TaxTMI 
TaxTMI 
2016 (1) TMI 459
X X X X Extracts X X X X
X X X X Extracts X X X X
....f convenience and brevity. Assessment Year 2006-07 2. The assessee's appeal ITA 1859/Ahd/2011 raises first substantive ground challenging the CIT(A)'s action in confirming prior period expenditure disallowance of Rs. 67,88,591/- made in the course of a regular assessment. This assessee-company is engaged in a variety of businesses i.e. export and import, domestic trading and manufacturing of commodities. It claimed prior period expenditure inter alia on the ground that the very practice is consistently followed in many assessment years, prior period income of Rs. 24,53,397/- had already been declared, relevant bills had not been received at the time of finalizing accounts of the previous assessment year, its unique business gave rise to credit and debit entries of earlier years, there was no revenue loss involved and the issue had already been decided in its favour in earlier assessment years. This was followed an alternative plea of netting of prior period income against the impugned expenditure. The Assessing Officer rejected all this explanation by quoting lack of proof of crystallization of the impugned expenditure. He observed that no supportive bills, vouchers, and reas....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of no consequence, more particularly, when the same is allowable. Next judgment (2010) 194 TAXMANN 158 (Del) CIT vs. Jagatjit Industries accepts consistent accounting practice claiming identical expenditure in mercantile system of accounting wherein the necessary expenditure vouchers have been received after 31st March of the relevant accounting period. Case law (2014) 221 TAXMANN 80 (Bom) CIT vs. Mahanagar Gas Ltd supports assessee's case that prior period expenditure crystallize during the year on receipt of bills is allowable. This is followed by (2010) 328 ITR 17 (Del) CIT vs. Exxon Mobil Lubricants Pvt. Ltd upholding CIT(A)'s and tribunal's view that if the assessee admits prior period income which was not excluded while working out relevant previous year income, it is unreasonable to allow one part of prior period adjustment i.e. prior period expenditure. We come to Revenue's case law now. The first one is (2013) 33 taxmann.com 92 (Bang) Bearing Point Business Solutions vs. DCIT and (2013) 35 taxmann.com (Hyd) now Bharat Ventures Ltd vs. CIT deciding the issue in Revenue's favour. We find that these tribunal's decisions do not confirm to different views of various hon'ble....
X X X X Extracts X X X X
X X X X Extracts X X X X
....owable. The Tribunal had confirmed the view of CIT (Appeals). We may record the Tribunal's discussion on this aspect. '36. We have heard the rival contention of both the parties. We relied upon the decision of Hon'ble Punjab and Haryana High Court in the case of Ramco Industries reported in 17 DTR 241, wherein it is held as under:- 'When the assessee having folly furnished the documents and submitted form No. 10CCB during the assessment proceedings, claiming the deduction under section 80-IB which was not claimed in the return, the deduction is admissible even in absence of revised return. The Hon'ble High Court held that there was no requirement for filing of any revised return. Hon. High Court has further considered the decision of the Hon'ble Goetz (India) Ltd. v. CIT (284 ITR323) (SC) and after considering the decision of SC the High Court has held that when the assessee has filed form No. 1OCCB during the assessment proceedings, the claim is admissible and CIT(A) has rightly allowed the claim of the assessee and we find that there is no requirement of filing any revised return." 37. In the instant case, on hand, the assessee h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t "The Appellate Assistant Commissioner, therefore, has plenary powers in disposing of appeal The scope of his power is coterminus with that of the Income-tax Officer. He can do what the Income-tax Officer can do and also direct him to do what he has failed to do." It was observed that there was no reason why the appellate authority cannot modify the assessment order on an additional ground even if not raised before the Income-tax Officer. The Act does not place any restriction or limitation on the exercise of appellate power. It was observed that- 'The above observations are squarely applicable to the interpretation 251(l)(a) of the Act. The declaration of law is clear that the power of the Appellate Assistant Commissioner is co-terminus with that of the Income-tax Officer, if that be so, there appears to be reason as to why the appellate authority cannot modify the assessment order on an addition ground even if not raised before the Income-tax Officer. No exception could be taken to this view as the Act does not place any restriction or limitation on the exercise of appellate power. Even otherwise an Appellate Authority while hearing appeal against the order of a sub....
X X X X Extracts X X X X
X X X X Extracts X X X X
....), the Delhi High Court held that there is no prohibition on the powers of the Tribunal to entertain an additional ground which according to the Tribunal arose in the matter and for just decision of the case. 35. In case of CIT v. Pruthvi Brokers & Shareholders (P.) Ltd. [2012] 349 ITR 336/208 Taxman 498/23taxmanacom 23 (Bom) the Bombay High Court considered the issue at considerable length and held that Commissioner (Appeals) as well as the Tribunal have the jurisdiction to consider the additional claim and not merely additional legal submissions. The appellate authorities have discretion to permit such additional claims. Such claims need not be those which became available on account of change of circumstances of law but which were even available when the return was filed. 36. The Delhi High Court once again in recent judgment in the case of CIT v. Sam Global Securities Ltd. [2014] 360 ITR 682/[2013] 38 taxmann.com 129 observed that the Courts have taken a pragmatic view and not a technical one as to what is required to be determined in taxable income. In that sense assessment proceedings are not adversarial in nature. With these observations Court confirmed the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Tribunal when facts necessary to examine such ground, contention or claim are already on record. In such a case the situation would be akin to allowing a pure question of law to be raised at any stage of the proceedings. This is precisely what has happened in the present case. The Appellate Commissioner and the Tribunal did not need to nor did they travel beyond the materials already on record, in order to examine the claims of the assessees for deductions under sections 80-IB and 80HHC of the Act. 41. In the decisions that we have noted above, the Courts have considered such questions when a legal contention or a claim was based on material already on record but raised at an appellate stage. On such premise we wholeheartedly agree that the appellate authority and the Tribunal would have the power to entertain any such new ground, legal contention or claim. However, it is only the Bombay High Court in the case of CIT v. Pruthvi Brokers & Shareholders (P.) Ltd. (supra), which has travelled a little beyond this preposition and come to the conclusion that even if facts necessary to examine such a claim are not placed before the assessing officer and, therefore, not on record,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....edging 23.5% shareholding of Mundra Port and SE2 Limited owned by assessee company. For providing this guarantee by pledging shares no guarantee fees was charged by the assessee. In view of same, a show-cause notice dated L 10.2010 was issued to the assessee to show cause why arm's length guarantee fees should not be computed using CUP as most appropriate method for the transaction. 5.2 In response to the above show-cause notice the assessee has submitted its reply vide letter dated 16/10/2010. The relevant portion is reproduced hereunder. "... In respect of above the assessee company would hereby like to clarify that its AE (M/s. Adani Global Pte Ltd.) had raised term loan of$ 239.82 Million from ICICI Bank Limited and for the same the assessee company intended to provide a guarantee by pledging the above mentioned shares. However though the Bank and AE agreed on the given terms (annexed Enclosure 1 to this letter) the same could not have been done without the permission and approval of RB.I. In order to do so AE wrote a letter (annexed herewith as Enclosure-2) to R.B.I. for obtaining permission for the same. But in response to the said letter RB.I. after doi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rovided by the parent company for some reason, subsidiaries that attract funding from third parties are necessarily required to arrange additional collateral from related (parent) company in the form of guarantees. At the same time, guarantees are also being used, at the option of the borrower, to obtain better conditions, notably interest rates, on external financial transactions, creating a benefit on a group -wide basis." 2.2 The appellant has submitted in its written submission, which is as under: 1.1. "This ground of appeal pertains to an addition of Rs. 3,65,96,000 made by the Ld. A.O. pursuant to the order dated 18th October, 2010 passed under Section 92CA(3) of the Income Tax Act, 1961 by the Transfer Pricing Officer - I, Ahmedabad. During the course of proceedings before the TPO, the Appellant Company was informed by the TPO that its associate enterprise M/s. Adani Global PTE Limited, Singapore, raised term loan of Singapore Dollars 239.882 million (converting to Rs. 731.92 crores) from ICICI Bank Limited, for which the appellant company provided guarantee by way of pledging 23.5% shareholding of Mundra Port & SEZ Limited. 1.2. The Transfer Prici....
X X X X Extracts X X X X
X X X X Extracts X X X X
....;s attention to recent judgment of hon'ble Hyderabad ITAT in case of Four Soft Ltd. vs. DCIT, Circle - 1(3), Hyderabad (ITA No. 1495/Hyd/W) (copy enclosed on Page No. 285 of PB), Further, we submit that it is not a financial transaction for the appellant company and accordingly the addition cannot be made in the hands of appellant company. 1.5. In addition to above, we also submit that, the Ld. TPO has further mentioned that the letter dated 21st February, 2007 from Reserve Bank of India is regarding pledging of shares in favour of IDBI Trusteeship Services Limited and not in favour of ICICI Bank Limited. Based on the above mentioned facts, the Ld. TPO has arbitrarily concluded that the Appellant Company did provide guarantee by pledging the aforesaid shares and, therefore, he proceeded to calculate the Arms Length Price. 1.5. 1 It is respectfully submitted that the order passed by the Ld. TPO is based on non-existent and incorrect facts. The Transfer Pricing Officer has referred to the letter dated 28th December, 2006 of ICICI Bank Limited, Singapore the copy of same is enclosed herewith as Annexure - A - 8. From this letter it is clear that the loan was sanc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ledge shares of MPSEZ in favour of IDBI trusteeship services Ltd (These letters were stated to have been submitted to the TPO). TPO made the addition on the ground that loans were taken from ICICI bank Limited, Singapore whereas RBI's permission refusing pledge of shares was in the case of IDBI trusteeship Ltd. TPO considered these two transactions separate and held that appellant provided guarantee to AE by pledging its investment in shares. However after considering these letters referred earlier, it is clear that IDBI trusteeship Ltd is security trustee of ICICI bank Limited, Singapore and RBI's letter refusing the permission for pledge of shares is in respect of same shares which were provided for guarantee to ICICI bank Limited, Singapore. Thus, it is clear that entire addition is based on the misconception that these two entities represented separate transactions. In view of this it is clear that appellant did not provide guarantee services by pledging shares of MPSEZ for which any adjustment of guarantee commission can be made. The addition made by the assessing officer is therefore not sustainable on facts. Apart from this, appellant also relied upon the de....
X X X X Extracts X X X X
X X X X Extracts X X X X
....facts and circumstances that the CIT(A) has rightly held the assessee not to have furnished the impugned corporate guarantee in favour of its AE so as to be taken as an international transaction u/s. 92C of the Act. This first substantive ground is rejected. 13. We come to Revenue's second substantive ground challenging lower appellate order restricting section 14A disallowance of Rs. 8,13,65,928/- to Rs. 2,10,81,000/-. The assessee also raises a corresponding ground in its appeal ITA 558/Ahd/2012. There is no dispute that assessee has earned exempt incomes from dividends amounting to Rs. 8,77,953/- as well as its share profit from partnership firm M/s Adani Exports of Rs. 71.86 crores exempt u/s. 10(2A). The assessing Officer sought to invoke section 14A to disallow corresponding expenditure. The assessee submitted that there was no nexus arising between its exempt income and expenditure incurred. It denied to have put on use any borrowed funds in making the impugned tax free investments. And also that no administrative expenditure had been incurred on its part. The Assessing Officer appears to have entered into a much lengthier discussion for observing that though Rule 8D of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rores received from advances given to subsidiary companies out of funds borrowed during the year. Since assessing officer reduced other interest income from interest expense, this interest income should also have been reduced and only on net interest expense of Rs. 2.66 crores, the proportionate disallowance of interest should be worked out as per rule 8D (ii) The aforesaid arguments of the appellant have been considered in detail. Just by maintaining separate books of accounts, appellant cannot claim exemption from disallowance under section 14A. When business funds were commonly used for business as well as investment, it cannot be said that no part of borrowed funds were used in making investments resulting in exempt income. Assessing officer dealt with this argument in detail. Just by maintaining separate books of accounts, appellant cannot be exempted from applicability of section 14 A. The disallowance of interest under section 14 A can still be made if appellant paid interest which is not directly relating to earning taxable income and all expenses relating to investment are discernible. Since appellant was not able to demonstrate the working of disallowable expense....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l these decisions and also assessing officer's computation of interest disallowance, I find merit in appellant's argument that RS 59.71 crores interest income should be reduced from interest expenses while computing disallowance of interest. After reducing the said interest income, balance interest payment of Rs. 2,65,86,319 remains for proportionate disallowance as per rule 8D (ii). Assessing officer is directed to disallow interest as per the formula given in rule 8D (ii) by adopting interest figure at Rs. 2,65,86,319 as against RS 62.37 crores taken in assessment order. Appellant computed the interest disallowance at RS 30.99 Lacs in the submission which may be verified by the AO. The disallowance of interest under section 14 A is confirmed to this extent. As regards disallowance of administrative expenses, appellant's arguments are in the following lines- 1-Profit from partnership firm is not really exempt as held by Bombay tribunal in the decisions relied upon by the appellant and accordingly no disallowance of expenses relating to this income can be made. 2- The disallowance of administrative expenses till assessment year 2007-08 cannot ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....se claims availability of sufficient non-interest bearing funds much more than its tax free investment throughout. Its further case denies to have incurred any administrative expenditure as well. Its categoric case made out in lower proceedings is that its non-interest bearing funds in the nature of general reserves, debt redemption reserves and share premium amounts read Rs. 396.61 crores, Rs. 70 crores and Rs. 181.30 crores respectively. Its tax free investments are of Rs. 600.82 crores. These figures are as on the last day of the relevant account year 31- 03-2007. We observe in these facts and circumstances that a presumption can safely be drawn as per case law of (2014) 363 ITR 474 (Guj) CIT vs. Torrent Power Ltd that the impugned tax free investments have been made out of such surplus funds not carrying any interest component. Hon'ble jurisdictional high court further concludes that a specific finding regarding involvement of actual administrative expenditure has also to be given while making such a disallowance. The above extracted portion of the relevant finding makes it clear that the same neither takes into account assessee's non-interest bearing funds nor its plea of havi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of building block included this asset. As per section 43 (6), WDV cannot be changed subsequently without any basis. Depreciation is allowable on WDV of block of asset and therefore assessing officer cannot modify the same in any subsequent year. Apart from these arguments, appellant's reliance upon the decision of ITAT Mumbai in the case of Deepak fertilizers and Petrochemical Corporation Ltd, 116 ITD 372 is very relevant. In the said decision it is held that assessee was the owner of the premises allotted to it by virtue of purchases of shares and consequently was entitled to claim depreciation. Respectfully following this decision, assessing officer is directed to allow depreciation on full value of office premises which is partly represented in the form of shares. This ground is accordingly allowed." 17. Heard rival contentions. There is no dispute about the fact that the assessee has claimed deprecation in question on shares of the above stated assets. The Revenue fails in rebutting the crucial appellate finding that the same already forms part of the relevant bloc of assets since 1998 treated eligible for deprecation. We further find that a co-ordinate bench decision o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng payment of outstanding bonus as qualified by the Auditor on 26.10.2007 and 27.10,2007 (after the date of report by the Auditor & before the due date of filing of return]. In view of the evidences on record, no disallowance for outstanding bonus as qualified by the Auditor is being made. c) 6.5 As regards leave encashment the contention of the assessee has been considered and is not found acceptable. It is with respect submitted that as on date Section 43B(f) is a part of the Income-tax Act. Moreover, the decision of the Calcutta High Court is not binding as the matter is pending before the Hon'ble Supreme Court. As has been explained by the assessee above, the decision of Hon'ble Calcutta High Court M/s. Exide Industries has been stayed by the Hon'ble Supreme Court and the assessee has been directed to pay fax as if Section 43B(f) is on the Statute Book. Accordingly, since the assessee has not paid the amount of provision for leave encashment debited in its books of accounts during this year before the due date of filing the return of income (there is no dispute on these facts), the same are clearly disallowable u/s.43B(f) and are accordingly added. Penalty ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....essee h) 6.6.2 Thus, on combined reading of above two decisions, it is clear that the entries in the books of account are not determinative of the question whether the assessee has earned any profit or incurred any expenditure, or not. What is to be considered is the true nature of the transactions. In the case at hand, the true nature of the transactions with respect to VAT Payable (Karnataka), Entry Tax and Custom Duty is that these are revenue items which should have been passed through P&L Account. Accordingly, if is held that these receipts are revenue in nature and are of the nature specified u/s.43B i.e. tax & duty, if may be noted that these entries of taxes and duties payable would represent the taxes collected by the assessee from its customers on sales, which has been credited to the tax/ duty payable account instead of crediting if to the sates account. Thus, to this extent the credits in the P&L Account are reflected less. i) The assessee has the ability to pay these amounts to the Government which if passed to the P&L Account, would be debited to it. Hence, by not passing the entries to the P&L Account the credits have been recorded less and similarl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s far as the outstanding interest demand as of date is concerned, it would be open to the Department to recover that amount in case Civil Appeal of the Department is allowed. We further make it clear that the assessee would, during the pendency of this Civil Appeal, pay tax as if Section 43B(f) is on the Statute Book but at the same time it would be entitled to make a claim in its returns." 1.2.2. However, the id A.O. held that since the appellant company has not paid the amount during the year before filing its return of income, the same is clearly disallowable. 1.3. In this regards, it is respectfully submitted that the decision of Hon'ble Calcutta High Court is good in law till the ultimate outcome of the Department's civil appeal by the Supreme Court. Further, we state that the said cannot be applied as a universal principal for other cases. We also submit that till today the hon'ble Supreme Court has not passed its final order. The last hearing of the said case was called on 13.07.2011, wherein both appellant & Respondent have filed their statement of cases. The copy of order of Hon'ble Supreme Court is enclosed on Page No. 72 of Pape....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... payable but were not paid therefore irrespective of the method of accounting; these expenses are not allowable in this year. The same will be allowed in the year of payment as per section 43B. Accordingly the disallowance made by the assessing officer is confirmed." 19. There is no dispute so far as factual position that the assessee has not paid the above stated sums on or before the due date of furnishing the return is concerned. It refers to case law of Exide Industries vs. Union of India 292 ITR 470 (Cal) striking down section 43B(f) as ultra-vires followed by a co-ordinate bench of the tribunal in 33 taxmann.com 476 (Ahmedabad) in case of Eimco Elecom (India) Ltd vs. Addl. CIT accepting the very argument. The Revenue places strongly reliance on the case of (2014) 45 taxmann.com 428 (Kerala) South Indian Bank Ltd vs. CIT in support of the impugned disallowance qua leave encashment provision. It is to be seen that hon'ble Calcutta high court quashed section 43B(f) being ultra-vires. Hon'ble apex court admitted Revenue's special leave petition against the same. The ld. co-ordinate bench (supra) deletes the impugned disallowance after quoting he above stated high court decisio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....antive ground is treated as allowed. 22. The assessee's third substantive ground assails correctness of disallowance of Rs. 50,31,149/- out of exemption claim u/s. 10AA of the Act. The CIT(A) rejects assessee's corresponding ground as under:- "6. The fifth ground of appeal is against addition of Rs. 50,31,149/- u/s 10AA of the Act. 6.1 The A.O has stated in the assessment order dtd. 2170272011, which is as under: "The submissions of the assessee hove been considered and are not found acceptable. Although, the assessee has produced audited account of the undertaking as extracted from the Trial Balance run through SAP Accounting Software, the fact remains that the common head office expense have not been charged to P&L Account for working out the profits eligible for exemption u/s, 10AA. At this juncture, attention is invited to Note-838 of Schedule-20 wherein, the commission paid to the Chairman and The Managing Director {@ 2% each} of 4% of the profits earned by the Company has been stated and charged to the P&L Account of this year. The profits on which such commission has been worked out includes the profits earned by this SEZ undertaking and claimed....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e appellant company decided to pay the aforesaid Commission to be calculated at 2% each of the profits. It is submitted that, this is only a mode of calculation of the commission payable to the Directors and it does not follow that the commission is in relation to the earning of the profit in the SEZ Unit. 1.1.3. The aforesaid commission is payable on the net profits of the appellant company irrespective the fact as to whether such net profit includes any exempt income or not. Similarly, there is no justification whatsoever for allocating General Head Office administrative expenses of the SEZ Unit at 1% of the profit of the SEZ Unit. Separate set of Books of account has been maintained in respect of SEZ and all expenses relating to this unit have already been debited in the books of SEZ unit. It is respectfully submitted that the expenses should not be assumed, that the said expenses has been incurred by the appellant company. Further no allocation can be made merely on assumptions as done by Ld. A.O. 1.1.4. In view of above, it is humbly submitted that the addition of Rs. 50,41,149/- may kindly be deleted." 6.3 I have considered the facts of the case; as....