TaxTMI 
TaxTMI 
TaxTMI 
2020 (5) TMI 82
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....common adjudication. 2. Coming to Revenue's three appeals ITA No.217 to 219/Kol/2018, we notice that its first and foremost identical substantive grievance seeks to reverse the CIT(A)'s action allowing leave encashment claim(s) payment basis of Rs.46,11,027/- each in former two and Rs.28,64,737/- in last assessment year 2013-14 out of the alleged disallowance figure of Rs.13,98,000/-, Rs.87,41,000/- and Rs.1,30,76,000/-; respectively. The Revenue's only case is that the CIT(A) has granted excess relief exceeding amount of disallowance made by the Assessing Officer. Learned CIT-DR fails to dispute the CIT(A)'s identical lower appellate discussion in these three assessment year(s) has gone by actual payments only u/s 43B(f) of the Act. The CIT(A) has also taken note of the hon'ble jurisdictional high court's decision in Exide Industries Ltd. vs. Union of India (2007) 292 ITR 470 (Cal) quashing foregoing statutory provision itself as ultra vires and its operation stayed in hon'ble apex court's to conclude that assessee's mere provision of leave encashment does not deserve to be accepted. We find neither any legality nor irregularity in the CIT(A)'s action under challenge. The....
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....rmula prescribed in Rule 8D(2)(ii), the AO worked out interest disallowable at Rs. 53.56 lacs. The Ld. AO also made disallowance out of business administrative expenses at 0.5% of the average cost of investments, and thereby disallowed Rs. 202.04 lacs in terms of Rule 8D(2)(iii). 4. In their oral and written submissions, the Ld. A.Rs have strongly contested the invocation of Rule 80(2) by the Ld. AO in the impugned order. The Ld. AR submitted that although the Ld. AO disallowed a sum of Rs.I0.12 lacs under Rule 8D(2)(i), nowhere in the assessment order the AO had identified even a single specific item of expenditure which was directly incurred in relation to earning of exempt income. In all the past assessments the appellant had suo moto disallowed 1% of the dividend income earned as the amount disallowable under Section 14A of the Act. The disallowance offered at the rate of 1% represented allocation of common administrative overheads which might have been incurred by the appellant in relation to earning of dividend. The appellant's offer to make disallowance u/s 14A at the rate of 1% of the gross dividend income was in conformity with the decisions rendered by the Hon'b....
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....is that the investments, yielding tax free income were made or acquired out of appellant's own funds. The appellant's reliance on the recent judgment of the Calcutta High Court in the case of CIT Vs Rasoi Ltd (ITA No. 109 of 2016) dated 15.02.2017 appeared to be very relevant. In this judgment the jurisdictional Calcutta High Court had benefit of considering the earlier judgment of the same Court in the case of Dhanuka & Sons (339 ITR 319) as also the judgment of the Bombay High Court in the case of CIT Vs HDFC Bank (383 ITR 529). In the case of Rasoi Ltd (supra), the High Court found that assessee's own funds were higher than the investments in tax free securities and in that view of the matter, the interest disallowance made u/s 14A read with Rule 8D(2)(ii) which was deleted by the ITAT was upheld by the Calcutta High Court. The relevant findings of the Hon'ble Calcutta High Court was as follows: "It appears for both the assessment years the Appellate Authority held that there was no finding of direct nexus between the borrowed fund and investment in shares. The assessee's own funds were far in excess of the average total investments. There could not be any ....
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....strated that the borrowings were made for specific end uses and the borrowed funds were utilized entirely for business purposes and not for the purposes of making investment in shares which yielded tax free dividend income. It was also the pleading of the appellant that the appellant's own funds in the form of capital & free reserves were sufficiently large to meet the cost of investments and therefore no interest disallowance under Rule 8D(2)(ii) was called for. I find that the income-tax assessments of the appellant for AYs 2008-09 to 2010-11 were subjected to proceedings before the Hon'ble Settlement Commission and the Hon'ble Settlement Commission by its order in Application No. WB/Kol/Central-III/2011-12/9/IT dated 07.05.2012 upheld the contention put forth by the appellant. In other words, I find that the Hon'ble Settlement Commission had accepted the assessee's pleading that the loan funds were utilized by the appellant for the specific business purposes for which the loans were obtained and borrowed funds were not utilized for making investments in shares and units of mutual funds or other securities capable of yielding tax free income. The Hon'ble S....
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....ake the disallowance under Section 14A read with Rule 8D(2)(iii). This manner of making disallowance was objected by the appellant in the proceedings before the Hon'ble Settlement Commission for AYs 2008-09 to 2010-11. In its order dated 07.05.2012, the Hon'ble Settlement Commission recorded following material findings with regard to disallowance to be made out of administrative expenses: "9.3 Having said as above, when this Bench observed that since the Commission has exclusive Jurisdiction over the years covered by the application as pointed by the Revenue and hence for AY 2008-09 to 2010-11, it has to be satisfied about the correctness of the. Applicant's claim of expenditure to be added back in terms of Section 14A(2) read with Rule 8D, the AR replied that the expenses allocated by the Applicant as per working statement filed is actually less that the amount offered on the basis followed by the AO in earlier years as aforesaid, and hence the question of "dissatisfaction" is ruled out in the present case but none the less, in the spirit of settlement, it agreed to otter expenses quantified at approx, 3% of the exempt income instead of 1% thereof so that there may n....
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....cation jurisdiction to correct the corresponding sum(s) involved herein (supra). He clarified that case law of hon'ble Patna high court in Narendra Prasad vs. Commissioner of Income Tax (2010) 322 ITR 171 (Pat) holds that the issue decided by the Settlement Commission is a settled state of affair which could not be disturbed unless there is change in facts and circumstances. Learned counsel then invites our attention to the assessee's multi-folded arguments that the impugned disallowance was not at all warranted since it had not incurred any such expenditure. The Assessing Officer had also not recorded any cogent satisfaction regarding assessee's books of account before invoking Rule 8D disallowance of the Income Tax Rules, 1962. Its interest free funds exceed the interest bearing ones in all these assessment year(s). Its last plea without prejudice to all the foregoing arguments is that only net interest expenditure and investment yielding exempt income(s) have to be considered for the purpose of computing the impugned disallowance. 6. We have given our thoughtful consideration to rival pleadings against and in support of the CIT(A)'s action partly restricting Assessing Offic....
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....ards, we are of the opinion that the Income Tax Settlement Commission's adjudication in the said preceding three assessment year(s) restricting the impugned disallowance pertaining to three AYs of exempt income does not form a binding precedent being per incarium as per CIT vs. B.R. Constructions (1993) 202 ITR 222 (AP) (FB). We thus reverse the CIT(A)'s above lower appellate findings to this effect. 8. Next comes equally important aspect of quantification of the impugned disallowance under these three head(s) of direct, proportionate interest and administrative expenditure. The assessee's suo motu disallowance figure(s) of Rs.10.1, Rs.12.04 and 15.97 (in lakhs) falling under the first category of direct expenses only. We thus, uphold the same since Revenue has also failed to rebut correctness thereof. 9. We next proceed to the second limb of proportionate interest expenditure, under Rule 8D(2)(ii) and notice that the assessee's corresponding figures of interest income includes Rs.11.38 crores against interest expenditure of Rs.2.04 crores in assessment year 2011-12, Rs.9.17 crores as against Rs.6.01 crores in assessment year 2012-13 and Rs.16.36 crores against Rs.8.10 crores in ....
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....,14,64,051/- which comprised of additional depreciation of Rs. 17,64,56,401/- on the new assets which were acquire during the relevant year. In the present appeal, the appellant has now raised a claim that in respect of actual cost of machinery installed but put to use for period less than 180 days in the preceding FY 2009-10, on which the additional depreciation was allowed at the reduced rate of 10% in the computation of income for AY 2010-11; that in the relevant AY 2011-12, the remaining 10% of the additional depreciation for which deduction was not allowed in the earlier year, should be allowed under Section 32(1)(iia) of the Act. 2. The Ld. ARs of the appellant have claimed that the above claim is legal in nature and submitted that the first appellate authority has the power to entertain new claim if the grounds raised are bona fide. In support of this proposition the Id. AR relied on plethora of judgments including the decision of Supreme Court in the cases of National Thermal Power Co. Ltd Vs CIT (229 ITR 383)& Jute Corporation of India Ltd. v. CIT (187 ITR 688)and Bombay High Court in the case of CIT Vs Pruthvi Brokers & Shareholders Private Limited (252 CTR 151)and the ....
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....machinery for its manufacturing unit and put to use for a period of less than i.e. 180 days, during the financial year 2009-10 and claimed 50 per cent additional depreciation under section 32(1)(iia) in view of the second proviso to section 32(1)(ii). The balance 50 per cent of additional depreciation on such plant and machinery has been claimed by the assessee company during the year under consideration i.e. FY 2010-11. Bare reading of clause (iia) of section 32(1) applicable with effect from the assessment year 2006-07, provides for allowance of additional depreciation equal to 20 per cent of actual cost of new plant and machinery acquired and installed after 31-3-2005 by an assessee engaged in the business of manufacture or production of any article or thing. Such additional depreciation is to be allowed as deduction under section 32(1)(iia) but second proviso to Section 32(1)(ii) restricts the allowance of depreciation at 50 per cent, if the plant and machinery is acquired during the previous year is put to use for a period of less than 180 days in that previous year. It is because of the second proviso that the assessee claimed only 50 per cent additional depreciation in the a....
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....dditional depreciation claim @ 10% u/s 32(1)(iia) since it had put its corresponding fixed assets to use in earlier assessment year(s) than installation thereof in the relevant previous year only Mr. Shankar refers to this tribunal's recent decision in Welspun Corporation vs. DCIT and vice versa ITA No.5370 & 5722/Mum/2015 dated 13.12.2019 accepting the Revenue's identical plea. We find no merit either in Revenue's foregoing arguments. This tribunal's yet another co-ordinate bench deciding the very issue in Revenue's favour (2017) 82 taxmann.com 238 (Chennai) Brakes India Ltd. vs. ACIT declining simultaneous additional depreciation claim stands reversed byhon'ble Madras high court in TCA No.55/2017 dated 14.03.2017. Their lordships have made it clear that such a deduction claim is allowable even if in case than fixed assets had been put to use in earlier assessment years. We thus affirm the CIT(A)'s identical detailed reasoning extracted hereinabove in all these three assessment year(s). The Revenue fails in its identical third substantive grievance. 14. The Revenue's 4th to 6th , 7th to 9th and 9th to 12th substantive grievances in assessment year-wise; respectively plead th....
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....e that that the transaction has a bearing on the profits, income, loss or assets of the enterprise, and that there has to be cogent material on record to indicate that intra AE international transaction has some impact on the profits, incomes, losses or assets. Most importantly, it has been argued that the Hon'ble ITAT, Delhi, in a ruling in the case of M/s. Bharti Airtel Limited Vs Addl. CIT[2014] 64 SOT 50 (URO) / 43 taxmann.com 50(Delhi) adjudicated on transfer pricing issues arising from the issuance of a Corporate Guarantee to associated enterprises among others in this case, the taxpayer, an Indian company, provided a guarantee to a third-party bank on behalf of its foreign subsidiary for which it did not charge a fee. The taxpayer contended as it did not incur any costs in providing the guarantee, there was no requirement for it to charge a fee to the subsidiary under the transfer' pricing provisions. During assessment proceedings, the AO imputed an arm's length guarantee fee by applying the CUP method and considered the commission charged by independent banks as a benchmark, The Hon'ble ITAT, considering the facts of the case, held that the corporate guarant....
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....n intra-group service under the arm's length principle. Given that Indian TP law differs from the OECD's approach in certain aspects with respect to the application of the arm's length principle, it would not be out of place to state that this judgment highlights one of them. 3. Be the case, as it may, it has to be said that the Hon'ble jurisdictional ITAT in the case of M/s Tega Industries Vs DCIT in ITA No. 1912/Kol/2012 [Reported as [2016] 76 taxmann.com(Kolkata-Trib)] has adjudicated the matter' and held that where the assessee has provided corporate guarantee to the Bank to fund its subsidiary for acquiring a company(ies) on behalf of the assessee, since the assessee's expectation from loan was that of a Shareholder, and the intention was to protect its investment interest, no T.P adjustment on account of Corporate Guarantee was to be made. In this case, the Hon'ble ITAT, based on the facts of the case has adjudicated that if the intention of the assessee is not to earn interest or guarantee fees by providing loan or guarantee, no TP adjustments could be made. The facts of the case were that the assessee is engaged in the business of manufacturing....
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....to the AE as an international transaction. 4. I have also carefully considered other supplementary arguments of the Ld. A.Rs for the appellant-company in the matter rebutting and challenging the action of the Ld. AO/TPO. The appellant has been able to draw and demonstrate similarity in the factual and legal matrix in the case of Tega Industries and its own case. It has been pleaded that the contention of Tega Industries Ltd is similar to that of the appellant. The objective of Paharpur Cooling Towers Ltd, i.e, the appellant to set up PNRL & SFPL was to undertake the expansion of appellant's operations in South Africa. Tile appellant had set up operating subsidiaries to with the sole intent & purpose of vertically integrating Its core business activity by conducting forest operations, plantations for manufacture & supply of timber, which is the primary ingredient in constructing cooling towers. The subsidiaries thus represented an extended arm of the appellant company itself in South Africa. I further find merit in the contention of the appellant that in the course of raising funds for investment via the equity/quasi-equity route, an arrangement was employed till the time such....
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....s available to benchmark the corporate guarantee. The Ld. AR submitted that the appellant had also obtained guarantees from external Banks/FIs to whom guarantee commission in range of 0.35% to 0.5% was paid. In view of the judgment rendered by the Hon'ble Bombay High Court in the case of CIT Vs Everest Kanto Cylinder Ltd (358 ITR 57) rendered on this specific issue, the Id, AR alternatively claimed that the guarantee commission fee of 0.35%-0,5% actually paid by the company to the Bank was a fair & reasonable parameter and the most appropriate benchmark for determining ALP of corporate guarantees issued to AEs. I have taken note of the foregoing argument, but in light of the findings set out in the earlier paragraphs wherein the issuance of corporate guarantees by appellant to AEs has been held to be a shareholder activity not meriting any adjustment, I am not inclined to adjudicate on this aspect as this is now only of academic importance. Overall considering the facts and circumstances, and for the reasons set out above, impugned order find that the Ld. AO /TPO was not justified in working out the total guarantee commission at Rs. 1,50,45,000/-. The said adjustment of Rs. 1....
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....ld that the corporate guarantee is in the nature of service provided by the taxpayer to its associate enterprises (AEs) and hence should bear a charge. The judgments have explicitly held that after the Income Tax Act,1961 was amended by the Finance Act, 2012 to include 'guarantee' within the definition of "international transaction" with retrospective effect from 01.04.2002, the corporate guarantee should be benchmarked from arm's length perspective. 10. However, after hearing both the parties, we note that there are plethora of judicial pronouncements wherein it has been held that corporate guarantee does not constitute an international transaction and accordingly there should not be a charge. We note that in assessee's case under consideration, the assessee, in order to avoid protracted litigation made an estimated adjustment of Rs. 51,50,327/- @ 1% of the corporate guarantee amount as fees for corporate guarantee, for income tax purposes. However, the TPO rejected the method adopted by the assessee and recomputed the arm's length price by making upward adjustment. We note that the assessee has extended this corporate guarantee as a shareholder activity hence the ad....
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....it of transfer pricing adjustment in respect of arm's length price. " " .... We are in agreement with these views. There can thus be activities which benefit the group entities but these activities need not necessarily be 'provision for services'. The fact that the OECD considers such activities in the services segment does not alter the character of the activities. While the group entity is thus indeed benefited by the shareholder activities, these activities do not necessarily constitute services ... " " .... The issuance of financial guarantee in favour of an entity, which does not have adequate strength of its own to meet such obligations, will rarely be done. The very comparison, between the consideration for which banks issue financial guarantees on behalf of its clients with the consideration for which the corporate issue guarantees for their subsidiaries, is ill conceived." " ... These guarantees do not have any impact on income, profits, losses or assets of the assessee. There can be a hypothetical situation in which a guarantee default takes place and, therefore, the enterprise may have to pay the guarantee amounts but such a situation, even if that be s....
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....ends an assistance to the associated enterprise which does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the course of its normal business, such an assistance or accommodation does not have any bearing on its profits, income, losses or assets and therefore it is outside the ambit of international transaction under section 92B(1) of the Act. ..." "Para 35 .... In the case of GE Capital Canada -vs- The Queen, the tax court of Canada has indeed dealt with ALP determination of the guarantee fees, but then it was done in the light of their domestic law provisions which are quite at variance with the Indian transfer pricing legislation ....." Similar views have been held by various coordinate benches, including jurisdictional as under: i) Tega Industries Ltd. vs. DCIT [I.T.A. No. 912/2012 dated. 03.08.2016, [Kol Trib.] ii) Marico Ltd. vs. ACIT [TS-411-ITAT-2016 (Mum)-TP] iii) TVS Logistics Services Ltd. [TS-324-ITAT-2016 (CHNY)-TP] iv) Manugraph India Ltd. [TS 324-ITAT 2016 (Mum)-TP] v) Siro Clinpharm Pvt. Ltd. vs. DCIT [ITS-185- ITAT 2016 (Mum)-TP] vi) Apollo Health Street Ltd. ....
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....e equated with a 'loan' and hence no benchmarking exercise was carried out in this regard. 3. On examination of the transfer pricing order, I find that the Ld. TPO was not in agreement with the assessee's contentions and the TP study of the appellant. From the show cause notice CSCN') issued by the Ld. TPO, it appears that according to him the loans should have been bench marked at the probable cost of loan if the AEs had Independently obtained such loans from foreign markets and that such interest should be appropriately adjusted in view of the factors normally governing interest on loan prevailing in foreign markets. According to the SCN of Ld. TPO, the interest rates paid by AEs to Banks was also not the appropriate parameter since while advancing the loan & determining the interest rate, the Bank did not consider the credit rating of the AE on stand-alone basis but for the group as a whole. The Ld. TPO thereafter elaborated in his SCN the different parameters for ascertainment of credit rating set out by Standard & Poor in 2002-2004 booklet and also as to how the CUP analysis should be performed based on the credit rating & market information. After analyzin....
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....o application of ROCE Method. The appellant also brought on record several judgments of the coordinate benches of the Hon'ble Income-tax Appellate Tribunal wherein it has been held that the relevant currency related LIBOR rate was the most appropriate benchmark for arriving at ALP of inter-corporate loans. 6. From the impugned order, I find that having considered the objections raised by the appellant to the SCN, the Ld. TPO himself abandoned the methodology propounded by him in the SCN and altogether shifted his stance by adopting an altogether different methodology for determination of ALP, which did not have sanction or support of the five methods set out in Rule 10B. I further note that although in tile order u/s 92CA(3), the AO forsake tile methodology proposed in SCN and adopted altogether new methodology for determination of ALP, no opportunity of hearing was afforded to the appellant resulting in miscarriage of justice. In my considered opinion, it was incumbent on the Ld. TPO not only to set forth the reasons as to why internal CUP adopted by the appellant was not acceptable but it was also incumbent on him to disclose to the appellant the new methodology which he ....
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....d to have obtained a loan facility of USD 200 million at 12.25% to infer that the spread that should be charged by the appellant was 600 bps. However how did the Id. TPO connect these dots between the aforesaid loan connector sheet of Singapore and the loans advanced by the appellant to its AEs in South Africa & Mauritius is nowhere discernible from the impugned order. Nevertheless, the Ld. TPO aggregated the cost of funds and credit spread and determined the ALP interest rate at 17.68% which far exceeded the ALP interest rate of 3.6% determined by the appellant. Accordingly the Id. TPO proposed upward adjustment of Rs. 83,71,497/- with reference to the loans/advances given by the appellant to its AEs. 9. On examination of appellant's submissions and TPO's order, I find that the observations made by the Ld. TPO in the impugned transfer pricing order suffered from apparent infirmities & contradictions. In the impugned TPO's order, he has taken into account return on investment to be integral part of cost of funds for determining ALP of the loan transaction. In my opinion, there is a fundamental fallacy in the Ld. TPO's working in as much as what the returns the....
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....actor. More so such "return on investment" could not have been taken into account by the Ld. TPO to determine the "cost of funds". It is apparent from the appellant's balance sheet that substantial portion of its own surplus funds have been deployed in making investments in shares of other bodies corporate as also loans and deposits. The returns derived from the range of investments represent the efficacy of the appellant's investment decisions and as such it does not reflect the cost of funds to the appellant. The "cost of funds" is what an independently lender would require the appellant for using its funds in the appellant's business. Further one also needs to factor In the currency in which the funds were borrowed or funds were lent, so as to remove the dissimilarities. In the present case the appellant had demonstrated that besides making borrowings in Indian currency, it had also borrowed the funds for its business purposes in US denominated sources where the interest was paid at the rate of 3.6%. Similarly the appellant had lent the funds to its AEs in US denominated terms. In the circumstances the cost of funds procured by the appellant in US denominated terms w....
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....010-TIOL-55-ITAT-MUM) * M/s Aithent Technologies Pvt. Ltd. v/s ITO (2010-TII-134-ITAT-DEL-TP) 14. In view of the above and respectfully following the judgments of the High Courts & Income-tax Appellate Tribunal, I hold that the ALP determined by the TPO in his order u/s 92CA(3) was wholly inappropriate and excessive. I further hold that the most appropriate method to be adopted in the facts & circumstances of the appellant's case was internal CUP based on the interest which the appellant had on its own foreign currency denominated borrowings. Accordingly, the Ld. AO/TPO is directed to compute the ALP of loans as well as the advances totaling to Rs. 14,48,22,149/- at* the rate of 3.6% per annum. Accordingly the Ld. AO/TPO shall recomputed such interest income at the rate of 3.6% after giving credit for the income suo moto offered by the appellant in the return of income. Ground No. 6 is therefore partly allowed." Mr. Shankar's case during the course of hearing that the TPO's order had rightly proposed the impugned ALP adjustment(s) in the nature of interest pertaining to assessee's alleged interest free advance to its overseas associate (AE) enterprises keeping in mind the ....
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....atory accounting standards, AS-7, notified by the Institute of Chartered Accountants of India on a fair & reasonable basis and following the established doctrine of prudence. The Ld. AO however not being agreeable to the explanation furnished by the appellant disallowed the foreseeable losses provided in the books characterizing it to be contingent loss. 2. The material facts on record thus show that the Ld. AO neither disputed nor disbelieved the basis and working of the provision for foreseeable loss which the appellant made in its books of accounts. It was found by the appellant that it had obligation to execute certain contracts which it had obtained in the ordinary course of business having no escalation clauses. In the circumstances at the time when the appellant re-commenced the work on the contracts earlier suspended, the assessee had reasonably advanced knowledge that it is going to incur loss from execution of these contracts. In the circumstances on the principle of prudence, which is one of the fundamental accounting principles and which has also been accepted under Section 145 of the Act, as also required by mandatory AS-7, the appellant was obliged to create provisi....
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....whether the anticipated loss on the valuation of fixed price contract, in view of the mandatory requirements of the AS-7, was to be allowed in the year in which the contract had been entered into or it was to be spread over a period of contract, as was done by the assessee in earlier years. As far as the change in the method of valuation of work-in-progress was concerned, it could not be disputed that in view of mandatory requirements of the AS-7, it was a bona fide change in the method of valuation of work-in-progress, particularly in view of the qualification made in this regard by statutory auditors as well as by the Comptroller & Auditor General of India. Therefore, the observation of the Commissioner (Appeals) that the assessee had booked bogus loss was not correct. As far as the basis of estimation was concerned, the same was done on technical estimation basis and, therefore, merely because there were some variations in the figures furnished by the assessee at different stages, it could not be said that the estimated loss was not allowable. It was not disputed that the department in earlier years had allowed the loss on estimated basis having regard to the expenditure actuall....
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....issued by ICAI. ICAI being the highest accounting body of the country, created by an Act of Permanent, accounting standards issued by it cannot be brushed aside lightly. On the contrary, if an assessee is following the accounting standards issued by ICAI, it would give more credibility and authenticity to its account. AS -71 inter alia provides: 'When the outcome of a construction contract cannot be estimated reliably: Revenue should be recognized only to the extent of contract costs incurred of which recovery is probable, and Contract costs should be recognized as an expense in the period in which they are incurred. An expected loss on the construction contract should be recognized as an expense immediately in accordance with para 35.' 15. It is not in dispute that the assessee is executing fixed price contract which means that the contractor has agreed to a fixed contract price or rate in some cases subject to cost escalation prices. As per AS-7, the assessee is entitled to make provision for foreseeable losses. 16. A perusal of the accounting statement of the assessee for the year under consideration shows that at para 1.6 to the notes to the financial statement,....
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....ot disputed that the Department in earlier years had allowed the loss on estimated basis having regard to the expenditure actually incurred in various years. Therefore, in principle, it was not disputed that the estimated loss under the present circumstances was an allowable deduction. However, merely because the change in method of accounting was bona fide, it could not lead to the inference that the income was also deducible property under the Act. This aspect is very evident from the first proviso to s. 145 as it stood prior to the amendment by the Finance Act, 1995 w. e. f. 1st April, 1997 It could not be dispute from the method adopted by assessee, the assessee's income could not be deducted properly in the year in which the loss had been anticipated. As a matter of fact this aspect was not disputed by the AO also. He had swayed more by the revenue loss than by the correct principle to be applied. The matching principle of accounting was not of much significance in the present context because if the loss had been properly estimated in the year in which the contract had been entered into, then it had to be allowed in that very year and could not be spread over the period of....
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....R 62/180 Taxman 422 (SC). 9. We have carefully considered the rival submissions. The respondent- assessee is engaged in the execution of an infrastructure development project which was awarded by the TNRDC. The work related to improvement of work and its maintenance for a period of five years. The job has been done on a contractual basis. Factually speaking, the contract for improvement of the road and its maintenance for a period of five years is a composite contract. The AO, however, has observed that TNRDC has awarded separate contracts, i.e. one for construction of road and second for its maintenance for a specified period. The AO has observed so on the ground that TNRDC has specifically quantified the amount payable for the two components of the work separately. For this reason, the AO held that the impugned losses calculated by the assessee are only relating to the maintenance portion of the work and therefore, maintenance expenses should be allowed only to be considered in the period corresponding to the period for which maintenance is being effected. 11. The AO has disallowed the impugned provision on the ground that it is liable to be allowed in the year when it is act....
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....reseeable losses in arriving at the total income of the appellant as per computational provisions as also in assessing book profit u/s 115J8 of the Act. Since the assessee's claim of provision for foreseeable losses has been allowed to be deducted in AY 2012-13, the Ld. AO may also take necessary remedial measures for withdrawing the relief allowed by him in respect of such amount in AY 2014-15. Ground No. 7 is therefore allowed." 20. We have given our thoughtful consideration to rival pleadings against and in support of the CIT(A)'s above extracted discussion deleting the impugned disallowance. The assessee had admittedly debited these sum(s) to its profit and loss account in relation to "provision for foreseeable loss" in contract revenue for the purpose of normal as well as MAT computation. The Assessing Officer disallowed the same as a contingent liability since not crystallized in the relevant previous year. Learned counsel invited our attention to pages-12 & 13 in the assessment order containing tabulations of the corresponding project's job details. The Assessing Officer was of the view that the alleged project qua foreseeable loss in contract revenue; had been substant....
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....Rs.1,05,19,532/- and Rs.67,36,892/-; respectively by invoking sec. 36(1)(via) of the Act since the same had not been paid within the due date as prescribed in the specific Acts. Suffice to say, hon'ble jurisdictional high court in Commissioner of Income Tax vs. M/s Vijay Shree Ltd. ITAT 245 of 2011 G.A No. 2607 of 2011 dated 07.11.2011 holds that such a disallowance deserves to be deleted in case the assessee has deposited the ESI / PF contribution in question before the due date of filing of its return of income which is not in dispute before us. We thus affirm the CIT(A)'s action deleting the impugned disallowance on this count alone. The Revenue's corresponding identical substantive 5th grievance in these two assessment year(s) fails accordingly. Its second appeal ITA No. 218/Kol/2018 is also partly allowed on statistical purposes in above terms. 23. Now we proceed to deal with the Revenue's remaining grievances in its last appeal ITA No. 219/Kol/2018 its 6th substantive ground avers that the CIT(A) has erred on facts and in law allowing provision of market-to-market loss amounting to Rs.117,86,272/- derived from the derivative transactions. The CIT(A)'s detailed discussio....
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....ngement put in place by the appellant was intended to cause saving in the effective interest out go. I note that the Ld. AO has not disputed the basic premise that the loan was available by the appellant to meet working capital needs and interest payable on the said loan was allowable in computing business profits of the appellant. 3. In the foregoing background therefore the interest rate swap derivative entered into by the appellant was also connected with the revenue item and therefore any gain or loss arising from such an arrangement was in the revenue field. The only question to be decided therefore is whether the loss provided for in the appellant's books as on the balance sheet date on account of re-statement of foreign exchange transactions was contingent! notional or whether it was real loss liable to be allowed in computing business income. In the Ld. AO's opinion, the loss provided in the books was mere notional loss accounted on the basis of exchange rate prevailing on the last date of previous year. In this regard I note that the provision made by the appellant in its books towards MTM loss was in conformity with Accounting StandardPage 34 11 prescribed by th....
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....IT(A)'s action deleting the impugned market-to-market losses provision pertaining to derivative transactions. There is no dispute that this assessee had debited the impugned sum to its profit and loss account with reference to interest rate derivatives in order to hedge interest case payable on commercial borrowings. The Assessing Officer disallowed the same under normal computation as well as for sec. 115JB book profit computation for the reason that this sum represented only a notional loss contingent in nature as per CBDT instruction No. 3/2010 dated 28.09.2010. The CIT(A) on the other hand has reversed the said findings by holding that such a loss is neither contingent nor notional since related to hedging of interest cost payable on external commercial borrowing in the regular course of business. The CIT(A) has admittedly taken note of various judicial precedents i.e. Woodward Governor India P. Ltd. (supra) that the impugned mark-to-market loss is allowable to be recognized in respect of the outstanding derivative contracts pertaining to regular course of business. Hon'ble apex court's decision in CIT vs. Indra Industries (2010) 248 ITR 338 (SC) also holds that Board's c....
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....transactions nor could prove that the expenses were made wholly & exclusively for the business purposes and treating the amount paid as bogus expenditure the disallowance was made. 2. On careful consideration of the submissions of the Ld. AR and transactional documents furnished, I find that in the course of assessment the appellant had produced before the Ld. AO all material documents which it was expected to maintain in the ordinary course of business. It was submitted before the Ld. AO that in connection with the contract awarded by BHEL, the appellant had availed the consultancy services of RNPL. In support of the services rendered, an invoice was raised on the appellant, copy whereof was filed before the Ld. AO. It appeared from that the payee was registered with service tax department and the assessee number under the service tax was duly mentioned. The appellant had also furnished before the Ld. AO, the ST registration certificate which proved that the payee was assessed under service tax. The appellant had discharged the payment of service tax and credit therefore was allowed in the indirect tax proceedings without there being any adverse inference. It is further noted th....
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....whereas the enquiry about the transaction was conducted in FY 2016-17. In the circumstances if in the intervening period, the payee company had gone into liquidation, then for such circumstances the appellant could not be held responsible and for the reason that the company was found liquidated, inference could not be drawn that the appellant's transaction was bogus. In support of this inference, reference is invited to the judgment of the Calcutta High Court in the case of CIT, Kolkata-I vs. Inbuilt Merchant Pvt Ltd (G.A. No. 3825 of 2013).The relevant findings of the High Court were as follows: "The views expressed by the Assessing Officer are erroneous in law. The Assessing Officer has overlooked the importance of the books of accounts maintained in the ordinary course of business. Reference in this regard may be made to sub-section (2) of Section 32 of the Indian Evidence Act, 1872. The books of accounts maintained in the ordinary course of business are relevant and they cannot be discarded in the absence of appropriate reasons. The mere fact that recipient did not reply in some cases or they were not found at the address furnished by the assessee does not in the leas....
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....e. After dealing with the issue at length, it sustained addition of Rs. 36.18 lacs (rounded off). 6. When CIT( A)'s order was challenged before the Tribunal, the Tribunal deleted the entire addition by observing thus: "23. We have heard the rival submissions and the materials placed on record. We are inclined to agree with the submission made on behalf of the assessee and find that no evidence, had been placed on record that the commission expense is bogus. Assessee made payment of commission expenses is bogus. Assessee made payment of commission through account payee cheques for sales canvassed by the party and also in consideration of the collection recovered from purchaser. Payments cannot be unreasonable particularly when M/s. Shree Shantinath Silk Industries is not related to the assessee and so even disallowance made by CIT(A) is not proper. We therefore delete the full disallowance of Rs. 72137,808/- made by the assessing officer. Hence assessee's ground of appeal is allowed and revenue's ground of appeal is allowed and revenue's ground of appeal is dismissed." 7. This issue is again based on facts. Essentially the Tribunal ties, with cogent reasons d....
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....ave also considered the loan agreement and the supplementary deed between the appellant & SPL. In the impugned order the Ld. AO noted that From perusal of Form 26AS of the AST system, he found that SPL has deducted tax of Rs. 1,17,22,859/- u/s 194A in respect of sum of Rs. 11,72,28,588/-; whereas in the appellant's books as also in the return of income, the interest income offered by the appellant in respect of the said payer was only Rs. 1,48,76,697/-. The Id. AO also noted that the appellant had claimed TDS of Rs. 11,44,428/- in respect of tax deducted by SPL although as per statement of Form 26AS, the tax deducted was Rs. 1,17,22,859/-. The appellant was accordingly directed to explain the discrepancy. Before the Id. AO it was explained that the appellant company had granted loan to SPL on the terms evidenced by the loan agreement dated 01.12.2007 and in terms thereof the interest at the rates prescribed amounting to Rs. 1,48,46,692/- was offered to tax. The said agreement also provided for charging of penal interest by way of liquidated damages in the event there was default on the part of the borrower to pay interest and re-pay principal. It was explained that in FY 2012-1....
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.... did not pertain to FY 2012-13 being relevant AY 2013-14 alone. The provision for penal interest to the entire period of default commencing from December 2007 when the loan was taken by SPL. In the circumstances the interest including penal interest for the period prior to 1st April 2012 could not have been considered by the Id. AO as appellant's income for AY 2013-14 even under mercantile system of accounting. Where the assessee followed mercantile system of accounting, then it was wholly immaterial whether- or not the debtor or the appellant had passed accounting entries in their books in respect of such interest. However the facts & the assessee's action demonstrate beyond any doubt that assessee had never invoked penal clause of Article 3.07 of the Agreement and had never demanded from the borrower payment of liquidated damages. Even though in the past assessments, the appellant had followed mercantile system of accounting, the Id. AO had not made out a case that penal interest was also assessable as income because the appellant followed mercantile system of accounting. In the circumstances I find that even in the regular assessments of earlier years, the AO accepted th....
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....ayment of penal interest or liquidated damages was recognized by the parties in writing. Pursuant to execution of such addendum, SPL had passed entries in its books of accounts r reversing the provision made for payment of penal interest. A confirmation of these facts issued by SPL was also furnished before the Ld. AO in the course of assessment. The foregoing facts and documents therefore prove beyond doubt that save & except passing tile entries books of accounts for FY 2012-13, SPL had never acted upon these entries and payment of penal interest never materialized and the assessee did not receive any part of such penal interest. In fact I note that since the appellant had not demanded payment of liquidated damages not only the appellant did not account for such penal interest but also did not claim credit for the tax which was unilaterally by SPL from the amount of penal interest. These facts therefore cumulatively show that the appellant had never made any demand for payment of liquidated damages from SPL even though the appellant followed mercantile system of accounting but accounted only the income in the form of normal interest. 5. The Ld. AO has justified the assessment....
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....o the year for which assessment is made or on the income that accrues or arises or is deemed to accrue or arise in India during such year. The computation of such income is to be made in accordance with the method of accounting regularly employed by the assessee. It may be either the cash system where entries are made on the basis of actual receipts and actual outgoings or disbursements or it may be the mercantile system where entries are made on accrual basis i.e., accrual of the right to receive payment and the accrual of the liability to disburse or pay . In the instant case even though the assessee-company was following the mercantile system of accounting and had made entries in the books regarding enhanced charges for the supl2iYmade to the consumers, no real income had accrued to the assessee-company in respect of those enhanced charges in view or the fact that soon after the assessee-company decided to enhance the rates in 1963 representative suits were filed by the consumers which were decreed by the trial court and which decree was affirmed by the appellate court and the High Court and it was only on 3-10-1968 that the letters patent appeals filed by the assessee-company w....
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....spect of the assessment years under consideration. The Tribunal, therefore, had rightly held that the claim at the increased rates as made by the assessee-company on the basis of which necessary entries were made represented only hypothetical income and the impugned amounts as brought to tax by the Assessing Officer did not represent the income which had really accrued to the assessee-company during the relevant previous years." 7. Applying the same ratio, the jurisdictional Calcutta High Court in the case of Sri Kewal Chand Bagri Vs CIT (183 ITR 207); had held as follows: "The mercantile system of accounting is relevant only to determine the point of time at which tax liability is attracted and whether the income has accrued or not. It cannot be relied on to determine whether the income has, in fact, resulted or materialised in favor of the assessee. In the instant case, it was true that the assessee had been maintaining his accounts on the basis of mercantile system of accounting. The interest income might have accrued according to the mercantile system, but the issue had to be viewed in the context of commercial and business realities of the situation. The fact remained th....
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....m the case file(s) is that the assessee had admittedly advance a loan of Rs.15 crores to M/s SPL Ltd. vide agreement dated 01.12.2007. The said entity appears to have been defaulting consistently since then. Coming to the relevant financial year, the borrower concerned accounted for penal interest expenditure as well from the inception of the above stated loan agreement. Learned counsel clarifies that assessee thereafter entered into an addendum dated 06.03.2014 contending delay on the said entity part. These two parties resolved not to enforce the damages clause in the original agreement. We are informed that the Assessing Officer went by the said clause only in adding the impugned sum. There is no evidence about the assessee having received any such amount since we are dealing with an instance of notional interest income only. That being the case, we find no fault in the CIT(A)'s action going only by real income principle in view of the various judicial precedents that such a notional income in case of defaulting entity a NPA does not lead to assessment of taxable income. Tribunal's co-ordinate bench's decision in Yash Corporation vs. Income Tax Officer Ward-5(2)(4) Ahmedabad IT....