head of income - house property v/s business income - treating the rental income received from leasing and renting of trailers as income from house property - Assessee submits that such income is not from the property but income from profits and gains of business. It is submitted that merely because the TDS deduction u/s. 194I which is rental income from renting of trailers, which is business of the Assessee, it cannot be taxed as income from house property - HELD THAT:- Assessing Officer merely because tax is deducted u/s. 194I treated it is as income from house property. It is not the case that the Assessee has not shown this income as business income. Merely because, the tax deducted u/s. 194I, it cannot be the case that the income is always chargeable to tax under the head income from house property. Provisions of section 194I is not talking about only renting of the property but also renting of machinery, plant or equipment. Further, with respect to the sum of Rs. 15,00,000/- received as sub letting charges at a trade exhibition is already shown by the Assessee by netting off the expenditure. Therefore, there is a double addition of all the above three income. Hence, we direct the Ld. Assessing Officer to delete the above addition as income from house property because income has been correctly offered by the Assessee under the head business income. Calculation of correct carry forward of losses - Both the parties confirm that Assessing Officer may be directed to verify and allow correct carry forward of losses. Accordingly, we direct the Ld. Assessing Officer to compute the correct carry forward of losses for any subsequent years to the Assessee. In the result, this ground is also allowed. Non-deduction of TDS and short deduction of tax u/s. 194C and 194J - We find that Assessee has filed additional evidence before the Ld. Dispute Resolution Panel on 10.05.2022 wherein the detailed breakup of payment u/s. 194C and 194J. In this breakup, the Assessee has also given the details of lower deduction of tax certificates obtained by the parties. The Assessee also filed a miscellaneous application before the Ld. Dispute Resolution Panel. That this miscellaneous application is with relation to the other addition. Further, while reading the direction of the Ld. DRP, we do not find that any such additional evidence were admitted or not admitted by the Dispute Resolution Panel. Therefore, we find that, that the claim of the Assessee that there is not short deduction of tax at source has not at all been considered by the Ld. lower authorities. On verification of the details furnished before us, it is evident that, that Assessee has produced the evidence to that fact that Assessee has deducted tax properly. But, as these details were not verified by the Ld. Authorities, we restore this ground of appeal to the file of the Ld. Assessing Officer with a direction to verify the detail. Addition under the provisions of section 56(2)(viib) - consideration received for issue of shares exceeding the fair market value of such shares - During the year, Assessee has issued 2,00,000 equity shares at a face value of Rs. 100 to its foreign holding company at a premium of Rs. 9,900/- per share and an issue price at Rs. 10,000/- per share - HELD THAT:- The undisputed recorded facts of the case in the Assessment Order show that Assessee is a company in which the public are not substantially interested. If such company receives, from any resident person, any consideration for the issue of shares that exceeds the face value of such shares, such consideration received if exceeds the fair market value of the shares is income of the Assessee u/s. 56(2)(viib) of the Act. In this case, it is recorded by the Assessing Officer that the shares are issued to its foreign holding company which is a non-resident. Identical issue arose in case of the Assessee for Assessment Year 2020-21 wherein the addition of similar thing was made but u/s. 68 of the Act which was deleted. For that year, no action was taken to tax the above receipt u/s. 56(2)(viib) of the Act. The reading of the provision clearly shows that this provision will apply only if the consideration is received from a resident. Therefore, no such addition could have been made u/s. 56(2)(viib) of the Act. The coordinate bench in Edulink Private Limited vs. ITO [2019 (9) TMI 338 - ITAT BANGALORE] has also dealt with this issue and held that, that the provisions of section 56(2)(viib) does not apply on shares of the non-resident. Accordingly, we allow ground no. 3 and direct the Ld. AO to delete the addition u/s. 56(2)(viib) of the Act. Adhoc disallowance made on cost of vehicles, repairs expenditure and residual value obligation settlement expenses - We find that as the technical goodwill on repairs is questioned by the Ld. Assessing Officer in the subsequent years and after obtaining the explanation of the Assessee the disallowance was not made. We also find that this is the expenditure on general repairs of the vehicles sold by the Assessee for the reason that these are part of the free services or minor repair works just to save the brand value and goodwill of the company as well as the relationship with the customers. In view of this, the disallowance made by the Ld. Assessing Officer being 10% of that expenditure deserves to be deleted and hence deleted. Cost of vehicles on settlement, details of repurchase of the vehicles were also submitted. The E-mail communication with respect to the repairs are also submitted. The Assessee has submitted item-wise details of the expenditure of all these expenses along with the invoices which are not considered by the lower authorities including Ld. DRP and merely disallowed 10% of the above expenses on adhoc basis. We do not find that when the 90% of the expenditure is allowed in the Assessment Order itself why the balance of 10% should have been disallowed. It is not the case that complete expenditure of Rs. 27.86 crores which disallowed by the Ld. Assessing Officer holding that in absence of details, same is not allowable. The details were completely furnished by the Assessee before the Ld. DRP which was not even verified - we direct the Ld. Assessing Officer to delete the complete disallowance. Accordingly, ground no. 4 of the Appeal is allowed. Disallowance of depreciation claim - plant and machinery were not put to use - We restore this ground back to the file of the Ld. Assessing Officer with a direction to verify and without questioning the genuineness of the claim, the date of actual vehicles put to use and income offered by the Assessee decide the issue that why Assessee is not entitled to the depreciation as claimed by it when the income for the same is already disclosed in the profit and loss account. The Assessee is earning rental income by showing the vehicles leased out then if lease rent is earned for a particular period, we fail to appreciate that why depreciation should not be allowed to the Assessee. The Assessing Officer is directed to verify the same and decide the rate of depreciation on the vehicles. Issues: (i) Whether depreciation disallowance of Rs. 2,14,45,821/- (ground no. 17, AY 2017-18) made after invoking section 68 is sustainable; (ii) Whether warranty provision balance of Rs. 4,51,07,257/- (ground no. 18, AY 2017-18) is disallowable or requires recomputation; (iii) Whether rental receipts of Rs. 48,51,630/- (ground no. 19, AY 2017-18) are income from house property or business income; (iv) Whether carry forward of losses is correctly computed (ground no. 20, AY 2017-18); (v) Whether disallowance under section 40(a)(ia) for short deduction of TDS (ground no. 2, AY 2018-19) is sustainable; (vi) Whether addition under section 56(2)(viib) of Rs. 198 crores for issue of shares to a non-resident (ground no. 3, AY 2018-19) is sustainable; (vii) Whether adhoc 10% disallowance on cost of vehicles, repairs and residual value obligation settlement (ground no. 4, AY 2018-19) is sustainable; (viii) Whether depreciation claim of Rs. 5,85,75,163/- for plant and machinery not put to use (ground no. 5, AY 2018-19) is correctly restricted.Issue (i): Whether depreciation disallowance of Rs. 2,14,45,821/- is justified.Analysis: The Tribunal examined purchase records, banking channels, audited books, user and ownership of assets; noted that original unexplained-credit addition under section 68 was deleted and that AO's disallowance related only to source of funds; evidence in books and statutory audits established cost, ownership and use.Conclusion: Depreciation disallowance of Rs. 2,14,45,821/- is deleted and depreciation/WDV carry forward to subsequent years must be allowed. (In favour of Assessee)Issue (ii): Whether warranty provision balance of Rs. 4,51,07,257/- is disallowable or requires recomputation.Analysis: Tribunal reviewed movements of provisions across AY 2016-17 and AY 2017-18, amounts created and utilized, audited notes and computation; found correct deductible amounts are the provisions made for respective years and that AO/DRP treatment was incorrect.Conclusion: Addition of Rs. 4,51,07,257/- is not sustained; matter is restored to AO to compute and allow correct warranty provision deductions (deduction to be Rs. 9,18,70,138/- for AY 2016-17 and Rs. 26,53,18,804/- for AY 2017-18 as indicated). (Partly in favour of Assessee)Issue (iii): Whether receipts of Rs. 48,51,630/- are income from house property or business income.Analysis: Tribunal considered nature of receipts (renting of trailers, subletting of exhibition space), TDS under section 194I covering renting of machinery as well, and that income was offered as business income and supported by records.Conclusion: Amounts are correctly taxable as business income; AO directed to delete the addition treating them as income from house property. (In favour of Assessee)Issue (iv): Whether carry forward of losses is correctly computed.Analysis: Both parties asked AO to verify and allow correct carry forward; Tribunal directed AO to compute correct carry forward as claimed by assessee.Conclusion: Ground allowed and AO directed to compute and allow correct carry forward of losses. (In favour of Assessee)Issue (v): Whether disallowance under section 40(a)(ia) for alleged short deduction of TDS (u/s. 194C/194J) is sustainable.Analysis: Tribunal noted that assessee produced detailed breakups and lower TDS certificate evidence before DRP and furnished further particulars; lower authorities did not verify these materials; factual verification by AO is required.Conclusion: Ground restored to AO for verification and deletion of disallowance if particulars are in order. (In favour of Assessee)Issue (vi): Whether addition under section 56(2)(viib) for issuance of shares to foreign holding company is sustainable.Analysis: Tribunal examined statutory language of section 56(2)(viib) and rule 11UA, noting provision applies when consideration is received from a resident; shares were issued to a non-resident holding company; precedents and coordinate bench decisions support inapplicability to non-resident consideration.Conclusion: Addition under section 56(2)(viib) of Rs. 198 crores is deleted. (In favour of Assessee)Issue (vii): Whether adhoc 10% disallowance on cost of vehicles, repair expenditure and residual value obligation settlement is justified.Analysis: Tribunal reviewed submitted annexures, master buyback agreements, invoices and item-wise details placed before AO/DRP; found substantial particulars were furnished and not verified; similar expenditures allowed in other years on explanations.Conclusion: Complete adhoc disallowance of Rs. 27,86,84,867/- is deleted. (In favour of Assessee)Issue (viii): Whether depreciation claim for plant and machinery (claimed Rs. 5,85,75,163/-) should be restricted for being not put to use.Analysis: Tribunal found buses were manufactured, transferred from inventory to fixed assets and leased to subsidiary on different dates; invoices and stock transfer evidence exist; factual determination of put-to-use dates and corresponding income requires verification.Conclusion: Ground restored to AO to verify dates of actual use and allow depreciation accordingly. (In favour of Assessee)Final Conclusion: The Tribunal allowed the assessee's corporate grounds for AY 2017-18 (grounds 17-20) and granted substantial relief for AY 2018-19 by deleting or directing verification of contested additions and disallowances; overall the appeals are allowed in part and remitted where factual verification is required.Ratio Decidendi: Section 56(2)(viib) applies only where consideration for issue of shares is received from a resident; factual verifications are required before making adhoc disallowances or sustaining additions alleged due to short deduction of tax at source.